Benchmark Electronics Inc (BHE) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Benchmark Electronics second quarter 2010 earnings call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session, and instructions will be given at that time. (Operator instructions). As a reminder, today's call is being recorded. At this time, then, I'd like to turn the conference over to Mr. Don Adam. Please go ahead, sir.

Good morning. Welcome to the Benchmark Electronics conference call to discuss our financial results for the second quarter of 2010. I'm Don Adam, CFO of Benchmark Electronics. Today, Cary Fu, our CEO, will begin our call by reviewing the current market environment and the resulting impact to Benchmark. Gayla Delly, our President, will then discuss our operational activities for the second quarter and our outlook for the third quarter. I will then follow with a review of our financial metrics for the second quarter. After our prepared remarks, Gayla, Cary 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 expectation and that actual events or results may differ materially. We would also like to refer you to our 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 Cary.

Good morning; thank you for joining our call today. Benchmark Electronics' second quarter results once again show a good growth, [material] growth in some operating metrics. For the quarter, our revenue was up 22% compared to the same period of time in 2009 and at 3% sequentially. Our earnings per share excluding restructuring charges are up 74% compared to the same period 2009 and up 10% sequentially. Our earnings per share result was within the guidance we reported last quarter. For Q2 our earnings per share were impacted by two items which were not forecast, a favorable tax rate and a favorable FX impact. These items are basically offsetting with our results.

For the year-to-date results our revenue for first half was up 19% compared to last year's, and earnings per share excluding the restructuring charges up 85% compared to 2010 to 2009. Our gross margin for the quarter was -- the 2010's is 4% compared to 2.8% in 2009 and consistent with our first quarter of the years. We have retained our operation leverage while ramping up some of the new programs which we have been talking about over the last several quarters, in addition to the overall challenging component environment.

Of course we are disappointed that our Q2 revenues fell short of our revenue guidance. In comparison to our guidance we are (inaudible) impacted by the continued challenges on the supply chain, changing the mix from our customers' forecasts, in addition to a lack of a demand pool at the end of the quarter from one of our computer customers. This factor impacted our revenue and the inventory level as well.

We went into the second quarter confident with our revenue guidance. In development of Q2 forecast we considered the supply chain environment. We also conservatively discounted forecast provided by our customers, but that's not enough. The product mix change we received from our customers was in -- with this constrained supply chains, in addition to the lower demand pool from the computer customers means that we did have a slight miss on our top line.

The good news is our teams continued to do a diligent job in this environment in meeting the needs of our customers. The long lead time for several components has continued to impact our ability to meet our forecast mix changes in supporting the drop-in orders from our customers. Our supply chain team, in support with our customers, [delivered] very diligently in supporting -- in working with extensive supply chain to bring the demand challenge. However, this extended lead time impact our shipment in the approximate $30 million for the quarter.

Our revenue from the Medical sector was slightly down in Q2 from Q1, mainly due to the product transition crossover. We do expect this to be rebound in the second half of the years with the new program ramping we have in front of us.

Looking at the Q3 forecast, we are looking for continued growth. We see our customers' forecasts continue the growth quarter over quarter. In determining our guidance, particularly in the revenue for the third quarter, we have considered a continued supply chain challenge. It takes a more conservative discount on the forecast from the customers, also considered our [quarter to date] shipment at volumes.

We do anticipate top-line growth for the third quarter. We do feel comfortable with the guidance which we are providing today, looking at new program ramps and the quarter to date activities. Know that we do anticipate an overall macro environment remains stable during the quarter, but the currently changing overall environment could impact our results.

Now I turn to Gayla to talk more about operation (inaudible).

As Fu noted, the second quarter was a challenging quarter, another quarter of good results and continued constraints within the supply chain as well as significant mixes in the demand levels from our customer, including their increased demand. As you will recall, we booked 11 new programs with current estimated annual run rate revenues of $300 million to $375 million at full production during the first quarter of 2010. These are tracking to plan and we expect to start seeing the benefits of these bookings beginning in 2011.

