Q4 2006 Merix Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, everyone and welcome to the Merix Corporation conference call. This call is being recorded. For opening remarks and introductions, I would like to turn this conference over to Mr. Mark Hollinger, Chief Executive Officer for Merix Corporation. Please go ahead, sir.

MARK HOLLINGER, CEO, MERIX CORPORATION: Good morning. This is Mark Hollinger, Chairman and Chief Executive Officer of Merix Corporation. Joining me on the call today is Lynda Ramsey, our Vice President and Treasurer.

As a reminder, statements made during the course of this call that state the Company's or management's intentions, goals, beliefs, plans, expectations or predictions are forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Many factors could cause actual results to differ materially from the forward-looking statements, including the factors discussed in the press release announcing our results, the Company's annual report on Form 10-K for the year ended May 28, 2005 on file with the SEC and those discussed from time to time in the Company's other SEC filings.

By now, you should have received the press release we issued earlier announcing fourth-quarter and full year results for fiscal 2006 and first-quarter fiscal 2007 guidance. During this call, we will review our results and guidance and then open the line up for questions.

Fiscal 2006 was a transformational time for the Company marking the beginning of a new era for Merix Corporation. We began to execute on our strategy of creating a global manufacturing footprint with the acquisition of Merix Asia. We achieved record revenues and record quick-turn sales and we diversified our customer base and end markets. We believe that Merix is now in the top 25 of full service PCB fabricators globally.

I will discuss our fourth-quarter achievements and our focus for fiscal 2007 a bit later, but now I'll turn the call over to Lynda for a financial overview.

LYNDA RAMSEY, VP & TREASURER, MERIX CORPORATION: Thanks, Mark and good morning, everyone. Consolidated sales were $100.4 million in the fourth quarter compared to $95.1 million in Q3. The increased revenue for the period was largely attributed to increased quick-turn revenue and premium pricing opportunities driven by strong demand in the telecom and high end computing market. We believe that pent up demand from postponing upgrades and the need for networks that can move larger amounts of data and content have contributed to these increased activity levels.

As a percentage of consolidated revenues, quick-turn and premium revenues increased to 30% of sales, up from 28% last quarter. We expect quick-turn revenue and premium pricing to be approximately 25% to 30% of total revenues in our model going forward.

Overall, average pricing was up slightly in Q4 compared to Q3 primarily in quick-turn sales as well as some volume applications. We expect that average pricing will continue to be flat to up slightly in Q1 2007. Our consolidated gross margin was 22.4% in Q4 compared to 17.4% in Q3. Increased profitability in Q4 at the gross margin line is primarily the result of increased higher margin quick-turn revenue and premium pricing complemented by a more favorable product mix. We expect to continue this favorable mix trend into Q1 2007.

As a reminder, the third-quarter gross margin was adversely impacted by a $2.2 million charge related to inventory purchase accounting adjustments. Without this charge, consolidated gross margin would have been 19.7% in that period.

Operating expenses totaled $13.5 million for the fourth quarter of fiscal 2006, which was flat to Q3. Excluding stock option expense that will begin to be recorded in fiscal 2007, we expect modest reductions in operating expenses in Q1 as we further integrate with Merix Asia.

Interest expense net of interest income was $1.9 million for Q4. We also recorded a $1.8 million debt restructuring charge in Q4 related to the cancellation of two loan agreements as a result of the $70 million 4% convertible debentures issued in May. This recent [ante] will reduce our annual interest cost by about $2 million. Therefore, we expect that net interest expense will be about $500,000 less in Q1 versus Q4.

Non-GAAP income in Q4 was $3.9 million or $0.19 per share compared to non-GAAP income of $2.7 million or $0.14 per share in the third quarter. During Q4, we generated cash from operations of $8.4 million and spent $1.6 million on capital equipment. Cash and investments were $31.1 million at the end of Q4 and net debt was $67.9 million, down from $70.7 million at the end of Q3. The incremental borrowing capacity under our revolving line of credit increased to $36.8 million, up from $18.1 million at Q3.

Net working capital increases consumed $3.7 million of cash during the quarter as required to support the increased operating activity. As mentioned earlier, we issued a $70 million, seven year 4% convertible debenture in May 2006 using the net proceeds to redeem the $25 million 6.5% convertible debenture coming due in May 2000, prepay and cancels of $30 million Asian credit agreements that we entered into in conjunction with the acquisition of Merix Asia and reduced approximately $12 million on our domestic revolving line of credit.

In addition to reducing our interest cost by about $2 million per year as previously stated, we benefit from a stable source of financing, eliminating the Asia debt covenant requirements and aggressive debt amortization schedule, which will allow management to focus on operating the business.

We intend to continue to use excess cash to repay debt as we go forward in an effort to minimize our interest cost. Global lead times averaged around eight weeks in Q4. However, we expect them to run in the six to eight week range in Q1 due to increased capacity. Global factory capacity utilization was in the 85% to 90% range during the quarter and we expect these capacity utilization dynamics to continue into Q1. The global book-to-bill ratio was over 1 to 1 in the quarter and in Q4, global 90-day backlog was approximately $65 million.

Looking to Q1, Merix currently expects the consolidated sales will range between $102 million and $106 million. Non-GAAP income is expected to range between $6.3 million and $7.2 million or between approximately $0.31 and $0.35 per share. Non-GAAP guidance for Q1 excludes expense of approximately $500,000 for stock ops and charges and $700,000 for amortization of intangible assets.

The effective tax rate is estimated to be about 10% for 2007 and EBITDA is expected to range between $13 million and $14 million in Q1. Consistent with the industry, we have seen increases in the cost of certain raw materials, particularly laminates, gold and petroleum products. Those cost …