Benchmark Electronics, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Benchmark provides engineering, technology and manufacturing services to OEMs across industrial, aerospace and defense, medical, test and instrumentation, computing, and telecommunications markets.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017, as adjusted |
|---|---|---|
| Sales | $608.1 million | $557.9 million |
| Gross profit / margin | $58.3 million / 9.6% | $47.5 million / 8.5% |
| Operating income / margin | $18.0 million / 3.0% | $10.9 million / 2.0% |
| Income before taxes | $17.5 million | $9.7 million |
| Income tax expense | $41.2 million | $1.1 million |
| Net income (loss) / diluted EPS | $(23.6) million / $(0.49) | $8.6 million / $0.17 |
| Operating cash flow | $24.5 million | $77.9 million |
- Cash and cash equivalents were $676.3 million at quarter-end, down from $742.5 million at December 31, 2017. Working capital was approximately $1.1 billion.
- Debt and capital lease obligations totaled approximately $207.3 million, including $202.7 million outstanding under the term loan. The company reported $197.2 million available under its revolving facility and compliance with its debt covenants.
- Investing cash outflow was $21.0 million, including $20.1 million of property, plant and equipment additions. Financing cash outflow was $70.6 million, reflecting repurchases, debt payments and other activity.
- Capital expenditures were $20.1 million; management expects approximately $50–$60 million over the next 12 months.
Changes versus the prior comparable period
- Sales rose 9%. Test and instrumentation increased 35%, medical 15%, industrials 6%, computing 3% and telecommunications 3%; aerospace and defense declined 2%.
- Gross profit increased 23%. Management attributed the improved underlying gross margin partly to higher sales and a better mix of higher-value work. The comparison also reflects a $3.4 million customer-insolvency inventory charge in Q1 2017 and partial recoveries in Q1 2018.
- Operating income increased to $18.0 million from $10.9 million. Net income nevertheless shifted to a loss, primarily because of a large deferred tax charge related to a change in the company’s foreign-earnings repatriation assertion.
- Operating cash flow declined to $24.5 million from $77.9 million. Q1 2018 cash generation included a $38.2 million inventory increase, primarily to support new-program ramps.
- The company adopted ASC 606 retrospectively on January 1, 2018. Under many manufacturing contracts, revenue is now recognized over time as work progresses; prior-period figures shown in the filing are adjusted for the new standard.
Outlook, commentary and risks
- Q1 income tax expense included $30.7 million of deferred foreign withholding tax and $9.4 million of deferred U.S. state tax following the decision not to treat certain pre-2018 foreign earnings as indefinitely reinvested. Excluding these items, management reported an effective tax rate of 8.7%.
- The company repatriated $277 million of foreign earnings during the quarter and expects to repatriate another $223 million in 2018. It reported $438.1 million of cash held outside the U.S. at quarter-end.
- Management expects $1.0–$1.5 million of additional restructuring charges in Q2 2018. Q1 included $1.4 million of restructuring charges and $0.8 million of costs related to the corporate headquarters transition to Arizona.
- Management believes cash balances and operating cash flows will meet liquidity needs over the next 12 months. The filing provides no specific revenue or earnings guidance.
- Key exposures include customer concentration (the 10 largest customers represented 44% of sales), program ramp and execution challenges, component shortages, international and foreign-exchange risks, and potential margin pressure or idle capacity. Management said risk factors were not materially changed from the 2017 10-K.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. The company reported no significant off-balance-sheet arrangements and no ongoing tax examinations.
Important facts for investors to verify
- Whether the reported operating improvement and margin gains persist after considering the prior-year customer-insolvency charge and current-year recoveries.
- The ongoing tax rate and cash-tax implications of repatriations, GILTI and the company’s post-2017 foreign-earnings strategy.
- Whether inventory growth supports successful program ramps and converts into sales and cash, given lower operating cash flow.
- Execution of restructuring plans, expected Q2 charges, and the $50 million accelerated share repurchase settlement; the company had $245 million remaining under its repurchase authorization at March 31.
- Customer concentration, aerospace and defense qualification delays, component availability, and compliance with credit-agreement covenants.