During our second quarter we booked 11 new programs with estimated annual revenues of $87 million to $92 million. These bookings were in the following industry sectors -- Industrial Controls, Telecommunications and the Medical sector -- and they were with both new and existing customers. These bookings, of course, are subject to the risks of timing and ultimate realization of the estimated revenues.

Additionally, in our sales [front log], we have opportunities which we anticipate will close in Q3 that have not closed during Q2 that are significant. During the second quarter, we did not report any restructuring charges, as we did complete our planned restructuring activity during Q1. Of course, we continue to review our global footprint in relation to customer demand to determine if actions are warranted for the short-term or the longer-term.

As noted, we expect to see continued growth in the third quarter of 2010, and based on what we see today, we expect estimated revenues, considering the factors Cary pointed out, during the third quarter of 2010 to be in the range of $590 million to $630 million, with corresponding earnings per share for the third quarter in the range of $0.33 to $0.36 excluding restructuring charges.

We are providing third-quarter guidance only at this time, and at this time I'd like to turn the call back over to Don to go through some financial metrics for Q2.

We completed the second quarter of 2010 with revenues of $589 million, which was a 22% increase over the prior year and a 3% increase over the first quarter, yet these revenues were slightly below our revenue guidance of $600 million to $630 million provided during our last conference call. On a quarter-over-quarter basis, we saw stronger shipments for all industry sectors we serve, except for Medical, where we saw a decrease due to product transitions and crossovers. Sequentially, when comparing Q2 this year compared to Q1 of this year, revenues from Test and Instrumentation were up 14%, revenues from the industrial control sector were up 8%, revenues from the Telecom sector were up 7%, revenues from the computing sector were up 3%, revenues from the Medical sector were down 20%.

Our earnings per share for the quarter were $0.33. Note that we did not report and restructuring charges during the second quarter, as anticipated in our last conference call. To provide a more meaningful comparative analysis, we will present certain financial information, excluding restructuring charges incurred in the prior periods during this call. As previously mentioned, we did not report any restructuring costs this quarter. Recall your attention to the fact that these items are excluded when. In today's press release, we have included a reconciliation of our GAAP results to our results excluding these restructuring charges.

Our gross margin for the second quarter was 8%, which was once again an improvement over the prior quarter's gross margin of 7.9% excluding restructuring charges. Our operating margin for the second quarter was 4%, which was consistent with the first quarter.

Net income was $20.8 million for the second quarter of 2010 compared to $12.2 million in the second quarter of last year, which is excluding restructuring charges. GAAP net income in the second quarter of last year was $11.6 million. Second-quarter diluted earnings per share was $0.33 in 2010 compared to $0.19 in 2009, excluding restructuring charges. GAAP diluted earnings per share was $0.18 in the second quarter of last year.

Interest income was approximately $447,000 for the quarter. Interest expense was $340,000, and other expense was $680,000, which was primarily related to foreign currency losses for the quarter. Our effective tax rate was approximately 10.8% in the second quarter compared to 15.2% in Q1, which excludes the restructuring charges. The decrease is due to the changes in forecasts of taxable income between taxing jurisdictions.

Diluted weighted average shares outstanding for the quarter were 63.2 million. Our cash and long-term investments balance was $397 million at June 30, which includes $46 million of auction rate securities classified as long-term. The unrealized loss in our auction rate securities at June 30 was $4.1 million due to changes in the market value for these securities. The unrealized loss is reflected in accumulated other comprehensive loss as a component of shareholders equity.

For the second quarter we used cash flows from operations of approximately $24 million, due to increase in receivables and inventory levels. We expect to generate $30 million to $40 million of cash flows from operations during the third quarter.

Capital expenditures for the second quarter were $9.7 million. We anticipate capital expenditures to still be in the $35 million to $45 million range for the year, of course dependent upon market conditions. Depreciation and amortization expense were approximately $10.1 million. Repurchase of our common shares in the second quarter were $15 million, or approximately 800,000 shares. Shares repurchased totaled 33 million, or 1.7 million for the first half of this year. Since the inception of our share repurchase program in July 2007, we have repurchased approximately $207 million of common stock, or 11.7 million shares.

