Benchmark Electronics Inc (BHE) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Benchmark Electronics second-quarter 2009 earnings conference call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session. (Operator Instructions). As a reminder, today's call is being recorded.

At this time then, I would like to turn the conference over to Don Adam. Please go ahead.

Good morning. Welcome to the Benchmark Electronics conference call to discuss our financial results for the second quarter of 2009. I am Don Adams, CFO of Benchmark Electronics.

Today, we will begin our call with Cary Fu, our CEO, discussing the overall business environment for Benchmark. Gayla Delly, our President, will discuss our activities and performances in the second quarter, as well as our outlook for the next quarter. I will then follow with a review of our financial metrics for the second quarter. After our prepared remarks Cary, Gayla and I will take time for your questions in our Q&A session, and we will hold this call to one hour.

During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We would like to caution you that those statements reflect our current expectations, and that actual events or results may differ materially.

We also would like you to refer to the Benchmark 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 Forms 10-Q and our annual report on Form 10-K. These documents contain cautionary language and identify important risk factors which could cause our actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update these projections or forward-looking statements in the future.

Now I will turn the call over to Cary.

Good morning. We are pleased that you joined us today. We are happy with our Q2 results in this very challenging environment.

We saw stronger shipments for all our industry sectors we serve, except for computing sectors, which we saw softness. Sequentially, when comparing Q2 to Q1 revenue, revenue from the test instrumentation sector was up by [143%]. Revenue for telecom sector is by 8%. Revenue for medical sector was up by 8%. Revenue from industrial control sector was up by 2%, while revenue from computing sector, mainly the enterprise computing sector, was down by 18%.

Our new customers and new program ramps continued to contribute to our revenue streams. However, the favorable impact of this have not fully insulated us from slight revenue declines from Q2 compared to prior quarters.

In the quarter, we saw signs of recovery from some customers. Customers are now talking about future plans, although they remain cautious. But we are seeing many dropping orders. We believe the end-market demand has stabilized, although the improvements are slow. We continue to see the improvement to continue into Q3.

Overall, the pipeline for new business opportunities showed signs of increase as of late. We are particularly excited about several significant potential programs we are currently in discussions.

In this environment, we remain diligent and focused on managing our business to be ready to execute when business from our customers rebounds. We will continue to provide an excellent and proactive service to our customers. We will continue to pursue new business opportunities, expand our service scope. In fact, we enhanced our service offering this quarter by adding precision machining capabilities through a small [asset] purchase in Q2. Of course, we'll continue to manage our costs and maintain a strong balance sheet.

In Q2, we will continue to monitor and take action to help manage the bottom line in line with the continued low demand. Capital expenditures are only made for long-term (inaudible) items as well as the critical items at this point in time.

During Q2, we generated positive cash flows of approximately $13 million, and $77 million for the first six months of 2009.

A strong balance sheet and available cash is critical in this environment, from our point of view. We have 450 -- we have about approximately $452 million in cash and long-term investment, with virtually no debt. Our cash and long-term investment per share is approximately $7 per share as of June 30. We will continue to evaluate our cash position and use of cash in line with our cash generation, as well as any M&A activity.

During the quarter, we resumed modest purchase under our share repurchase program of approximately $4 million. Our margins are very strong, and we believe that Benchmark [manages] through this downturn diligently to emerge as a stronger organization.

Now I'll turn the call to Gayla Delly, the President of Benchmark Electronics.

Thank you, Cary. Q2 overall was a good quarter for Benchmark. While the economy remains tough, the efficiency and productivity improvements we have achieved from our strong cost controls and restructuring efforts are reflected in our operating margin improvement.

Overall, the end markets were closely in line with what we anticipated, except for computing, which had a variety of external factors impacting our revenues. Product lifecycles, lower demand for enterprise IT generally in this environment, and the unknown impact of pending M&A transactions all factor into having an impact on our business in that sector.

During Q2, we had revenues of $482 million, which was in line with our guidance, and down slightly, 3%, from Q1.

Our improvement in operating margins, excluding special items, is attributable to new program wins driving a strong product mix and our continued focus on operational efficiencies and cost controls.

There are signs of increasing opportunities. We see a very active pipeline of opportunities, and our bookings for Q2 were solid -- 13 new programs with current estimated annual revenues of $92 million to $116 million. These new program opportunities are with both new and existing customers within industrial controls, computing, medical and telecom industries.

Due to the current market conditions, the timing and actual future revenues from these bookings are uncertain at this time.

