Benchmark Electronics, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Benchmark provides global electronics manufacturing and related engineering services to OEMs across industrial control, telecommunications, medical, testing and instrumentation, and business-computing markets. Results are unaudited.
Financial performance
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Sales | $716.9 million | $607.5 million | $1,356.2 million | $1,150.0 million |
| Gross profit | $57.8 million | $44.4 million | $108.9 million | $81.2 million |
| Gross margin | 8.1% | 7.3% | 8.0% | 7.1% |
| Operating income | $27.1 million | $12.8 million | $49.6 million | $26.8 million |
| Net income | $22.2 million | $8.5 million | $41.3 million | $19.9 million |
| Diluted EPS | $0.41 | $0.16 | $0.76 | $0.36 |
- Sales rose 18% in both Q2 and H1. Management attributed growth primarily to higher demand from existing customers, new programs and customers, and the Suntron and CTS acquisitions.
- Operating margin was 3.8% in Q2 versus 2.1% a year earlier; H1 operating margin was 3.7% versus 2.3%. Higher volume, program mix and acquisitions contributed to improved gross margins.
- Q2 sales by industry shifted: telecommunications increased 49%, testing and instrumentation 55%, industrial control 21%, and medical devices 13%; business-computing sales declined 16% year over year. Europe segment operating income also declined, to $1.5 million from $3.8 million in Q2 2013.
- SG&A increased 23% in Q2 and 24% in H1, largely reflecting acquisitions and costs supporting higher volume. H1 restructuring, integration and acquisition-related costs were $4.0 million, primarily CTS integration.
- H1 effective tax rate was 17.3%, versus 24.4% in 2013. Foreign tax incentives reduced H1 tax expense by approximately $6.5 million, compared with $2.4 million a year earlier; the 2014 amount included a $1.2 million retroactive China incentive benefit.
Cash, liquidity and capital
- Cash and equivalents were $401.9 million at June 30, up from $345.6 million at year-end. Working capital was $987.6 million, compared with $944.5 million.
- H1 operating cash flow was $85.7 million, versus $61.2 million in H1 2013. A $60.3 million reduction in receivables helped cash generation, partly offset by a $24.7 million inventory increase and a $21.1 million reduction in accounts payable.
- H1 investing cash outflow was $28.4 million, including $29.4 million of property, plant and equipment additions. Financing cash outflow was $0.9 million, including $11.9 million of share repurchases and $10.8 million from option exercises.
- No borrowings were outstanding under the $200 million revolving credit facility; $198.8 million was available, net of letters of credit. The facility matures July 30, 2017. The company reported compliance with its covenants.
- Capital lease obligations totaled $9.8 million. Management estimated capital expenditures of $45–$55 million over the next 12 months and said existing cash and operating cash flow should cover liquidity needs for that period.
- The company repurchased $11.9 million of shares in H1; $35.0 million remained under its $100 million authorization at June 30. No cash dividend was anticipated in the foreseeable future.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management noted that results depend on customer demand, production volumes and capacity utilization, program mix, and successful execution of new programs.
- Customer concentration remains significant: the ten largest customers represented 51% of H1 sales; the two largest each exceeded 10% and together represented 21%.
- Management cited risks from program transitions and product obsolescence, competitive pressure on margins, component shortages and inventory exposure, and international operations, including currency, political, regulatory and natural-disaster risks.
- The company said it could not obtain adequate cost-effective flood insurance for its Thailand facilities. It received $1.6 million of Thailand flood insurance proceeds in Q1 2014 and completed the recovery process; a significant uninsured loss could materially affect results.
- Long-term investments included auction-rate securities with $11.3 million par value and $9.7 million fair value. These Level 3-valued securities had a $1.6 million unrealized loss, outstanding for more than 12 months; management reported no credit loss.
- Uncertain tax-benefit reserves, including interest and penalties, totaled $21.3 million. The IRS began an audit of the company’s 2011 federal tax year in Q2. A Thailand tax-refund claim of $8.0 million remains disputed; an existing reserve applies to the claim.
- The company is evaluating the new revenue-recognition standard, effective for it January 1, 2017; management said it could affect contract revenue and cost recognition, processes and systems. Ordinary-course litigation was not expected by management to have a material adverse effect. No material risk-factor changes were reported.
Most important facts for investors to verify
- How much of reported sales and profit growth reflects organic demand versus Suntron and CTS acquisitions, and whether acquired programs sustain margins.
- Whether stronger gross margins and operating cash flow persist as inventory rises and customer demand and program mix change.
- Customer concentration, especially the combined 21% H1 sales exposure to the two largest customers.
- The durability and expiration terms of overseas tax incentives, and potential outcomes from the IRS audit and Thailand refund claim.
- Capital spending returns, share-repurchase pace, and exposure to uninsured Thailand losses and Level 3 auction-rate securities.