Good day, ladies and gentlemen, and welcome to the Benchmark Electronics Second Quarter 2016 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 follow at that time. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference Lisa Weeks, Vice President of Strategy, Investor Relations. Please go ahead ma’am.

Thank you, operator and thanks everyone for joining us today for Benchmark’s second quarter earnings call. With me this morning are Gayla Delly, President and CEO; Don Adam, CFO. Gayla will provide an update on our near-term outlook and our strategic priorities and Don will provide a detailed review of our financial results followed by a question-and-answer session. Earlier today, we issued an earnings release highlighting our financial performance for the second quarter and we have prepared a presentation that we will 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 fact are forward-looking statements which involve risks and uncertainties described in our press releases 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 measures in the earnings release, as well as in the Appendix 1 of the presentation. I will turn the call over to our CEO, Gayla Delly.

Thank you Lisa and good morning everyone. We are happy to have you with us to review our second quarter successes and challenges and preview our third quarter. Please turn with me to slide 4 in the earnings presentation. Our second quarter results for 2016 were in line with our expectation, revenue of $579 million and non-GAAP EPS of $0.31 were each near the mid-point of our for guidance. The higher value markets grew quarter over quarter led by strong performance in Medical, and Test & Instrumentation where our new bookings have been strong. Industrials lagged a bit as the number of new program ramps in the regulated aerospace and defense markets were delayed. In our traditional markets, revenue increases were lead by stronger than expected demand from some of our top Computing customers. Telco declined as expected sequentially with the completion of legacy products for one customer. Incorporating these industry dynamics for the second quarter, our year-over-year revenue from higher value markets increased from 53% to 63% reflecting the progress of our portfolio and the Secure acquisition. Our year-over-year gross margin improved to 9.1% as a function of our business mix and productivity improvement. Our recent investments to enhance our sales, marketing and engineering efforts in support of our business strategies are impacting our current and near-term margins. These intentional SG&A investments impact our short-term performance while they lay the foundation for future growth in our targeted markets building a richer margin profile. Including these costs, our second-quarter operating margin was 3.7% in line with our guidance. Going forward, we have defined cost realignment actions to offset these investments and Don will provide further updates on this in our operating expense outlook. During the quarter, we generated strong free cash flow, our progress on our working capital initiates allowed…

Thank you Gayla, and good morning to everyone. I will start on slide 8 with a second quarter recap of our income statement. Our second quarter revenues of $579 million were within our guidance and up $30 million from the last quarter as each of the market sectors improved excluding Telco which declined as we forecasted. Our year-over-year quarterly revenue declined by 13%, due to lower demand in our traditional markets. Second quarter net income of $13 million and non-GAAP net income of $15 million were both up sequentially. Our GAAP results included approximately $3.6 million of expenses associated with restructuring and other activities including our recent proxy contest. Our GAAP EPS was $0.26 and our non-GAAP EPS was $0.31 for the quarter, which were in the range we expected. Our non-GAAP operating margin improved by 20 basis points from the last quarter to 3.7%. Second quarter non-GAAP effective income tax rate was 21.8% and we expected to be approximately 23% for the next quarter. We increased from Q2 to Q3 as a result of the tax impact of excluding amortization of intangibles from non-GAAP income as Gayla just mentioned. The diluted weighted average shares outstanding for the second quarter were $49.7 million. Now please turn to slide 9 for a discussion of our quarterly business trends. Gross margins have improved 70 basis points from the prior year as we’ve transitioned our portfolio to a higher mix in our targeted markets. SG&A expenses of $31 million which were in line with our expectations reflect the increased investments in go-to market engineering resources. Again our non-GAAP operating margin was 3.7% in the quarter. In line with our business outlook we will drive further improvement gains as we optimize our manufacturing footprint. In connection with these actions, we expect to incur restructuring…

