Benchmark Electronics, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Amounts below are in U.S. dollars; financial statement figures are converted to millions unless stated otherwise. The interim statements are unaudited.
Business context
Benchmark provides global electronics manufacturing and related design, engineering, precision technology, fulfillment and post-deployment services to OEMs. Its end markets include enterprise computing, telecommunications, industrial controls, medical devices, and testing and instrumentation. Operations are reported across the Americas, Asia and Europe.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales | $613.9m | $510.5m | $1,775.2m | $1,489.0m |
| Gross profit | $47.7m | $36.8m | $140.0m | $103.0m |
| Gross margin | 7.8% | 7.2% | 7.9% | 6.9% |
| Operating income | $23.9m | $11.7m | $68.9m | $34.2m |
| Net income | $23.0m | $16.4m | $62.0m | $37.2m |
| Diluted EPS | $0.37 | $0.25 | $0.98 | $0.57 |
Q3 sales grew 20% year over year and nine-month sales grew 19%. Management attributed growth to new program wins, expanded services and improved business conditions. Higher sales, improved product mix, operating efficiencies and better facility utilization lifted gross margin. Nine-month operating margin was 3.9%, versus 2.3% a year earlier. SG&A rose in dollars but declined as a share of sales.
Q3 sales rose across most reported industries, led by testing and instrumentation (+174%), industrial controls (+46%) and telecommunications (+16%); medical devices fell 21%. For the first nine months, testing and instrumentation increased 326%, industrial controls 51% and telecommunications 12%, while enterprise computing fell 4% and medical devices fell 11%.
Cash flow, balance sheet and capital allocation
- Operating cash flow: Cash used was $4.9m for the first nine months, compared with $117.5m provided in the prior-year period. The principal working-capital uses included inventory growth of $66.0m, receivables growth of $10.8m, an increase in prepaid and other assets of $13.9m, and a decrease in accounts payable of $11.2m.
- Investing and financing: Investing used $18.6m, including $28.9m of property and equipment additions, partly offset by $10.2m of investment redemptions. Financing used $51.2m, primarily reflecting $53.6m of share repurchases.
- Cash and liquidity: Cash and equivalents were $346.3m at September 30, down from $421.2m at December 31, 2009. Working capital was $877.4m, up from $859.1m. The company had a $100m revolving facility, no borrowings, $0.1m of letters of credit and $99.9m available; it was in covenant compliance. Its Thailand subsidiary also had no borrowings under an approximately $11.4m facility.
- Debt and investments: The balance sheet reported $11.5m of capital lease obligations, including current installments. Long-term auction-rate securities had $39.9m par value and a $36.3m carrying value, with a $3.6m unrealized loss; the market remained illiquid. Management reported no identified credit loss and no intent or expected need to sell before recovery.
- Repurchases: The company repurchased $53.6m of shares in the first nine months. It had $96.7m remaining under its $100m 2010 repurchase authorization at quarter-end. Repurchased shares were retired.
Outlook, commentary and risks
- Management expected approximately $5.0m of restructuring charges in Q4 2010, following $2.1m recognized in the first nine months.
- Management estimated next-12-month capital expenditures of $35m–$45m, principally for machinery and equipment, and expected to spend approximately $18m to expand precision technology capabilities in Asia. It said existing cash and operating cash generation should meet liquidity needs over the next 12 months. No sales or earnings guidance was provided in the filing text.
- Restructuring efforts include capacity and workforce reductions and shifting production from higher-cost to lower-cost locations. New and higher-volume programs may face early-stage inefficiencies and competitive pressure on margins.
- Key business risks include customer concentration and dependence on customer demand, rapid product obsolescence, economic conditions, component shortages and longer lead times, inventory exposure, international operations and foreign-exchange risk. The company reported no foreign-currency hedges at September 30.
- The effective tax rate was 10.4% for the first nine months of 2010, versus a tax benefit and negative 9.8% rate in 2009. The comparison was affected by prior-year tax benefits; foreign tax incentives reduced 2010 nine-month tax expense by approximately $6.7m. A $1.4m benefit in Q3 2010 followed expiration of a tax statute of limitations. Uncertain tax benefits, including interest and penalties, totaled $18.2m.
- A $7.7m Thailand tax refund claim remained under examination, with completion expected in 2011. Management said ordinary-course legal matters were not expected to materially affect financial position or results. The company reported no significant off-balance-sheet arrangements and no material changes to its previously disclosed risk factors.
- Management concluded disclosure controls were effective as of quarter-end and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether revenue growth and margin improvement persisted, particularly given the weaker medical-device and enterprise-computing trends and competitive pressure on new programs.
- Whether inventory and other working-capital investment converted to operating cash flow; operating cash flow was negative despite higher earnings.
- Whether planned capital expenditures, the Asia expansion and share repurchases were funded without materially reducing liquidity.
- Whether Q4 restructuring charges approximate management’s $5.0m estimate and produce the intended cost savings.
- Developments in auction-rate security liquidity and valuation, the Thailand tax refund examination, uncertain tax positions and the expiration of foreign tax incentives.