Benchmark Electronics Inc (BHE) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Benchmark Electronics third quarter 2014 earnings conference call.

At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Lisa Weeks. Please go ahead.

Good morning everyone. I would like to welcome you to the Benchmark Electronics earnings call for the third quarter of 2014. I am Lisa Weeks, the 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 third 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 is also 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 fact 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 will, please turn to slide three in our presentation and I will turn the call over to Don Adam, Benchmark's CFO.

Thank you, Lisa and good morning to everyone. I appreciate you joining us for today's call.

In the third quarter we generated revenues of $731 million which exceeded our guidance of $670 million to $700 million. Quarterly revenues increased $14 million or 2% for the second quarter of 2014 and increased 14% organically from the same quarter last year.

The upside for the third quarter was associated with accelerated market acceptance of our customers' new products in both computing and telco.

Also reflected in our Q3 results was a $5 million charge or $0.09 per share for the write-down of inventory and provisions to our accounts receivable associated with the October 6 bankruptcy filing of our customer, GT Advanced Technologies. These charges increased cost of sales by $2 million and SG&A by $3 million.

Our non-GAAP net income was $23 million for the quarter compared to $17 million last year. Net income was $17 million for the quarter compared to $24 million last year. Our non-GAAP earnings per share were $0.43 versus $0.31 in the third quarter last year. Our GAAP earnings per share were $0.33 compared to $0.43.

Our non-GAAP operating margin was 4% compared to 3.5% during the third quarter last year. Third quarter operating margin was down 10 basis points compared to last quarter, attributable to revenue mix and to a lesser degree, the impact of new program ramps.

Our consistent operating margin of 4% reflects the focus of our teams on productivity improvements and effective cost controls. During the quarter, third quarter of 2014, we incurred approximately $2.2 million of restructuring and integration related costs primarily due to the closure of our Matamoros, Mexico facility which was acquired in October of 2013.

The third quarter non-GAAP effective income tax rate was 16.2%. Our expected tax rate for the fourth quarter was 19% to 20%. The diluted weighted average shares outstanding for the third quarter are 54.3 million.

Please turn to slide four to review our revenue guidance per sector. Computing represented 21% of third quarter revenues and was up 5% sequentially. Computing was the forward lever forecast across multiple customers and products in the high performance computing, storage and enterprise. Revenues from our largest competing customer were 11.8% of third quarter revenues. For the full year we continue to expect computing to remain at approximately 20% of revenue.

Industrial control revenues were 30% of quarterly revenue which is consistent with the second quarter and up 20% year over year. Industrial controls were up 4% sequentially but slightly slower than expected due to the timing of new program ramps.

Telecom revenues were up 13% from the second quarter and 91% year over year. We continue to see robust demand from our largest customers in telco infrastructure, wireless networking and optical networking as well as strength from our top customer in the space, [Aris], which we currently expect to be a 10% customer for the year. We saw demand levels accelerate through the end of the quarter as we supported multiple strong new program launches.

Our medical revenues were up 12% year over year but slightly down sequentially due to a slight timing shift with new program ramps moving into the fourth quarter.

Finally, test and instrumentation revenues were down quarter over quarter as we expected. Year over year, demand was flat in the sector.

Now turning to slide five, our cash balance at September 30 was $420 million with $58 million of this in the U.S. During the quarter we generated $28 million in cash from operations. Capital expenditures were $6.3 million and depreciation and amortization expense was $11.8 million. We anticipate capital expenditures for the full year to range between $45 million to $50 million.

Our accounts receivable balance was $534 million, an increase of $35 million from the last quarter and our accounts receivable days were 66. Inventory at September 30 was $434 million, an increase of $13 million from last quarter. Inventory turns were 6.2.

In the third quarter we repurchased 545,000 common shares at a cost of $13 million and have $22 million remaining in our authorized share repurchase program which we expect to complete over the next three to six months.

For near term capital allocation we will continue to invest CapEx in the business for operational excellence and execute our share buyback program.

Now please turn to slide six to review our guidance. We expect fourth quarter revenues to range between $710 million and $740 million. Diluted earnings per share excluding restructuring and integration costs are expected to range from $0.41 to $0.45. Estimated restructuring and integration costs of approximately $1 million to $1.5 million are excluded from our guidance. At the midpoint, guidance reflects a 4% operating margin.

Now if you will turn to slide eight, I will turn the call over to Gayla.

