Benchmark Electronics Inc (BHE) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Benchmark Electronics fourth-quarter 2011 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Chief Financial Officer Mr. Don Adam. Please go ahead.

Good morning, welcome to the Benchmark Electronics conference call to discuss our financial results for the fourth quarter of 2011. I'm Don Adam, CFO of Benchmark Electronics. Gayla Delly, our CEO, will begin the call today by providing an overview of our fourth-quarter performance including the impact of the unprecedented flooding in Thailand. Gayla will also provide our guidance for Q1. I will then follow with a review of our financial metrics for the quarter. After our prepared remarks, 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 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 results or events may differ materially. We also like to 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 Forms 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 these projections or forward-looking statements in the future.

Now I will turn the call over to Gayla.

Good morning. Thanks, everyone, for joining our call today. First, I would like to begin by thanking our global teams for their strong support and performance during the fourth quarter of 2011. Last year was a very challenging year for Benchmark, and we undertook a number of actions to invest in our future. We believe those actions are beginning to show benefits.

First, we realigned our sales team last year. We see excellent opportunities coming from this action. Second, we invested significantly in our non-traditional EMS side of the business, expanding our footprint and our precision technologies business into Asia. This is also beginning to provide excellent opportunities for future growth for us.

Lastly, as a result of encountering the flood situation in Thailand, we took strong actions to put our customers first in response for this disaster. We invested rapidly and heavily to ensure that our customers' needs were put first, and met to the best of our ability. This too has proven to be a positive for Benchmark. In fact, we had several customers who temporarily moved their requirements to second sources, and they are now beginning to return their production requirements to Benchmark. Considering the significance of the challenges related to the Thailand flood situation, and the results which were achieved, Q4 was very successful for Benchmark. Each of these activities positions us well for 2012 and for our future.

Our revenues were $559 million, which exceeded the high end of our guidance, which was $475 million to $525 million for the quarter. EPS, excluding restructuring and Thailand flood-related charges, were $0.17, also above our guidance. Our guidance excluded Thailand-related costs. We were pleased to see that customer demand levels were strong across our industry sectors in the fourth quarter.

Our cash flows from operations were $55 million. And there were no insurance proceeds included in our operating cash flows for the quarter, as no insurance proceeds were received during the quarter related to the Thailand flood. Each of these metrics is very positive for Benchmark, and we're pleased that we are beginning to see several of our new program bookings booked over the past 12 to 18 months begin to ramp.

While we want to focus our attention on our recurring business and growth opportunities, I will take a moment to mention regarding the Thailand flooding impact, and what is flowing through our financial statements. But the key items I want to reiterate are -- we believe we are adequately insured; the claims process will be ongoing for several months; and we are on track for Thailand to return to normal operations as we exit Q1. We are very proud of our Thailand team, and thankful for their support, and the support of our customers and our global Benchmark teams who worked tirelessly to make this rapid recovery happen -- nothing less than remarkable. Importantly, I'd note that the Thai Government has vowed to invest in new infrastructure to ensure no recurrence.

Going back to the overall business discussion, I'm pleased to say that we saw customer demand levels strong across each of our industry sectors in the fourth quarter. Additionally during the fourth quarter, we continued the positive momentum of bookings for the Company. Our reorganized business development team is gaining momentum for Benchmark. During Q4, we booked 43 new programs including 13 engineering projects with current estimated annual revenues of $132 million to $150 million. These bookings were in each of the industry sectors that we serve, and had both new and existing customer programs included. Each of these are, of course, subject to the risks of timing and the ultimate realization of the estimated revenues.

Our teams also made great progress on several programs booked in prior quarters. Last quarter, we announced that we had booked a computing program with its annual expected revenues of approximately $35 million to $55 million, and this program remains on target in its ramp in the first half of 2012. Related to the large computing program which has been delayed, we still expect this program to launch during 2012, and I remain excited to work with our customer on this program. However, there is no meaningful ramp reflected in our Q1 guidance for this computing program at this time.

