Amkor Technology, Inc. (AMKR) Q3 2007 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Amkor Technology Inc. Third Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. This conference is being recorded today, Wednesday, November 7, 2007 and will run for only one hour. I would now like to turn the conference over to Mr. James Kim, CEO and Chairman. Please go ahead, sir.

Thank you. Good afternoon. This is James Kim, Chairman and Chief Executive Officer of Amkor Technology. With me today is Ken Joyce, Chief Financial Officer. Before we begin this call, I would like to remind you that any forward-looking statement made during the course of this conference call represents the current view of management. Prior to this conference call, our third quarter earnings release was filed with the SEC on Form 8-K. The earnings release, together with our other SEC filings contain information on risk factors, uncertainties, and assumptions that could cause actual results to differ materially from our current expectations. In the third quarter of 2005, I spoke about our commitment to a process of transforming and according to a company capable of achieving sustainable profitability and generating that was of a free cash flow sufficient to meet our debt obligation and to the fund to future growth opportunities. As we review our third quarter 2007 results, I believe that we have made solid progress towards achieving those objectives. We have now achieved eight consecutive quarters of profitability and the positive free cash flow, and have reduced our total debt by $308 million over the same period of time. Throughout this process, we have worked closely with our customers, suppliers, and the technology partners to optimize and of course roll in the semiconductor supply chain and to provide the highest level of the service and the value to our customers. As we move forward, we will remain focus on exercising financial discipline in the way we manage our business and the capital investments. Our commitment to fiscal responsibility should not be viewed as compliances however. Because of our improved cash flow and the liquidity position, we now have a greater flexibility to respond to new market opportunities as well as the ups and downs of our product cycles. We are prepared to support future growth through prudent investment in leading technology and to fund the future capacity expansion, customer projects, and other initiatives of that meet our long-term objectives. Third quarter 2007, sales deflected the seasonal bills across our product lines in support of a broad array of applications in consumer, wireless, gaming, networking, and computer markets. During the third quarter, overall IC packaging and test capacity remain tight. As a result, the pricing environment continued to be fairly stable. In general, our factories worldwide remained at high levels of utilization in Q3. That being said, we do have a user space in our factories, particularly in China, that can support additional growth opportunities. In closing, our decision making at Amkor is focused on long-term success, not our short-term results, that are often showed late. We are pleased with the overall progress we have made since 2005 towards our goal of achieving sustainable profitability, positive free cash flow, and the responsible growth through this splendid spending. We remain committed to our strategy and believe we are on the right path for building stockholder value. Ken Joyce will review our third quarter operating performance. Ken?

