Business context and reporting period
Benchmark Electronics, Inc. provides electronics manufacturing, engineering and design, and precision machining services to original equipment manufacturers. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. The company’s strategy emphasizes higher-value Industrials, Medical, and Test & Instrumentation markets. The November 2015 Secure Technology acquisition expanded its engineering and aerospace and defense capabilities.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $574.3 | $630.2 | $1,702.9 | $1,915.2 |
| Gross profit | $52.8 | $54.6 | $156.0 | $162.3 |
| Gross margin | 9.2% | 8.7% | 9.2% | 8.5% |
| Operating income | $18.1 | $26.1 | $52.1 | $71.1 |
| Net income | $21.7 | $20.6 | $45.5 | $56.0 |
| Diluted EPS | $0.44 | $0.40 | $0.91 | $1.07 |
| Cash from operations | Not separately stated for the quarter | $228.0 | $118.7 |
For the nine months, operating cash flow included a $61.8 million reduction in receivables, a $14.0 million reduction in inventory, and a $59.2 million increase in accounts payable. Capital expenditures were $24.1 million; cash used in investing was $14.4 million, including the $10.8 million Secure purchase-price adjustment received. Cash used in financing was $44.2 million, including $40.9 million of share repurchases and $9.2 million of debt principal payments.
At September 30, 2016, cash and cash equivalents were $635.7 million, including $561.2 million held outside the U.S. Long-term debt and current debt installments totaled approximately $226.5 million; $221.4 million was outstanding under the term loan. The company had $197.9 million available under its revolving facility, after $2.1 million of letters of credit. Working capital was approximately $1.1 billion. The company reported compliance with its credit agreement covenants.
Material changes versus prior periods
- Q3 sales fell 9%; nine-month sales fell 11%. Telecommunications and Computing were the largest sources of weakness. Q3 Telecommunications sales declined 33% and Computing declined 24% year over year.
- Higher-value markets represented 64% of Q3 sales versus 54% a year earlier. Q3 Industrials sales rose 10%, while Test & Instrumentation rose 13%; the Industrials increase was primarily attributable to Secure Technology.
- Gross margin improved, which management attributed to the higher-value market mix, capacity alignment, and operational-excellence initiatives; lower volume and utilization partly offset those gains. Operating income nevertheless declined, reflecting lower sales, higher SG&A, greater acquired-intangible amortization, and other costs.
- Q3 net income increased despite lower operating income and pretax income, principally because of a $5.8 million income-tax benefit. For the nine months, the effective tax rate was 0.7%, versus 18.9% in 2015, largely due to an $8.3 million reversal of uncertain tax benefits. Excluding that reversal, management said the 2016 rate would have been 18.7%.
- Interest expense rose to $6.9 million for the nine months from $1.4 million, mainly because of acquisition-related borrowing. Nine-month diluted EPS declined to $0.91 from $1.07.
Outlook, commentary, risks, and unusual items
- Management expected capital expenditures of approximately $40–$50 million over the next 12 months and an additional $1.5–$2.0 million of capacity-alignment costs in Q4 2016. It believed cash balances and operating cash generation would meet liquidity needs for the next 12 months. No sales or earnings guidance was provided in the supplied filing text.
- For the first nine months, the company recorded $3.8 million of proxy-contest costs and $3.0 million related to the former CEO’s separation, in addition to restructuring and other costs. Q3 included $3.5 million of restructuring charges and other costs; the filing’s MD&A describes nine-month restructuring and related costs using more than one grouping, so the exact composition should be checked against the statements and notes.
- On October 28, 2016, the company learned that the GT Advanced Technologies bankruptcy trustee had filed actions seeking to recover approximately $3.7 million in payments to subsidiaries. The company said it believed the payments were made in the ordinary course and intended to defend the claims; outcome was uncertain.
- Key risks include customer and end-market concentration, demand weakness and program maturity, production utilization and margin pressure, component shortages, international and currency exposure, and potential changes in tax incentives. The top 10 customers accounted for 44% of nine-month sales; no customer represented 10% or more in that period.
- Most foreign-held cash was intended to remain permanently reinvested abroad; repatriation could result in additional U.S. and foreign withholding taxes. A $166.0 million-notional interest-rate swap fixed part of the company’s floating-rate exposure; its fair value was a $3.5 million liability at quarter-end.
- The company disclosed no significant off-balance-sheet arrangements and no material changes to its stated risk factors. Management concluded disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Whether sales weakness in Telecommunications and Computing continues, and whether growth in higher-value markets offsets it.
- How sustainable the improved gross margin is given lower utilization, program mix, and ongoing capacity realignment.
- The extent to which quarterly earnings benefited from the tax-reserve reversal and the future tax rate after that one-time item.
- Cash-flow quality and working-capital movements, particularly the sizable receivables and payables contributions to nine-month operating cash flow.
- Debt repayment, interest-rate exposure, and available revolver capacity, alongside planned capital spending and remaining share-repurchase authorization.
- The outcome and potential financial effect of the GTAT recovery actions, which sought approximately $3.7 million.