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Text: For today's call, Jeff will begin by covering a summary of our second quarter results and by providing a current status of our global operations.
Roop will then discuss the second quarter results in more detail, including a cash and balance sheet summary and our third quarter guidance.
Jeff will wrap up with an outlook by market sector and an update on our strategic initiatives before we conclude the call with Q&A.
Our second quarter results were achieved against the backdrop of mandatory facility shutdowns, component constraints, and extra processes required to keep everyone safe.
During Q2, we achieved revenue of $491 million, which was down sequentially from Q1, but supported by strong demand in our Medical and Semi-Cap sectors.
Non-GAAP gross margin for the quarter was 7% and non-GAAP earnings per share were $0.07.
Our non-GAAP earnings include $4 million or $0.10 per share of COVID related costs that we could not fully anticipate as we entered the quarter.
In addition to these COVID costs, we experienced other production inefficiencies as a result of the current pandemic environment.
Our overall performance was helped by the aggressive cost reduction actions taken earlier in the quarter.
Our cash conversion cycle for the quarter was 84 days.
Despite operating challenges, we generated $23 million in cash flow from operations and returned $6 million of cash to shareholders as part of our recurring quarterly dividend payment.
As we look forward, I wanted to step back and offer a few perspectives.
I'll do that on Slide 4.
Since I joined Benchmark last year, we've made a lot of positive changes and all of these have been supported by an amazing team.
From the hard work required to execute on our strategic initiatives and goals that we outlined last year, to overcoming unique challenges presented by the unprecedented global pandemic of today, let me simply say our team has risen to the occasion.
Before I arrived, the company had embarked on a strategy to diversify the markets we serve and drive our portfolio mix with a greater concentration in higher value markets.
In the past year, we have worked further to align the customers where we can add the most value and these efforts have paid off.
Today we enjoy a diverse portfolio of products across many high growth and high value sectors.
That being said, we are not immune to the current recession that this disease has caused and we have an unprecedented amount of demand changes in our portfolio that's required a lot of the team's attention to ensure we capitalize on new opportunities while mitigating any risks.
We believe this diverse portfolio and exposure to high value segments will allow us to expand our quarterly revenue through the balance of the year.
Supply chain in our complex high mixed environment is a constant focus, and our recent results have been supported by the strong performance of our supply chain team.
During the second quarter and due to the team's efforts, we were not significantly impacted by component shortages, but they did in some places contribute to operational inefficiencies.
Further, our revamped go-to-market organization has grown the manufacturing and engineering services opportunity pipeline by over 30% in the past 12 months, and have delivered three quarters of sequential growth in bookings, which bodes well for our long-term growth potential.
As we look out to the end of the year, we are still on track to exit 2020 with at least 9% gross margin and we expect to build on this momentum into 2021.
As the global pandemic continues to evolve, we have expanded protocols focused on keeping a safe work environment for our employees.
Our actions are informed by the best practices published by the CDC, the WHO and local authorities, and we've completed a Company Employee Survey to solicit direct feedback on our actions to date and ensure our employees agree that we are maintaining a safe work environment.
Where possible we are continuing to permit about 20% of our employees to work from home.
We have shifted our customer engagements to a virtual environment with real time video supported factory tours as we limit travel to protect our teams.
We even hosted a virtual grand opening of our new Phoenix operation with Governor Ducey and Mayor Gallego.
Our teams have adapted well to the new reality, and we are finding creative ways to stay close to our customers and continuing to collaborate with them on solving new challenges.
In Asia, China and Thailand we are fully operational through the second quarter.
As we entered Q2, our Penang, Malaysia operations, which includes our largest precision machining facility operated at 50% capacity based on local restrictions, which were subsequently lifted at the end of April.
From the 1st of May, Malaysia has been fully operational.
Our European sites in the Netherlands and Romania were fully operational in the second quarter and remains so today.
Across the US, our five operations in California were impacted by shelter-in-place orders through April.
Since early May and to the present all California locations as well as our other US sites are fully operational.
In Mexico, we have two operations in Tijuana and one in Guadalajara.
The 100% shutdown that impacted our Tijuana operations was lifted in mid-May after we passed some inspection and were given authorization to operate by the Baja's state.
There has been a phase return to work since this time and the Tier 1 sites are now operating at approximately 75%.
Our Guadalajara facility has been essentially operating at 75% productivity due to at-risk employees being required to stay home for the Jalisco state government restrictions.
We are staggering shifts and other protocols in our Mexican operations to keep our employees safe and optimize output.
This has been and remains a highly dynamic environment.
As shelter-in-place orders were lifted in the US, we had hoped the country could maintain the declining infection curve.
Unfortunately this has not happened.
As the incident rate domestically increases, there could be temporary shutdowns of one of our facilities at any given time.
