Benchmark Electronics, Inc. (BHE) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Benchmark Electronics’ first quarter 2012 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chief Financial Officer, Don Adam. Please go ahead.

Good morning. Welcome to the Benchmark Electronics’ conference call to discuss our financial results for the first quarter of 2012. I’m Don Adam, CFO of Benchmark Electronics. Gayla Delly, our President and CEO, will begin the call today by providing an overview of the state of our business, our performance during the first quarter, and the outlook for the second quarter. I will then follow with a review of our financial metrics. After our prepared remarks, Gayla and I will take time for your questions in our Q&A session. We will hold this call to one hour. During the conference call, we may make projections or other forward-looking statements regarding future events or future financial performance of the company. We would like to caution you that those statements reflect our current expectation and that actual results or events may differ materially. We also would refer you to Benchmark’s periodic reports that are filed from time to time with the Securities and Exchange Commission, including the company’s 8-K and S-4 filings, quarterly filings on form 10-Q and our annual report on form 10-K. These documents contain cautionary language and identify important risk factors, which could cause actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update those projections or forward-looking statements in the future. Now I will turn the call over to Gayla.

Good morning everyone. Thank you for joining our call today. First I’d like to take a moment for a Q1 review. We’re off to a great start this year. Both our revenue and our earnings were above the high end of the guidance we provided last quarter. Our revenues were $593 million, compared to our guidance of $550 million to $590 million for the first quarter. And our EPS, excluding restructuring and the Thailand flood-related charges, were $0.25, and this compared to our guidance of $0.17 to $0.23. We were happy to see that some of the programs, our new programs, began to ramp during the quarter. These were program wins from over the last 12 to 18 months that are beginning to translate into revenue. Now let me share some of the highlights related to our operating margin improvement and our Thailand recovery. On the heels of our recovery from the flooding in Thailand, the first quarter showed improvement in our operating margins from 1.2% in Q4 to 3% in Q1. The increase in margin was achieved through revenue growth driven by the new program ramps, the Thailand recovery and the diligent focus of our global operations team. Although the recovery from the Thailand flooding is ongoing, and not all portions of our operation in Thailand are completely back to business as usual, we made good progress in our efforts and continue to work on the rebuilding plans internally and with our customers. With the recovery and the new program ramps, we are at pre-flood levels in revenues in Thailand. In fact, currently we are positioned to see year-over-year improvement in revenues in Thailand. Although we recovered on the revenue side, there are some significant challenges and inefficiencies which remain, impacting our financial results. The margin impact of the Thailand flood includes duplicative costs such as supplies, materials, expedites and replacement costs, in addition to program transition and reintroduction costs for Thailand. As we noted last quarter, we are working toward achieving our operating margin of 4% by the end of 2012. Achievement of this target will be dependent on the usual and ordinary factors that affect margins, such as our revenue mix and growth in revenues. In addition, we will continue to have an impact by the effects of the Thailand flood to a lesser extent as we progress through the year, each quarter. Throughout 2012, we’ll continue to focus on our recovery and our operating efficiencies, as well as the diversification of our customer base and the expansion of our customer base, to utilize our PT capabilities as we focus on improving our margin performance. Now moving on to our revenue and market sector performance. Overall, we saw increased demand during the first quarter of 2012 in three out of the 5 industry sectors we serve. When comparing Q4 2011 to Q1 2012, we saw revenues from the telecommunications sector were significantly up by 36%, as this sector experienced a rebound, primarily made possible by the recovery in Thailand and also impacted by new program ramps. Revenues from the medical sector were up 3%. Going forward, we believe recent wins will help maintain this sector’s growth, although customers in this sector continue to have concerns regarding some of the changes in their industry and sluggish spending overall. Revenues from the industrial control sector were up 1%. Revenues from tests and instrumentation sector were flat. And revenues from the computing sector were down 5%, which was as expected, as Q1 is generally a seasonably lower quarter for this segment. We continue to see stable demand from all of our business sectors in the first quarter, and expect this to continue through the second quarter. The macroeconomic environment is not providing a strong foundation for underlying growth, but even with the overall economic condition, our customers are generally optimistic, albeit cautious. On our revenue and new bookings during Q1, we booked 37 new programs, and this includes 10 engineering projects. We currently estimate annual revenues from these new bookings to be between $100 million and $120 million. Also in our pipeline, we have several positive opportunities that are currently in the final decision-making phase, and we are very excited as we progress on these. These bookings for Q1 were in each of the industry sectors we serve. They represented bookings from new and existing customers, and of course, these are subject to the risks of timing and the ultimate realization of these estimated revenues. To provide you a specific update on some of the larger computing programs that we booked and discussed in prior quarters, regarding the computing program we announced during Q4 of 2011, this is ramping and started shipping in Q1, and we’re very pleased with the progress made and the speed with which this program is ramping. Related to the larger computing program that has been delayed from our 2010 booking, we still anticipate this program to launch during the second half of 2012, and remain excited as we continue to work with our customer on this program. However, there was no meaningful ramp reflected in Q1 revenues and there is no meaningful revenue included in our Q2 guidance for this program. Looking to the future, we see a strong pipeline of opportunities and positive momentum in our bookings opportunities at Benchmark. Our sales team is focused on our target markets and customers, and continues to focus on the utilization of our expanded Asian PT capabilities. For our second quarter guidance for Q2, we are seeing stability and strength in demand levels from our customers, although the overall macroeconomic does give us reason for caution. Based on this and the information that we received from our customers, we currently estimate that our second quarter sales will be between $595 million and $625 million. Note that our guidance for Q2 reflects strength driven by our program ramps from several of the programs booked over the last few quarters, and this is offset by the macroeconomic environment headwind. Our diluted earnings per share for the second quarter, excluding restructuring and Thailand flood-related charges, are expected to be between $0.26 and $0.30 per share. In summary, our business teams are executing well, and they had outstanding performance to achieve our Q1 results. Our focus will continue to be on driving operational excellence globally. We will continue to support the ongoing efficiency and return to normal operations in Thailand. It would be unfair, though, to say that we have put this matter fully behind us, with so many of our staff and their families having been affected by this tragedy. They will feel the impact from this for some time to come. We are pleased to continue with our strong bookings, and look forward to a number of the new programs continuing to ramp throughout the remainder of this year and beyond. We’re excited about the new opportunities and future opportunities that we are currently evaluating. At this time, I’d like to turn the call back over to Don to discuss our Q1 financial metrics. Don?

