Lisa Weeks - Vice President, Strategy and Investor Relations Gayla Delly - President and Chief Executive Officer Donald Adam - Chief Financial Officer.

Jim Suva - Citigroup Andrew Hong - B. Riley Steven Bryant Fox - Cross Research LLC Brian Alexander - Raymond James Sean Hannan - Needham & Company, LLC Mitchell Steves - RBC Capital Markets.

Good day, ladies and gentlemen, and welcome to the Benchmark Electronics Second Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Ms. Lisa Weeks. Ma'am, you may begin..

Thank you, Kelly. Good morning, everyone, and thank you for joining us today for Benchmark's second quarter earnings conference call. My name is Lisa Weeks and I’m Benchmark’s VP of Strategy and Investor Relations. With me this morning are Gayla Delly, President and CEO; and Don Adam, CFO.

Gayla will provide quarterly highlights and a strategic overview and Don will provide a detailed review of our financial results followed by a question and answer period. Earlier today, we issued our earnings release highlighting our financial performance for the second quarter and we have prepared a presentation that we'll reference on this call.

The press release and presentation are available online under the Investor Relations section of our website at www.bench.com. This call is being webcast live and a replay will be available online following the call. Please take a moment to review the forward-looking statements advised on slide 2 in the presentation.

During our call, we will discuss forward-looking information. As a reminder, any of today's remarks that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties described in 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. The company has provided a reconciliation of our GAAP to non-GAAP measure in the press release as well as in the appendix of the presentation.

I will now turn the call over to our President and Chief Executive Officer, Gayla Delly..

Thank you, Lisa, and good morning to everyone. Please turn to slide 3 in our presentation for a review our second quarter highlights. Benchmark performed well in the second quarter against a backdrop of broad variability and end market demand.

Our revenue of $664 million was at the high end of our guidance range and our earnings exceeded the guidance we provided last quarter. Based on the strength of prior year bookings, medical, industrial controls and test and instrumentation revenues continued to increase.

We also experienced better than expected demand from our traditional computing and telecom sectors. Our operating margin was 4.2% for the quarter, a 40 basis point improvement quarter-over-quarter and a 10 basis point improvement year-over-year.

The second quarter operating margin highlights our team’s ongoing efforts to diversify our portfolio, our operational excellence initiatives and the culture of discipline that exists within the Benchmark organization.

In addition to our strong operational performance, we also returned $19 million to shareholders through the share repurchase program during the quarter. Over the past 12 months, we had returned $66 million to our shareholders through our share repurchase program and have $69 million remaining in our current authorization.

Now, please turn to slide 4 for a review of our portfolio. In Q2, revenues generated in our higher growth markets represented 53% of total revenue, exceeding our traditional markets for the third consecutive quarter. These results demonstrate continued execution on our portfolio diversification strategy and we expect this trend to continue.

Our diversification strategy balances the steady base of new program opportunities in our higher margin growth businesses, following management’s support the rapid pace of product mix changes and demand variability within our traditional customer base.

As noted in our prior calls, not all industries smooth and sleek, and we expect continued choppiness associated with seasonality and new product introductions in our traditional markets of computing and telecom.

However, we have the operational strength and resiliency that allows us to effectively manage these variations and continue to increase margins towards our stated targets. Now, let’s turn to slide 5.

Bookings during the second quarter aligned well with our focus on early engineering engagements and our focus on longer product lifecycle manufacturing solution. We won 42 new programs, including 13 engineering projects that should result in estimated annual revenues of $110 million to $130 million when fully released to production.

These bookings during the quarter were led by strong aerospace and defense wins in the industrial sector and wins in the medical sector, driven by our differentiated solutions and high reliability design and manufacturing. In the traditional markets, we had new bookings for data center solutions and networking infrastructure products.

The current pipeline of new business opportunities remain healthy and we’re encouraged and excited to be engaged with our customers at the inception point with new design technology, a key focus of our early engagement strategy. Now, I’ll turn the call over to Don to provide additional insight into our second quarter financial performance.

Don?.