Thank you, Jim. Third quarter net sales of $689 million were up 5.6% sequentially from $652 million for the second quarter of 2007, and inline with our prior guidance of sales up 47% from the second quarter. Third quarter net income was $61 million or $0.30 per diluted share. Our third quarter GAAP earnings of $0.30 per diluted share includes an after tax gain of $1.7 million attributable to an earnout provision associated with the sale of Amkor’s specialty test operations in October 2005 and an income tax benefit of $5.1 million from the release of a valuation allowance established at certain international operations. Excluding these benefits, EPS was still at the higher end of our prior EPS guidance of $0.23 to $0.28 per diluted share. During the third quarter 2007, unit shipments increased 7.6% sequentially, with 2.3 billion units. With higher unit volumes across most of our product lines, both wirebond and flip chip assembly contributed to the improved sales during the quarter. Test revenues in the third quarter also increased sequentially from $69 million to $73 million or 6% over the second quarter, but remain constant at approximately 11% of total net sales. As Jim mentioned earlier, the overall pricing environment was generally stable during the third quarter. However, over a period of time, pricing does become more challenging as packages type mature. In the third quarter, we did experience some price reductions on select package types as we share the benefits of our ongoing value engineering efforts with our customers, and to a lesser extent from competitive pressures. Gross margin in the third quarter of 2007 was 24.7%, down slightly from 24.8% in the second quarter of 2007 and 24.9% in the third quarter of 2006. The slight decline in our gross margin for the third quarter of 2007 reflects a number of factors, including capacity utilization, product mix, material costs, and the pricing environment. Selling, general and administrative expenses in Q3 were up approximately $2 million, reflecting higher expenses associated with our global ERP implementation project and increased legal costs. As we look forward to Q4, we expect SG&A expenses to increase slightly, primarily in connection with the ongoing consulting fess for the ERP project. Today, we are pleased with the progress we are making and upgrading our business processes in IT systems worldwide. This investment among other benefits is allowing us to provide our customers dynamic opening capabilities they demand from their key suppliers. Net interest expense in the third quarter of 2007 decreased $1.8 million sequentially, reflecting the results of our ongoing debt reduction efforts and selective refinancing of high cost debt in prior periods. The income tax rate was 1.9% for the third quarter of 2007 and we anticipate an effective rate of approximately 8% for the year. The lower income tax rate reflects recognition of a $5.1 million income tax benefit from release of valuation allowance previously established at a certain international operations. The income tax rates also include the utilization of foreign net operating loss carry-forwards and tax holidays in certain of our foreign jurisdictions. At September 30, 2007, the Amkor had U.S. net operating losses available for carry-forward totaling $345 million expiring through 2027, and $48 million of non-U.S. operating losses available for carry-forward expiring through 2012. Capital additions totaled $78 million in the third quarter and $193 million for the first nine months. Today in 2007, the largest portion of our capital investment 35% has been in support of strong sales of wirebond products. We are currently targeting full year 2007 capital additions in the range of $285 million to $300 million. During the first nine months of 2007, we generated $414 million of cash from operations. Of this amount, $160 million was reinvested in capital additions. Of the remaining $254 million in free cash flow, $202 million was used to pay down debt with the remainder used to increase existing cash resources. We ended the third quarter with a cash balance of $335 million. We have currently earmarked $88 million of existing cash resources to pay off the remaining stub of 9.75% senior notes at maturity on February 15, 2008. We also have foreign debt repayment obligations of approximately $55 million per year through 2010. Here is a recap of our fourth quarter 2007 guidance contained in our earnings release today. Sales up slightly from the third quarter of 2007, gross margin in the range of 24% to 25%, net income in the range of $0.25 to $0.30 per diluted share. Operator, we will now open this call for questions Question and Answer

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions]. And your first question comes from Timothy Arcuri with Citigroup. Please go ahead.

Hi, guys. This is actually Brian calling in for Tim. Just had a few things. Number one, Jim, I think you said that you saw about a $35 million to $40 million shortfall in revenues due to timing of some flip chip business, that’s from customers namely PC and graphics guys in Q2 and that you expected some of that to come back in Q3. So, how much of that did you actually see come back and kind of what’s left to come back?

I think you are referring to module business, Micro EMS. I don’t think… I don’t recall saying that in flip chip area.

Yes, I think you are right. Yes.

Micro EMS is the is the one that where a group customer where we design into it, but they haven’t selected that as a… already didn’t do very well. So, we are now able to get that module business. That is the actually… that is what our revenue would have been reasonably strong growth, though we haven’t seen it this year, that’s true. So, I mean that situation… we are not remedied on to probably late 2008 or early in 2009.

Okay

We are working on those designs at the moment however. But we want… the new model design will not start on to probably at the fourth… late fourth quarter or early 2009.

Okay. So, maybe I’m misunderstood. But I thought you have said last call that you are expecting some of that… some of the inventory related stuff that kind of go back into Q3?

I don’t believe so. I may have said Q4. But if I have said it, it could be wrong. It has to be 2008. It will come back late 2008, Q4 or 2009.

Okay. That is helpful. And then, I guess, as a follow-up, some of your peers have been talking about higher CapEx next year and raising overall capital intensity. And right now, you guys are close to about 10% CapEx to sale. Can you give us a sense for you are thinking about CapEx in ’08? And if we can expect your capital intensity to move back towards a more normalize low to mid teen level similar to what your peers have suggested?

Okay. If you listen to our press release… and read my press release as well our conference call, I have clearly stated what our goals are. However, I also made it clear that… current our cash position and improved balance sheet and so on. We are capable of meeting any challenge may come. If there is demand, we will meet those. However, I know our competitors are calling for some higher numbers, that highly speculative in my opinion. Therefore, I would like to stick by what I have said. If not get increase beyond our expectation, then we will be prepared to make the challenge, yes… meet the challenge.