Thank you, Gayla. First I want to comment on our first quarter revenue EPS. As Gayla mentioned, we were pleased to complete the first quarter of 2012 with revenues of $593 million. These revenues exceeded the high end of our guidance for the first quarter of $550 to $590 million, and we’re up sequentially from the last quarter of 2011 by $34 million or 6%. Our earnings per share, excluding restructuring and Thailand flood-related charges for the quarter, were $0.25, and our GAAP earnings per share was $0.10. This compares to $0.24 for both GAAP and non-GAAP EPS last year. The revenue breakdown by industry for the first quarter of 2012 was as follows: computing was at 31%; industrial control was at 27%; telecom at 25%; medical at 9%; and testing instrumentation at 8%. Included in our financial results for the first quarter are Thailand flood-related charges of $10.2 million. Note that we did not record any additional insurance recoveries this quarter. Upon settlement, recoveries for these and other items including lost profits will be recorded and may result in gains to Benchmark. As of December 31, we had recorded a receivable for insurance recoveries at $56 million. During the first quarter, we received $20 million of these insurance proceeds, leaving a balance of $36 million as a receivable on our balance sheet as of March 31 this year. We continue to work with our insurance carriers on the claims and recovery process, which will be ongoing for the next several quarters. To provide a more meaningful comparative analysis, I’ll present certain financial information excluding our restructuring and Thailand flood-related charges during this call. We have included a reconciliation of our GAAP results, or results excluding these charges, in today’s press release. Our operating margin for the first quarter was 3%, excluding restructuring and Thai flood-related charges, compared to 1.2% for the fourth quarter of 2011. Although the revenue ramp to recovery from the Thailand flooding has been quick and successful, we still see the margin impact on our financial results. As Gayla has mentioned, these are various costs related to Thailand that impacted our margin for the quarter and may provide some headwinds for the next quarter or so. Our net income, excluding restructuring and Thai flood-related charges was $14 million for the first quarter of 2012 as well as 2011. GAAP net income for the first quarter of 2012 was $5.6 million, compared to $14.5 million for the same quarter last year. We had interest income of approximately $378,000 for the quarter. Interest expense was $325,000, and other income was $366,000. The effective income tax rate was 21.5% for the first quarter, excluding restructuring and Thai flood-related charges. This rate was slightly higher than expected due to the geographic mix of pre-tax profit that we experienced. The diluted weighted average shares outstanding used in the calculation of earnings per share for the quarter was $57.9 million. Our cash and long-term investment balance was $282 million at March 31, of which $25 million were option rate securities classified as long-term. The unrealized loss on these securities of $2.7 million is reflected in shareholders’ equity. For the first quarter, we used $24 million in cash flows from our operation. This use was primarily due to an increase in our accounts receivable levels. As I mentioned earlier, we did collect $20 million in insurance proceeds during the first quarter related to the Thailand flood, and continue to work with our insurance carriers on the claims process. Capital expenditures for the first quarter were $11.9 million, and depreciation and amortization expense was $8.5 million for the quarter. Of the capital expenditures, $3 million was related to our Thailand recovery and rebuilding efforts. Repurchases of common shares for the first quarter were $3.9 million, or 256,000 shares. I would like to point out that since the inception of our share repurchase program in July of 2007, we have repurchased approximately $294 million, or 17.4 million shares. We currently have $31 million remaining under our approved share repurchase program. Our accounts receivable were at $476 million at March 31, an increase of $50 million from the last quarter. This increase was related to the increase in revenue as well as the timing of those sales within the quarter. Inventory was $404 million at March 31, a slight increase of $12 million from December 31 primarily due to inventory that we have positioned for program ramps and transitions. I’d like to point out that our inventory turns did improve to 5.5x for the quarter compared to 5.4x in the fourth quarter of last year. Current assets were approximately $1.2 billion, and the current ratio was 3.3:1 in the first quarter. Finally, as of March 31, we had $10.9 million in debt outstanding, which is primarily related to a long-term capital lease on one of our facilities. At this time, I’d like to open it up for the Q&A session. During the session, we request that you limit yourself to one question and one follow-up. Thank you.