Receivables were $413 million at June 30, an increase of $5 million from the last quarter. Inventory was $389 million at June 30. The inventories declined slightly from Q1 to 5.6 times from 5.8 times in Q1. Our inventory turns were impacted by material constraints, weaker-than-expected computing demand and planning for new program ramps. We expect inventory levels to decrease during the quarter when we compare that to the second quarter.

Current assets were approximately $1.2 billion and our current ratio was 3.5 to 1 in Q2 compared to [3.41] to Q1. As of June 30 we have $11.5 million in debt outstanding, which is primarily related to a long-term capital lease on one of our facilities.

Comparing second quarter of 2010 to the same period in 2009, the revenue breakdown by industry is follows -- Computers was 31% in 2010 compared to 38% last year; Industrial Controls was 25% this year compared to 19% last year; Telecom was 23% this year compared to 26% last year; Test and Instrumentation was 11% this year compared to 3% last year; and finally, Medical was 10% this year compared to 14% last year.

At this time, I would like to open the call for Q&A session. During this session, we request that you limit yourself to one question and one follow-up question. Thank you

(Operator instructions) Brian White, Ticonderoga.

Cary, could you talk a little bit about what you saw -- you said the Computing business weakened up the end of the quarter. Was that just one customer? And, what's going on -- is that end market demand weakness, is it some type of consolidation of relationships?

Yes, we have a significant under-pull from one of the computer customers toward the end of the quarter, and the -- not knowing the overall -- the computer industry environment and the -- this is probably a very unique situation. I cannot tell you overall macro environment, but the under-pull is significant enough there to know that.

And, Cary, one of your competitors is benefiting from a consolidation of a server customer, and I'm wondering, could that have a negative impact on Benchmark at some point this year?

They might. Because of the volume that that particular customer has dropped the volume, it's not that significant any more. But, the under-pull we talk about is not related to the customers.

Okay, thank you.

Sherri Scribner, Deutsche Bank.

Hi, thank you. You gave a little bit of detail in the commentary, but I was hoping to get your sense of how you think your segments will break out in the third quarter. I think you said Medical would recover, but wanted to see what you were thinking about some of the other segments.

I think, from the third quarter, we do anticipate the Computer sector will be back up a little bit, and of course Medical will be coming up.

We are expecting all of the sectors to increase over Q2, in real dollars all of them to increase over Q2 levels.

And with perspective to mix, Sherri, we expect Medical to have a slight increase in Q3. Probably the more dramatic increase would come in Q4, and then a little bit of strength in the computing sector, as we indicated. But overall, don't expect significant mix changes within the industry, just strength across the board as we are clearing through some of the supply chain.

And probably of note is the fact that we expect some of the supply chain constraints to ease a bit, both because we have had the increased forecasts out to the extended supply chain for a longer period of time for them to be able to react to, and also because within the extended supply chain there have been some investments made for them to ease the constraints that exist, as well as some of the increased inventory levels that we have as we position inventory for the ramping programs and the new programs that we've talked about beginning to ramp.

Okay, I guess just two quick follow-ups -- it sounds like the under-pull issues you've had in the compute segment have been resolved. You expect that to be up -- you've had some visibility in July; I assume those have come back. And then, in terms of the supply chain issues, was there any particular segment that was impacted more by this, the constraints?

First, to the computing, we have seen -- specifically don't have clarity around whether it was the actual forecast that was out there that has now been pulled. But yes; July has been stronger than expected as a result of some of potentially what was rollover. And then, as to industry, I don't believe the supply constraints picked favorites. I think it was really across all industries. Given the mix of products that we support for our customers and the level of unique components that we have for a number of our customers, the constraints are pretty common across the product sets. And as they go to fill their customer demand and have drop-in orders in this environment, that that's where the challenges arise. Though it's not specific, it probably is specific to some sub-tier suppliers that our supply chain team members know very well at this point.