Thank you, Don and good morning everyone. I first want to say thank you to our teams for another strong quarter. I am extremely proud of their ability to respond and execute to meet the timing needs of our customers.

Our results demonstrate strong operational execution and our strategic focus on our revenue diversity and our solution set combined with our disciplined management of the business.

Now to provide a few highlights for the third quarter. First, we had another strong quarter of bookings. We recorded 51 new programs which include 16 engineering projects with an estimated annual revenue run rate between $140 million and $160 million.

We had new bookings across all industries. For eight consecutive quarters, the industrial segment has had the highest number of new booking wins. Their use of technology and electronic solutions for automation and information is transforming this segment and the growth opportunities for us here. We are pleased to be a leader in industrial manufacturing.

Across our customer base we continue to see healthy R&D spending in new product development. Our engineering wins are a key indicator of the opportunity to engage early with customers to bring their products to market.

Now, turn with me to slide nine where we will discuss our perspectives on the markets we serve.

Beginning with computing we expect stable demand next quarter after achieving better than expected revenues in Q3. The higher computing demand was driven by our customers' ability to execute sales bookings planned in Q4 a bit ahead of schedule. Based on this quarter's strength which is more typical of Q4 and our current portfolio of computing products, we do not expect to see strong upside demand in computing for the fourth quarter. As we have previously discussed, we expect computing revenue to remain around the 20% level as we exit 2014.

In industrial controls we see stable demand and anticipate a low single digit growth rate for the upcoming quarter. We support a variety of sub-segments in industrial controls and these include transportation, oil and gas, building and construction, and commercial aerospace markets. Our industrial customers continue to maintain their near term forecasts and their R&D spending is resulting in new bookings for Benchmark.

In telecom, customer demand has outpaced our original forecast in the past several quarters. We have aggressively ramped new products this year in support of telco network build-outs, equipment upgrades and data-on-demand hardware.

Based on forecasts, demand remains solid but our telco customers do indicate that they are not expecting to see a strong budget flush from their customers in Q4. As such, we expect a pause with increasing demand returning next year. We do expect strong performance next year based on our customers' strong pipeline of R&D and new products which we plan to support with our engineering and manufacturing services.

In medical, we expect Q4 revenues to be up mid-single digits. We have several new programs that will begin ramping in Q4 and continue into 2015 based on the expected timing of regulatory approval.

Finally, we project that test and instrumentation will be up slightly over Q3 levels based on the timing of shipments. Overall, while we don't see significant near term catalysts for upside given the CapEx outlook for semi cap [end] customers, we continue to benefit from consistent new program wins.

Now turn with me to slide 10. In summary, our excellent performance continues in the third quarter of 2014. As the midpoint of our Q4 guidance implies, we are on track to exceed $2.8 billion in revenues with year over year growth in all segments except computing.

Our full year operating margin will be approximately 50 basis points higher than the previous year and these results are delivered by the ongoing success in our operational excellence initiatives and our Management Team's ability to effectively expand operating margins while investing in and growing our business.

Profitable growth remains a primary focus as we position the Company to deliver and drive increased shareholder value. Our performance is sustained by the consistent focus of our teams on three key strategic initiatives ? our portfolio management, our operational excellence and our customer focus.

First, portfolio management where we choose to participate in the traditional markets of telco and computing and remain a preferred and important supplier for customers that value our supply chain and technical solutions.

We also continue to win new business in the non-traditional markets of industrial, medical and test and instrumentation where we lead with a strong and differentiated offering in our engineering services. We remain excited about the opportunities in front of us. As our results show, we continue to succeed and execute in each of our chosen markets.

Second, operational excellence ? the foundation of our operational excellence programs is the ongoing development of our team, of best practices for process innovation and manufacturing efficiency. We continue to invest in our team. Our all-employee engagement programs to support continuous improvements are active in each of our manufacturing facilities including our acquired facilities.

Regarding our acquisitions, we look forward to completing our integration activities on schedule as planned for 2014. We expect to experience the full benefit of integrated sites in 2015.

Finally and importantly, customer focus ? we have placed a major emphasis on the design to production needs of our customers. The results are evident with the 16 new engineering wins for the quarter. When we engage early we are able to support our customers in bringing their new products to market more quickly and efficiently.

Our customers are investing and winning in their chosen markets and our strong new bookings reflect their confidence in Benchmark to be their solutions provider of choice.