[Operator instructions] And our first question is from Wamsi Mohan Bank of America/Merrill Lynch.

Your guidance is for about 2.3, 3.4% operating margin at a revenue level you previously you thought could drive about 4%. And Gayla, you mentioned in your prepared remarks duplicate of costs, supply chain, expediting, and other factors that sort of account for the 60, 70 basis points margin difference. Can you help us understand, maybe, which of these are the largest buckets of cost? And maybe perhaps size them for us in some way so we can understand how these should evolve through the course of the year.

Yes. I think the key that they probably all get captured under the heading of inefficiencies as we return to normal. As you might appreciate, we had very rapidly brought back the revenue level and this has been done amidst facility rebuild and the repurchase and replacement of any affected and impacted materials through expediting. So I don’t have a specific breakout to be able to capture each point of variance other than, as I call it, just inefficiencies. I think one of the other points that would be important to bring up though, as you referenced our goal and previously mentioned target of achieving 4% -- going back to 4%, so there’s 2 pieces that are important. First of all as we remove the inefficiencies associated with rebuilding Thailand and getting back to a normal level of efficiency there by the end of the year we expect to get back towards 4%. The other impact, which I noted in our prepared remarks, would be nicks. We all fear in our industry the impact of various nicks, changes within our revenue base. In our revenue base there are 2 industries which are currently at lower levels, which have more value add, more complicated business model, which when those are higher allow us to achieve a 4% operating margin closer to a $600 million revenue range. With the current mix with the industries of medical and testing instrumentation being lower we would expect that there would be somewhat higher level of revenue with a current mix of business. So take that to and I believe we’ve thought back in 2010 even but we’ll take that up to about a $625 million, $630 million level per quarter to achieve the 4% with the current mix of business. So hopefully framing both of those assists you in your model there.

