Benchmark Electronics, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Benchmark provides electronics manufacturing, engineering and design, and precision machining services to OEMs worldwide.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Sales | $566.5 million | $549.2 million | Up 3% |
| Gross profit / margin | $49.1 million / 8.7% | $50.3 million / 9.2% | Profit down 2% |
| Operating income / margin | $12.4 million / 2.2% | $16.3 million / 3.0% | Down 24% |
| Net income | $9.7 million | $11.1 million | Down 12% |
| Diluted EPS | $0.19 | $0.22 | Down $0.03 |
| Operating cash flow | $77.9 million | $77.1 million | Up $0.8 million |
Q1 2017 gross margin was 9.3% excluding a $3.4 million inventory write-down tied to a customer’s insolvency. SG&A rose 15% to $32.7 million, including a $1.7 million receivables provision related to that customer and investment in sales and marketing. The effective tax rate was 13.4%, versus 20.9%; excluding a $0.8 million discrete stock-compensation tax benefit, management said it would have been 20.5%.
Cash, debt and liquidity
- Cash and equivalents were $752.5 million at March 31, up from $681.4 million at year-end 2016. Only $93.0 million was available in the U.S.; substantially all foreign-held cash was intended to remain invested abroad and could incur additional taxes if repatriated.
- Operating cash flow was $77.9 million. Working-capital movements included a $59.7 million decrease in receivables, a $22.5 million increase in inventory, and a $16.2 million increase in accounts payable. The receivables decrease was partly attributable to a $25.0 million receivables sale late in the quarter.
- Cash used in investing was $7.5 million, including $7.0 million of property and equipment purchases. Financing cash flow was positive $0.3 million; the company paid $3.1 million of debt principal and repurchased $1.0 million of shares.
- Credit Agreement borrowings were $215.6 million under the term loan; $2.1 million of letters of credit were outstanding and $197.9 million remained available on the revolving facility. The balance sheet reports $220.3 million of total current and long-term debt and capital lease obligations. The filing says the company complied with its credit covenants.
- Management said cash balances and operating cash flow should meet liquidity requirements for the next 12 months. It projected 2017 capital expenditures of $45–$55 million. The share-repurchase authorization had $91.8 million remaining.
Business and material changes
- Revenue growth reflected Test & Instrumentation (+43%), Aerospace and Defense (+14%), and Computing (+10%). Industrials fell 14% and Telecommunications fell 13%. Higher-value markets made up 68% of sales, up from 66%.
- Americas segment sales increased to $374.6 million from $352.8 million, while operating income fell to $15.2 million from $18.0 million. Asia sales were $174.9 million versus $173.4 million and operating income increased to $12.3 million from $10.9 million. Europe sales and operating income declined to $40.4 million and $2.4 million, respectively, from $42.0 million and $3.0 million.
- Sales to the ten largest customers represented 44% of revenue, compared with 43% a year earlier. Medical revenue was adversely affected by approximately $3 million from the insolvent customer.
- Q1 restructuring charges were $1.5 million, primarily workforce reductions. Management expected another $1.5–$2.0 million of charges in the remaining quarters of 2017 for Americas capacity alignment.
Outlook, risks and unusual items
- No specific sales or earnings guidance was provided. Management emphasized shifting the portfolio toward higher-value markets, optimizing its global network, and expanding engineering capabilities.
- The company plans to adopt the new revenue-recognition standard on January 1, 2018, using retrospective adoption. It expects most manufacturing revenue to move from point-in-time to over-time recognition and anticipates a potentially material effect on revenue timing; the impact was still being quantified.
- A trustee in the GT Advanced Technologies bankruptcy brought claims against three subsidiaries seeking recovery of approximately $4.4 million in payments. Benchmark intends to defend the claims; the outcome was not predictable. Management did not expect ordinary-course legal matters overall to materially affect financial position or results.
- Risks highlighted include customer concentration and customer insolvency, component shortages and inventory exposure, international and foreign-currency risks, margin pressure and production utilization, and changes in tax incentives. Tax holidays in China, Malaysia and Thailand lowered Q1 tax expense by about $1.3 million; the China incentive is scheduled to expire through 2018 unless extended or renegotiated.
- The company adopted share-based payment accounting changes in 2017, including recording certain excess tax benefits in income tax expense and classifying share-withholding payments as financing cash flows. It also recorded a $0.6 million net-of-tax unrealized gain on its interest-rate swap in other comprehensive income.
Key facts for investors to verify
- Whether revenue growth in Test & Instrumentation and other higher-value markets continues, and whether the industrial weakness and telecommunications program runoff persist.
- Underlying profitability after excluding the $5.1 million customer-insolvency charges, including whether SG&A investment and restructuring deliver improved margins.
- How much of reported operating cash flow reflects sustainable operations versus working-capital movements and the $25.0 million receivables sale.
- The customer-insolvency and GTAT bankruptcy claim outcomes, and any further effects on receivables, inventory or earnings.
- The quantified effect and transition disclosures for the 2018 revenue-recognition change, along with the extent to which foreign-held cash is practically available to fund U.S. needs.