As we look ahead to next year we believe our ongoing focus on our strategic priorities provides a strong platform for steady operating margin improvements. In accordance with our current plans we remain confident that our growth strategies and our business model support long term profitable growth and we expect margins to continue to expand compared to current levels as we head into 2015. Our longer term operating margin target is 4.5%.

In closing, I want to thank our customers, shareholders and employees for their continued support. With that, I will turn the call over to the Operator now to begin our Q&A session. Operator?

(Operator Instructions) Our first question comes from the line of Brian Alexander with Raymond James. Please go ahead.

Could you just talk a little bit more about the strength you are seeing in telecom? I know there has been a lot of mixed data points in terms of CapEx from the communications space and your growth was very impressive. Some of that I believe was influenced by acquisition but even without that, still very strong. You mentioned Aris. Your outlook I think for Q4 still suggests you will be up double digits in telecom so maybe just give us a sense for what you are seeing out there and your confidence in growth going forward.

Brian, as you may recall, as we indicated last quarter we support a number of customers and programs here with backhaul and trunking, optical transport, broadband, data-on-demand activity ? routers, [footers], gateways ? and really what we see is our customers are benefitting from the rapid pace of change in technology and really it is consumer behavior I think at the end of the line that is driving this. Technology is really stressing network and the network capacity and CapEx is really what is required to support the growth that this creates and so we believe our customers are benefitting from that growth and our alignment with them and ability to have the agility and support infrastructure they need to bring their products to market has really benefitted us in this area to be able to support a number of customers with a variety of points where they support the infrastructure build-out.

And I have exhausted a lot of my knowledge there so beyond that, you really have to understand more about our customers.

That makes sense. And maybe just for Don, you guys are going to be at 4% operating margins in the second half as you said you would be. The 4.5% goal, maybe just remind us or update us on what sort of the minimum revenue level you think you need to be at to hit the 4.5%. I know it is mix dependent but maybe just give us kind of a range, thanks.

As you said, it is going to be mix dependent. It is going to factor in some revenue growth albeit we don't anticipate any of that in 2015. It is a longer term goal but depending on mix, you probably have a range. I mean, you certainly have to grow over ? you are going to have to have some level of modest growth over what we are doing this year to achieve four, to drive the margin up.

I would expect, Brian, although we are hesitant to put numbers around it as always because of the mix changes that may occur, really in simple math it would probably be somewhere near the $3 billion, $3.2 billion, somewhere in that range given the mix of customers that we support but you do hear a lot of hesitation for us to try to put a specific number around that because it is hard to project the timing of growth in some of the different industries that we participate in.

We have certainly seen kind of outpaced strength as you noted in telco and we have seen strength that has exceeded our expectations in computing. Our customers continue across all industries to invest very heavily in R&D and we are very pleased to be supporting them and some of their products are clearly exceeding their own expectations.

Just one last clarification, the revenue came in well above expectations this quarter and as I look at the profit upside, even backing out the bankruptcy charge and restructuring, it looks like the incremental profitability on the revenue upside was very modest in terms of incremental margin so is that just a function of where the upside came from in computing and communications and the low margin nature of those businesses or is there something else that accounted for that?

That is correct. It was largely mix dependent and as we indicated a little earlier, there were some costs associated with some ramps also but primarily mix.

Our next question comes from the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Just wanted to dig a little bit into the compute segment. You saw a pretty strong quarter and you are expecting a flat performance in December. Overall, this segment declined this year. Just trying to think about how you're, just trying to understand how you are thinking about compute in 2015 given some of the headwinds in the industry.

We continue to participate at the high end of computing and I believe that there are opportunities given some of the security and other issues that we see and the level of investment that our customers are making in R&D. We believe that there is continued opportunity for strength there. We aren't giving guidance for 2015 and I don't have an estimated outlook for growth or otherwise an industry breakdown but I would say that we are very pleased with the participation, with our customers in R&D activities. Beyond that, we would really have to look at what each of the customers are doing. Again though, I think what we have seen is very positive impacts from the investments they have made in recent quarters.

Okay great, and then Gayla, I was hoping you would give us some thoughts about what you are seeing from customers in terms of their forecasts. You guys have had very strong performance. Just wondering, are customers keeping their forecasts the same longer term? Are you seeing any uncertainty related to macro? Just wanted to get your thoughts.

Interesting conversation that we have had is that, and you have heard me refer to this I'm sure in the past but there once again seems to be a disconnect between what we are seeing from our customers and their behaviors as opposed to what you read in the newspaper and the news has, probably all a little bit alarmed by the macro environment but I don't see that manifesting itself in actions and behaviors in our customers ? not saying that the macro can't change behaviors and we are not saying that it can't change very quickly but have not seen that.