Yes, no Gayla, that’s very helpful thanks. And as a quick follow up, where’s your current capacity utilization? Do you see the need for incremental cap backs as your new programs are up?

No, actually, as I mentioned previously, I believe last quarter we have in place utilization of both of our facilities again in Thailand and somewhat fortuitous that looks like we need both of those as we are ramping some new programs there quite rapidly. As well we have recently over the last 15 to 18 months incremented our capacity in Asia for our precision technology business. With those 2 incremental levels of capacities that are already baked into our model, we feel comfortable that our foot print and capacity is in place to support the growth for reasonable period of time.

Our next question is from Sherri Scribner from Deutsche Bank.

I was hoping to get an update on your precision mechanical business. You’ve talked about it a lot in the past and also some detail as it relates to that segment on the semi-cap equipment market. Have you seen a turn in that market? Is that improving? Because that is a significant piece of your business.

Yes, it is a significant piece of our business and we do not -- we’ve seen mixed signals if you take a total read across the industry but do not see that there has been an immediate growth. Most of that is captured in our segment sector called test and instrumentation and as you can that has remained flat, so no real improvement there. I believe there are some pieces, if you read, that indicate that 2013 will be strength and then it may various of what the readings would indicate the second half of 2012 will have in store for us. But at this time I don’t see much growth in that sector for 2012, maybe a little bit of movement. With that we are expanding some programs and bringing up some new programs and as such a -- the precision technology business is, I would say, growing in base but on a volume -- we are down on some volume just given the nature of some of the business they support but we are expanding the industries and the customer base that are served by precision technology. So we are very excited about that and continue to see that as a very strong opportunity. It isn’t at a size yet where we would feel that it is at a level where we would capture that in our filings we would segregate that currently. But hope to achieve that level in some future period.

Okay, super and then I just wanted to circle back on the second compute customer that you announced in 2010 and the slow ramp of that product. I’m just trying to understand, in terms of what’s going on there, and I know we’ve talked about it a little in the past but it seems like in technology for a product to wait for over a year it essentially might become obsolete. So I’m trying to understand why is that ramp taking so long? And is there any risk that the OEM decides not to move forward with that product? Thank you.

That is an interesting differentiation I guess from most of the programs. The key there would be that it has now become obsoleted technology because we have been investing very heavily along with a customer in the ramp and during the course of this there have been continual upgrades, modifications, changes to the program and the product, as is -- guess the best way I would capture is, it’s a bit ahead of its place in the market place and therefore when the rest of the market catch up with what the technology offering is for the product it will be ready, so it would be improper to say that there haven’t been upgrades and changes. We have been constantly working with a customer and there have been a number of revisions and changes it’s just that the market is not quite ready for the solution that is there and when that is paired up properly then we believe, that’s when the launch will be announced and ready to go.

Our next question is from Jim Suva from Citi.

Now that it appears, hopefully a lot of the natural disasters are behind us and the economy over all is starting to recover or see some normal signs there. Can you just kind of update us at Benchmark? It’s been a long time since we’ve had what normal has been. Can you maybe just update us by quarter of kind of what normal at Benchmark we should see from kind of topline sales growth in the normal demand environment for like the June, September, December, and March quarters?

Well we don’t really indicate that there’s a specific seasonality, we do see seasonality within some of the sectors we support so if I were to think of what we make here to us as normalcy. Typically Q1 is flat to maybe modestly down, depending on the strength often of Q4 so if there’s a very, very strong Q4 especially in computing, then typically Q1 is a little bit off from that. Q2 is traditionally normalized a little bit of an increase similar to what we see now for Q2. Q3 is typically flat-ish or down but that has been in an environment where Europe has been strong and we have already seen quarter over quarter 34% decline in Europe so would not expect necessarily that Q3 would demonstrate that given the fact that Europe is already incorporated into the model pretty severe decline. So that changes what I might consider normal. And Q4 just again traditionally has some pretty good strength behind it. So a lot of moving parts in there, specifically with some of the dynamics in the market place today and the way Europe seems to be unfolding.