Our team is working to assure that we continue to differentiate ourselves through our execution and our flexible service model. Given our solid operational metric and our strong balance sheet, we are confident in our ability to flexibly support the needs of our current and future customers.

Based on our current outlook, we expect third-quarter 2009 revenues to be in the range of $470 million to $520 million, which is a modest increase from Q2. The corresponding earnings per share for the third quarter are in the range of $0.17 to $0.22, excluding restructuring charges.

Also, with the continued limited visibility and overall uncertainty in the economic environment currently, we will only provide guidance for the third quarter at this time.

Now I would like to turn it back over to Don to discuss some financial metrics for Q2.

Thank you, Gayla. We completed the second quarter of 2009 with revenues of $482 million. Again, these revenues were then within our revenue guidance of $460 million to $520 million provided during our last conference call. As Cary noted, we saw stronger shipments for all the industry sectors that we serve except for computing. Again, the strength in our non-computing sectors reflect the strong bookings over the last year or so.

Our earnings per share excluding restructuring charges were $0.19 per share, which was within the guidance provided. With the better product mix and our ongoing cost control measures, we've been able to improve the operating performance of the Company.

Our results for the second quarter included one special item, restructuring charges of $1 million. The restructuring charges incurred during the quarter were primarily severance-related, in addition to some other costs, due to the continued effort to realign our global resources based on our customer demands, which continue to be impacted by the ongoing economic slowdown and resulting changes in their demand requirements.

To provide a more meaningful comparative analysis, we will present certain financial information, excluding the special item, during this conference call. We will call your attention to the fact that this item is excluded when we do so. In today's press release, we have included a reconciliation of our GAAP results, or results excluding this special item.

Our gross margin for the second quarter was 7.2%, excluding special items, which is 80 basis point sequential improvement when compared to 6.4% for the first quarter. At the current revenue levels, our gross margin exceeded our expectations due to a better product mix, our operating efficiency and our aggressive management of our cost. We believe that this level of gross margin is sustainable at the current revenue level.

Our operating margin for the second quarter was 2.8%, excluding the restructuring charges, compared to 2.3% for the first quarter. Excluding special items, net income was $12.2 million compared to $22.1 million in the second quarter last year. GAAP net income for the second quarter of 2009 was 11.6, which compares to GAAP net income of $22.1 million in the same quarter last year.

Second-quarter diluted earnings per share, excluding the special items, were $0.19 in 2009 compared to $0.33 last year. GAAP diluted earnings per share were $0.18 in Q2 of '09.

Interest income was approximately $489,000 for the quarter, and interest expense was $350,000. Again, the decrease in interest income for the quarter is due to the continuing low interest rate environment.

Our effective tax rate was approximately 7.5% for the second quarter of 2009 on a GAAP basis. Weighted average shares outstanding for the quarter were [65.2] million on a GAAP basis. Our cash and long-term investment balance was $452 million at June 30, which includes $48 million of auction rate securities classified as long-term. The unrealized loss of our auction rate securities at June 30 was $4.7 million due to changes in the market value of these securities. The unrealized loss is reflected in accumulated other comprehensive income as a component of shareholders' equity.

In today's environment, we continue to monitor financial institutions and cash management vehicles we are using to invest our excess cash balances. We continuously monitor the overall creditworthiness of the financial statement, institutions that we use, in addition to investing our excess cash balances and vehicles where preservation of principle is the priority.

Note that our interest income has been significantly impacted by the overall decline in the market rates of interest.

For the second quarter our cash flows from operation were approximately $13 million. Capital expenditures for the second quarter were approximately $4.9 million. Depreciation and amortization expense were approximately $9.8 million. Receivables were $350 million at June 30, an increase of $12 million from the last quarter.

Inventory was $322 million at June 30. Our inventory turns were 5.6 times for the quarter compared to 5.4 times in the first quarter. Current assets were approximately $1.1 billion, and the current ratio was 4 to 1 in the second quarter compared to 3.7 to 1 in Q1.

At June 30, we have $11.8 million of debt outstanding, which primarily relates to a long-term capital lease on one of our facilities.

Comparing the second quarter of 2009 to the same period in 2008, the revenue breakdown by industry is as follows. Medical for this quarter was 14%; in 2008 it was also 14%. Telecom in 2009 was 26%; in 2008 it was 17%. Computing was 38% in 2009 compared to 48% last year. Industrial controls for the current quarter was 19% compared to 16% last year. And finally, test and instrumentation was 3% for the recent quarter compared to 5% last year.