And we stand ready to execute decontamination protocols beyond our normal safe work in cleaning procedures.
Our operation teams will continue to maintain our safety first approach, while managing schedules to ensure we meet delivery obligations to our customers.
Over to you, Roop.
I hope everyone and their families are staying healthy and safe.
Let me start by echoing Jeff's sentiment on the incredible efforts of our teams to support our customers through a very dynamic environment.
As we manage through the COVID crisis, our priorities remain centered on one, the health and safety of our employees.
Two, delivering for our customers.
Three, maintaining a healthy balance sheet and four, ensuring the financial flexibility to run our operations through uncertainty.
Total Benchmark revenue was $491 million.
Medical revenues for the second quarter increased 14% sequentially and were up 18% year-over-year from continued new product ramps, strength throughout our medical customers and increasing demand for critical devices necessary to support the COVID-19 fight, including X-ray and ultrasound devices, ventilators and diagnostic equipment, which we estimate is approximately a third of our sequential growth.
Semi-Cap revenues were up 5% in the second quarter and up 39% year-over-year from continued strong demand across our Semi-Cap customers.
A&D revenues for the second quarter decreased 26% sequentially due to approximately $15 million lower revenue from our commercial aerospace programs, which is approximately 30% of the sectors revenue.
The remaining decline in the sector is related to defense program timing changes, whether that is the end of certain programs or transitions to new programs.
Demand from our defense customers for security solutions, aircraft, munitions and satellites remained strong.
We expect continued strong demand in Q3 and Q4 2020 including new programs ramping which should result in sequential revenue growth.
Industrial revenues for the second quarter decreased 15% sequentially.
Demand for products in the oil and gas industry, which is approximately 20% of our revenue, continued to be generally soft and will likely stay soft for the remainder of the year.
In addition demand decreased for goods that support the commercial building and transportation infrastructure markets.
Overall, the higher value markets represented 81% of our second quarter revenue.
In the traditional markets, computing was up 20% quarter-over-quarter from new program ramps and two engineering and manufacturing programs in high-performance computing.
Telco was down 10% sequentially.
We saw pockets of strength in demand for network infrastructure, which was offset by lower demand for broadband and commercial satellite applications.
Our traditional markets represented 19% of second quarter revenues.
Our top 10 customers represented 44% of sales for the second quarter.
Our revenue of $491 million reflects a decrease on a quarter-over-quarter basis.
Our GAAP loss per share for the quarter was $0.09.
Our GAAP results include restructuring and other one-time costs totaling $5.7 million.
$3.3 million is related to the severance and other items for the announced closure of our Angleton site which Jeff will cover in more detail in his initiatives update.
$1.2 million is related to the completion of our San Jose closure and the remaining is due to other various restructuring activities around our network.
Our previously announced San Jose site closure has been completed on schedule and within our original cost estimates.
Turning to Slide 10.
For Q2, our non-GAAP gross margin was 7%, a 140 basis points sequential decline.
As Jeff stated earlier, our results were negatively impacted by $4 million of costs related to COVID-19 including site shutdown days pursuant to government orders, idle and not fully productive labor costs, personal protective equipment and incremental freight charges.
The majority of these costs impacted our gross profit.
We expect the second quarter to be the lowest quarterly gross margin in fiscal year 2020, and we still believe that we can exit 2020 at, at least 9% of gross margin.
Our SG&A was $28.5 million, a decrease of $3.1 million sequentially and $3 million year-over-year due to the cost containment measures, which we have continued, including salary reductions for certain management personnel, including the executive team, freezing travel, reducing discretionary spending and delaying hiring in addition to our reduction in variable compensation expense.
Operating margin was 1.2%, a decrease from 2.3% in Q1 due to lower revenue, reduced gross margin offset by the lower SG&A.
In Q2 2020, our non-GAAP effective tax rate was 29%, which was higher than expected for the quarter due to the distribution of income across our network and certain discrete tax items.
The higher tax impact was approximately $0.01 per share.
Non-GAAP earnings per share was $0.07 for the quarter and non-GAAP ROIC was 5.9%.
Our cash balance was $356 million at June 30, with $194 million available in the US.
We did repatriate cash in Q2.
We will continue to repatriate future quarters when appropriate, while also balancing our foreign site's cash flow requirements.
Our cash balances include $30 million of proceeds from borrowings under our revolving line of credit.
At June 30, we were at a positive net of debt cash position of approximately $183 million which was higher than the end of Q1 by approximately $12 million.
We believe we've got -- we have a strong capital structure and our liquidity position provides flexibility to manage our business through the current environment.
We generated $23 million in cash flow from operations and $13 million free cash flow after netting $10 million of capital expenditures.
Our accounts receivable balance was $302 million, a decrease of $16 million from the prior quarter.