Thank it Don. I want to wrap up our prepared remarks by providing an overview of our strategic priorities. The first is our portfolio transition. Over the last few years, Benchmark has moved forward with our business transformation focused on serving higher value markets. We are well positioned to serve these higher value markets which are in the early stages of their outsourcing efforts. Faster growth in these markets serves to reduce our customer concentration and volatility from large customers and programs. Macro pressures have weighed on some of our industrial demand recently but the ramping in several programs has served to somewhat offset that impact. Our year-over-year revenue from the higher value markets increased from 53% to 63% associated with the portfolio transition and the Secure acquisition and we maintained our 10% annual targeted growth rate in these markets over the longer term. We expect our rebalance portfolio to deliver sustainable growth and higher profit margin which will drive returns on invested capital above our cost of capital. The second focus area for us is our margin expansion. With our reporting change excluding the impact of our amortization and our non-GAAP results, our equivalent non-GAAP operating margin target is now 5.5%. Overall operating margins will improve as we one, leverage productivity and efficiency gains to moderate the near-term investments for sales, marketing and engineering. And second, realign our cost structure including our capacity to align with current outlook. And three, we gain leverage from the expected revenue growth. We will balance our investment, our operational excellence priorities and cost reduction initiatives with the longer term view of supporting margin expansion. We expect margin improvement to accelerate as we move into 2017. The third focus area is our cash generation and balance capital deployment. We have made excellent progress on our cash conversion cycle this quarter and look forward to continuing to do so through the remainder of this year. For the past 12 months, our cash flow -- free cash flow generation totaled 234 million. We will remain focused on a balanced and prudent capital approach to capital allocation. To increase shareholder value, we will first continue to invest in organic growth and second, make value enhancing acquisitions aligned with our strategic goals and then third return capital to our shareholders. Looking forward, we like the way we have positioned the business and the directional trend we see heading into 2017 with our diversified revenue base, improving cost structure and focus on increased working capital velocity. And yet, there is more work to be done as we continue to optimize our supply chain, align our cost structure and drive operational excellence. Operator, let's open the lines for Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Steven Fox of Cross Research. Your line is open.

Good morning. I guess my first question is on Secure, can you give us an update on how the business is tracking in the most recent quarter, and in to next quarter, and whether it had an impact good or bad on your results and outlook? And then I had a follow-up?

As always, with our acquisitions, we don't segregate those, but as we can see from our overall industry that we are expecting growth in the second half and we have benefited from incorporating both the acquisitions, but importantly the mindset and the approach and the engineering leading focus that we have to accelerate our new bookings. So we’re pleased with opportunities we see in front of us.

So some of the delays in ramping wouldn't be related to Secure. Can you comment on that at all?

No. Actually, good point. Our delays were associated with our new program bookings and associated ramp there and specifically in the defense and aerospace markets, we saw some timing lags there.

Great. And then just as a follow-up, so you made significant progress on your working capital this quarter. And I understand how the numbers functionally work, but can you talk about exactly what kind of actions you took to reduce your cash cycle by 16 days and then what would be the most important actions you still need to take to get it to 75 days? Thanks.

Yes. We’ve been, as we said in the call, Steve, we have transitioned a number of programs, one of the new programs that has started in low cost geographies. And so with that, we’ve undertaken a lot of actions. So, it’s everything from demand management to localizing the local -- the supply chain and reducing the number of suppliers that you’re dealing with, but given the number of programs that we have ramped and particularly in the higher value market that we’ve done a lot of work on that last year and then in the first half of this year and we saw the benefit. Some of the other things as we go through this process we’ve had to negotiate with the new suppliers as we’ve consolidated the supply base. So, [indiscernible] a lot of hard work to do that and it's an ongoing process, and it's not going to end. We do expect further improvements for the rest of the year, targeting 80 days for the third quarter and down to 75 days by the end of the year.

Great. So it sounds like a lot of it generally falls under the umbrella of what you’ve done in terms of moving to the low-cost locations and then catching the supply chain up? Is that fair?

That’s fair.

Okay, great. Thank you very much.

Thank you. And our next question is from Mitch Stevens of RBC Capital Markets. Your line is open.

Hey, guys. Thanks for taking my question. So I guess first on the telecommunications front, it looks like that's going to be up 20% sequentially in Q3. Can you maybe just walk through what markets are doing better, specifically within there?

We see improved markets in the broadband and optical market base primarily.

Got it. So it sounds like it's all optical driven then? And then secondly, I guess just kind of switching topics, with the new directors on board for the board of directors, are you guys seeing any changes in terms of strategy or any update there in terms of what they want to have change going forward?

No, again, I don't believe that there was ever any identification through the -- after this process took exception to our strategy. And so I don't believe that there is a strategic change for the indirection for the company. We’re very pleased with the direction that we have and the opportunity to increase our performance there is really what we’re focused on.

Got it. And then just one last one on the margin front, so how should we think about this working back, call it, 4.5% plus going forward?

I'm sorry, I don't believe I got that question clearly. Can you repeat that?

Yes. So if we think about the operating margin strategy, how do we think about this ramping up now with the new mix going towards like 4.5% or greater?

I believe the word I was stressing was trajectory and what I believe is that, of course, it's never been there. And as we are ramping the new programs and they’re inherently inefficient with the start-up and it really has to do with the mix of business, but we do expect to continue to drive it forward and mix has a great deal of impact on our ability to do that as well as the actions that Don identified. So we expect 2017 to be the biggest beneficiary of the improvements we’re driving currently.

Got it. Thank you.

Thank you. Our next question is from Jim Suva of Citigroup. Your line is open.

Thank you very much. You mentioned some aerospace and defense stagnations or delays, was that due to timing production schedule shifts, have they been resolved or how should we kind of think about that?