We currently estimate sales for the first quarter of 2012 to be between $550 million and $590 million. Our diluted earnings per share for the first quarter, excluding restructuring and Thai-related flood-related charges, net of insurance, is expected to be between $0.17 and $0.23. Also note, our guidance does not include estimates for insurance recoveries related to lost profits. Our guidance for Q1 reflects strength driven by new program ramps from several of the programs booked in prior quarters, in addition to the recovery from the Thailand flood. Also recorded in our Q1 guidance is normal seasonality and macro environment stabilization. We do expect our operating margins to significantly improve in the first quarter, although it is not expected to return to our normal levels. We expect the operating margin to improve during the year, as our operations recover from the Thailand flood and new programs ramp.

Lastly, there were two other significant milestones that took place in 2011. In August, the Company celebrated its 25th anniversary. And at the end of the year, Cary Fu, one of our Founders, retired. Cary remains as the Chairman of our Board of Directors, and we want to again thank Cary for his leadership and the commitment not only to Benchmark as a Company, but also to the development of our leadership team.

At this time, I would like to turn the call back over to Don to discuss the financial metrics.

Thank you, Gayla. Again, we completed the fourth quarter of 2011 with revenues of $559 million, which exceeded the high end of our guidance for the fourth quarter of $475 million to $525 million, and only slightly below our revenues for the third quarter. Our revenues were significantly impacted by the Thailand flood disaster. Our Thailand operations serve customers primarily in the Telecom, Industrial Controls, and Medical industry sectors. When comparing Q3 2001 to Q4 2001, revenues from the Computing sector were up 22%. Revenues from the Test and Instrumentation sector were up 11%. Revenues from the Telecom sector were down 29%, as this sector was significantly impacted by the Thai floods. Revenues from the Industrial Control sector were down 3%, and revenues from the Medical sector were down 2%.

Our earnings per share, excluding restructuring and the Thailand flood-related charges for the quarter were $0.17, and our GAAP earnings per share were $0.05. This compares to $0.37 and $0.31, respectively, in 2010. During the fourth quarter of 2011, we incurred restructuring charges of $3.9 million, which were primarily related to our previously announced closing of our Dublin facility.

Also included in our financial results are the Thailand flood-related charges including the estimated losses on property and partial estimates of insurance recoveries. Due to the complex accounting rules surrounding these types of losses, and how and when to record the corresponding insurance recoveries, the estimates recorded this quarter are not all-encompassing. Upon settlement, recoveries from other items including lost profits will be recorded, and may result in gains to Benchmark.

The following is a summary of the specific items related to Thailand that have been recorded in the line item titled, Thailand flood-related charges net of insurance in our financial statements. Inventory losses of approximately $40 million. Property, plant, and equipment losses of $6 million. Thailand-related flood costs of $13 million. The estimated amount of insurance recoveries is $56 million, for a net of $3.4 million. Note that these amounts are estimates reflected in our Q4 financial statements, and will be adjusted when actual amounts to determine insurance recoveries are settled in the future. The estimated insurance recoveries are included in other receivables as of 12/31. In January, we did receive $17 million from insurance related to losses that have been incurred.

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

Our operating margin for the fourth quarter was 1.2%, excluding restructuring and Thai flood-related charges. The financial impact of the Thailand flooding including [duplicative costs], program transfer costs, and lower fixed costs absorption, all of which adversely impacted our operating margin for the quarter. Net income, excluding restructuring and Thai flood-related charges, was $10 million for the fourth quarter of 2001 compared to $22.6 million in the fourth quarter last year. GAAP net income for the fourth quarter of 2001 was $2.9 million compared to $19 million for the fourth quarter of 2010. Interest income was approximately $475,000 for the quarter, interest expense was $330,000, and Other expense was $696,000 which was primarily foreign currency related.

The income tax benefit for the fourth quarter includes a net -- a $3 million net discrete tax benefit item related to the settlement of income tax audits. Diluted weighted average shares outstanding for the quarter were 57.7 million. Our cash and long-term investment balance was $309 million at December 31, which includes $25 million of auction rate securities, which are classified as long-term. The unrealized loss on our auction rate securities as of December 31 was $3.3 million. Due to changes in the market value of these securities, the unrealized losses reflected in the cumulated other comprehensive loss is a component of shareholders' equity.

