Benchmark Electronics, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Benchmark provides worldwide electronics manufacturing and related engineering services to OEMs. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $570.1m | $613.9m | $1,693.9m | $1,775.2m |
| Gross profit / margin | $34.6m / 6.1% | $47.2m / 7.7% | $110.0m / 6.5% | $138.7m / 7.8% |
| Operating income / margin | $11.6m / 2.0% | $23.4m / 3.8% | $41.6m / 2.5% | $67.6m / 3.8% |
| Net income | $19.9m | $22.5m | $49.1m | $60.7m |
| Diluted EPS | $0.34 | $0.36 | $0.81 | $0.96 |
Q3 sales fell 7% year over year; nine-month sales fell 5%. Gross profit decreased 27% in Q3 and 21% for the nine-month period. Management cited lower volumes, product mix, new-program ramp and Asia capacity-expansion costs, including $3.5m of settlement costs associated with transferring a major program. Nine-month operating income fell about 39%.
Net income was supported by a significant tax benefit rather than stronger operating results. Q3 included a $16.3m discrete benefit from reducing deferred-tax valuation allowances, partly offset by a $7.1m reserve for uncertain tax benefits. For the nine months, the company reported a $7.1m income tax benefit versus $7.2m expense in 2010; excluding specified one-time tax items, management said the effective rate was 6.4% versus 12.7%.
Cash flow, liquidity and capital
- Operating cash flow was only $0.2m for the first nine months, versus cash used of $4.9m in 2010. Inventory increased $69.5m, accounts receivable increased $7.0m and accrued liabilities decreased $9.8m; accounts payable increased $19.4m.
- Cash and equivalents were $253.8m at September 30, down from $346.3m at year-end 2010. Working capital was $865.5m. Cash held outside the U.S. was $202.0m and is generally intended to remain invested abroad.
- Investing activities used $39.0m, including $49.8m of property and equipment purchases. Financing activities used $51.8m, principally $53.2m of share repurchases. Repurchases were suspended because of uncertainty from the Thailand flooding.
- No borrowings were outstanding on the $100m revolving credit facility, which was available through its December 2012 maturity; the Thailand subsidiary also had no borrowings on its facility. The company reported compliance with credit covenants. Capital lease obligations totaled approximately $11.1m.
- Long-term investments were $24.8m fair value, representing auction-rate securities with $28.1m par value. The market remained illiquid; the company reported a $3.3m unrealized loss and no identified credit loss.
Material changes, outlook and risks
- Thailand flooding: After quarter-end, flooding suspended production at Ayudhaya, facilities that generated 20–25% of 2011 revenue. Production restarted at Korat in November, and production was being shifted to other locations. Management anticipated full Ayudhaya operations during Q1 2012, but timing and financial impact remained uncertain. It expected negative cash flow for Q4 and possibly beyond.
- Flood-related recovery costs, potential asset impairments and inventory write-downs were not yet estimable. The company expected Q4 capital expenditures of $20–25m for contingency plans and estimated capital expenditures of $40–50m over the next 12 months. Insurance coverage had a combined property and business-interruption limit of approximately $300m; timing and recoveries were uncertain.
- Management cited component shortages from Thai suppliers, potential higher component costs, underabsorbed fixed costs, production constraints and possible customer-order disruption as key risks. The company’s Asia goodwill was $37.9m; management noted uncertainty about the flood’s possible effect on that segment’s value.
- Customer and industry concentration remain relevant: the ten largest customers represented 50% of Q3 sales and 52% of nine-month sales; IBM accounted for 11% and 12%, respectively. Q3 declines included testing and instrumentation (-40%), enterprise computers (-17%) and medical devices (-10%); telecom and industrial control sales increased.
- The company expected about $3.4m of additional restructuring charges in Q4, primarily for closing its Dublin facility. A jury ruled in Pemstar’s favor in the Power Paper litigation, which had sought up to $22.8m; management said other ordinary-course legal matters were not expected to have a material adverse effect.
- The filing reports revisions for immaterial inventory-accounting errors in prior periods, including a $1.3m reduction to nine-month 2010 net income and a $0.8m reduction to Q1 2011 net income as previously reported. The revisions did not affect operating cash flows.
Investor verification priorities
- Track Ayudhaya recovery, production transfers, customer delivery performance and the timing and amount of insurance proceeds and flood-related charges.
- Assess whether inventory growth, weak operating cash generation and elevated capital spending improve or further pressure liquidity.
- Separate recurring operating performance from the discrete tax benefit; review deferred-tax asset realizability and the $25.3m reserve for uncertain tax benefits.
- Monitor customer concentration, program transfers, new-program ramp economics and gross-margin recovery.
- Confirm the timing and cost of the Dublin restructuring and the company’s plans for the remaining share-repurchase authorization.