Business context and reporting period
Benchmark Electronics, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2020. The company provides product design, engineering, technology and advanced manufacturing services to OEMs across aerospace and defense, medical, industrial, semiconductor capital equipment, computing and telecommunications markets. Results are compared with the first quarter of 2019; amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Sales | $515.0 million | $602.8 million; down 15% |
| Gross profit / margin | $43.4 million / 8.4% | $50.0 million / 8.3%; prior-year margin was 8.1% excluding a $1.0 million inventory recovery |
| Operating income / margin | $6.5 million / 1.3% | $16.1 million / 2.7% |
| Net income | $3.9 million; $0.10 diluted EPS | $13.8 million; $0.34 diluted EPS |
| Operating cash flow | $(3.1) million | $16.4 million |
| Cash and cash equivalents | $411.8 million | $347.6 million at December 31, 2019; quarter-end restricted cash was zero |
| Debt | $237.5 million of credit-facility borrowings: $142.5 million term loan and $95.0 million revolver | No revolver borrowings at December 31, 2019; term loan was $144.4 million |
| Available revolving capacity | $401.3 million, subject to covenants | — |
| Capital expenditures | $11.9 million of property, plant and equipment additions | $9.3 million |
Operating cash use reflected a $23.8 million inventory increase and a $17.2 million decrease in accrued liabilities, partly offset by cash released from receivables and higher payables. Working capital was approximately $0.8 billion. The filing reports cash and cash equivalents held outside the U.S. of $188.8 million at quarter-end.
Material changes versus the prior comparable period
- Revenue fell 15%, with a major mix shift: traditional-market sales declined 57%, while higher-value-market sales rose 8%.
- Computing revenue fell 71% to $36.6 million, primarily following the 2019 exit from a legacy contract; telecommunications fell 37% to $55.6 million. Aerospace and defense rose 15%, medical rose 14%, and semiconductor capital equipment rose 25%; industrials declined 12%.
- Gross profit declined 13%. Gross margin was slightly higher as reported, but the comparison is affected by the $1.0 million recovery included in Q1 2019 gross profit.
- SG&A increased 5% to $31.6 million; as a share of sales it rose to 6.1% from 5.0% (5.3% excluding a 2019 accounts-receivable provision recovery). Restructuring charges and other costs increased to $2.9 million from $1.6 million, including $1.0 million of asset impairment in Asia.
- Net income declined by approximately $9.9 million, reflecting lower gross profit and higher SG&A and restructuring costs. Financing included $110.0 million of new revolver borrowings and $17.2 million of principal payments; share repurchases were $19.3 million.
Outlook, commentary and risks
- COVID-19: Management said the pandemic disrupted Q1 operations through lower productivity, labor and supply-chain constraints, protective-equipment costs and under-absorbed fixed costs. Suzhou returned to full capacity by mid-March; Penang operated at about 30% capacity through quarter-end, and California and Mexican facilities also faced disruption. Management expected Q2 revenue to be negatively affected by operating inefficiencies and supply-chain constraints. The extent and duration of the impact were uncertain.
- Cost and cash actions: Announced actions included temporary salary reductions for executives and other senior leaders, rotating time off at U.S. factories, lower variable compensation and discretionary spending, reduced planned capital expenditures, deferred investments and temporarily suspended share repurchases. The company was also evaluating tax credits, payment deferrals and other government relief. Q1 repurchases occurred before the announced suspension.
- Liquidity and investment: Management believed existing cash and operating cash generation would meet liquidity needs for the next 12 months. It estimated capital expenditures of $25–$30 million over the next 12 months. The filing notes that future dividends are not guaranteed and may depend on COVID-19 impacts and other factors; the credit agreement restricts dividends and repurchases. The company reported compliance with its debt covenants at March 31, 2020.
- Other items: A $142.5 million interest-rate swap fixed part of the term-loan exposure at 2.928% plus the applicable margin; its fair-value liability rose to $11.3 million and contributed to an after-tax unrealized loss in other comprehensive income. The company continued pursuing insurance recoveries related to the 2019 ransomware incident; it reported no evidence of customer or employee data exfiltration. Management considered ordinary-course legal matters not expected to materially adversely affect financial position or results.
- Uncertainty: The filing highlights pandemic-related risks to facilities, customer demand, shipping, supply availability, employee resources, receivable collections, financing and asset values. Sales to the ten largest customers represented 42% of Q1 revenue. Management cautioned that interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether facility capacity, labor availability and component supply recovered as expected, and the actual Q2 and subsequent revenue and margin effects of COVID-19.
- Whether the sharp declines in computing and telecommunications revenue were offset by sustained growth in higher-value markets, and the resulting customer and sector concentration.
- Whether inventory levels and accrued liabilities normalized and operating cash flow improved after the Q1 working-capital outflows.
- How borrowing needs, covenant headroom, interest costs and available revolver capacity changed as the company responded to disruption.
- Whether management met its reduced capital-spending outlook, resumed or changed repurchases, and maintained dividends.
- The realization and timing of any ransomware insurance recovery, and any further impairment, restructuring or pandemic-related costs.