For the fourth quarter, we had cash flows from our operations of approximately $55 million. As Gayla previously mentioned, we did not receive any proceeds during 2011. Capital expenditures for the fourth quarter were approximately $21.7 million. The increase from our normal spend this quarter was primarily for the replacement equipment related to the Thailand flood and our recovery efforts. As noted in our conference call last quarter, we did accelerate future purchases to provide for additional capacity needed as part of our Thailand contingency plan. Depreciation and amortization for the quarter was approximately $9.3 million.

Repurchases of common stock for the fourth quarter were $3.1 million or 200,000 shares, bringing our total repurchases for 2011 to $56 million or 3.7 million shares. Since the inception of our share repurchase program in July of 2007, we have purchased approximately $290 million or 17 million shares. We have $35 million remaining under the approved share repurchase program.

Receivables were $426 million at December 31, a decrease of $38 million from last quarter due to timing of sales when comparing to prior periods. Inventory was $392 million, a decrease of $37 million from September 30. Inventory turns were 5.4 times for the quarter, compared to 5 times in the third quarter. Inventory of approximately $40 million was damaged and lost in the Thailand flood. Current assets were approximately $1.2 billion, and the current ratio was 3.4 to 1 in Q4. As of December 31, we had $11 million in debt outstanding, which is primarily related to a long-term capital lease on one of our facilities.

Comparing the fourth quarter of [2001] to the same period last year, the revenue breakdown by industry is as follows. Industrial Controls, 29% in 2011 versus 24% last year. Computing was 34% in 2011 versus 33% last year. Telecom was 20% in 2011 versus 22% last year. Medical was 9% in 2011 versus 10% last year. Finally, Test and Instrumentation was 8% in 2011 versus 11% last year.

At this time, I'd like to open for the Q&A session. We request that you limit yourself to one question and one follow-up question. Thank you.

(Operator Instructions) Sean Hannan with Needham & Company.

Yes, thank you and congratulations to you and your team. First question around Telecom, you had indicated that this was-- this received a pretty notable impact in the flooding in Thailand. Can you provide us a little bit more color around what that business would have looked like X the flooding? I think then separately Gayla, you've commented, as well, recently that there was an absence of a budget flush in the fourth quarter, so I'm just trying to get a sense of where Telecom really should be, and then your outlook in that space going forward?

Thank you, Sean. We do see that Telecom, as an industry for the customers we serve, did not have the strength normal-- that it would normally show in Q4, which, as we have talked to customers, believe is due to a lack of a budget flush in Q4. Having said that, as we move into 2012, and as we would have expected barring the Thailand flood, we have won a number of new programs in Telecom which will provide us a strength in that industry. But, I do not believe that relates to the industry environment. It relates specifically to the new program ramp.

Also, you'll see that that's really the same situation in several of the other industries, and is what we've included in our guidance for Q1. That although the seasonality for Q1, for instance would normally indicate that several industries, such as Telco and Computing might be down. Because of new program wins, we will actually expect those to be flat or up in contrast to normal seasonality.

So, it sounds like there's pretty solid confidence that at least in that space specifically, there should be some notable improvement in ramp through the remainder of 2012?

I wouldn't say that I have clear visibility into the second half. We have better visibility into the first half of 2012. As always, we're giving guidance only for Q1. But our visibility into Q2 would indicate that it's sequentially improved, based on our program wins and ramps and overall macro environment stabilization. Beyond that, I don't have the visibility to really provide much color on that.

Okay. And then separately, in your Precision Machining business, you've commented in the past, I believe, that there was some hope for some recovery later in '12, what are some of your thoughts there? And then part two to that, based on your cost structure today, does that essentially have to come back in order to get your gross margins into that mid upper 7% range? Or, can overhead absorption from ramps and other assembly business simply get you there? Thank you.

So, consistent with our model and previous guidance, we really look at operating margins and our target is to get back to our operating margin which we had in 2010 of 4%. And that's where we target to return as we recover from the flood impact of Thailand and we do that through two primary-- and that two primary effects. That is the overall revenue growth, as well as the revenue growth, and throughput in our expanded precision technology support that we have included in Asia.

We do see program wins to both provide the revenue growth and to provide the utilization of the Asian PT capabilities. So, we see both of those coming online with as Don indicated, some margin pressure in the near term, as we continue to recover from Thailand and have a duplicative cost and overhead cost associated with that under absorption.