Okay. Thank you.

Thank you. Our next question comes from Bill Ong with American Technology Research. Please go ahead.

Yes. Sure. I have technology trend question. If you look at the foundries, they haven’t been seeing a slower ramp at the leading edge. So, as the result, they have been spending the CapEx lot more modestly in the recent years. So, can you characterize the sub-con industry, just like of a supply cycle? What changes in the packaging trends are you seeing in recent years that influencing your CapEx as well as the business?

Well, as we are concentrating some new areas such as flip chip area and bumping area, which are require some heavy investment. Which we already started two years ago in fact, and we are seeing the results of that. Some areas are definitely tight, not only tight, we are in locations. So, those are the kind of step function kind of investments we have to make. But other than that, really leading edge technology like wirebonding area, certainly to meet the 60 nano and so on require much more fine pitch kind of a technology. But industries are meeting those challenges. Now, yesterday there was an IBM conference there. They tried to discuss 32 nano and so on, but these are really future technologies, which we are trying to understand it, so we can prepare for it. But that includes the materials everything.

The way the technology progress hasn’t changed much in this cycle versus the prior cycle for the sub-con.

Some very gradual change, evolutionary change, not drastic change.

Okay. Great. And then my last question is, could you explain the increased legal cost anything behind that. And what type of tax rate should we look at for 2008?

Ken will answer that.

The legal cost, Bill, are principally inline with some of the litigation we’re involved with arbitration with Tessera, the principal contributor this year. As far as the tax rate goes, we will be looking at a blended rate of around 12% for next year, 2008.

Great. Thank you very much.

Thank you. Your next question comes from Satya Kumar with Credit Suisse. Please go ahead.

Hi, this is [inaudible] for Satya Kumar. In your PR you mentioned about price pressure experience and select packages during the quarter. Can you give a little more color if these packages with any specific end-markets?

Well, I do not want to go into detail, but it is an old packages mostly, a redefined package.

Okay. And if I look back your highest gross margin was in the range of about 27% to 28% and based on your guidance for fourth quarter looks like maybe you’ll be in the 24% to 25% for three quarters in a row so. At current run rate, do you expect to reach the prior… like 27% gross margin levels?

A twenty what percent?

The 27% 28% was back in 2000, I think was when we hit the 28%. But with that being said, one of the key determinants obviously for us is utilization. Utilization is running very high right now, but also a major contributor to gross margin is the product mix. So, depending on where the product mix is and how materials come into play with that product mix that could have a big impact on gross margins.

Okay. Thank you.

Thank you. Our next question comes from Chris Blansett with JP Morgan. Please go ahead.

Hi guys, thanks. So where we are kind of along lines of gross margin, I think you said you are at 83% during the quarter. How high can you go to your effectively max out and what kind of gross margin leverage would you get at those levels?

That's highly speculative. We are certainly like to shoot to higher than that. It’s going to be a step-by-step approach. We have internal goal, we try to reach higher than what we are doing. But I think it’s a very speculative to give you a numbers at this time.

Do you have some sort of margin… given the mix today if you were at 85% or 86%, what kind of margins you would expect?

Well, I think we gave our guidance for the quarter is 24% to 25%. I think that is once again mix dependant. We’re at 83% utilization right now, of course. So, if you went to 85%, I wouldn’t see that margin changes substantially.

Okay. And then when you look at the… your results over the past three quarters compared to your Taiwanese peers and your revenue growth is definitely under performed them. And I am trying to understand, is there some market share loss going on here? Is just this the effect of the loss of the module business, what is it?

Well, obviously, our loss of that in our module business, definitely could they have affected it. That would have given us extra few percentage point of our revenue increase and that could also improved our cash and that kind of things. But again, remember Taiwanese have companies that I know of they all competitors are, they have DRAM business. So, as you well aware, we have been staying away from DRAM market. We do participate in Flash market, but not in DRAM market. So, because the DRAM market is very challenging unless you are in Taiwan probably live with the day-to-day basis is very difficult business to tackle. But they… so we are not going to be going in there. Therefore, you have to… DRAM market is a large market in our whole semiconductor space. So, we are literally not participating in that part of the market.