A combination of timing and production ramps associated with supply chain and ongoing qualifications, but none of them are of the nature that we are specifically concerning or push out cancellation there. They are ramped as you recall, these often are longer term in the nature of the products that are being supported as well as the complexity and so we expected them to fall into the second quarter and expect now to be able to do a good bit of those in the third quarter.

Okay. And then on your new program ramps, you mentioned that there are some delays there, are those related to like BREXIT, because BREXIT happened after your quarter closed or they’re more macro or qualification, a regulatory like with the health healthcare industry with some hurdles there or what's happening while there are some delays in the new program ramps?

One of the things on the defense and aerospace is that the defense and aerospace was primarily probably associated with the program ramps. So it was that impact.

Got you. Okay. And then finally on BREXIT, are you saying any impact to your customers or bookings or things so far, what has progressed through July from BREXIT?

We have not seen any customers point to that as having specific impact. It likely causes some caution associated with their forecasting, but nothing specifically has been pointed out to us.

Great, thanks so much for the details. Much appreciated.

Thank you. Our next question is from Herve Francois of B.Riley. Your line is open. Please check your mute button.

Sorry, Gayla. Good morning. Can you just talk about for some of these new program ramps that you are talking about, have the expenses and I think you might have mentioned this earlier, have the expenses been set aside for those new program ramps or you are expecting some impact to your margins because of the expenses associated with those new program ramps?

The new program ramps, again, as we expected them to occur in the second quarter, the costs associated with the ramp, the inefficiency associated with the ramp is ongoing through the process, getting to a steady state of production. So it's not to say there is no cost, there are no inefficiencies in the future, but the cost incurred on the initial start-up has already been accounted for.

Is it more -- can you get a little bit more granular in regards to some of those costs, is it pretty much just lined up with the size of the overall program, or even by the -- if the program is in a particular end market, whether it’s in telco or industrial or anything else like that or is it just overall within your facility?

Well, the regulated industries, medical and defense and aerospace typically will have both longer production ramp cycles and higher upfront cost associated with those due to the nature of those programs. But that is the primary differentiator in the type of programs.

Okay, thanks very much.

Thank you. Our next question is from Sean Hannan of Needham & Company. Your line is open.

Yes, hi. Thanks for taking my question here. So just want to see if I can get back to the margin topic. You guys had some good aspirations for how you’d like to exit the year and just want to see if we can get a little bit more color on that as we think about the trajectory coming out of September and through December, this is something you’ve commented on the past. So I just want to see if we could follow up around that?

Yes. I think, Sean, we had targeted 4.8% on our last call exiting the fourth quarter, given the choppiness that we are seeing in industrials and the overall macro challenges. At this point, certainly, I don't think we’re going to be able to -- we’re going to attain that. But I would say, we should have, depending on what revenue comes up, I mean, we're projecting a positive trajectory as we go into next year and as Gayla indicated, I mean ultimately, we want to drive to the 5.5% if you will, adjusting for the amortization we talked today.

Okay. So just want to make sure we address all this on an apples-to-apples, so if we were to think about previous thoughts in trying to achieve a 4.8 by the end of this year, adjusted, that would be kind of a 5.2 the way that we are modeling now. That’s going to be harder to accomplish, however, as we get into ‘17 and based on what you’re winning, do you think that there is a relatively acceptable pathway to get up to 5.5.

Yes. I think coupled with the mix that we have and the actions that I previously mentioned, yes, there is a pathway to get there.

Okay. And then, if I could have a follow-up here in terms of the program wins, now, a while back, you guys had redefined how you are quantifying those wins in the criteria, when you do that. I think that we’ve anniversaried that change and approach and now I’m looking at a trailing 12-months scenario that has been consistently ticking down. So just want to see if we can get a little bit more color, because qualitatively I think we’re hearing a lot of optimism, quantitatively, I want to see if I can get better understanding around how that’s being backed up because the trend doesn't seem to be quite as supportive?

I believe we will see the bookings begin to tick up. As we indicated, we are, I would call it, seeding the base of our high-growth high-value markets base of customers and as we see those numbers of those opportunities are at the front end and we are trying to continue to move to the point of leading with engineering, and as we do that, those opportunities will differ. So, as expected, and I believe as we’ve talked about over a number of calls, that is exactly what we’re seeing and as we move towards next year and as we continue to focus as well as invest in both sales and marketing and engineering portions of our business, we expect to see those bookings begin to increase. I believe they’ve been more flattish as you likely know any time you’re kind of estimating those, there can be a range and that we do believe that they’ve been pretty much flattish with a good mix of business that we've seen and we want to see those begin to accelerate in 2017.

Okay. Thanks very much for the color.

Thank you. And that concludes our Q&A session for today although the company is taking questions after the call. I would like to turn the call back over to management for any further remarks.

Thank you, operator and thank you everyone for joining us this morning. We know it's a very busy day in our industry for earnings calls. We’ll look forward to hearing from you and follow up. Have a great day.

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