Contract assets were $154 million at June 30 and $160 million at March 31.
Payables were down $11 million quarter-over-quarter.
Inventory at June 30 was $364 million, up $26 million quarter-over-quarter.
Turning to Slide 12 to review our cash conversion cycle performance.
Our cash conversion cycle days was 84.
The primary driver for the slightly higher cycle days was the effect from the increase in inventory.
Inventory days increased due to mix changes from customers late in the quarter and advanced inventory purchases to support long production cycles for products in our Semi-Cap and Medical sectors.
Along with the inventory increase, we did see a corresponding increase in customer cash deposits, which is used to offset advanced inventory purchases.
Now turning to Slide 13 for a capital allocation update.
In Q2, we continued to pay a quarterly cash dividend of approximately $5.8 million.
As a reminder, we increased our recurring quarterly cash dividend to $0.16 per share on February 3, 2020.
We expect to continue the recurring quarterly cash dividend.
We suspended our share repurchase program in Q2, and we are not planning any share repurchases in the third quarter.
Turning to Slide 14 for a review of our third quarter 2020 guidance.
We expect revenue to range from $490 million to $530 million.
Our non-GAAP diluted earnings per share is expected to be in the range from $0.26 to $0.30 or a midpoint of $0.28.
We expect to generate cash flow from operations for the full year even considering the challenging COVID-19 environment.
Capex for the year will be approximately $30 million to $35 million as we prioritize investments to support new customers and expand our production capacity for future growth.
Implied in our guidance is a 2.9% to 3.1% operating margin range for modeling purposes.
The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs.
We expect to incur restructuring and other non-recurring costs in Q3 of approximately $800,000 to $1.2 million.
Other expenses net is expected to be $2.4 million, which is primarily interest expense related to our outstanding debt.
We expect that for Q3, our non-GAAP effective tax rate will be in the range of 20% to 22%, because of the distribution of income around our global network.
The expected weighted average shares for Q3 are 36.7 million.
This guidance takes into consideration all known constraints for the third quarter and assumes no further significant interruptions to our supply base, operations or customers.
The guidance also assumes no material changes to end market conditions due to COVID-19.
Following Roop's guidance for the third quarter, I wanted to provide additional color on our view of demand by sector for the second half of 2020 on Slide 16.
As I stated earlier in the call, our global operations are at or near our planned staffing levels with the exception of Mexico.
Given our current operational state, our ability to fulfill demand remains high.
Through the second quarter and early in July, we have gained a better picture of the demand outlook from customers in each of our market verticals, and have a current snapshot of what our revenue trends could look like in the second half.
I want to reinforce, this is just a snapshot because there will likely be puts and takes across our sub sectors as we move forward.
I will start with the Medical sector where demand grew almost 14% sequentially from Q1 and is forecasted to remain strong throughout the rest of the year from new program ramps in imaging systems and for critical care and diagnostic devices supporting COVID-19.
On the flip side, our core medical products that supports cardiac, renal and orthopedic therapies have seen demand reductions in the second half that have offset some of the increases as hospitals and clinics are deferring planned procedures and elective surgeries based on hospital capacity.
We expect demand for these products to increase when the COVID crisis lessens.
But the end result for our portfolio, is that we believe it will remain at the Q2 level for the balance of 2020, which still represents double-digit year-over-year growth.
In Semi-Cap, the demand recovery for semiconductor capital equipment continues based on the current forecast from our customers.
On the strength of this demand, we expect sequential quarterly revenue growth for the rest of the year further supported by some new program ramps as well.
Our competitive position remains very strong and we look forward to increasing our industry leading precision machining position in this sector.
Our A&D sector is comprised of approximately 70% defense related products and 30% aerospace.
Demand for radar, missiles, military aircraft and satellite communication devices remains strong, and we expect continued strength in the second half.
However as Roop referenced earlier in our Q2 results, demand for commercial aircraft programs are not showing any signs of recovery in the second half of this year.
Moving to the Industrial sector.
We see limited recovery for customers supporting oil and gas through 2020, which represents approximately 20% of sector revenue.
We are also seeing softer demand for commercial and transportation infrastructure markets, as many of our customers' projects have been deferred.
As a bright spot, we are seeing strength in testing instrumentation and IoT related products.
Similar to Industrials, the traditional markets of Computing and Telco will remain mixed.
We see strength in Computing as we saw in Q2 with very complex high performance computing projects landing in the second half.
However, these programs tend to be project orientated.
So it's important that the end customer scheduled supports installing these machines in the year.
Demand from customers we support in security computing and enterprise data centers will remain muted given the lockdown on enterprise IT capital spending.
On the Telco side, we've seen increases in network infrastructure products, supporting greater work from home bandwidth demand, but this has been offset by declines for next generation network build out and in some commercial satellite applications.