All right. Then one last thing for me, when you look at your fourth quarter CapEx and maybe even your ’08 CapEx, this going to be more packaging and assembly focus, test focus, or yet to be determined?

No, it’s packaging and assembly. Test is being running historically for the last year about 25% of our business and probably will continue I would think in that 2008 right now.

All right. Thanks guys.

Thank you. The next question comes from David Egan with Lehman Brothers. Please go ahead.

Hi guys. Thanks for taking my question. Could you talk a little bit about the outlook why… well, actually first of all, if you can clarify when you say that the revenues going to be slightly up for the fourth quarter. What kind of number would that be? Would that be like $690 million, $700 million?

We wouldn’t put the exact number and I think that’s why we said slight… we’ll be a low single digits.

Okay, low single digit. Perfect. And then so as the year is progress things have slowed down. What you… how do you… what you attribute the cause of that?

What you mean by slower down. I thought, we’ve done very well from second quarter of Q3. In fact, we had… this year, if you look back, probably, we’ll do that in January conference, but 2007 could have been really… not to bad if we haven’t loss that three modules that we could have won. Unfortunately, they didn’t go through. But that could haven’t… if we had that business probably you guys wouldn’t be asking that question. And also when you say slower down, remember again compared to our competitors, we don’t participate in their large part of the business, they are participating. And also PC market as you know, Taiwanese are very active in PC market. We are lesser. So, those are the difference of the… on the other hand, we are very strong in gaming market, consumer market, and so on.

Well, let me say this way. So, in the fourth quarter, you are guiding slightly up in the low single digit, which a fairly probably less than normal seasonality for the fourth quarter--?

That is not true. Normally, if you go back historical sense, Q4 is somewhat lower than Q3 or flat. That’s the normal. In fact, whenever Q4, in the past anyway, remember, doesn’t repeat always. Whenever Q4 is higher than Q3, normally following year is strong, but I’m not going to make this statement because we don't really know.

Okay. Well, it based upon how you see things now. Do you see that the first quarter would show normal seasonality with the decline of say mid ingle digit? How do you think that year might begin next year?

That’s a pure speculation at this time.

We really don’t know how… especially what the seasonally sense of holiday season revenue sales are going to be especially in electronics area. That is going to influence… I do not know our customer inventories are very long. Semiconductor industries having a low inventory, but we don’t know, their customers inventory level. How their demand is going to be? That is going to dictate. That is going to dictate, but all we hear is even though U.S maybe slowing down, rest over the world is still humming. So, we have to wait and see how is going to play.

Okay. Thank you. One last question. In terms of the linearity of this quarter, how was the month of October compared to September? And how do you think that November will be compared to October?

October was better than September, and we expect the November to hold. The question mark is always in December.

Okay. Thank you very much. I appreciate it.

Thank you. Next question comes from Peter Kim with Deutsche Bank. Please go ahead.

Hi, thanks for taking my questions. So, when I look at your CapEx forecast for next quarter it suggests that you are going to spend a pretty big chunk of your CapEx for the year in Q4. Should I read into that as being the end of Q4 and Q1, the seasonality is going to be better than normal or what is the reason the CapEx is particularly high in the next quarter?

That CapEx is largely, Peter, it’s service the first half of what we are seeing in 2008. So, it doesn’t necessarily indicate that Q4 is going to be stronger. It also reflects somewhat a change in the mix of the business that we see. So, it’s a… once again, what we see… what business we see, we still see some good strength in 2008 in the first half. And we see a change in some of our mix. Some of that mix is more advanced product related which is more capital intensive, so we will have to put some money in there.

Okay. And then if you could give us a status update about the Tessera arbitration. I understand that you guys are involved in that right now. I was wondering if you had an idea about how long this is going to go on to? What your expectations are?

Yes, Tessera is be fully explained and I refer you to our SEC filing which we hope to file in the next day here and our 10-Q you will get a complete update it’s been fully vetted with our legal department. But that being said, the Tessera arbitration is scheduled to go in March of 2008. We have been told that there will be no postponements of that. So, we are looking forward to it. We believe we have meritorious defenses and we are ready.

Okay. Thank you so much.

Thank you. Your next question comes from Mark Bachman with Pacific Crest Securities. Please go ahead.

