Good day ladies and gentlemen and welcome to your Benchmark Electronics Fourth Quarter and 2014 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today, Lisa Weeks. You may begin.

Good morning, everyone. I’d like to welcome you to the Benchmark Electronics earnings call for the fourth quarter of 2014. I am Lisa Weeks, VP of Strategy and Investor Relations, and thank you for joining us. Earlier today, we issued a press release highlighting our financial performance for the fourth quarter. If you did not receive a copy, you may obtain it from the Investor Relations section of our website at www.bench.com. This call is being webcast live, and a replay will be available on our website following the call. Gayla Delly, our President and CEO; and Don Adam, our CFO, are with me this morning. After their prepared remarks, we will open the call for your questions. For your information, Gayla and Don will be using a slide presentation, which also is available on our website. The company has provided a reconciliation of our GAAP to non-GAAP measures in the press release as well as in the appendix of the presentation slides. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties disclosed in the safe harbor section of our earnings release and SEC filings. Actual results may differ materially from these statements, and Benchmark undertakes no obligation to update any forward-looking statements. If you would, please turn to slide 3, and I will turn the call over to Gayla Delly, Benchmark's CEO.

Thank you, Lisa. Good morning everyone and thank you all for joining our call. Before Don goes through our financial results for the quarter in detail, I want to thank our teams for their strong performance. All in all, 2014 was an excellent year with 12% year over year revenue growth, 31% EPS growth, $137 million in operating cash flow and $575 million in new bookings. As you noted in our earnings release this morning, our fourth quarter results reflected softness in revenues primarily associated with computing and telcom and our first quarter guidance continues to reflect weakness in these segments as well as seasonal impacts from other industries. Our strong level of bookings throughout 2014 fuels the opportunity for growth as our new programs move into production and with these ramps occurring in the latter position of 2015 and approaching their expected revenue run rates in 2016, we believe we’re well positioned for a solid platform for growth following the Q1 levels. Now, let me turn it over to Don. Don?

Thank you, Gayla, and good morning to everyone. In the fourth quarter, we generated revenues of $710 million, which was at the low end of our guidance of $710 million to $740 million. We were very pleased to see the continued strength in our industrial and medical markets. As we discussed last quarter, we did not expect computing and telecom upside based on forecast from our customers, and fortunately not only did we not see an upside, we saw unexpected softness. On a positive note, our cash flow from operations was excellent and did achieve our operating margin goal of 4% for the quarter and for the second half of 2014. Our non-GAAP net income for the quarter was $23 million compared to $24 million last year. Net income on a GAAP basis was $24 million for the quarter compared to $67 million last year, which included some significant non-recurring items including insurance proceeds received and a discrete tax benefit which are reflected in today’s press release. Non-GAAP earnings per share were $0.43 for both the fourth quarter this year and last year. Our GAAP EPS was $0.45 compared to $1.24 in 2013, which again was impacted by the non-recurring items mentioned above. Our non-GAAP operating margin was 4% compared to 4.1% during the fourth quarter of 2013. During the fourth quarter of 2014 we realized a benefit of approximately $1.5 million related to the gain in the sale of our China facility which was partially offset by restructuring and integration related costs of approximately $955,000. I’d also like to highlight that SG&A was moderately lower for the quarter due to lower variable compensation associated with lower revenue. We expect SG&A to return to normal levels in future quarters. The fourth quarter non-GAAP effective income tax rate was 18.5%. Our…

Thank you, Don. I’d like to provide a backdrop on the dynamics in our traditional and non-traditional industries we serve. First, looking at the traditional market, our three year compound annual growth rate was 5%. As the chart on the left at slide 9 shows, during that period, there has been quite a bit of variability on a quarter to quarter basis. There are several drivers for this phenomenon in computing and telecom, which we expect will continue in the future. In high-performance computing storage and server products, we generally have seen demand being seasonally strong in our second and fourth quarters. In addition to this seasonality, we see variation in project timing associated with new technology introduction, while this cycle is not new, the level and rate of change has increased. In telecom, we see greater non-linear demand as our customers feed the market during their new product upgrade cycle. With our traditional market, we expect program ramps to demonstrate more pronounced but shorter period strength, followed by shorter more pronounced softness between cycles as industry dynamics continue to evolve with the Internet of Things as a key driver for many of our customers’ products. This is the new norm barring any macroeconomic changes which are not considered here. Importantly, while these cycles may present periods of demand variations, I’d like to reiterate that we have maintained and have strong relationships with our key customers and the programs in these markets. We’re committed to support our value traditional customers and to adapt to meet their operating needs and their rapid time to market expectations. Now, looking at the chart on the right, our growth within our non-traditional segment of the market, industrial, medical and testing has been steady. In fact, in this area, we have experienced a compound annual…

[Operator Instructions] Our first question comes from the line of Steven Fox of Cross Research. Your line is open.