Thank you, Gayla, and good morning to everyone. Please turn to slide 6 for a summary of our results. Second quarter revenues of $664 million were at the high end of our guidance range of $635 million to $665 million. Revenues were generally in line with our expectations across all markets with demand in traditional computing and telco at the high end.

Net income on a GAAP basis was $21 million for the quarter, compared to $22 million last year. Non-GAAP net income for the quarter was $22 million compared to $23 million last year. Our GAAP EPS was $0.40 compared to $0.41 in 2014. Non-GAAP earnings per share were $0.42 in the second quarter a share compared to $0.43 last year.

Our non-GAAP operating margin was 4.2% compared to 3.8% during the second quarter of 2014. This continued improvement is a result of our ongoing operational excellence initiatives and the diversification of our portfolio.

During the quarter, we had $1.6 million of restructuring and integration costs, mostly associated with the consolidation of previously acquired facilities. The second quarter non-GAAP effective income tax was 22% compared to 20.9% last quarter, primarily due to the geographic mix of revenue.

We expect the tax rate for the third quarter to range from 21% to 22%. The diluted weighted average shares outstanding for the second quarter were 52.7 million shares. Now, please turn to slide 7 for a trending view of our operating income. Our second quarter non-GAAP operating income of 4.2% demonstrates the strength of our operating platform.

It represents a 40 basis point improvement over last quarter and a 10 basis point increase from the last year. Our improving operating margins result from our continued efforts to diversify our portfolio into higher margin business sectors and to execute in a well defined lean and operational excellence initiatives.

Please turn to slide 8 to review our revenue by industry sector. Industrial controls were $201 million and represented 30% of second quarter revenues.

On sequential basis, revenues were up 1% which was slightly less than we expected due to lower shipments to customers that support the energy markets and continuing headwinds associated with the strength of the US dollar.

As expected, telecom revenues of $177 million increased sequentially from the first quarter and performed better than we expected due to increased demand in the final month of the quarter. Computing revenues of $137 million increased sequentially from our seasonally low first quarter and similar to telecom, experienced strong final month demand.

Medical revenues of $90 million, which was up from prior quarter sales based on the significant number of new program introductions, this represents 11% increase both sequentially and year-over-year. Testing and instrumentation revenues of $59 million were up quarter-over-quarter.

The significant difference in the year-over-year comparison includes $27 million for a customer who declared bankruptcy in 2014. Excluding this customer, year over year sales were up 32% based on new programs. Please turn to slide 9 where I’ll highlight a few balance sheet and cash flow items. Our cash balance at June 30 was $409 million.

During the second quarter, we repurchased 779,000 shares at a cost of $19 million. As Gayla noted earlier, we have $69 million remaining for future repurchases and we finished the quarter with $57 million of cash in the US.

Our near term capital allocation priorities remain focused on executing share buybacks, investing CapEx in the business to drive continued operational improvements and supporting strategic growth initiatives. During the quarter, we generated $52 million in cash from operations.

Capital expenditures were $8.2 million and depreciation and amortization expense was $12.3 million for the quarter. We believe that CapEx will range from $40 million to $50 million for the full year.

Our accounts receivable balance was $501 million, an increase of $10 million from the last quarter and our accounts receivable days were 68, which is a 3-day improvement from the last quarter. Inventory at June 30 was $445 million, an increase of $18 million from last quarter. Inventory turns were 5.5, which improved from the last quarter.

Overall, our cash conversion cycle improved by 8 days in comparison with last quarter, with improvements demonstrated in all areas, receivables, payables, and inventory days. Our continued portfolio diversification strategy to higher mix businesses provide near-term headwinds to our cash conversion cycle.

To offset these impacts, we have aggressive initiatives related to improving working capital in place, including better aligning our customer and supplier payment terms, optimizing demand and inventory management programs and implementing strategic sourcing initiatives.

Although we’re pleased with our progress to date, we believe there is much more work to be done. In the near term, we’re working to reduce our cash conversion cycle to 82 days, longer term our goal is to reach 75 days. Now I’ll turn the call back over to Gayla..

