Business context and reporting period
Benchmark Electronics, Inc. provides product design, engineering, technology and advanced manufacturing services to OEMs in aerospace and defense, medical technologies, complex industrials, semiconductor capital equipment (Semi-Cap), computing and telecommunications. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales | $601.6m | $660.6m | $1,204.4m | $1,268.7m |
| Gross profit / margin | $53.0m / 8.8% | $54.3m / 8.2% | $106.8m / 8.9% | $112.6m / 8.9% |
| Operating income / margin | $11.9m / 2.0% | $14.3m / 2.2% | $28.0m / 2.3% | $32.3m / 2.5% |
| Net income (loss) | $9.4m | $10.9m | $23.2m | $(12.7)m |
| Diluted EPS | $0.24 | $0.23 | $0.58 | $(0.26) |
For the first six months, operating cash flow was $68.8m, versus cash used of $16.2m in 2018. Investing activities used $15.4m, mainly for $14.2m of capital expenditures; financing activities used $115.1m, including $100.0m of share repurchases and $12.1m of dividends. Cash declined $61.5m to $396.6m from year-end 2018. Management attributed operating cash generation in part to a $106.7m decrease in accounts receivable; the company also sold $130.6m of receivables during the half-year.
At June 30, cash was $396.6m, including $179.4m held outside the U.S.; working capital was approximately $0.8bn. Credit Agreement borrowings were $148.1m, with $497.0m available under the revolver and $3.0m of letters of credit outstanding. The company reported compliance with its debt covenants. A $148.1m interest-rate swap fixed the rate on that portion of borrowings at 2.928%. Adoption of lease accounting added $84.0m of operating right-of-use assets and $85.6m of operating lease liabilities to the balance sheet.
Material changes versus the prior comparable period
- Q2 sales fell 9% year over year; first-half sales fell 5%. Semi-Cap weakness and the planned exit from a legacy Computing contract were key drivers.
- Q2 gross margin improved to 8.8% from 8.2%; management cited operational improvements and a better mix of higher-value markets. First-half gross margin was 8.9% in both years. Operating margin declined in both comparison periods.
- Q2 industry sales: Industrials down 3%, A&D up 7%, Medical up 18%, Semi-Cap down 41%, Computing down 17% and Telecommunications down 10%.
- First-half sales by reporting segment were $796.2m in the Americas, $361.6m in Asia and $89.9m in Europe. Segment operating income was $37.6m, $28.5m and $3.2m, respectively; corporate and intersegment items reduced operating income by $41.2m. Americas operating income increased from $32.3m, while Asia and Europe declined from $34.5m and $5.2m.
- First-half 2019 net income was $23.2m versus a $12.7m loss in 2018, largely because 2018 included $40.1m of tax expense from a change in the company’s assertion about reinvestment of foreign earnings. The 2019 effective tax rate was 21.2%; the comparable 2018 reported rate was 141.1%.
- First-half share repurchases totaled $100.0m. Shares outstanding declined to 37.7m at June 30 from 41.4m at year-end 2018.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects $40m–$50m of capital expenditures over the next 12 months and believes cash, operating cash flows and revolver access will meet liquidity needs over that period.
- The legacy Computing contract is not being renewed; the final build was completed in Q2, with an immaterial amount of expected Q3 revenue before transition completion.
- Benchmark announced closures of its San Jose, California and Guaymas, Mexico sites, with customer transitions expected to other company locations by mid-2020. It expects $3m–$5m of additional restructuring and transition charges in Q3 and $6m–$8m related to the closures over 2019–2020.
- First-half restructuring and other costs totaled $5.0m, including $2.3m of restructuring charges and $2.7m of proxy-related, cooperation-agreement and CEO-transition costs. Q2 also included a $1.1m recovery from a favorable legal settlement in other income and a $0.8m customer settlement accrual in cost of sales.
- Customer concentration and demand volatility are material considerations: the ten largest customers represented 41% of first-half sales, versus 45% in 2018. Management also cites component shortages, customer demand changes, program ramp delays, margin pressure, foreign currency and international operating risks.
- Tax incentives reduced first-half 2019 tax expense by approximately $3.0m; Malaysia and Thailand incentives have stated expiration dates through 2021 and 2028, respectively. A Chinese subsidiary applied for a new incentive in Q3 2019 after its prior incentive expired.
- Legal matters include ordinary-course claims that management does not expect to materially affect the company. Benchmark is a plaintiff in capacitor price-fixing litigation and reported $2.94m of net recovery during the first half from settlements by certain defendants.
- The board intends to continue quarterly dividends, but payments are not guaranteed. $101.5m remained under the share-repurchase authorization at June 30. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Semi-Cap demand stabilizes and the announced customer and site transitions proceed on schedule and within expected costs.
- Whether the gross-margin improvement is sustainable as revenue falls and program mix and production utilization change.
- The impact of receivables-sale activity and working-capital movements on the quality and sustainability of operating cash flow.
- Debt, lease obligations, covenant headroom, planned capital spending, and the company’s continued use of cash for repurchases and dividends.
- Tax incentives and jurisdictional tax mix, including the outcome of the Chinese incentive application and future tax rates.
- Customer concentration, component availability, foreign-exchange exposure and the outcomes of legal and tax contingencies.