At this time, I would like to open for the Q&A discussion session. During this session, we request that you limit yourself to one question and one follow-up question in order to allow enough time for everyone's questions. Thank you.

(Operator Instructions) Sherri Scribner, Deutsche Bank.

Thank you. It was a little difficult to hear some of the comments. I was curious if you could go through the new program wins again and give us more detail on who the -- which segments those were in. I'm sorry, but I missed it.

Okay. No problem, Sherry. We had 13 new program wins this quarter, with annual revenues in the range of $92 million to $116 million. And the new programs were in industrial controls, computing, medical and telecom, with more significant activity in the industrial control and medical sectors.

Okay, great. And then in terms of the compute segment, can you just go through again -- it sounded like some of the slowdown was related to the Sun business. You usually break that out as a percentage of revenue. You mentioned the pending mergers. And then I think there is a couple of details in there that I think relate to other customers. Could you just go through that again?

I will try to answer all those questions, hopefully. Sun was just below 10% of our revenues for the quarter. And overall, what we indicated was the infrastructure IT spending, as [composed] to overall computing, which it would include the consumer portion of computing, consumer seems to be -- from what we are seeing, as we don't support that portion of the marketplace -- that seems to have some bright spots currently.

However, on the infrastructure side, we still see spending controls and do not see a lot of strength in that, and that is the sector we serve. Then we've seen more economic environmental pressure on that part of the computing sector, which is what we support.

Okay, great. Thank you.

Jim Suva, Citigroup.

Thanks. Gayla, you had mentioned your largest customer was just under 10%. Can you let us know what is going on there? Is it the M&A, or is there more share losses than you anticipated?

I think as we've indicated previously last quarter or probably the quarter before, we've seen some end-of-life products and commoditization in certain products in computing, not specific to any one customer. As well -- as you well know, in Sun's environment, there is M&A activities. Don't know if or what impact that may have on the sales cycle. Can only read kind of anecdotally what is out there in the marketplace.

But overall, we've seen the impact of all of those factors have an impact on our revenue, and that is how we've described it in the call. I don't know that we can parse those out into pieces.

And then maybe a bigger question about the kind of strategy and what has changed at Benchmark in the industry. This is probably for everyone who is in the room.

But when we look at your run rate of sales compared to the profitability -- and you've done a lot on the cost control, which has been very admirable -- compared to past times when you've been at these run rates, your operating profits were significantly higher as well as your earnings. So I wonder if structurally things have taken a step back here in the profitability of Benchmark, as one would expect operating margins to be well into the 3 or sometimes 4% in the past of what they've been at these revenue levels.

I think there are probably several factors, Jim. And depending on what points in time you look at, I think if you go back far enough, you will see everyone in the industry -- and I can remember in years gone by where double digits was not unheard of. So some of it has just been environmental factors, where the overall marketplace has changed.

Some of it is clearly just the competitive environment that everyone has faced. But in general, I think what you are referring to is do we have incremental leverage. And my answer to that is yes. We do see that we do still have a leverageable model. And in fact, one of the things that is probably important to point out is that when I looked back to see where we were on 20 of our most significant wins over the past six quarters, I found that 50% of those have not achieved -- their current environment -- we've already rightsized the programs to expectations for the current environment -- and they have not met the revenue run rates that we expect yet.

So I don't have a further drilldown to understand specifically if that is a result of the programs being more complex and taking longer to launch. But I just know they are on path. They have not been abandoned or stalled or stopped, but they have not yet achieved the run rates expected, and are still on path to reach increased activity.

So with those factors in mind of some of our wins and some of our new wins that we are excited about, as well as the funnel and the fact that we do have the assets in place and the infrastructure -- may be some direct labor you have to add -- but I think that overall we have the footprint to be able to support it, and therefore the leverageable model is still very much intact.

We have not cut to the bone. I think we've been very diligent. You've seen our restructuring costs have been very modest. And so we are holding the model in place and it is leverageable.

On that path to get to say 3.5% or 4% operating margins, what type of revenues would we need? Or is it more just all mix?

It is probably a combination of revenue and mix. As you probably also know, it has to do with where each of those programs are in their lifecycle. So -- how many of the programs are in the early ramp stages versus maturing.

But I think what we've demonstrated in the current environment with the current model is that we have the ability to control those items that are within our control effectively and to be able to manage the ramp of business properly.

Thank you very much.

Amit Daryanani, RBC Capital Markets.