Amit Daryanani, RBC Capital Markets.

I may have missed this. Could you update on the two big computing customers that you guys talked about last quarter? It was supposed to be $350 million to $375 million. Is that numbers still on track? And should both of them start to ramp in Q4? Is that still the time line?

As I mentioned in my comments, some of those are going to begin ramping. We won't see significant impact until next year, but we will begin the ramp in the latter half of 2010. I don't know specifically it will have much of an impact in Q3, probably more so beginning of Q4.

Is there a way to quantify how much of a headwind did you really have from this one computing customer? And was this more a product transition issue or a program actually transitioning away from you guys?

It is not a loss of business. I think there is a transition within the program. I don't know if that's significant to the end customer, but it is not a loss of business.

Did you guys have any customer over 10% of revenues this quarter?

No.

Sean Hannan, Needham & Company.

So on the Medical side you had spoken around transition, product transitions there, and I just want to see if we can clarify and nail down. Are we talking about a single program, multiple programs, multiple customers or a single?

We actually have ramps and transitions taking place in four programs right now that are pretty significant, so all coming at the same time, which tends to be what we've seen traditionally. Maybe it's the markets we serve.

Okay, four programs, four customers, or --?

Yes, four customers.

Okay. All right, that's helpful. And then, in terms of -- if I look at what you did in terms of OpEx, is this $23 million a sustainable level that we should assume moving forward through the year?

Yes. I think $23 million, $23.5 million, somewhere in that range, is probably a pretty good estimate.

Okay, terrific.

To the extent that revenues go up, I think you will see some marginal increase. You will keep the leverage, but the dollars may go up a little bit.

That's great. All right, thanks so much.

William Stein, Credit Suisse.

Just, first, a housekeeping question. The taxes -- I understand how the predictability of profits in different jurisdictions drives this; I get the idea. Can you tell us what we should expect for the rest of 2010? Is it the same level?

Yes, I'd probably use that 11% to 12%.

Okay, then I'm wondering if you can quantify to what degree components hurt revenue and caused the inventory to increase in the quarter, and when you expect these problems might go away, based on what you see among the supply base.

It's in the component challenge. Most the suppliers still have reported pretty good booking into the Q3, even into the Q4. And we believe that we will see some improvement, slightly improving, in Q3. You will probably see the most improvement in Q4 because that's what we say in the Q4 conference call; we anticipate the improvement coming in Q2 2010.

But it looked like, like what Gayla was talking about earlier, we do see some suppliers to add additional capacity, and not only from the fab, as well as from the assembly resources standpoint of view. So we see some slightly improving Q3, and I don't believe -- the lead time's still long but have been stabilized. So we see a sign it's getting a little bit better.

And again, this is not an across-the-board 20,000 components shortage issues. The component (inaudible) in the 300, 400 different components. But those are the components you can't -- preventing us ship the product. So it's kind of in summary, we see -- the lead time will probably not be significantly improved in Q4, but we see a slightly improving Q3.

Any effect on revenue and inventory in the quarter?

The impact of the supply chain challenge for Q2 was $30 million. And the inventory is probably in the $20 million-some range. And keep in mind, some of the inventory increases are related to the new program ramps. And in this environment, it has become a more difficult issue when you have new programs. You have no commodity relationship with the supplier for the particular commodity, it makes it more difficult to get a part.

Jim Suva, Citi.

The quick question I had was on your new programs. Last quarter, meaning the March quarter, they were extremely strong. But when you look at the June quarter, it looks like they are down year over year, and I think many people on this call would assume that the economy is better today than it was a year ago. Were some of the program wins borrowed into the March quarter from the June quarter, or can you help us understand if the economy is better and business is better now than a year ago, why would business wins be down year over year? Or are you seeing some hesitancy in signing new programs or just the topic in general?

