Benchmark Electronics, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Benchmark provides product design, engineering, technology solutions and advanced manufacturing services to OEMs across aerospace and defense, medical, industrial, test and instrumentation, computing, and telecommunications markets.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Sales | $602.8 million | $608.1 million; down 1% |
| Gross profit and margin | $53.8 million; 8.9% | $58.3 million; 9.6% |
| Operating income and margin | $16.1 million; 2.7% | $18.0 million; 3.0% |
| Income before taxes | $17.4 million | $17.5 million |
| Income tax expense / effective rate | $3.6 million / 20.8% | $41.2 million / 235.0% |
| Net income (loss) and diluted EPS | $13.8 million / $0.34 | $(23.6) million / $(0.49) |
| Cash from operations | $16.4 million | $24.5 million |
| Cash used in investing / financing | $(10.2) million / $(68.5) million | $(21.0) million / $(70.6) million |
Gross margin fell principally because Test & Instrumentation revenue declined and that sector generally carries above-average margins. Management said adjusted gross margin, excluding inventory-charge recoveries, was 8.8% versus 9.5% a year earlier. Q1 2019 included $2.7 million recovered from a customer insolvency: $1.0 million reduced cost of sales and $1.7 million reduced SG&A.
At March 31, 2019, cash and cash equivalents were $395.3 million, down from $458.1 million at year-end. Working capital was approximately $0.8 billion. Total current assets were $1.30 billion and current liabilities $490.2 million. The balance sheet reported $8.7 million of current and $145.2 million of long-term debt; the company separately disclosed $150.0 million outstanding under its term loan. It had $497.2 million available on its revolving facility, net of letters of credit. The company reported compliance with its debt covenants.
Cash from operations reflected collections, including a $64.2 million decrease in accounts receivable, partly offset by higher contract assets and inventories and lower accounts payable. Cash financing uses included $61.1 million of share repurchases and $6.2 million of dividends. The company repurchased 2.38 million shares at an average $25.61; $140.5 million remained under its authorization. The quarterly dividend was $0.15 per share.
Material changes versus the prior comparable period
- Revenue by market sector: Industrials declined 8% to $115.8 million; Aerospace & Defense rose 8% to $103.9 million; Medical rose 7% to $103.5 million; Test & Instrumentation fell 36% to $66.0 million; Computing rose 20% to $124.3 million; Telecommunications rose 7% to $89.4 million.
- Management attributed the overall revenue softness primarily to weaker semiconductor capital equipment demand. Higher-value market revenue declined 8% overall, while traditional market revenue increased 14%, mainly from Computing.
- Net income improved by $37.4 million year over year, principally because Q1 2018 included $40.1 million of tax expense tied to a change in the company’s assertion about repatriation of certain foreign earnings. Excluding that change and other 2018 tax benefits, management said the prior-year effective tax rate would have been 15.6%, versus 20.8% in Q1 2019.
- Benchmark adopted the lease accounting standard on January 1, 2019 without restating prior periods. It recognized $81.2 million of operating lease right-of-use assets and $82.7 million of operating lease liabilities; comparisons of balance-sheet items are affected by this adoption.
Outlook, commentary, risks and unusual items
- Management forecast capital expenditures of approximately $40 million to $50 million over the next 12 months, primarily for machinery and equipment. It stated that cash, operating cash flows and available borrowing capacity should meet liquidity needs over the next 12 months. The filing provides no broad revenue or earnings guidance.
- Benchmark expected $3 million to $4 million of additional restructuring and other costs in Q2 2019 as it reduces excess capacity and improves its cost structure. Q1 included $1.6 million of restructuring and other costs, including proxy-related activity and CEO transition costs.
- The company is not renewing a legacy contract with a large Computing customer when it expires at year-end 2019. It expected about $20 million of related revenue in H2 2019, an approximately 88% decline from H2 2018.
- Customer concentration is significant: the 10 largest customers represented 41% of Q1 sales, versus 44% a year earlier. Management also cited risks from customer demand changes, component shortages, international operations, foreign exchange, and production transitions.
- Malaysia and Thailand tax incentives reduced Q1 tax expense by approximately $1.7 million. Incentives expire at various dates through 2021 in Malaysia and 2028 in Thailand; a China incentive expired in 2018, with an application for a new one expected in H2 2019.
- Debt facilities include a $500 million revolving credit facility and a $150 million term loan, both maturing July 20, 2023. A $150 million interest-rate swap fixes the rate on that notional amount at 2.928%. The company reported no significant off-balance-sheet arrangements.
- Benchmark is a plaintiff in a capacitor price-fixing and market-allocation class action. Three defendant groups settled, producing a net recovery of $1.836 million. Management said other ordinary-course legal matters were not expected to materially adversely affect financial position or results.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp Test & Instrumentation decline stabilizes and how its mix affects gross margin.
- Revenue and profitability implications of the Computing contract expiration and the planned restructuring.
- Cash conversion and working-capital trends, particularly contract assets, inventory and accounts payable.
- Use of remaining repurchase authorization and dividend sustainability relative to cash needs and debt covenants.
- Continuation or replacement of expiring tax incentives, and the resulting effective tax rate.
- Customer concentration, component availability, and exposure to international, currency and operational risks.