Sure. Hey, Ken, I just want to finish up on Tessera here. So, you said March of 2008, can you give us an idea of the dollar value that is being litigated there for the past loyalties?

I believe that amount is disclosed, I don’t have the 10-Q in front of me, but I believe it’s around $115 million in damages that they have asserted in back royalties.

Okay. And have you earmarked or reserved any of your cash balance in case the litigation doesn’t go in your favor?

We have not, because the accounting literature as far as booking a loss accrual or continues to see it must be estimable or probable. We, clearly, don’t think it’s probable. We would also disagree with the amount of damages that they claim… their damages that they are claiming. So, we don’t have anything reserved for that in particular. Once again, litigations… litigation I can give you no certitude, but in working with our counsel, we believe we have very, very strong meritorious defenses against Tessera.

Okay. Sorry if I missed this already. But did you happen to mention when you might spend CapEx in 2008?

We did not, but our capital intensity ratio if you look for this year has been running about 10% to 11% of sales. It could go a little higher than that, but no more than 12% or 13%.

Okay. And then, so my final question then, how can I get more comfortable with your cash position relative to this lawsuit that is outstanding, your debt repayment of next year $88 million and then a pretty sizeable CapEx budget than again for the next year.

Well, let’s talk about that for a minute. For the last two years for 2006-2007, we’ve generated over EBITDA of over $600 million… $650 and over that in each of the last two years. We’ve had free cash flow of over… and when I say free cash flow, that’s cash from operations less your CapEx payment in excess of $250 million per year. We have a cash balance right now of $335 million. And with the cash balance of $335 million, we’ve earmarked $88 million as we say. Based on our projections, as we look forward, we think that we’re going to be continue to be cash flow positive, we’re managing in that direction. And over and above that, we have an unused line of credit of over $100 million that’s available, if we had to draw on that. But I’m in no way… you can never give any certitude with litigation, but I’m going to tell you again, we believe we have meritorious defenses against Tessera.

Perfect, thanks so much.

Thank you. The next question comes from Tom Diffely with Merrill Lynch. Please go ahead.

Hi, good afternoon. A couple of quick questions here. Earlier you mentioned there were competitive pressures, can you give a little more color as to where you see those by product or by end-market or by just specific competitors?

I don’t think with end-markets because a lot of products could be used in different end-markets. But I think as Jim had indicated too a little earlier, it would have been in a more of our traditional lead frame products where we're seeing the most price pressures now. Although, there are some price pressures in other areas as well.

And then the tax rate you said it was going to go up to about 12% next year. What’s driving that if you have all the NOLs and you’re quite comfortable this year?

We are taxable in a number of jurisdictions as we return to profitability. So, you do have certain foreign jurisdictions where we don’t have tax benefits available. And that’s what gives the overall blended rate.

Okay. But it seems like you would have that effect this year as well though?

Well, we did. We had some taxes, but we are using up a lot of foreign NOLs.

Okay. All right. And then just one last question on CapEx. Previously you talked about certain customers signing equipment to you. Is that actually happened or what is that?

We are not pursuing that very strongly this year. That was for 2006. That was because of our financial situation, we requested the customers to help us in that particular of time. At the moment, I don’t think we any left, Ken, do you?

We have some consigned equipment.

We do have some consigned equipment, but especially in test area.

Okay. Thank you.

Thank you. Your next question is a follow-up from Chris Blansett with JP Morgan. Please go ahead.

Yes. Looking at your interest expense for the fourth quarter and then as you look in to ’08, could you give some guidance, Ken, on how that should trend?

Yes, I think the interest is going to continue to get down. I would anticipate in Q4… I would say in the range of… you have hold on one second here and I could just take a look for you. I would say we are going to be about $31 million in Q4. And then as we go forward, our total interest expense this year is probably going to be in the range of around $131 million net interest expense. And we would expect that to come down by approximately $8 million to $10 million because as you are aware in February we are paying off the $88 million of senior notes that are 9.25%. So, you should be coming down by that amount. Plus there will be some other amortizing debt of about $55 million we are paying down. So, between that, and we are paying down some revolving debt. So, our interest should be down from… it will be down to around I would say in the area of about $110 million from $131 million this year.