Just a quick follow up. I think you’d mentioned Q2 or the June quarter is normally you see a little bit of an increase and I think if I do my math right your June quarter sales guidance is flat to up 5%. Is that just kind of normal? Or I would think the ramping computing customer that it would kind of be a little bit higher end or maybe it’s just kind of rounding differences.

I would say that it is probably normal to have a slight increase in Q2. Again I don’t - I wouldn’t say there is a really good way, given the mix of programs and changes in the macro environment to be able to depict what normal really looks like in the current environment because there are so many changes ongoing and with the newness of Europe still being very weak.

Our next question is from Brian Alexander from Raymond James.

Just a follow up on Wamsi's question, I’m still not clear. To get back to 4%, how much of the delta versus where we are now is the removal of the efficiencies in Thailand, and how much is mixed? I’m just trying to get a sense for relative size there.

I would say that we will -- we expect to exit Q4, and get back to 4%. At our current mix, we would expect that, excluding Thailand, we would need to be probably around the $620 million, $630 million level to achieve that versus a $600 million level if there’s a more balance mix with medical testing instrumentation bought.

And then just on the new programs, they continue to be strong on both in dollars and in terms of the number of wins. If I look at the average program size, it continues to come down versus historical levels, I think you’re running closer to $3 million to $5 million per win today versus historically $10 million to $15 million. I’m just trying to understand that better. Is that smaller average program size mostly a function of the end market to your winning in, where maybe the deal size is in general tend to be smaller, or is there some other explanation here? Maybe that’s part of your new strategy to go after smaller programs. And I’m wondering related to that what are the margin implications for the company longer term as these new smaller programs ramp versus the larger one historically?

That is none of the above. What it really relates to is we have incorporated the engineering, and you see it as when 10 of these wins are engineering -- by definition and the way we have captured engineering is really the engineering revenue, and to the extent that those are to be manufacturing, we are not incorporating the manufacturing revenue in advance of the product being ready for release. And that comes back to, I guess, adding a bit more discipline and certainty around the ramp given that we have had some elongated ramps that were questioned and backed by the analyst community of when they are going to ramp. So, the longer the ramp, the more it kind of seemed to impact the model. So, we wanted to tighten up on that, and so our engineering revenues are included only as engineering. As such, we believe in what we see and what I’ll call the top of the funnel, the front log for new business, not a significant difference in the types of margin, or the types of business we’re going at, nor are we seeing as significant difference in the size of the programs that we’re going after. We’re just putting it in a tight timeframe, it’s when we expect it to ramp, so to give a greater understanding and certainty.

Great, and then one final one for Don and working capital, I look at the receivable pays around 70, they’ve been rising steadily for the last few years, they use to be kind of 50 to 60-day range, and currently they are well above the other ENS companies out there that are in sort of the 30 to 50-day range. If I also look at the payable for Benchmark, they are in the 40 to 50-day range, while your peers are at 50 to 60. So, on both sides, it looks like you’re working capital is less favorable than your peers, and I’m just wondering what are the drivers of that and then more importantly, what can you do to bring down the working capital per sales dollar? Thanks.

In terms of the receivables, I know there’s a number of companies within our industry that can secure ties or AR -- essentially borrowing against it. So, that will bring down their AR base considerably. So, doing an actual comparison is -- you’re not -- it’s an apple to oranges comparison. So, yes, in comparison to our days this quarter we’re at 72 days, again, that’s more of a function of timing. I would expect typically that our receivable days are going to be in that 65 to 70 days in terms of the way you measure the days, but kind of going back to the comparison of others within the industry, I think, again, we’re not borrowing against receivables, which has a very favorable impact.

Our next question is from Sean Hannan from Needham & Company.

