Benchmark Electronics, Inc. — Q1 2013 Form 10-Q
Business context and period: The company provides global electronics manufacturing and related engineering services to OEMs across several industries. This unaudited quarterly report covers the three months ended March 31, 2013; comparisons are with Q1 2012 unless stated otherwise. Financial statement amounts below are in millions of U.S. dollars, except per-share data.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Sales | $542.4 | $593.4; down 9% |
| Gross profit / margin | $36.8 / 6.8% | $40.5 / 6.8% |
| Operating income / margin | $14.0 / 2.6% | $7.8 / 1.3% |
| Net income | $11.5 | $5.6 |
| Diluted EPS | $0.21 | $0.10 |
| Operating cash flow | $48.6 | $(23.8) |
| Cash and cash equivalents | $416.9 at March 31 | $384.6 at December 31, 2012 |
| Working capital | $891.9 at March 31 | $883.7 at December 31, 2012 |
Cash from operations benefited principally from a $40.2 million reduction in receivables, partly offset by a $12.7 million decrease in accrued liabilities. Investing activities used $6.9 million, including $6.7 million for property, plant and equipment. Financing activities used $8.8 million, including $12.1 million of share repurchases, partly offset by $3.3 million from option exercises.
The company had no borrowings under its $200 million U.S. revolving credit facility, which was fully available, and no borrowings under its approximately $11.9 million Thailand facility. Capital lease obligations totaled about $10.5 million. The company reported compliance with credit-facility covenants. Of its cash, $285.2 million was held outside the U.S. and is intended to remain invested in foreign operations.
Material changes and business drivers
- Sales declined mainly because of weaker demand from existing customers, particularly in computers/business enterprise products and testing and instrumentation, as well as new-program timing and global economic uncertainty.
- By industry, sales decreased 25% in computers/business enterprise, 21% in testing and instrumentation, 6% in telecommunications and 1% in industrial control; medical-device sales rose 28% on new program wins.
- Gross margin held at 6.8%, while gross profit fell with lower sales. SG&A declined slightly in dollars but rose to 4.1% of sales from 3.8%.
- Operating income and net income improved despite lower sales, primarily because Q1 2012 included $10.2 million of Thailand flood-related charges net of insurance; Q1 2013 had none. Q1 2013 also included $0.4 million of restructuring charges.
- The effective tax rate was 19.5%, versus 32.1%, including a $0.8 million discrete benefit from the American Taxpayer Relief Act. The filing says the rate excluding specified discrete tax items was 25.4% versus 23.9%.
- Sales to the ten largest customers were 52% of revenue, down from 59%; the largest customer accounted for 15% of Q1 2013 sales. Shares repurchased totaled 680,000 at an average $17.74; $76.0 million remained under the repurchase authorization.
Outlook, risks and unusual items
- Management estimated capital expenditures of approximately $35–$45 million over the next 12 months and said existing cash and operating cash flow should meet liquidity needs over that period. The filing provides no specific revenue or earnings guidance.
- Management did not expect significant additional Thailand flood-related charges in 2013. However, the company could not obtain adequate cost-effective flood insurance for its Thailand facilities and warned that a significant uninsured loss could materially harm results.
- A certain customer had delayed payments, increasing past-due receivables; management considered the balance collectible and said it would continue monitoring it. Component shortages, customer forecast changes, inventory obsolescence, customer concentration, and lower capacity utilization could also pressure operations and cash flow.
- The company reported $21.3 million of reserves for uncertain tax benefits, including interest and penalties. A Thai subsidiary’s $8.8 million tax refund claim for 2004–2005 was rejected and is under appeal; a $7.1 million reserve had been recorded against the claim.
- Auction-rate securities remained illiquid: $12.2 million par value was carried at $10.3 million fair value, with a $1.9 million accumulated unrealized loss. The company used Level 3 valuation inputs, but concluded there was no credit loss.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Investor verification priorities
- Assess whether demand and program ramps recover, particularly in computers/business enterprise and testing and instrumentation, and monitor the medical-device growth contribution.
- Check whether margins and earnings remain resilient without the prior-year Thailand flood charge, and distinguish operating trends from restructuring and tax-related effects.
- Monitor receivable aging and the delayed-paying customer, customer concentration, inventory exposure, and operating cash flow as sales fluctuate.
- Verify capital-spending plans, ongoing share repurchases, and the availability and covenant terms of credit facilities; consider the tax implications of cash held overseas.
- Track Thailand flood-risk mitigation and insurance availability, the Thai tax-refund appeal and uncertain-tax reserves, and the valuation/liquidity of auction-rate securities.