That's very helpful. Thank you so much and congratulations again.

Thank you.

Wamsi Mohan with Bank of America.

I think this Thailand has been more exposed to Telecom and Industrial Controls, but seems like the revenue was actually quite strong in Industrial Controls. So, was it a function of moving some of these customers and programs to Korat faster than expected, or was demand at other customers better?

It was mostly that we saw strong demand overall in Industrial Control. So, what becomes difficult to say is what that level would have been but for the Thailand flooding. But, we would have expected that to be much stronger in Q4. So, there was, most of the impact was from not having that throughput. We did probably have some recovery, but that had been factored into our guidance overall in Thailand.

Okay thanks, Gayla. And sorry if I did not catch this, but did you say that you will have -- did you quantify how much headwind you will have from Thailand next quarter?

No, but as you can see in our guidance we do-- from the guidance provided, we don't get back to our targeted margin rate, it is still below that in our guidance.

Okay, thanks a lot.

Sherri Scribner with Deutsche Bank.

Hi, thank you. I just wanted to get a little more detail on the Computing segment. I know you gave some detail on the new customers and the ramp of those new programs, but it looks at Computing was quite strong this quarter, up a bit. It seems like some of those new Computing programs are ramping, but I think you said that you're not expecting the new program to ramp in the first quarter, so just wanted to understand where the strength came from, and how we should expect those programs to ramp over 2012?

So, there's several new programs that are incorporated into both our revenue and our Q1 guidance. And there was one specific program that was the largest single win over the last 24 months probably. And that program specifically is not-- has not ramped, and specifically is not expected or incorporated in any material-- to have any material favorable impact in our Q1 guidance. So, that's kind of a call out separately.

Beyond that, our other programs that we've won, as you'll note for several quarters, we've indicated that we've had program wins in each of our Industries. And several of those programs, as well as some strength in existing customers, were and are continuing to ramp in Q4, as well as into Q1.

Okay, great. And then looking at the new program wins this quarter, that also seemed exceptionally strong. I mean you're usually in the 10 to 20 program type range. I think you said 46 programs, which seems quite high. Just trying to understand, is that customers coming back, and are you counting that as a program, or are these-- how is that working and how'd you get that higher?

No these are not revision rolls of existing product. There were quite a number of engineering projects which we booked. And I believe it was 43, and of those, 13 were engineering. But, what we have seen, and are focused on, is the incremental program wins from new and existing customers. And so, we are benefiting from expanding in that way.

And in fact, you'll see, and as I have pointed out in our call notes, some of those are allowing us to get a faster ramp with some relationships and some of the tools, methods and processes being in place. So, that's how you're seeing some of the programs -- that supplies the programs or the number of programs increase, as well as the speed of the ramp increase.

Okay great, thank you.

Brian Alexander with Raymond James.

Thanks. Gayla, so do you need to get back to the $600 million revenue run rate per quarter to get back to 4% operating margins? Or does it have to be higher than $600 million because you're going to be running two facilities for a period of time? And maybe just update us on how long you're going to be running Korat pass the first quarter?

Overall, approximately $600 million is about the right level for us to be at to return to our targeted operating margin and 4%. And given the marketplace we see now and the growth in new programs and ramps that we have had, we do expect to keep both of our Thailand facilities open, and expect that as we move through 2012, both of those will be very busy and bustling.

So, I don't have a crystal ball, but it may very well have been that, given the opportunities that we're seeing now, even without the flood at some point during 2012, we may have elected to reopen Korat anyway just given the growth opportunities that we have. So, with that, we would expect that our margin and our absorption will be back as we get close to $600 million and the negative impacts of the flooding subside.

Okay. And then my follow up, could you talk more about the sales force reorganization that you mentioned in your prepared remarks, and I think you alluded to this last quarter, too? Specifically, how are you structured today versus how you were structured previously? How have you changed your comp plans, if at all?

And just why does this put you in a better position to win new programs, which it seems like it's already having an impact. But, my guess is, there's a long tail to this where the funnel's probably a lot bigger today than it was a few quarters ago, as well.

Absolutely. I wouldn't say that there is ever any one single change or a silver bullet that you utilize in business development that works. So, I won't go into details specifically of how we were and are organized.