Thank you, Don. Please turn to slide 11 to review our guidance. We expect our third quarter revenues to be between $635 million and $665 million. Diluted earnings per share excluding restructuring charges are expected to range from $0.38 to $0.42. [indiscernible] in this guidance is the range of 3.8% to 4.2% operating margin.

In addition, our guidance includes an expected tax rate of 21% to 22% as Don noted. Restructuring charges are expected to be less than $1 million next quarter. Now let’s please turn to slide 12 as we provide an outlook for the industries we serve, I would like to highlight that many of our customers are experiencing challenging business conditions.

Our customers are reporting greater uncertainty related to the timing of business recovery. It is worth noting that the growth we’re seeing is not so much driven by broad based demand improvements, but by new programs where our customers are stimulating growth with new products and innovative technology.

With positive momentum on our early engineering engagement approach and supported by our diversified portfolio, Benchmark is well positioned to support our customers in this regard. However, we do expect to see continued variability across our end markets.

In industrial controls, for the third quarter, we expect increases based on new program launches which will continue into Q4. We’re seeing some strength in our aerospace and defense customers, partially offset by softer demand from industrial customers serving the energy market.

In medical, after a strong increase in Q2, we expect an increase further in the third quarter as we continue to support program qualification. As Don stated previously, medical is up 11% sequentially and year over year, based on the conversion of our prior year bookings into revenue. For the full year, we expect double digit growth in medical.

In test and instrumentation, we expect demand in Q3 to be higher than Q2 level. We expect double digit growth in this sector for the full year, excluding the impact of a customer declared bankruptcy in 2014.

In our traditional market, we expect telecom to decline for the quarter and for the full year in comparison to the very strong double digit growth we witnessed in 2014 which was based on the new projects. In general, our telecom customers are reporting restrained spending by their end customers.

Our support of customer R&D activities remain high and return of telco spending is not expected until 2016. In computing, after our seasonally low first quarter and expected increases in the second quarter, we anticipate revenue decline in the third quarter. As previously reported, we expect overall computing revenue to decline for the full year 2015.

Now turning to slide 13, in summary, during the second quarter, we continued to execute well against our long term strategy. In the near term, we remain committed to effectively allocating our capital.

We will continue to repurchase shares against our $69 million remaining in the current program, invest in CapEx for operational excellence and in support of organic growth, and selectively support strategic growth investments.

We also remain focused on our key strategic priorities, including further diversifying our portfolio, enhancing our operational excellence program and accelerating working capital improvements to increase value for our customers and shareholders.

As we continue to navigate through challenging end markets of our customers, we believe Benchmark remains on a positive trajectory supported by our ongoing initiatives.

As our higher growth markets continue to outpace growth in the traditional markets, we expect to sustain and exit the fourth quarter at our previously stated target of 4.2% operating margin. In 2016, we anticipate even further progress towards our 4.25% operating margin target.

In closing, I have confidence in our strategy, our business model and most importantly our team members who work tirelessly to create value for our customers and our shareholders.

Now, as you could tell by my voice, I'm a bit under the weather and we will keep our Q&A to a bit shorter time today, but we will be available at our office for follow-up questions that you may have. Operator, I’ll turn it over to you to open it up for Q&A. Thank you..

[Operator Instructions] And our first question comes from the line of Jim Suva with Citi..

A quick question, it looks like your operating margins are progressing in the right direction, which is great.

Assuming a favorable mix, is there a specific revenue level we should think about of what it takes to get to that 4.5%? And then on the customer break down, did you have any customers over 10%, if so, how many and who and which segments they were?.

Jim, in terms of the second question, no 10% customers for the year. In terms of the revenue, again, it’s a little bit difficult to measure, certainly to achieve 4.5% will need increased revenue, but to pinpoint that number is a little bit difficult given the changes in mix that may occur..

Maybe just a quick follow-up, when you think about your new business wins that came in, were they – I know you mentioned they are pretty broad, were there a couple of segments that maybe a little bit bigger than others historically as far as your new business wins?.

