Business context and reporting period
Benchmark Electronics, Inc. provides global electronics manufacturing, engineering and related services to original equipment manufacturers in several industries. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Sales | $589.4m | $481.8m | $1,161.4m | $978.6m |
| Gross profit / margin | $46.9m / 8.0% | $34.6m / 7.2% | $92.2m / 7.9% | $66.2m / 6.8% |
| Operating income / margin | $23.9m / 4.0% | $12.4m / 2.6% | $45.0m / 3.9% | $22.5m / 2.3% |
| Net income | $20.8m | $11.6m | $39.0m | $20.8m |
| Diluted EPS | $0.33 | $0.18 | $0.61 | $0.32 |
- For the six months, operating cash flow was negative $18.5m, versus positive $76.8m in 2009. The principal working-capital use was a $77.4m inventory increase; prepaid and other assets also rose $8.0m.
- Six-month investing cash flow was negative $18.7m, including $19.1m of property, plant and equipment purchases. Financing cash flow was negative $30.9m, including $32.6m of share repurchases.
- Cash and equivalents were $351.5m at June 30, down from $421.2m at December 31, 2009. Working capital was $863.4m. Total assets were $1,471.0m and shareholders’ equity was $1,095.4m.
- No borrowings were outstanding on the $100m revolving facility; $99.9m was available, with $0.1m in letters of credit. The company reported compliance with facility covenants. Capital lease obligations totaled $11.5m, including current installments.
Material changes versus the prior comparable period
- Revenue grew 22% in Q2 and 19% in the first half. Management attributed improvement to a broader recovery in the business environment and higher sales across most served sectors.
- Gross margin expanded, which management attributed primarily to improved product mix, operating efficiencies and better utilization from higher volumes. SG&A increased in dollars but declined as a percentage of sales.
- First-half operating income roughly doubled. Restructuring charges were $1.7m in the first half of 2010 versus $2.1m in 2009; there were none in Q2 2010.
- First-half diluted EPS increased to $0.61 from $0.32. The effective tax rate rose to 11.5% from 8.6%, primarily due to lower tax incentives in certain foreign locations.
- Basic weighted-average shares fell to 63.0m from 65.1m for the first half, partly reflecting share repurchases. The company repurchased 768,100 shares in Q2 for $14.9m; $117.7m remained under its repurchase programs at June 30.
Outlook, management commentary, risks and unusual items
- Management expected capital expenditures of approximately $35m–$45m over the next 12 months, principally for machinery and equipment. It believed cash balances and operating cash generation would meet liquidity needs over that period.
- Management cited continued sales recovery but cautioned that results depend on customer demand, major-customer performance and product lifecycles. Sales to medical-device customers declined 19% in Q2; testing and instrumentation sales rose sharply from the prior-year comparison.
- Inventory and component availability are key operating risks. Management reported longer lead times for some components into the first half of 2010 and warned shortages could delay shipments. Lower volumes, unfavorable mix, new-program inefficiencies and competitive pressure may constrain margins.
- International operations expose the company to currency, political, regulatory and economic risks. It reported no foreign-currency hedges at June 30. Foreign-currency translation reduced first-half comprehensive income by $8.0m.
- Long-term investments included auction-rate securities with $49.7m par value and $45.6m fair value. Their market remained illiquid; the $4.1m unrealized loss had persisted for over 12 months. The company reported no credit loss and stated it did not intend, and was more likely than not would not be required, to sell before recovery.
- Uncertain tax benefits, including interest and penalties, totaled $19.6m; management said the balance could decrease by about $1.4m within 12 months. Foreign tax incentives reduced first-half tax expense by approximately $4.1m. Legal matters were described as ordinary-course matters not expected by management to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing noted that results for interim periods are not necessarily indicative of full-year results. No material changes to the risk factors in the 2009 Form 10-K were reported.
Important facts for investors to verify
- Whether sales recovery and improved utilization persist, especially given sector mix, customer concentration and the medical-device decline.
- Whether inventory growth converts into shipments and operating cash flow, and whether component lead times or obsolescence create additional costs.
- The realization timing and valuation of illiquid auction-rate securities, and the assumptions behind the Level 3 fair value estimate.
- Tax-incentive durability, uncertain-tax-position developments and the effect of changing foreign tax rates.
- Capital spending, share repurchases and liquidity relative to operating cash generation; the filing provides no specific full-year revenue or earnings guidance.