But I think it's important to note that we have modified it, we-- no significant changes specifically, but some new blood, some new activities, ways of approaching the business, and are very excited about the results and the opportunities that we're seeing in the funnel. So, I wouldn't say that there is a formulaic or a specific change, one item that made the difference, but it's a variety of changes that we've made and they are coming together quite nicely.

Any way to quantify how big the funnel is today versus what it was before you made the changes?

No, I don't have any metrics specifically that I would be prepared to share on that, other than to say that it significantly improves.

Okay. Thanks, Gayla.

Thank you.

Jim Suva with Citigroup

Thank you, Gayla and Don, and congratulations to you and your team for really turning around Thailand as fast as they did. I'm sure there's a lot of effort there. On that same topic of Thailand, given your guidance, can you help us understand about for the Q1 outlook, how much still headwind or shortage you think Thailand is impacting your total Company sales run rate? Or on the other hand, is there a little bit of additional restocking or double production runs you're doing that may not carry on sustainably? We're just trying to figure out what's the sustainable goal level kind of Q1 beyond of what you're coming up short of or that you may be running duplicative on.

Jim, very, very good questions, and I guess the way I see it currently is, given the fact that we expect, and as I indicated, although we don't have specific guidance to give, Q2 is showing to be stronger than Q1. So, given that, I do believe that there is some level of backfill potentially in Q1 associated with Thailand. But further, as I mentioned, some customers did elect and have alternate sources where they utilized those to meet the needs for December.

So, I don't have a specific quantification to say that this is the amount. But from what we're seeing, the most significant impact that's driving the growth in Q1 is associated with new programs, versus existing programs doubling down and trying to recover from Q4.

That's great to hear. And then as my follow up, when you think about your new programs ramping, is there anything unique that forward would just cause a little bit of operating margin pressure as they ramp? I know you've got some ones, like that new large Computing win that in the second half of the year is supposed to come in. Or, should we just look at-- are you just digesting the margin impact of that is quite normal, is there anything unique in these new wins, which have been increasing year over year, that we should just be mindful of?

So no, I believe the key there is, we have our infrastructure in place. None of these are beyond what we've already invested in our infrastructure. As we indicated for our Precision Technologies, none of these are requiring expansion of footprint or significant other investments. So, we have our costs in place to be able to support the programs and are looking for these to have a favorable impact as we ramp them.

Great, thank you and congratulations again to you and your team.

Thank you.

Ryan Jones with RBC Capital Markets.

Hi, thanks for take my question. Just a quick question on capital allocation. I was wondering, one if you would be free cash flow positive for the year to the extent you have visibility? And two, your buyback has gotten mostly consumed at this point. How should we think about cash coming back to shareholders in 2012?

So, for our utilization of cash, we would expect that we will continue to buy back. We have the $35 million remaining and we'll continue to assess that as we go through the year. Additionally, we will invest in continuing to grow the business, and we'll look at opportunities for growing our business and growing our profitability with additional opportunities that we may see going forward. Overall, for the year, I believe that cash flow from operations for the Q1 will likely be flat and slightly, possibly use or provide, but primarily flat for Q1.

And then, as we move out into the out quarters, it will be dependent upon the rate of growth. So, if we grow substantially into the second half, we would be utilizing cash. But, if it doesn't grow at a rapid rate, we would expect it to begin to throw off cash. So, it really depends on the size and rate of ramp.

Any thoughts about a dividend?

No, we have not currently looked at a dividend as a vehicle. We primarily have utilized buyback as the vehicle for returning cash.

And then just one final one, can you talk about have there been any share shifts at all, favorable or unfavorable, as a result of Thailand in the industry?

As I mentioned in the prepared comments, we did see some of our customers for obvious and rational reasons shift to second sources, or identify how they needed to meet their immediate needs for Q4 demand. But actually, I do see that there have been very solid opportunities as a result of the ability to compare and contrast the performance of our Thailand team to some of the other sources. And we've had favorable results, as several customers have moved back the production to our Thailand team. So again, kudos to our Thailand team for their superb performance.

All right, thank you.

And there are no more questions in queue. Like to turn it back for any closing remarks.

Thank you everyone for joining us today. We will be in our office if there's any follow-up calls. Thank you.

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