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Text: Actual results may differ materially from these statements most notably from the ongoing impact of the COVID-19 pandemic and Benchmark undertakes no obligation to update any forward looking statements.
For today's call, Jeff will begin by covering the framework of our COVID-19 emergency response protocol and providing a current status of our global operations.
Roop will then discuss our first quarter results including a cash and balance sheet summary.
Jeff will wrap up with a rundown of demand outlook by market sector and our near-term guidance, before we conclude the call with Q&A.
I'd like to start off the call by offering our heartfelt condolences to all who have been affected by the COVID-19 crisis.
I would also like to recognize the courageous healthcare workers and first responders, who are taking care of those impacted by the COVID-19 virus.
For the past three months, we've been working very hard to maintain operations against the global spread of the pandemic with two priorities in mind.
First, is the health and safety of our colleagues and their family.
The second priority is to sustain the output of our operation so that we can continue to serve our customers during this critical time.
Since the early outbreak and direct impact to our Suzhou, China operations, the senior leadership team have met daily and created a task force to centralize employee and operational safety protocols and to establish a global communications cadence.
We receive a daily report on employee health and the status of our global manufacturing and engineering operation.
We also established a critical work stream to deal with the ever-changing government requirement and regulation and to maintain alignment between the local authorities, our operations and our customers.
I want to give tremendous kudos to our team for all they have accomplished.
This is a 24-hour a day, seven day a week day-in and day-out effort to stay aligned, productive and coordinated.
Our teams have approached this challenge with incredible result, and a sense of responsibility to our employees, customers, shareholders and local community.
While some employees are being asked to work from home, this is not an option for many directly involved in the manufacturing or design of critical product.
For our employees working in our facilities, we've added new protocols for extensive and frequent disinfecting and cleaning, facing of personnel and more.
To those employees who could work remotely, we have invested in tools and equipment to allow them to continue to be productive.
We are pleased with the results and creativity these teams have shown as they have found new ways to collaborate and to communicate with each other and our customer.
As the coronavirus began to make its way around the world, we saw challenges imposed by governments from various forms of stay at home, shelter in place and lockdown orders and some imposed by our own health and human resources teams to ensure we are maintaining safe facilities.
Benchmark provides critical infrastructure products and essential services in each of our location.
However, government policies and implementations have still impacted operations.
I'll start with our Suzhou site, which was impacted after the Chinese New Year.
We were given early approval to reestablish operations to support critical medical products and were ramped back to full capacity by mid-March.
Our China plant continues to operate at full capacity today.
In mid-March there were new decrees that caused significant disruptions in our Penang, Malaysia operation which includes our largest precision machine facility.
Unfortunately, local restrictions remain in force and we were only operating at 30% of capacity to start the quarter.
This is now changing where we can move to full capacity starting this week.
We worked hard to minimize the impact by staggering shifts, extending coverage and modifying our workflow.
But we have not been operating at optimum level.
Our European operations in the Netherlands and Romania have had some limited interruptions but continued to operate near full capacity.
In the last few weeks of March and in early April we saw all states in the U.S. implement some form of shelter in place order.
We were hit particularly hard in our California facilities where we have five operations, two in the Bay Area and three in Southern California, which are not yet back to full capacity.
As we sit here today, we're still working through a major disruption in our two Tijuana, Mexico operation, which were shut down practically overnight by the Baja state despite previously passing an inspection and given the authorization to operate by the Central Mexican Government.
These two locations currently remain closed with zero manufacturing output.
Our Guadalajara facility is also not operating in full capacity due to government restriction.
This has been and remains a highly dynamic environment and through the collective efforts of our incredible employees, we are managing priorities to meet and fulfill as much demand as possible.
Our estimate today is that we are operating approximately at 75% to 80% of productivity.
We are hopeful that shelter in place orders do as intended and the infection curve peak and starts to decline, so that normal operation can resume in all location.