Thanks. Good morning. First question, can you just maybe expand on the new bookings for the year, it looks like it was about 20% of your revenues. I think you mentioned timing-wise that a lot of that ramps as you get later into this calendar year, can you talk about what we should expect in terms of the pace and what kind of mix it should look like and then the effect on profitability as we go through the year? Thanks.

So on our bookings, as we are booking a number of our programs in the non-traditional market, as we’ve indicated the ramp to production is a longer cycle in those markets. So while I would hesitate to call it a norm, it typically would be more of a three to five quarter ramp, excepting for medical which of course can be impacted by the regulatory environment and be even longer or in some cases it can be fortunate to have it within that range. But typically, we would see these to be longer ramp than what we would see in telecom and computing, which can be in a couple of quarters. I don’t have a specific guidance to say the cadence or the layering in of these and as always we do not provide financial guidance for the year. But we wanted to provide an indication that we feel comfortable and confident that the level of bookings that we have will have a favorable impact on the latter half of 2015 and moving into 2016.

Great, that’s helpful. And then just as a follow up, Gayla, you talked about the variability in telecom revenues this year and I guess more pronounced strength was the wording you used, can you just sort of maybe compare how that’s going to look as you exit this year versus exiting 2014. Are we looking at a business that recovers to year over year growth, are we looking at a different type of mix, any color around how the telecom business is going to change during the course of this year would be helpful? Thanks.

On the ramp for telecom, I don’t have clarity out as far as what I would expect for Q4 versus Q1, except to say that there does seem to be some pause in infrastructure spending currently which could last a couple of quarters, I don’t have a guidance as to whether that’s two or three quarters, how long that impacts maybe seen. But as the spending resumes and then with the introduction of new products, I expect those to have a favorable impact, whether it’s Q4, Q1, I don’t have clarity on timing of that. But I do expect that the infrastructure spend pause will last for a couple to three quarters would be my estimate.

Great. That’s very helpful. Thanks very much.

And our next question comes from the line of Sean Hannan of Needham & Company.

Yes, thanks for taking my question here. So just wanted to see if I get a better sense of how you’re thinking about 2015. It almost seems like the directional guidance you’re providing, you might be looking for a flattish revenue years, is that how to think about this based on the segment outlook? I do realize a few puts and takes here, but just want to see if we can get some clarity around that. Thanks.

Sean, one of your key word cut out and so I’m not sure of the descript you used for the 2015 revenue. But as you can see with the areas of growth that we have being the non-traditional market and some softness in the computing and telco, which remain sizeable markets, there is a bit of headwind that we are facing. I guess importantly, we do not see as we enter the first quarter or in fact as we would indicate for 2015 at this point that we would have a greater than 10% customer. So while I believe we’re continuing to see some headwinds in those market places, we do see diversification and do not see the headwind that would be associated with concentration. So I don’t have clarity on where we would expect telco and computing specifically for the reason associated with the prior question as to timing when spending returns on telco. So I do believe that we see headwinds in our 2015 associated with, 49% of revenue associated with telco and computing and we see growth as spending resumes on those.

Okay. And I suppose that kind of nets out, are you looking at, at least at this point, perhaps more of a flattish revenue year?

Again, I’m hesitant to give guidance and not give guidance, we’re really providing the guidance for Q1 and expect to see positive opportunities for growth beyond that. But I’m giving a specific guidance for 2015.

Okay. Then at least in terms of margin commentary, I think that I heard expectations we might be able to get to a 4.2% margin by 4Q, just want to confirm if that was accurate? And then what are the expectations that allow us to get there, is that a measure of the mix and what you have with those growth expectations in those non-traditional markets or is this also a big picture of, by getting to that quarter at the end of the year, we have much greater overall revenue leverage and it’s that leverage function that allows us to achieve that? Thanks.

I guess as in all cases, it’s a combination, not as much expected from volumetric increases in leverage, although we would expect some improvement by Q4 in some of the traditional markets. But we do see strong growth in the new programs that we expect to come in at – by the fourth quarter, at the end of the year. So you’re correct, 4.2% is what we would expect to exit the year based on what we see. So some growth in telecom and computing resuming, but I would say clearly not the volumetric increases that we see in prior years. And as we indicated in the comments, in many years, we’ve seen a pretty significant swing upward in Q4 and we don’t see that occurring in the current environment.

Okay, thanks very much for taking my questions.

Our next question comes from the line of Brian Alexander of Raymond James.

I just want to follow up on Sean’s question, so on that 4.2% exit margin Gayla, what would be the minimum level of revenue you think you would need to achieve at the company to be comfortable with that? Is that something that, if revenue were flat year over year in the fourth quarter which I know you’re not shooting for that, but if that occurred, do you think that’s still possible?