I wouldn't try to read too much into it, as the bookings are on a long continuum. We have a very good pipeline of opportunities, but some of the larger opportunities probably do take a little bit longer in the decision-making. So they tend to be a little bit lumpy. But we do not see any indication that the funnel is not improving. In fact, we see just the contrary; we do see good opportunities in front of us and expect, as I said, that Q3 would be stronger.

So nothing to cause alarm there. That's just a cutoff that we use that doesn't always indicate quarter over quarter (multiple speakers).

Just a quick follow-up. I know that this is a long-term question, but when we look at -- assuming that those bookings continue in the pipeline to be extremely strong, would you expect growth year over year and quarter over quarter to accelerate as we go ahead in the next few quarters, and then for 2011? Or, how should we think about Benchmark? Obviously, year over year is benefiting from easy comps, but how should we think about the acceleration of revenues?

Well, as you can see from the first half revenue that we had, while we had better opportunities in our forecast and in our guidance and we weren't able to fully achieve that, what we did have is 19% growth as compared to the industry, which was at 14.7%. So I think our growth year-over-year, while we say easy comps, easy comps from the standpoint of the backlog and the demand being there, not so easy as to shipment in a high-mix industry.

So, yes, we do continue to see the opportunity there, the challenges there. And I think our guidance proves out that we are seeing continued opportunity for growth. So I'm not sure that I fully comprehended your question, but hopefully that answers it.

And just housekeeping -- tax rate as we look ahead?

11% to 12% going forward.

Brian Alexander, Raymond James.

Just back to Amit's question earlier, I don't know if you guys quantified the impact from the computing customer, where you saw -- the pull at the end of the quarter was not quite what you expected. And then, related to that, was that driven by demand for that customer's product, or was it really due to a product transition issue? I'm just trying to understand why you expect that revenue to come back in third quarter.

I don't know that we specifically can say demand, product transition, and quantifying the actual impact, probably $10 million, maybe a little bit more than that, the [read in] as to whether the demand evaporates or is really there, our true indication is based on the fact that the July shipments remained and were, in fact, stronger than we anticipated. So I don't get into the mind of the end customer and understand what the forecast expectations were built upon. But we just see the dynamics of the outcome.

Okay, and then I guess you guys talked about baking in, I think I heard you say, more of a discount to your customer forecast in terms of what you're guiding for the third quarter than the discount you've applied over the last few quarters. And if that's what I heard correctly, what is driving that approach? Is it because (laughter) the customers forecast -- or is it because the customer forecasts are becoming more volatile and unpredictable? Or, are you just choosing to be more conservative?

Clearly, based on not meeting guidance, it is prudent for us to say that whatever we had used in our modeling previously needed to be ratcheted down. So, while our customer forecasts continue to show strength, and as we mentioned in our comments, we are seeing strength and demand, in fact, increasing. So the gap between what we are providing as guidance and what our customers are providing us guidance to us has expanded. And because of slightly missing the quarter, this quarter, that is the basis for it. It just seemed to be prudent because we, as you, do not like surprises, and we want to be able to meet our commitments.

In terms of magnitude, are we talking 5%, 10%, 15% haircut?

I would say it's between 5% and 10% -- incremental.

And then the last question is -- incremental? Okay. I think you guys talked about mix changes within your customer base that you saw during the quarter, and that somehow affected your results. Could you elaborate on what you meant by that?

Because of the mix of products we have for our customers, just because even dollars of shipments may increase for a customer, when they want product A at the beginning of the quarter and that's what we forecast, and they end up having true demand for product B and C, even though there's increases, those drop-in orders become very challenging. If you are one part shy, you don't get to ship. And yet, your inventory for product A will be on the dock and ready to go.

So that's the ongoing dynamic we have in our marketplace; that's not unusual. But volatility, when there's growth opportunities out there as we've seen this year, the volatility seems to be increased because somebody has got to anticipate the exact nature of the orders, in order to place demand in the supply chain. The supply chain has elongated lead times in it, which dictates the forecast being put in place, but they don't seem to get any more accurate just because demand increases.

Okay, that makes sense; thank you very much.