Benchmark began its journey as a medical device manufacturer more than 40 years ago and has maintained partnerships with some of the largest medical technology companies in the world.
We are working with medical customers and governments to get lifesaving equipment, where it is needed most, by providing critical design services and expediting manufacturing capacity, even doubling or quadrupling production volumes for some customers.
Demand has increased for diagnostic imaging products, including mobile X-ray and MRI products and handheld ultrasonic devices.
We are supporting multiple ventilator projects with new and existing customers, which are in high demand to support those who need the most critical support in hospitals around the world.
On the diagnostic front, we are supporting point of care devices, including a rapid one hour COVID-19 virus tester and a rapid sepsis testing device.
Roop, over to you.
I hope everyone and their families are 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 to deliver our first quarter results.
As we manage through the COVID crisis, our priorities remain centered on one, the health and safety of our employees; two, retaining the critical resources and capabilities to support our customers; three, maintaining a healthy balance sheet; and four, ensuring the financial flexibility to run our operations through uncertainty.
I would discuss these priorities and our actions to support each as we step through our results.
As a reminder, on March 16, 2020, we announced that the COVID-19 outbreak would negatively impact our first quarter results relative to the guidance that we had provided on February 6.
Our first quarter results were below our February guidance driven by direct cost associated with labor expenses, personal protective equipment, supply chain inefficiencies and under absorption, all caused by the disruptive impact of COVID-19.
Even considering the challenging environment, we achieved revenue of $515 million in the first quarter, which were supported by strong demand in our Semi-Cap, Medical, and A&D sectors.
Our gross margins for the quarter were 8.4% and non-GAAP earnings per share were $0.22.
Our non-GAAP earnings reflect revenue changes as well as costs associated with employees who were restricted, quarantined or otherwise affected by the COVID-19 condition.
We also incurred higher overtime expenses and we've paid labor premiums to those employees working in our China factory as they worked to recover from the shutdown.
And as a result, we estimate that our China factory inefficiencies impacted our global earnings per share by approximately $0.08.
As the impact of COVID-19 conditions expanded globally as Jeff mentioned, there were further inefficiencies and other operations beyond China which, were reflected in our reported non-GAAP EPS.
Our cash conversion cycle for the quarter was 81 days.
We used $3 million in cash flow from operations and free cash flow was a negative $15 million as a result of $13 million spent on capex.
Originally we expected to spend approximately $50 million in capital expenditures in fiscal year 2020.
We now expect that our capital expenditures for fiscal 2020 will be reduced by approximately half and focus primarily on new product introductions and associated brands.
Medical revenues for the first quarter increased 15% sequentially and were up 14% year-over-year from volume increases across several customers for new and existing programs.
Demand through the quarter remained strong with -- in some cases increasing demand for products such as X-ray and scanning devices, controls for hospital equipment including ventilators and diagnostic devices that are critical to support the COVID-19 pandemic.
Semi-Cap revenues were up 2% in the first quarter and up 25% year-over-year where increase in demand across the majority of our Semi-Cap customers along with the ramp of new customer to our portfolio.
This sector was most significantly impacted by labor constraints related to aggressive shelter in place protocols in our Penang, Malaysia and California location, which began in mid-March.
A&D revenues for the first quarter increased 13% sequentially and were up 15% year-over-year from new program ramps for defense satellite, munition and security.
We did receive signals late in the quarter of demand decreases in Commercial Aerospace segment which is less than 30% of our A&D sector revenues.
Industrial revenues for the first quarter decreased 4% sequentially and 12% year-over-year.
The industrial sector was lower and had the largest variant of any sector as compared to our original Q1 expectation from COVID-related impact.
Overall the higher value market represented 82% of our first quarter revenue.
Turning now to our traditional market; computing was down 71% year-over-year from the completion of the legacy computing contract in 2019 and 18% sequentially quarter-over-quarter from lower data center storage and commercial printing product demand.
Telco was down 15% sequentially and down 37% year-over-year from lower demand for infrastructure build out related products.