I would say, Jim, that what we’ve seen as far as our new business wins is truly a good broad mix. In fact, some of the programs that we are engaging in are early engagements, very broad opportunities such as industrial that have a very long lifecycles that we’re excited about.

And then likewise, we see some other opportunities as we spoke to in the network and telecom, [they are just] different. So we have a good blend of new opportunities that we’re excited about and I think that’s the important message that we want to get across to shareholders, it is portfolio management, it’s not that we prefer one versus the other.

It really takes a blend of business to allow us to operate most effectively and efficiently. And we’re seeing our go to market allow us to balance the portfolio in a manner that we’re very happy with..

And our next question comes from the line of Andrew Hong with B. Riley..

In the business wins that you talked about, I’m not going to complain, but computing and telco seemed a little bit high compared to normal.

So I was just wondering why that is?.

Welcome [indiscernible]. We see telco and computing to traditionally have variability in demand such that the second and fourth quarters are the stronger quarters and first and third quarters are the – in comparison, weaker quarters for those market places.

And we long ago determined that we know the customers seem to be able to move [Christmas] and so June and December are the strong quarters for this market. And then [actually we had] another question..

I was more commenting on the wins, like, it seems like it’s a little bit higher as a percentage of your wins, those two segments.

I was just wondering what’s driving that?.

On the new program wins, sorry, I misunderstood your question. On the new program wins in computing and telco, again, this is just probably timing of wins. We really strive to – I don’t think we’ll ever get to a perfect allocation by quarter, but we want to see them across each industry and so we’re seeing a pretty good level there.

But I wouldn't consider it imbalanced..

And then my next question is that if I look at consensus revenue for 2016, I think it’s up like 4% year over year.

Can you just comment on that directionally?.

We’re not at the point of giving guidance for 2016. What I do see though is we expect to be competing effectively in the industry. I haven’t really looked a great deal to see where the updates have come in for the industry, but I would expect us to be at or above what you see for the industry and we’re clearly driving for stronger than 4%.

But I’m not giving any guidance at this time for 2016..

And our next question comes from the line of Steven Fox with Cross Research..

Just a couple of questions. First off, you guys talked about strong finish to the second quarter for both computing and telecom, but it sounds like you still have a muted outlook for the rest of the year and maybe even into next year.

Can you talk about if there was anything encouraging behind that finish or what drove it and why the difference between that and the forward outlook?.

I think that in some cases we saw the demand exceed both ours and our customers’ expectations. And what we see in our outlook in comparison is the environment.

There are a number of environmental changes going on, continued headwinds in currency, continued very high level of M&A activities that is changing the end market demand and also causing some hesitation or potential delay in the infrastructure spending of the end customers.

And I think that is what is embedded in the forecast given by our customers and the conservatism that has been baked into their outlook for the third quarter that we have rolled up into our forecast..

And then just really quickly as a follow-up, among the new wins, you did mention data center and I know there’s been a trend towards EMS providers benefiting more from a white box type of products.

Is that something that you’re participating in and leveraging your design too, or could you just generally talk about what you’re doing in data center to drive some new wins there?.

We’re performing more on the high performance computing end of the market place there..

And our next question comes from the line of Brian Alexander with Raymond James..

Gayla, did I hear correctly that you’re looking for the industrial segment to be up sequentially in the September quarter? And I know you called out oil and gas is sort of an area of weakness.

But if you’re expecting that overall segment to be up, how do you reconcile that with maybe some of the comments coming from your supplier base that industrial has softened in the US as well as in Europe?.

In my comments, what I highlighted was we also have our industrial sector aerospace and defense and we're seeing strength in aerospace and defense offsetting the weakness in energy that we see right now..

And maybe switching over to working capital, Don, I think you talked about trying to get to 75-day cash conversion cycle, I think you said longer term, so maybe what’s the timing on reaching that target? Where do you see the improvements occurring specifically and what are you guys doing differently to get there?.