Again, it’s so dependent on mix, but generally I’d say as you can see with productivity improvements and operational excellence as we continue to drive improvement in that and I’d like to have a line to get that range to 7.25 to 7.50 to be able to achieve that generally. And actually I’d like to see us drive even further than that, but that’s generally where I would expect us to achieve that.

Okay, that’s helpful. And then if I look at the guidance for Q1 and look at what’s implied for operating margins, I think it’s around 3.5% and that’s on revenue of $630 million. And I think if I go back like the last two to three years, you’re able to do better than that on similar revenue levels, higher than 3.5% operating margin on similar revenue levels. And your mix is a lot better now. So I don’t know if you’re seeing more margin pressure in certain aspects on the business or if it’s really just a function of the severity of the revenue decline and the abruptness of that decline, but I just want to see if you could comment on that?

A couple of things. I think if you look at Q1 last year, you’re correct, we did 3.6% that was also on a slightly higher revenue base, but I think the other key thing you just mentioned, Brian, is the abruptness of the decline between those two factors, that’s really where the margins are coming out right now.

And additionally, Brian, I guess the one thing that we have in there as always at the lower watermark, if you will, the significant impacts associated with number of new programs does have a downward pressure on our margin.

And then just a final clarification, Don, you talked about the buyback, I think it’s kind of your number one investment priority when you talked about cash use, and if you’ve said that in prior quarters maybe I didn’t catch it. So is that a change and do you think we might see the buyback this year kind of north of what we’ve seen over the last few years, which has been $40 million to $50 million given where the stock is trading and given what you have left on the authorization?

I think in terms of priority, it was just first in the sentence, the priorities will be both stock buyback and reinvesting in the business. In terms of share repurchases, we were a little bit higher in the second half. So what I’d say is I would expect our share buybacks to – will continue to evaluate our needs from a CapEx standpoint and I wouldn’t anticipate any significant change, maybe a little variability from quarter to quarter, but overall no significant change.

And Brian I guess the message there is that we expect that to continue on pace, nothing dramatic on the buyback. So that’s just kind of a steady path there and investing in the business is an ongoing priority. But with that, I think it’s important to note that we have a strong footprint, we don’t have critical view right now of meeting an extraordinary level of CapEx. So both of those, we expect, to be investments and share buybacks at a steady pace, not with an extraordinary level of investment required to do that. And then beyond that, what we didn’t mention is of course we’ll continue to look at opportunities to invest in our business and strengthen the capabilities and skills that are needed to support the growth in the industries where we think growth opportunities for outsourcing as well as potential adjacencies.

Okay, thank you very much.

Our next question comes from the line of Amit Daryanani of RBC Capital Markets.

Thanks a lot. Good afternoon, guys. Couple of questions. One on the high end computing segment, the sequential decline that you guys saw, just want to clarify this, it was all related to your largest customer, so ex that trends were essentially flattish, is that fair?

Say that again, I didn’t catch all that, Amit.

Sure. On the compute segment, the revenue decline that you guys saw on a sequential basis, was that largely related your largest customer there, i.e., ex that large customer, business was essentially flattish?

I would say the expectation that we had, Amit, was from our top customer.

Kind of two things there. Yes, the most significant decline was associated with the largest customer and excluding that we did see strength in computing. So I think both of those statements are correct.

Got it. And then just on the telco side, the abrupt softness that you guys saw, are you fairly certain there wasn’t some market share shift that happened against you potentially in the quarter and that’s what impacted the numbers?

Yeah, it’s absolutely certain, absolutely certain in conversations with customers that is not the impact, we do see other impacts, of course, as transitions are made from site to site, there may be additional throughput that is done and we don’t have any transitions going on, so we wouldn’t get impacts from that. But there is no share shift.

And then just finally, when I look at the non-tech segments, especially look at all the wins you guys have had in the last six to eight quarters, maybe longer, is it reasonable to think that you would expect these segments to be up north of 10% in 2015?

Barring any macro environment changes and to the extent that they are associated with some FX impacts, we do see some potential for that.

Perfect, thank you very much.

Our next question comes from the line of Todd Schwartzman of Sidoti & Company.

Gayla, I’m curious about FX, what did the strength in the US dollar cost you in EPS in the fourth quarter?

So to be clear, the FX impact is not with us, we use natural hedging and we don’t have any significant impact from that directly. It would be more of an indirect impact associated with the sell through of our customers’ products, especially as they are competing in US dollars in the global market.

Is it safe to say that impact has intensified in Q1?

I believe that is what is demonstrated and seen through the forecast we provided, yes.