And our next question comes from the line of Jim Suva with Citi. Please go ahead.

When we think a little bit about computing, it is normally extremely strong in Q4 and I think you guided to flattish if I am correct and if so, can you help us better understand that? When we think about rebates and yearend budget flush, typically it is up and I think a couple of financial crises every year has been the case so if you can help us better understand that. Is it share losses? Is it customer challenges? How should we think about that in a segment that is traditionally quite strong in the Q4?

I think we are primarily seeing that to be a mix of product. This is not share loss. We haven't seen programs go away. We did see strength in Q3 though so we believe some of that was some successful bookings that occurred in Q3 that we otherwise would have anticipated in Q4. Some of those are late quarter, very strong orders that came in and so that is the primary change that we see is just kind of an exceptional level of strength in Q3 for compute which was above our expectations, beyond what was planned and don't know that we will see that same kind of strength in Q4. It is always hard and I think that the one thing that you see is there are areas that can surprise that we don't expect that there is going to be a significant upside. If you read the news and activities around compute, we just don't have a reason to believe that it is going to have the same kind of momentum in Q4 that it has had in past years.

Okay, that makes a lot of sense with the Q3 strength. Is there any way to quantify how much last bit of the quarter came in that you think may have been the pull forward from Q4 into Q3?

No, I don't have that and again, that is just our take on it. That is not something that has been signaled from any customers. I am sure that they are working all quarter long, every quarter for their bookings but it just seems that the strength that we saw was something that is usually reserved for Q4 so I don't really know if they are changing any behaviors or activities but that is our take on it. It is clearly not something that was signaled or directed in commentary from customers.

Okay and just housekeeping, tax rate outlook, what should we expect there and customer concentration that you may have had this quarter?

Tax rate for Q4, Jim, we are modeling 19% to 20%. In terms of concentration we had, as we indicated in the prepared comments, we have two customers over 10%.

And our next question comes from the line of Amit Daryanani with RBC Capital. Please go ahead.

A couple questions, I guess maybe start with on the telco side maybe talking about high single digit declines as you get into Q4. Is that just reflective of some of these Aris ramps that peaked in Q3 and now they are going to head down or is there something more than just some seasonal headwinds that is playing out in Q4 on the telco side, specifically?

I think there are some seasonal headwinds that I would expect and as I mentioned in the prepared comments, I believe that in some years, not even every year, in some years there is a budget flush in telco in our customers' customers and that isn't anticipated this year as well as potentially there is some M&A or transition in activities along the telco supply chain that don't directly impact us but may impact the infrastructure spend and the timing thereof. Those are kind of the backdrop against what we have in our Q4 guidance but no other real underpinnings that are of significance. Again, consistent with compute, we saw phenomenal performance in Q3 and then not having a budget flush, those two things combined.

And then a reasonable thing, when you mentioned that you think there was a bit of a pull-in happening in Q3 from Q4, your belief is that may have happened in the telco and compute segments or is it do you think more broader across all the other segments as well?

No, I only saw it specifically in telco and compute and remember, our frame of reference is primarily based on that which we expected so it was kind of a forecast to actual performance continued to go strong through quarter end.

And just finally, the charges you took for the GT Advanced bankruptcy, is this the maximum amount of exposure you have to this company or is there something else we should stop and think about as well?

And then on the inventory side, is inventory very specific to this company so it is impossible for you to reuse it for some other customer?

In the course of bankruptcy it gets pretty complex but it is our best estimate of our reserves required for this but I'll let Don speak more on that.

Again, it is our estimate of the potential loss. The actual loss may differ from the provisions that we have established. In terms of the inventory, that is specific to this customer.

(Operator Instructions) And our next question comes from Steven Fox with Cross Research. Please go ahead.

Just one question, actually. You brought up mix a couple of times in relation to margin expansion. Can you talk about how big of an influence mix could be in the coming calendar year and also to the extent that you are willing to dive into what would be the most attractive mix products we are talking about? Thanks a lot.

I think if you, Steven, if you look at the, really look at last quarter I think we had for three or four quarters in a row now where we had what I would call non-traditional revenue, being non-compute, non-telco, exceeded 50%. Our gross margins came in north of 8%, 8.1% for the first half of the year. Excluding the bankruptcy charge where we saw telco and computing climb, I think it was 52%, 53% of our revenues this quarter, we saw the gross margin decline about 7.9% so that is a pretty good representation right there just looking back at Q2, at the impact on mix. As you go forward, some of the margins are going to be impacted by the mix but in terms of the impact, Q2 to Q3 is a pretty good example.