Thanks. Good morning, guys. Just a question on your sales guidance. It looks like we are seeing some -- talking about a little modest sequential growth here [up]. Any sense on how the computing business is going to do sequentially at this point? And really, the 2% growth we are looking at, is that end-market driven or is it just new-wins driven?

Q3 is typically a very soft quarter in two areas, one being computing and the other being Europe in general. So I believe we will continue to see that type of environment exist in the third quarter, and that is what we've incorporated into our guidance given.

So I don't think the current economic environment is going to change the overall environment that we typically would see in the third quarter in those two areas.

All right. And then maybe if I just go back to the modeling question. I was looking at it a little differently. But at least on a year-over-year basis, your gross margins have actually expanded, while sales have gone down. And sequentially, we saw some pretty good operating margin expansion.

As sales start to come back possibly in the next few quarters, just talk about the sustainability of actually seeing margins continue to expand. Or do you think you will have to add back incremental cost as fast as revenues come back?

I think -- as we said, I think it currently -- with the revenue levels that we are at now, the margins are certainly sustainable. And as Gayla indicated before, our model is leverageable. So with levels of sales increases, you would expect -- we would expect the margin to also increase.

But -- so, I think a couple points again. I think the margins are sustainable at the current levels, and the model is leverageable. Again, it is going to be dependent upon product mix and the number of new ramps that are ongoing, whether we are in the early stages or, again, the number of ramps going on.

Got it. And then just finally, Cary, I was wondering if you could maybe just talk about priority of cash usage. In the past, you've talked about M&A being a high priority. Any thoughts on that?

Of course, with the strong cash position is -- from our customer standpoint of view, is it counts very favorably because we're able to support their activity in a downturn. And definitely we are looking at a lot of opportunity. And as I say earlier -- in my report earlier, saying that we did have a small asset purchase for -- a small asset for (inaudible) equipment activity.

We're continuing to look at a lot of assets out there, and some are interesting. And the challenge we have right now is a lot of tech companies does have a pretty strong cash position and not willing to do a transaction on, so on and so forth. But definitely, we are looking at the (inaudible) very closely and mainly from the skill standpoint of view and to enhance our offering.

Thanks a lot, guys.

Sean Hannan, Needham & Company.

Over the course of the last couple of quarters, obviously we have seen this transition, as Sun is becoming a little bit more marginalized within the impact to your model. We see some of the medical business and telecom coming a little bit more to the forefront.

As we look at this point forward, what are our general thoughts in terms of relative order of magnitude of how your business materializes, how that mix may change as we look at your different segments?

If we look at kind of our wins and where we see the growth opportunities coming from, I believe we are seeing growth in industrial, test and instrumentation and medical. Ultimately, diversification is something that we all strive for in business, and it kind of doesn't matter what portfolio you are managing.

So to the extent that we could have five areas that we focus on all approximating 20, that would be just wonderful. But we are trending more towards that direction, is ultimately what you'll see. And if you look at the wins, we are kind of supporting that with the business to our bookings.

That's helpful. And in terms of the wins, you mentioned that there were some wins within computing. Does this also include wins at Sun, and to what degree is Sun versus the rest of the group within computing, if there were in fact wins there?

Sean, now you're getting to the point where I can't answer. I don't actually answer on specific wins, unless they are very significant and reportable. So I won't speak to any specific customers on the wins, but I think we are very excited for each of the new bookings that we have, and the mix of customers and new customers that we are adding in our bookings.

Is there any reason to believe that the trend in terms of the business with Sun is correlated to the win rate?

Maybe it's too early in the morning, but I'm not sure I understand that. Ultimately, you are trying to quiz multiple points of quizzing about Sun. And I'll just frame it this way. Anytime there is M&A activity, it doesn't matter how many points of contact you have. I think there is a lot of decision-making that will be made by the new management, by the joint management and the ownership, that not all of which are carved in stone, and likely won't be even in the next six months. So there will be a lot to transpire.

So I, nor probably the people on the Oracle Sun side, have all the answers that you'd like to have right now, and we'll all be waiting for those to be forthcoming. In the meantime, once again, what Benchmark will do is control what we can control, and serve excellently and flexibly the customer and the customer's model and strive to support them with our business model where it fits well.

That actually provides a lot of what I was looking for. Thanks very much.

Thank you. That does conclude are question-and-answer portion of the call. I would like to turn the conference back over to Gayla Delly for any closing comments.

We want to thank you all. We know today is a day filled with a lot of conference calls. We will be available in the office if you have any follow-up, and thank you again for your time.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.