All right. Thanks a lot, that seems very helpful. And then one last thing, when you look at your fourth quarter CapEx, I mean, how do you define? These are more long-term strategic spend I guess as what you are looking at for the fourth quarter. I mean, are these tied to specific customers, are these tied to specific technologies, or--?

Types of the technology as well customers.

Our business in product groups have meetings on a weekly basis, actually to monitor and they work with the sales force in the factories. Monitoring what projects that we are going to invest in and as you are aware there is always more project and money available. We have set return criteria and we are measuring to that. But it requires an ongoing review of both your product business units working with your factories, working with the sales force to evaluate which customers we are going to serve. But I can say right now that we have the cash available and we have made the commitment that we have not turned down any customer projects that meet our return objectives.

All right. Thanks a lot guys. Appreciate it.

Thank you. Your next question comes from Sunder Natarajan with deutsche Bank. Please go ahead.

Thanks guys. Going back to this CapEx spend and investing in some customer projects and so on could you kind of elaborate a little bit more in terms of what kind of return criteria are you currently looking at in term of both near term and long term impacts. And also how do acquisition kind of fall in the mix two years ago you did the IBM transaction, which has worked out pretty nicely for you guys. Are there more of those in store. Could you give us a little bit more color in those areas as well?

Sure, we can. On the CapEx we are using as one of our… we do a lot of different metrics, but probably the overall guiding metric for us is ROFA, which is return on growth fixed assets. And we look for a cash return in the area of around 40% that would equate to about a 2.5 year payback, that’s our target, you don’t always hit it, some cases you do, some you don’t but that’s the target that we have been using. As far as your question on Acquisition and corporate development we have an active team that’s always looking at opportunities, we are prepared and quite frankly and Jim as said in his opening remarks we are well positioned, we believe from an operational standpoint, talent standpoint, financial resource and liquidity standpoint to take advantage of that but we are going to do it in a very thoughtful, methodical manner, we are not buying sales just to buy the topline we are going to be driven by growth that’s profitable growth.

And then… and then just one follow up here. As you look at your financial flexibility you guys knew where you were two years ago so clearly you don’t want to go anywhere close to that kind of scenario so as you weigh these different opportunities, what kind of minimum liquidities would you want to maintain in terms of cash on the balance sheet as you kind of look at these opportunities and where you need to invest and keeping the long term and short term kind of perspective in mind.

Well, let me answer I am sure Ken has the answer, but as far as I know that the minimum cash balance we require is probably $120 million, $150 million but remember we also have revolver of $100 million withdrawal which is available but having said that I think I know where you are driving it. If the opportunity arise where we need considerably more than our current cash balance, doesn’t mean we cannot do it. With our current situation I’m sure. We have enough credibility established to be able to finance it if we have to do it but again it has to meet very strict financial goal that we have set. It is going to be well designed otherwise we will not touch it. So I think again I would like to assure to everyone. We are not going be… again go out try to spend CapEx or any other. We are going to be very strictly disciplined management of the cash.

Thank you.

And your next question comes from Eric Griewbl with MTR Securities. Please go ahead. Eric Griewbl – Miller Taback and Robert Securities: Gentlemen, thanks for taking my call. Ken or Jim, you guys mentioned some capacity availability in China and you also referenced those facilities also have the ability to provide some growth. Are you taking any direct steps to kind of serve the local China market and how much of a driver could that be for 2008?

When you say China market, China itself still, there are few foundry AlphaTec just SMIC and so on. Obviously, we deal with them, but I don’t… right now their market is not that clearly defined and especially low end of the Lead frame packages and so on where we are not, I don’t see if we really can participate that market to compete against the second and third tier companies. Eric Griewbl – Miller Taback and Robert Securities: Fair enough.

So, yeah, I mean we are doing, everybody has conception that we go in China for low cost kind of Philippine, China. That isn’t it. We are really going there for quality labor… Eric Griewbl – Miller Taback and Robert Securities: Okay.

Without technology. And we don’t have to do the advanced packaging. Eric Griewbl – Miller Taback and Robert Securities: And we don’t talk too much about Japan. Could you give us an update on how Toshiba, the Toshiba relationship is going and are there any opportunities to really get extra growth out of that in 2008?