Our traditional markets represented 18% of first quarter revenues.
Our top 10 customers represented 42% of sales for the first quarter.
Our GAAP earnings per share for the quarter was $0.10 and our GAAP results included $2.9 million of restructuring and other non-recurring costs in Q1.
These costs included $1.9 million of cost-related to our previously announced site consolidation effort and other restructuring type activities around our network and $1 million for an impairment related to a building that is now being classified as held-for-sale.
Our previously announced San Jose closure is on track to be completed in Q2.
As a reminder, there were no GAAP to non-GAAP adjustments related to COVID-19.
Turning to slide 10 for our non-GAAP financial information for Q1, our non-GAAP -- our Q1 non-GAAP gross margin was 8.4% a 100-basis-point increase quarter-over-quarter and 30-basis-point year-over-year.
Q1 2020 results were impacted by labor inefficiencies due to the government mandated shutdown in China and shelter in place requirement throughout the rest of our global network and the incurrence from incremental expenses for personal protective equipment.
Our SG&A was $31.6 million, an increase of approximately $7 million sequentially.
Q4 2019 SG&A was lower due to reduced variable comp, including stock comp.
Additionally in Q1 we have to restart a payroll [Indecipherable].
SG&A was flat on a year-over-year basis.
Operating margin was 2.3%, a decrease from 2.6% in Q4 due to the lower than expected revenue and inefficiencies related to COVID-19.
In Q1, 2020, our non-GAAP effective tax rate was 19%, which was lower than expected for the quarter due to the distribution of income across our network.
We expect that for Q2, our non-GAAP effective tax rate will continue to be in the range of 20% to 22%, again because of the distribution of income around our global network.
Non-GAAP earnings per share was $0.22 for the quarter and ROIC was 7.1%.
Jeff will provide more details shortly about the strength we are seeing in Defense, Medical and Semi-Cap.
We're also seeing a challenging supply chain environment and labor constraint due to the COVID-19 virus.
As a result of these inefficiencies, we are proactively taking a series of actions to lower our cost structure and reduce capital expenditures.
Our CEO, the board and our senior executive team will take a temporary 10% salary cut, while the rest of the senior leaders in the company will take a 7% salary cut through Q3 2020.
Additionally, we expect to reduce variable compensation and other discretionary expenses such as travel.
The cost reduction actions in our U.S. factories will consist of employees taking rotating time off depending on the factory loading levels.
Cost reduction actions in our non-U.S. locations will depend on a local law requirement.
In summary we're being vigilant and very much appreciate the support of our entire organization as we navigate the current environment.
Our cash balance was $412 million at March 31 with $223 million available in the U.S.
We have continued to repatriate cash from our foreign location and we will continue to repatriate in future quarters, while balancing our foreign side cash flow requirement.
Our cash balances include $95 million of proceeds from borrowings under our revolving line of credit.
We borrowed against our revolver proactively to support navigating through the current environment.
We will continue to monitor our financial covenant and ensure compliance.
We do expect our net interest expense to increase by $500,000 in Q2.
Overall at the end of Q1 2020 we are in a positive net cash position of approximately $170 million.
We believe we have a strong capital structure and our liquidity position provides flexibility to manage our business through the current environment.
Our accounts receivable balance was $318 million, a decrease of $6 million from December 31.
Contract assets were $160 million at March 31 and $161 million at December 31.
Payables were up $13 million quarter-over-quarter.
Inventory at March 31 was $338 million up $23 million quarter-over-quarter due to mix changes from customers late in the quarter and bringing in inventory to support long production cycles for product in our Semi-Cap and Medical sectors.
We continue to make proactive investments to secure the critical components needed to support our customers while managing inventory balances.
For Q1 2020, our cash conversion cycle was 81 which was within our expectations at the beginning of the quarter and was achieved even considering the challenging environment.
This is consistent with our expectation.