Brian White, Ticonderoga.

Cary, just on the component situation, do you think the component situation will ease in the September quarter because there's enough inventory out there, our capacity has just come in these different component areas.

It's a combination, I guess. We do see some inventory increase in distributors for certain components. And of course, there was new capacity coming in line and it will ease up a little bit. But the good thing about it is, if you look at it, is the component challenges usually -- first, it will be leadtime extension, then next time will be price increase. Right?

And once you see the lead time stabilize, not continue extended, that means the situation start getting better. And that's what we are seeing today.

Okay, and just on -- is there any reason that December quarter sales won't see a typical uptick from the September quarter? Is there any reason that we could see a downtick this year?

I don't anticipate a downtick, and particularly with the several major programs start to ramp in Q4. And typical, Q4 we'll have a stronger demand. No; we do anticipate, looking at the customer forecasts and activity, we see Q4 will be [just as promising].

William Stein, Credit Suisse.

Two quick follow-ups -- first, can you help us understand what's driving the strength in the testing market that has been strong for a while, and it looks like it has continued into Q2? Do you expect that to continue into Q3?

At this point, yes, we see continued strength there as we, I believe, we're taking market share.

Can we get an update on the vertical precision machining business?

The business is doing very well, and we have been -- this particular business I'm very excited about. Number one, it is a better margin business, of course. And the second thing is, it can further expanding our service to go with our customers. And it's difficult quantify how big this business [bring in from accommodating]. The volume definitely could continue to increase. We are starting to introduce the capacity to our key customers, and we get a lot of very excited about the capabilities. And we are also, at this point in time, looking at expanding the capacity into Asia's markets.

So we are pretty excited about it, and I think this is a great addition to the customers -- to the Benchmark portfolio to supporting our customers.

Amit Daryanani, RBC Capital Markets.

I just have two quick follow-ups. Just on the Medical side, was the entire 20% sequential drop due to programs coming into life and new one not ramping, or was there some end markets softness as well?

As product crossover between the new product and the old costs are in there.

And then FX has been fairly volatile, and a couple of your peer have called that out as a headwind, at least in the June quarter. I'm curious; could that have any impact for you guys at all?

For the second quarter?

Yes.

Yes; I think FX was probably $800,000, $900,000 for the quarter, loss.

And how do you see that shake out for Q3?

I think -- I guess it depends on what the exchange rates are going to do going forward. So it seems to have moderated a little bit so far, but we still have two months left in the quarter, two-plus months.

Brian Alexander, Raymond James.

Just a follow-up on the Medical segment -- I understand performance this quarter, but it seems like you have had a lot of success with new wins there over the last several quarters. And yet, this segment continues to decline on a year-over-year basis. It has really declined every year going back to '06. So is there anything else going on within the Medical segment that you could talk about and anything that gives you confidence that, going forward, we will start to see that business grow again?

No; probably two things -- one is, first, we are moving more product from -- to overseas. We do see price reductions, and some prices would decline in the medical device. And, also, we have several customer have some [FD] issue; we deal with it, and those are hurting us a little bit. And the product transition -- some of the product we support has been there for a long time, and the -- some of the transition time take longer than we anticipated.

But fundamentally, I think the medical device portfolios are looking pretty good. With this, the PT capacity we have -- we're probably able to expand it a little more revenue standpoint of view. It's also the program ramps, and we feel very comfortable with our medical device practice, and we should see some -- as we say earlier, we should see some growth in the second half.

Do you think this business can get back to $350 million a year, like it was back in '07-'08, or is that too aggressive?

It's a possibility, yes.

Did you guys say what utilization was for the quarter?

Well, it was about high 60 and approaching 70, but it's not 70 yet.

(Operator instructions). At this time, then, I'm showing no further questions in queue.

All right. That will conclude the call, and we'll be in our offices for follow-up questions.

Thank you all for joining us today.

Thank you.

And ladies and gentlemen, that does conclude our conference for today. Thanks for your participation for using AT&T's executive teleconference. You may now disconnect.