Okay. Just wanted to get some clarification, not to beat a dead horse, but with regard to the 2015 guidance or outlook, if you will, on the traditional market side, you pretty clearly telegraphed an expected decline full year revenue, whereas in terms of the full year outlook for compute, you’ve got in the slide as stable and I think in your opening remarks you said that you expect it to remain a bit soft and I understand that there is variability, but is it that you just have better visibility that lead you to call for, from where you sit now, expect a full year decline in telecom, but just not really clear on directionally what you’re looking for from computing for the full year, up, down, sideways?

So computing, I’d say, pretty close to sideways based on the visibility I have. I’d say computing has highest level of ability to support transitions up or down in a most rapid pace that we don’t get extended visibility there. And so you’re clear as we have given lack of visibility which is what we have from our customers in that space. And again, because of the product lifecycles and because of the supply chain, we’re able to act and react very quickly in those markets and the visibility isn’t required. In the longer lifecycle products, we clearly get stronger visibility.

And I would think diversification on the telecom side with respect to the customer base gives you a little bit better clarity, vis-a-vis, computers, is that a fair assessment?

Yes.

Okay, thanks. That’s helpful. On industrial control, I wanted to kind of get my arms around the timing of a pick up that you seem to be looking for throughout the year, so you’re looking for down Q1, but growth for the year. Could you maybe speak to the timing of any particular ramps that make you more bullish as the year plays out, whether it’s each quarter sequentially or just where you expect to wind up the full year? Thanks.

Generally I expect it to be sequential, but I think it clearly gains [indiscernible] as the programs ramp. So as you might imagine as we ramp these programs, they really gain momentum after you get through kind of the first couple of months. So I’d expect that the most significant impact is in the back half of 2015.

So it’s really just a function of those nine consecutive quarters of that sector leading your growth in wins?

Absolutely.

Okay. And what’s your free cash flow goal for 2015?

Free cash flow, I think it’s going to be dependent on where ultimately sales are, but given where we’re at now I would expect $100 million.

Got it. Thanks. Appreciate it.

[Operator Instructions] Our next question comes from the line of Sherri Scribner of Deutsche Bank.

I just want to dig a bit into the compute segment again once again, I know a lot of people have asked questions on this, but you saw softness this quarter and guided to a flat demand for the next quarter. But I just wanted to think of how should we look into the compute segment going into the rest of 2015 given the headwinds in the industry and also into 2016?

So as I just mentioned on computing, as is indicated in our slide deck, we see Q1 of 2015 down approximately 20% and then for 2015 overall we expect it to be stable outlook. So I don’t have further insight or visibility to provide than that, but that is kind of our outlook overall for the compute sector.

Okay. And then Gayla you did highlight and even in the slides, I think the traditional market being quite a bit, seeing quite a bit of variability on a seasonal basis. I was just trying to understand should we think of seasonality for the different segments being quite different going forward as to what we’ve typically see in prior history?

So what I was trying to in part in the discussions that we had in our prepared remarks is that they cycles are getting tighter in computing as to new products and programs brought to the marketplace, and we would expect those to continue, but I do not expect overall for Benchmark that our revenues as the composition of revenue changes and we have more significant growth in the non-traditional market. I do not expect the overall revenue to see as much impact by the seasonality as we have seen in periods where computing and telco as we show in some of our slides, I believe, last quarter represented three-quarters or two-thirds of our revenue. So I guess two points that we’re trying to make there, yes, we expect seasonality in computing and telco to continue. And in fact, be probably even stronger. And then second, the impact to Benchmark we expect will be somewhat dampened or lessened by the fact that our overall revenue composition is more balanced and not tilted significantly as much as it has been in the past to the computing and telco market.

Okay. Thank you for the clarification.

And we will take our last question from the line of Jim Suva of Citigroup.

Great, thank you very much. Can you help me better understand again the reason for the year over year EPS decline? If I look at it, it looks like tax rate maybe [indiscernible]. And then when I look at your – you mentioned ramps, I actually look at your ramps year over year for the December quarter and year over year for the September quarter actually declining. So I kind of need to understand the reason for the year over year EPS decline.

And you’re trying Q1 to Q1, Jim?

Yes, March quarter outlook versus March quarter of last year actual results?

Well, a big piece, you’re correct, is the tax rate. In the first quarter of 2014 we had a discrete tax benefit. I believe our tax rate in the first quarter last year was 16%. Because of the geographic mix, we’re now forecasting 21% to 22%. So that certainly is a big impact. And then alluding to the question earlier, there is a slight degradation in the operating margin from – if you look at last year’s 3.6%, this year our midpoint of our guidance is 3.5%.

Okay, great. Thank you so much for the clarity. It’s much appreciated.

And thank you operator and everyone for joining us today and we’ll be in the office today for any follow-ups and appreciate your time this morning.