As discussed previously after the completion of the legacy computing contract in the third quarter of 2019, our cash conversion cycle will be between 78 and 83 days.
Turning to slide 13 for our capital allocation update, in Q1 we returned approximately $25 million to shareholders, this included $5.5 million as part of our recurring quarterly cash dividend, which we recently increased to $0.16 per share and announced on February 3, 2020.
We expect to continue the recurring quarterly cash dividend.
We also repurchased approximately 724,000 shares or $19 million.
As of the end of March 2020, we had approximately $210 million available under the current share repurchase program after an increase approved by the Board in February 2020.
We are prioritizing cash usage for operational need and as such we are not planning to repurchase shares in Q2.
Because of the uncertain conditions related to COVID-19 we will not provide our usual detailed level next quarter guidance.
Jeff will provide a detailed view of demand in our end market by sector, an overview of recent new business wins and an update on our key strategic initiative.
Turning now to the impact of the pandemic on Benchmark on slide 15, I want to provide some insights into what we're hearing from our customers by sector.
I would like to focus on two dimensions, the current visibility of demand by each market vertical and our ability to translate that demand to revenue based on operational and supply chain constraint.
In summary, the second quarter will be less about demand than our operational and supply chain capability to support it.
Our supply chain team has been proactively managing parts supply during this pandemic, since the early days of the outbreak in China.
The team is accessing risk areas with our suppliers every day and taking preventative steps to ensure our critical supply lines remain open.
However, the global supply base remains subject to the same ordinances and decrees that affect our operation and are causing inevitable interruption in our suppliers, ultimately impacting our output.
In the Medical sector, demand remains strong for the medical products we produce.
Our medical design services and new program ramp.
Furthermore, as I discussed, we have been engaged by existing and new customers and helping produce medical equipment to help fight COVID-19 and in some cases this has meant a significant increase in demand.
This demand and our ability to support medical customers will result in sequentially higher revenues in Q2 and we expect our second half 2020 revenue in this segment will be higher than the first half.
In Semi-Cap, the demand recovery for semiconductor capital equipment continues based on the current forecast from our customers.
However, operations to supply chain challenges that exist in our California and Malaysia operations are impacting our ability to fulfill all of our demand backlogs in Q2.
Our competitive position remains strong in the sector, where we have won new programs and expanded our penetration in key accounts over the past several years.
We also expect increased revenue in the second half of the year in this area based on strong semiconductor capital equipment demand.
Demand in the industrial sector is met and we expect some subsectors to be impacted more than other.
Approximately 20% of our industrial customers support the oil and gas industry and we expect demand to be softer throughout the balance of the year.
We also expect weakness in industrial transportation and infrastructure.
A bright spot could be the automation and robotic sub-segment where we have a number of new wins.
As a result, we expect the industrial sector to be down in the second quarter with some recovery in the second half.
Similar to industrial, the traditional markets of computing and telco are met.
At present satellite communication-related products are increasing, but datacenter and telco infrastructure buildup budgets are expected to be under pressure.
In Q2, impact through our Tijuana and Malaysia operations and supply chain are impacting computing and telco revenues as well, but output should recover the demand in the second half.
We also expect an increase in high performance computing projects and associated revenue in the back half of the year.
Our A&D sector is comprised of approximately 70% defense related product and 30% aerospace.
Demand remains strong for defense product, but we are challenged at this time to fully support these programs in our California location, including critical subcomponent shortages that are manufactured in Tijuana.
As these issues improve, we expect higher defense related revenue.
For our commercial aircraft program, we have seen a significant decline in demand and we anticipate much lower demand through the rest of the year barring any major improvement in commercial aviation.
Despite the challenging global environment and disruption to our normal customer engagement workflows, we were pleased with our continued design and manufacturing win momentum accomplished in Q1 as shown on slide 16.
In our Medical sector we were awarded programs for affordable ultrasound and a mobile imaging device both with existing customers.
