Analyst Conference Summary

conference date: May 2, 2013 @ 1:30 PM Pacific Time
for quarter ending: March 31, 2013 (Q1, first quarter)

Forward-looking statements

Overview: Revenues okay but earnings weak.

Basic data (GAAP) :

Revenues were $325.4 million, down 15% sequentially from $382.4 million, but up 8% from $300.5 million in the year-earlier quarter.

Net income was $5.2 million, down 67% sequentially from $15.7 million, and down 59% from $12.6 million year-earlier.

EPS (earnings per share) were $0.06, down 68% sequentially from $0.19, and down 60% from $0.15 year-earlier.

Guidance:

Q2 2013 revenue estimated between $320 and $340 million. GAAP EPS $0.01 to $0.07. Non-GAAP EPS $0.08 to $0.14.

Conference Highlights:

Results were in-line with management expectations, and with normal seasonal drop. Revenue was near high end of guidance, and EPS was above guidance. Cell phone and networking end markets led sales growth. There was one week less in Q1 than in Q4.

Seeing signs of improvements in end markets. Gaining market share. Sees sales ramp for new products in second half of year.

Non-GAAP net income was $10.7 million, down sequentially from $21.5 million. EPS $0.13 down sequentially from $0.26 per share. EBITDA was $39.1 million, down sequentially from $49.6 million.

Gross margin was 15.6%.

51% of Asia segment was from advanced products, declining from Q4. Asia accounted for $202.6 million sales, up 18% y/y. Capacity utilization declined due to seasonality. 8.5% pay increase in April for Asian workers.

North America segment $123.6 million, flat sequentially but down 5% y/y. Some plants were underutilized and there was an uneven work flow.

Aerospace/defense represented 16%, up from 13% in Q4. Improved sequentially and y/y despite budget concerns. Expects to be stable in Q2.

Cellular Phones represented 17%, down from 21% in Q4. Sees up to 19% of sales in Q2.

Computing, storage and peripherals were 19% of total sales, down from 24% in Q4. Demand for touchpad tablets was seasonally down. Sees declining to 17% of cells in Q2.

Medical and industrial were 8% of Q1 sales, up from 7% in Q4 despite a slight dollar decline. Sees at 8% in Q2.

Networking and communications end market was 34% of total, up from 30%, while down sequentially on a dollar basis. 4G build out helping. Expects slight improvement in Q2.

Other was 6%, down from 5% in Q4, sees flat in Q2.

Top five customers: Apple, Cisco, Ericsson, Huawei, and Juniper. They accounted for 35% of sales in quarter, down from 40% in Q4. One customer accounted for 14% of sales in the quarter.

ASPs decreased 6.5% in Asia sequentially mostly due to seasonal mix change. In North America increased 4.5% also due to mix.

Cash and equivalents ended at $284.1 million, nearly flat sequentially from $285.4 million. Cash flow from operations was $10.4 million. Capital expenditure was $12 million. Net debt ended at $290 million. $23.1 million depreciation.

2013 capital expenditure plan is for $100 million. Expects to close the production plant swap transaction with the minority partner in July time frame. This will reduce traditional PCB capacity. Will net about $40 million in cash from the transaction.

Cost of goods sold was $274.4 million, leaving GAAP gross profit of $50.7 million. Operating expenses of $38.1 million consisted of: sales and marketing $9.2 million; general and administrative $26.6 million; amortization $2.3 million. Leaving operating income of $12.7 million. Interest expense was $6.3 million. Other income $1 million. Income tax benefit $0.8 million. Loss from noncontrolling interest $1.4 million.

Q&A:

Substrate business revenue? On an annualized basis it continues to go up. Now classified in cell phone category. Was about $13 million in Q1.

Seasonality tends to be mostly in Asia, with North America much more steady. We are optimistic America sales will continue to grow this year. Margin challenge in North America in Q1 was the uneven rate of orders between facilities. One facility has a backlog and we are hiring, and another where orders have been irregular, with some idle capacity.

The networking market is improving overall, but we are also capturing market share.

Labor rate increase effect? Margin deterioration in Q2 is mostly from the wage increase, but we also have mix and material content issues. We are offsetting those headwinds partially with productivity improvements.

Short term debt due in 2014? We may pay it off, unless we determine it is not the best use of cash.

Margin improvement in second half? At a high level, the SYE transaction will eliminate conventional capacity we don't need, which should improve gross margins about 1% within Asia-Pacific segment. There is a lot of leverage in our model if the revenue comes in. We will lose about $20 million in SYE revenue per quarter, but it should have little effect on profit.

Any benefit from dropping copper prices? That would probably kick in some time in Q2 as contracts renew.

Lead times at Chippewa Falls are at 6 to 8 weeks.

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