Despite a challenging global backdrop that is most of our business development team grounded, we had our third sequential growth quarter of bookings growth.
Our marketing team has been instrumental in working with our operation and sales teams on virtual tours and capability demonstration that is becoming a part of the new norm in our business.
Fortunately, the demand environment remains favorable for outsourcing, as many companies continue to pivot to more variable design and manufacturing cost models.
In the Medical sector, we were awarded programs for a fall detection system and a new drug delivery device, which have both coupled with front-end engineering projects.
Also, as we stated last quarter, we were awarded new ventilator programs that are being rapidly transferred into manufacturing revenue for Benchmark.
In Defense, we were awarded a number of new programs including design and manufacturing for space module electronics, and for optical sensors for military applications.
In Industrials, we were awarded a new product that will come to market for microbial cleaning in commercial venues, which has become a critical application in the new normal of living with COVID and beyond.
I'm also pleased to announce that we have partnered with CoreKinect to provide IoT ecosystem hardware from our new Phoenix EMS operations.
Our new business pipeline is strong across our targeted sectors and we remain very encouraged about the prospects for continued outsourcing wins in the coming quarters.
During the first half of 2020, even with the significant challenges brought on by the pandemic, we've continued to make progress on our strategic initiatives, and I wanted to share a few updates as we close the call today.
Benchmark is in the services business, and one of our top priorities is to deepen our relationship with customers as a strategic partner and trusted innovation collaborator.
I can report that customer satisfaction which I review with the team weekly remains very high.
During the crisis, there is a heightened level of communication and coordination required in serving customers and as I noted last quarter, I have personally received multiple inputs on the discipline and excellence of our teams.
In fact, in Q2, we received three service excellence awards from our top customers recognizing our performance during this pandemic.
As I stated earlier in the call, I couldn't be prouder of our organization.
In addition, we are partnering with Applied Materials on their SuCCESS2030 Sustainability Initiative and participated in their announcement at SEMICON West earlier this month.
Benchmark is committed to supporting ESG initiative and are excited when we can further these actions working closely with a valued customer.
Turning now to growing our business, with our revamped go-to-market organization, we have had our third consecutive quarter of sequential growth in new program wins.
We have the right team on the field and we'll continue to reap benefits from the investment in this area.
We are making progress in our Medical, Semi-Cap and Defense accounts and starting to see early results with new engineering and EMS wins in our Industrial sector.
We continue to drive enterprise efficiencies.
Against a very challenging macro backdrop, our teams have maintained focus on meeting the needs of our customers and our operating performance is improving.
We have also continued our global footprint optimization program, which we started almost a year ago.
The objective of this program is to utilize ongoing voice of the customer feedback to align our geographic capabilities and footprint to meet customer needs.
The outcome of our most recent round strategic reviews, is that we decided to close our Angleton Texas operations.
We plan to consolidate many of the programs into other Benchmark manufacturing operations, which will improve utilization and efficiencies.
This initiative isn't just about closing factories.
As we are also looking at where we want to expand our investment and footprint.
In support of that in June, we announced our newest facility with the virtual grand opening of Benchmark Phoenix.
This new state-of-the-art facility in Phoenix features RF design in manufacturing circuit fabrication Micro-E, SMT, systems integration and testing all under one roof.
This enables us to provide the proverbial one-stop shop for sophisticated customers, looking for extremely densed hybrid circuit designs, who might also have a need for Micro-E or SMT assembly on the same design.
And with our new facility, they don't need to look any further.
The customer response for this type of advanced manufacturing operation has been very positive and we look forward to the growth from this operation.
Finally, I want to close with our initiative on engaging talent and shift in culture.
First, Benchmark has a great cultural foundation and the work we've completed over the past year, since I joined, is a testament to the support we provide each other in this organization.
At Benchmark, we are committed to advancing diversity and inclusion efforts at all levels in the company.
In this endeavor, we are committed to more transparency, education and diversity training, and talent recruitment to improve our pipeline of diverse future leaders.
We look forward to sharing details on our progress in the future as part of our increasing focus on environmental, social and governance affairs.
Now, let me wrap up.
The senior leadership team is engaged in driving these initiatives and the level of collaboration throughout our organization is energized.
We remain committed to our long-term strategy and we'll use this unprecedented time of change to hone our skills, rightsize our operations and expand our technical capabilities, so that we will emerge with a stronger organization and business in the years to come.

user
q2 non-gaap earnings per share $0.07.
q2 gaap loss per share $0.09.
q2 revenue $491 million versus refinitiv ibes estimate of $474.3 million.
sees q3 2020 non-gaap earnings per share $0.26 to $0.30 excluding items.
sees q3 2020 gaap earnings per share $0.21 to $0.26.
sees q3 2020 revenue $490 million to $530 million.

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