Is there any area you would call out specifically where the new programs could be most impactful in the coming quarters on mix?

As Gayla noted in her comments, I think we have had eight quarters in a row where industrial controls have been our largest, we have seen the largest amount of bookings and if you, in general, if you look at the turns that we have seen over the last 18 months to two years, we have had the majority of our new program bookings have been in the non-traditional areas.

Our last question comes from the line of Todd Schwartzman with Sidoti & Company. Please go ahead.

How much revenue goes away with GT Advanced Technologies?

We have no revenue included in our Q4 guidance and really nothing of any significance in Q3.

What were they doing on an annual run rate basis the last couple years?

They were not a disclosable customer so we won't share details of that but I think the important thing is that we don't have them in our guidance going forward and they were not a significant customer. It would be clearly below 2%.

Okay, I understand. Could you speak to the change, if any, in the degree of visibility of your customers and their business forecasts by sector or if you care to generalize?

Wait, if you will repeat that? Say that again, please.

The visibility into the customers' business, their own forecasts, has there been any reduction in their ability to forecast or not really or does it depend on the sector?

I would say we haven't seen any changes. This goes back along the lines of what Sherri was inquiring about, if the macro environment was manifesting itself in any either behavior change or forecasting changes from our customers? No, I don't see that our customers have modified their forecasts. If you come back to accuracy of customer forecast, I would say that they are constantly working to improve on their forecast accuracy and the more successful their sales teams are, the less successful they are in being able to anticipate that which requires us to have a significant level of agility to be able to be able to support a quarter such as what we did this quarter.

Of those customers who normally speak to you in terms of more than just three months out, they continue to do so it sounds like.

Yes.

The 16% tax rate in Q3, was that country mix mostly?

That was primarily country mix. That is exactly correct.

Okay, because that seems evident somewhat in your Q4 guidance as well so you expect that to continue?

For Q4 it is going to be a little bit higher. We are factoring at 19% to 20%, or estimating it.

Right, but no longer ? I think you were previously speaking to 20%, 22% perhaps?

Correct, we were at 21% and certainly the impact this quarter, we are expecting it to drive a little lower this quarter.

Got it, and what are you seeing as far as the impact of the strength in the U.S. dollar versus the euro?

We had a little bit of, we did have a larger than expected FX loss that you see in other income or other loss but other than that, most of the transactions we have are U.S. dollar denominated anyway so generally, the impact to us is not that significant.

And how much was that FX loss, Don?

For the quarter it was $1 million.

I was going to say ? because I considered that more significant than Don did. Compared to others this year you are hearing report it is clearly insignificant but it is still significant to us and we primarily are using that for hedging.

Terrific, thank you very much.

And we do have another question and that comes from the line of Sean Hannan with Needham Company. Please go ahead.

I just want to see if I can ask a little bit or see if you could talk a little bit more about your new program wins. When I look at the trailing 12 months for you folks, for this quarter, last quarter, really through the course of the last four quarters, that metric has been above $600 million. It is a pretty strong number so if I look at that and I think about what that really should suggest for growth as we look forward to the next 12 plus months, just wanted to get a little bit more perspective from you folks in terms of what level of optimism we have at this point outside of some of the macro concerns that we might be monitoring more? What can we think about for growth next year and just in general context and where are we more positive in some of our sub-segments?

I think as we previously indicated we are optimistic for profitable growth in next year. We are not providing specific guidance for the year but again, if we go back to where we have seen strong wins and where we continue to have some ramps in front of us that we are excited about, we see that in industrial controls, we see that in medical and we expect to continue to gain momentum there.

We do have program wins across all of our industries and what becomes difficult to see is given the complexity of the product is the timing of which those are ramped and brought into the revenue line.

We are excited with the momentum we have gained with bookings and at the same time, as you mentioned and as others have pointed out, the macro environment has not translated into what I would consider a headwind but at any time that potentially could be something that would impact our business and we would have to factor that in as we get visibility to any impacts that would have. We are cautiously but very optimistic given what we have been able to control in our bookings so feel very good about what we have seen in our bookings activity.

And at this time there are no other questions in queue.

Thank you everyone for joining us today and we look forward to following up with any other questions you may have. Have a good day.

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