We also received a design win for an automated drug freezer with a new customer, which we expect to convert to a manufacturing win in the future.
The new ventilator program that we were awarded will appear as new business wins in Q2.
In Semi-cap we were awarded a precision machining program for a next generation in-chamber tool focused on wafer elimination along with a design and manufacturing award for an EUV electronics controller expanding our participation in this cutting edge technology.
In aerospace and defense, we received additional award for munitions, electronics and a flight recorder in which we will perform process design and manufacturing.
Our pipeline in the defense segment is very encouraging and we have bid on a large number of projects that we expect to hear the results of in the coming months.
It's clear this segment has made a serious commitment to outsourcing more of their manufacturing needs but they require sophisticated partners who can meet their exacting standard.
Benchmark is up to this challenge and has continued to invest in this segment.
In Industrial, we're making process to new wins for a vehicle tracking and diagnostic devices and the design and manufacturing of a new artificial intelligence enabled LIDAR scanner.
In addition to new business wins, we were pleased to be recognized by our customers for delivering complex products with high quality.
For example, we announced that we were selected by Raytheon with an EPIC Award for Excellence related to the design and manufacturing of a ruggedized multi-domain router using critical communications supporting our military.
Benchmark Secure Technology has been a Raytheon partner for almost 20 years and we look forward to supporting this expanding strategic relationship across Benchmark.
Given the current environment, we've elected to suspend quarterly guidance for the second quarter.
The quarter can unfold under a variety of scenarios, the magnitude of which remains uncertain depending on the timing of government action to allow the return to full production and supply chain improvement.
Instead, we will offer some directional guide posts for now and resume guidance once we have more clarity and predictability.
Given where we are in the quarter and our assessment of our operations, we expect revenue to modestly decline sequentially as we have lost manufacturing time which cannot be recovered.
We also expect that second quarter will be the lowest revenue quarter of 2020 despite the stronger demand outlook in Medical, Semi-Cap and Defense.
Second quarter margins will be down sequentially primarily from lower revenues and associated under absorption, lower productivity levels, incremental supply chain costs and employee-related expense.
At present many of our operations which are shut down or operating at reduced capacity, payroll costs cannot be mitigated even if employees cannot come to work.
Also given our demand outlook and new program ramp from wins in the past 24 months, we need to maintain critical resource capability, which Roop mentioned as a top priority.
We also expect gross margins will recover to the 9% range in the second half of 2020.
As Roop covered, we've taken a number of proactive actions during the quarter to manage expenses including compensation adjustments, merit and hiring delays and furloughs where permissible.
We are biasing toward these actions versus headcount reductions in the near term to support our long term growth.
As a result of some of the actions, we expect that SG&A will be reduced approximately 8% in Q2.
Beyond Q2, we also -- have also run a number of scenarios for the remainder of the year and we will take appropriate actions to further reduce costs as appropriate if the pandemic continues or demand conditions change.
We feel very confident that our experienced, disciplined execution and strong balance sheet will allow us to navigate this period of uncertainty, while continuing to invest in the future.
As we enter 2020, we prioritize how we would spend our time this year to build a better Benchmark.
Even with the significant challenges brought on by COVID-19, our key strategic initiatives remain unchanged.
In fact, progressing these initiatives goes hand-in-hand with how we are managing the current price.
One of the greatest testaments on progress has been the multiple calls and emails we receive from our customers on our effective and standardized protocols and efficient communication to make sure our priorities remain aligned.
These endorsements confirm progress on our journey to be a trusted partner and service provider for our customers.
We will continue to work on these longer term initiatives to prepare the company to capture the growth that lies ahead.
Our competitive position remains strong and I have the utmost confidence in our leadership and our global team.

user
q1 non-gaap earnings per share $0.22.
q1 gaap earnings per share $0.10.
q1 revenue $515 million versus refinitiv ibes estimate of $510 million.
unable to forecast with certainty effect on benchmark's financial and operational results for q2 of 2020.

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