Benchmark Electronics, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company provides engineering, technology and advanced manufacturing services to OEMs in aerospace and defense, medical, industrial, semiconductor equipment, computing and telecommunications markets. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $555.2 | $640.7 | $1,759.7 | $1,909.4 |
| Gross profit / margin | $52.9 / 9.5% | $52.8 / 8.2% | $159.7 / 9.1% | $165.4 / 8.7% |
| Operating income / margin | $9.8 / 1.8% | $11.0 / 1.7% | $37.8 / 2.1% | $43.3 / 2.3% |
| Net income (loss) | $7.1 | $7.8 | $30.4 | $(4.9) |
| Diluted EPS | $0.19 | $0.17 | $0.77 | $(0.10) |
| Operating cash flow | Not separately stated | Not separately stated | $57.3 | $(17.3) |
Cash and cash equivalents were $348.0 at September 30, down from $458.1 at year-end 2018. Current assets were $1,198.1 and current liabilities $441.2. Debt totaled approximately $149.8, including current installments; the company also reported $497.0 of available revolving-credit capacity and $3.0 of letters of credit. It was in compliance with its credit covenants.
Nine-month investing cash outflow was $25.7, including $23.7 of property, plant and equipment spending. Financing cash outflow was $140.7, including $118.4 of share repurchases, $17.7 of dividends and $4.6 of net debt principal payments. Working capital was approximately $0.8 billion.
Material changes versus the prior period
- Sales fell 13% in Q3 and 8% for the first nine months. The sharpest Q3 decline was Computing, down 59%, principally following the exit from a legacy contract; Telecommunications fell 22%.
- Higher-value markets increased 5% in Q3, led by Medical (+33%) and Aerospace and Defense (+10%); Semi-Cap declined 11%. For the nine months, Medical rose 19% and Aerospace and Defense rose about 8%, while Semi-Cap fell 31%.
- Q3 gross margin improved to 9.5% from 8.2%, reflecting operational improvements and a more favorable mix, including the exit from a legacy contract that had diluted margins. Nine-month gross profit nevertheless declined 3% as sales fell.
- Nine-month net income improved from a loss to profit, but the comparison is substantially affected by $40.1 of tax expense in 2018 related to changed assertions about foreign earnings. The 2019 effective tax rate was 20.5%; excluding the specified 2018 one-off items and benefits, management reported a 2018 rate of 13.7%.
Outlook, commentary and risks
- Management expects $3.5–$4.5 of additional restructuring and transition charges in Q4 2019. Closure of the San Jose and Guaymas sites is expected to involve $6–$8 of total restructuring charges during 2019–2020, with customer transitions expected into other facilities by mid-2020.
- Expected capital expenditures over the next 12 months are $40–$50, primarily for machinery and equipment, IT infrastructure and software. Management believes cash, operating cash flows and available borrowing capacity will meet liquidity needs for at least the next 12 months. No specific revenue or earnings guidance is provided.
- In Q4 2019, after the quarter ended, a ransomware incident encrypted systems and disrupted customer and employee access. The company reported restored network connectivity and resumed operations in progress as of the filing; investigation continued, no evidence of data exfiltration had been found, and total costs and insurance recovery were undetermined. The incident could materially affect results or financial condition.
- Customer concentration remains notable: the 10 largest customers represented 41% of nine-month sales, versus 44% a year earlier. Other stated risks include customer demand and program ramp delays, component shortages, international and currency exposure, and tax-incentive expirations.
- The company recognized $10.8 of restructuring charges and other costs in the first nine months, including $7.4 of restructuring charges and $3.4 tied to proxy-related activities and the CEO transition. A $0.1 favorable legal settlement increased Q3 other income. Management said ordinary-course legal matters were not expected to have a material adverse effect; Benchmark also reported a $3.0 recovery in 2019 from ongoing capacitor price-fixing litigation.
- The board intended to continue quarterly dividends, but payments are not guaranteed. At September 30, $83.2 remained under the share-repurchase authorization.
Important facts for investors to verify
- Whether the ransomware event caused further disruption, costs, customer impacts or data exposure, and what insurance will cover.
- Whether site closures, customer transitions and restructuring deliver the expected savings without additional charges or lost business.
- Demand trends and program ramps across Computing, Telecommunications, Semi-Cap, Medical and Aerospace and Defense, including effects of the legacy contract exit.
- Cash conversion and working-capital movements, particularly contract assets, inventory and accounts payable; also note the use of receivables-sale programs.
- Tax-rate sustainability, foreign tax incentives and any replacement Chinese incentive, alongside debt covenant headroom and capital-return plans.