Yes, in Japan you have to separate two. One is our own factory which service we both from Toshiba and has a relationship and the other is serving Japanese market as a whole. Eric Griewbl – Miller Taback and Robert Securities: Okay.

And the Toshiba factory is doing well, I mean again, we don’t make kind of margin we like to see but still never lost the money, so always positive cash flow. On the other hand, relations with Toshiba in other area, not that we are not making there… by making China or Korea or Philippine. The business is still booming. I mean Toshiba relationship is excellent and other Japanese company like Sony and so on, strong relationship and we expect to continue to grow in that area. Eric Griewbl – Miller Taback and Robert Securities: Thank you.

And your next question comes from David Fiz [ph] with Citi. Please go ahead.

Thanks for taking my question. Most of them have been answered, but have you purchased any debt securities during the quarter?

We have not.

Okay any intentions to do so?

We would love to. We continue to monitor it, but right now the yields and maturity we think, we get a better return investing in our business than we do buying back the debt. But with that being said if that yield goes the other way, we’ll be in there.

Okay, thank you.

Next question comes from Rider Campbell [ph] with Barclays. Please go ahead.

Hi. Thanks. Most of my questions have been answered as well. But I do have another one that’s kind of I guess a little bit bigger, broader, more industry question. Looking at your business and you guys have clearly been focusing on cash generation and debt reduction. Is in clear contrast to another trend that we see such as, deals from private equity firms whether they get done with some of your competitors, new deal with the UTAC acquisition where people are essentially expressing views that they think that the market has stabilized to an extent that you can lever up very substantially, it seems to be kind of a direct contradiction to the direction you guys are taking. I wanted to I guess, just get your overall view on how you guys look at that, perhaps what you think about what something like that is doing versus what you’re doing. I guess I’m just looking for a little bit of color.

We wouldn’t want… do you want to handle that?

Well, environment again changing. The market… I’ve been living long enough to see many changes happening. Opportunity comes, we look at it. Every opportunity comes, we’ll have opportunity to review it. Always there is something on the table. Having said that, however, again, like you said, we are committed to achieving our objectives.

And on the other hand, we do love to see them lever up because that’s less money they’ll have for CapEx and that works well for us in the industry.

Okay. Fair enough. Thanks.

Next question comes from Paula Tinko [ph] with Deutsche Bank. Please go ahead.

Hi, just one follow-up. I think to Sunder’s question on potential acquisitions. Is there… and the last question as well. Is there a maximum leverage that you would like to stay within some sort of area and maybe you can give an outlook on short and long-term profit on that?

We are already at maximum leverage.

But I mean, say for instance, you saw a great opportunity and how could you give some sort of idea of how we shouldn’t but consider increasing your leverage…

We should look at it case-by-case. I mean if there is something that I can recover in one year. I am sure we’ll look at it right away. Again really we have to be very specific case to the side each case and the long-term impact on the company balance sheet and earnings and so on. I just don’t think it’s appropriate for me to speculate on this one.

Thank you.

Thank you. Your next question comes from Guy Berea [ph] with Credit Suisse. Please go ahead.

Hi, there. Just a couple of quick question actually have some answered, but clarification on I guess on some sort of topic. First, on acquisitions. What’s your level of tolerance for taking on an acquisition or buying an asset which could potentially require some more sort of restructuring or turnaround work or maybe more specifically could be diluted short term?

Well, we are not turnaround artists so I don’t think that that’s something would meet our acquisition criteria. So we are not interested in turnarounds, but that being said it’s highly speculative as Jim said we do look at these… but it has to be taken. The acquisition has to be taken as an whole much of the amount of leverage that it generates.

Okay. And then again, on the same kind of topic of leverage maybe asked another way. What is the right level of leverage for this business? In other words what’s the equilibrium that you look to get back to even if you did spike on a particular acquisition short term?

Given the volume of business that we are doing right now for a $3 billion company. And if you look at the cash flows that we are generating, I think if you went in and did optimal capital structure and we have had different bank advisors on this and they are far more expert then we are. And its somewhere between 800 million to $1 billion, is the optimal capital structure, the optimal leverage that you want to have in there.