The challenge or the opportunity we have right now, Brian, is as we diversify into these higher mix customers, what we’re finding is we’ve got – as we ramp these products, we’ve got programs, we have more work to do on the front end.

So in terms of the targets in days, I think certainly 82 at some point this year, toward the end of the year, and then longer term 75 sometime into 2016..

So that’s not too far out in the future?.

Right..

And then just on margins, the 4.2% this quarter was obviously very strong given that you actually had some adverse end market mix and overall revenue environment pretty challenging.

It sounds like you’re still expecting that 4.2% in the fourth quarter after dipping maybe a little bit in Q3, but I suspect your revenue might be higher in the fourth quarter than the second quarter.

So I guess I’m curious, one, would Q4 revenue likely be above Q2? And if so, what would keep margins in the fourth quarter from not getting above what you just reported? That’s all from me..

I think in terms of revenues for Q4, we’re certainly not providing guidance. I think what we’re trying to reiterate is that we said at the beginning of the year as we expect to exit the year at 4.2%. Certainly margins are going to be dependent and you're going to have leverage if revenues are up.

So more so just trying to reiterate that we expect to finish the quarter and year at 4.2%. It’s not higher than Q2..

Maybe a different way to ask that, was there anything unusual or temporary that aided the second quarter?.

No..

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

So just want to – I think most of my questions here have been answered. Just want to see if I can summarily understand the overall picture for you guys at this point accurately.

It appears that from a telco standpoint, we’re going to be – and computing back end of this year and we had some comps where that may not be necessarily a lot to get excited about, but it’s really within the other areas of your business, particularly driven by new program wins versus necessarily end market demand pull through that is giving you the optimism you have going into the back end of this calendar year, perhaps positioning for 2016.

Is that the right way to think about?.

You said it very well, Sean..

And we have a follow-up question from the line of Andrew Hong with B. Riley..

As your revenue mix shifts towards the higher growth markets versus the traditional, I’m just curious are there any end markets in the higher growth segment where you have gross margins above 9%?.

Andrew, we don’t go into details of that level, but I think the easy way to make sure that you get an understanding of the mix of business is we have a broad base of services that we offer to customers and depending on the level and type of services they require, some of those will render greater margin opportunities for us to the extent that we are engaged at the early phase on engineering all the way through the end life cycle, based on the complexity of the business model and the products, there may be an opportunity to have a more favorable margin versus when it is a more volumetric build to print volume product.

So it’s a variety and we really don’t have any specific margin that we provide publicly on a program by program basis..

And then as a follow-on, you’ve done a really good job keeping operating expenses very tight.

Should we expect that to continue going forward?.

I would not expect any significant changes from the levels that we’ve seen in the first half of this year..

Thank you everyone for joining our call. I believe we have one or two more questions..

Our last question comes from the line of Mitch Steves with RBC Capital Markets..

Just had a quick one on the networking business, it looks like the Q over Q guidance from the whole sector seems to have been mixed [indiscernible] high teens, you guys are kind of in the center.

So maybe it would be helpful since you guys aren’t going to give customer information, maybe within networking what’s stronger, what’s weaker within the segment going forward?.

I think the challenge in networking specifically has to do with AT&T [strength]. Clearly, they are the large driver as well as some of the other players that are part of pending or potential transactions.

So I think when I referred to M&A that would be an industry that is probably most highly impacted with limited visibility on behalf of our customers to provide a lot of insight in forecasting accuracy on any short time window basis, just given the level of and number of customers that they have driving some of the infrastructure spend on that side.

Beyond that on some of the newer products where we are seeing strength, so that’s probably why we’re going in our guidance towards the middle of the package you would say. And that new product implementations and some of the higher performance in telecom, if I can refer to it in that manner.

So it is a mixed bag out there in the telecom space right now as to what the build out opportunities and plans are. But you would really have to look to our customers to get a greater understanding because I don’t have very strong depth of knowledge on truly the underpinning on that.

Okay, operator, so we’re at 10:30 and appreciate all of you – having you join us on our call today and we look forward to following up with you, we are in our office this afternoon. So thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day..