So, the Telecom segment has been [indiscernible] evolved for -- or soft for many, many of your peers. This is also been a period where you’ve had some other dynamics, and serve the market obviously, the Thailand floods -- you commented on it slowly being back, you also are benefitting from new wins, but you’re not up to what you saw in the third quarter of last year. So, can you perhaps discuss a little bit of what you’re seeing in the segment, the consideration factored into guidance for June in terms of whether this is flat as your house significantly it could be up. And then also, is there any business left on the table for the first quarter as you got your Thailand facility back on line?

We have seen growth in Telecom really with a number of new program ramps. I don’t believe that the overall environment that we’re seeing in Telecom over the last few quarters is much different than, but any of the other industry players are seeing it, so it has not been as drawn -- there have been some deals, transactions, that have -- that were supposed to come through that didn’t. So, there’s a little bit of struggle in the industry overall there, and some spend levels have not been as high specifically in Q4 as it would have been expected by many in that industry. Having said that, we’re very pleased with the programs and the ramps that we have had, and yes, we do believe that there would have been opportunity in -- increase of com revenues to -- if we had been to shed that a little bit more through Q4 -- I don’t think that number is necessarily significant, but we clearly saw that demand levels were strong in the new program that we’ve been supporting our customers with. So, the information and the guidance provided by our customers does incorporate what I would consider to be some weakness, or choppiness demand, and primarily dominated by new programs that’s pulling the strength.

Then can you provide us with a breakdown of those wins that you’ve had in the quarter just by segment -- how to take about that?

This is the -- not the ballot, we don’t have a dollar that we have of wins. Give me one second, Sean.

Okay, actually, and while we’re looking that up, just if we could get some color around the supercomputing project you mentioned some of that did ramp up in the quarter, was it much, how much is actually factored into 2Q, and does some of that actually trickle into September?

So, on the new computing program that did ramp, we are continuing to ramp that into Q2, it’s progressing as expected, and we’ll probably see some opportunity for continuation in Q3 at this point.

Okay, in terms of the wins, Sean, 8 in computing, 14 in industrial controls, 5 in Telecom, 8 in medical, and 2 in testing instrumentation.

[Operator instructions] Our next questions is from Ryan Jones from RBC Capital Markets.

Yes, I was just trying to get a sense of to the extent you can measure it how much of the sequential revenue increase was a function catch up of production from Thailand? I though last quarter you had said that Q1 would not seem like as much of a back fill from Thailand, and that most of it was due to organic trends. So, I was just trying to confirm that and see if there is any way that you could size that for us?

We took a look at that, and it is a bit difficult to actually quantify because in addition to the recovery, we actually -- the teams were very successful in ramping new programs. So, again, congratulations to the team for what they were able to achieve there, but it does make it difficult to say how much would kind of -- if you will, recovery revenue to support customers that would have been shipped in in Q4 had it not been for the flood. I believe we estimated that to be around $15 million of, that again, that is difficult to do a with or without calculation, but probably about $15 million would be my estimate, and that would have been, again, at a level that we incorporated into our guidance based on what we estimated.

All right, that’s helpful, and then last quarter you also talked to about how free cash generation would double over the course of 2012, and I think you said it’s in a one hand, if growth does slow down, that you would be free cash positive, but it sounded -- if growth picked up you would be the opposite. So, I was just curious, based on the coloration that you’re seeing now going to the back half, is it your expectation that you’ll be maybe free cash neutral or free cash negative this year?

I think going through the next quarter we’ll probably be anywhere from neutral to maybe up $20 million or so is our current expectation for Q2, and I think beyond that, that’s really going to be dependent on sales for Q3 and Q4.

So, as -- I believe it was one Dave pointed out, we will continue to challenge our teams and drive efficiencies and improvements in our working capital management. So, we will continue to focus on that knowing that we do have a number of programs that either inherent nature are back in and loaded for the quarter -- we will still be driving our teams for improvement in that area.

Thank you, and at this time there are no further questions, thank you.

Thank you to everyone for joining us today, and we’ll be available in our offices for any follow up. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using AT&T Executive Conference. You may now disconnect.