Okay. Right, and then from a free cash perspective what’s your level of commitment to that, again were you to need to invest in CapEx short term and it resulted in negative…

Sounded like you have some ideas and you know try to speak…

All we can do is that we do know that our CapEx intensity has to be some where in the area we said 10, then I would think no more then 15% under circumstances that we can see. Based on that and whatever you model in is the product mix and margins that’s about where you will come out for your cash flow generation.

Okay. Great. Thank you.

Thank you. [Operator Instructions]. And our next question is a follow up from Timothy Arcuri with Citigroup. Please go ahead.

Hi guys sorry I jumped on a bit late. Jim, I know that you didn’t make any comments about next year but if you go out year-over-year chip units and if you look at one of your peak it looks like things are going to peak probably in Q4. And in every cycle in history that’s been a pretty big headwind for your revenue trends kind of in a six month period after that. So, I guess I am wondering is there something that may be in ’08 would be different this time from a customer perspective. Is there like one particular customer that under spent this year that you think will overspend next year that we kind of cause you to buck that trend because it’s pretty consistent going back about seven or eight years.

Tim you raised this issue year ago through I recall. You are very good at the unit and I have no sense of units and I always follow that because of community. In fact, I credited the board yesterday, look back way back to 1991 and looked at it and I came with the same conclusion. Our business character has changed very drastically from ‘90s to about ’96 then ’97, ’98 there was a down turn and then spikes in ’99 and there was a bubble in 2000 and 2001 was a sharp drop. And I think 2002 to 2003, 2004 we kind of, whether or not whether we are going back to the early ’90s or not. But as we all know it never happened that way. And there are many reasons for my opinion. One really is, all these questions you are asking world economy is changing. I am telling you emerging economies taking up more than 50% of the world GDP now, therefore either I think we don’t know yet what it is going to be like until that economic model is fairly understood and even with really look at all this emerging economies, 1990s we had a financial crisis in Asia. Asia hadn’t a dollar in their reserves. Today, look at all these countries, they have huge reserves of U.S. dollars. No economist at the moment understands what the implication of that is. Until we fully understand the rest of the world economy and the old liquidity of our financial dollar holdings and so on I don’t think any economist can predict what it is going to be other than consumer spending. If you look at the consumer side semiconductors is becoming very pervasive in all the things we are living everyday. Therefore, the main source semiconductors is going to continue to grow that’s a certainty that’s why your argument… I’m not agreeing or disagreeing with you. May be fourth quarter is the peak, but on the other hand, hey who thought this year that cell phone is going to increase by another 10% in order to asking a few percent of 1 billion, went up another 10%. PC went up another 10% and pizza with a market went up 20%. So I’d really think we have to look at that model to make a decision where this, I don’t think I can answer your question on that other than this.

Okay.

I hope you can extend that and divide it something that I’ll read it.

No. Sure, I do I guess just kind of from a customer perspective I guess on when you look at ’07 versus ’08 was there. May be you can point to micro processor customer may be. I’m just wondering was there one customer that may be or some industry dynamic that will be better next year than it was this year relative to may be a micro processor customer that kind of missed a design spin this year that could kind of come on next year that could help you buck that trend or?

Again, for I don’t about competitors or what markets is as a whole but our case definitely we are getting closer to several more customers in wireless area as a proximity and the gaming area but these are all growing areas as you are well aware. So that is what going to drive plus as I told you earlier whether this year, we can’t or next year whether it is going to come back or not some of these margins that we were doing now that we understood our failure from experience from the last year. We are improving ourselves and we already are talking to the several customer 6, 7 customers where this could bring significant increase in revenue. Potential is there, but again I cannot promise this is going to be 2008 necessarily or 2000 is going to big in 2009, but those are the areas I see unit gross significant.

Great.

And that’s were our technology is strong. Remember our technology we know how to do this kind of a signal, as a EMS company not to the other way from us to go to that direction.

Great. Okay, Jim. Thanks a lot.

Thank you. And gentlemen I’m sure there are no further questions. I will turn it back to you for closing remarks.

Thank you for participation in our conference call. We look forward to speaking with you again. Thank you.

Ladies and gentlemen, that will conclude today’s teleconference. We do thank you again and at this time you may disconnect.