Benchmark Electronics, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Benchmark provides engineering, technology and manufacturing services to OEMs across industrial, aerospace and defense, medical, test and instrumentation, computing, and telecommunications markets. Amounts below are in U.S. dollars; financial figures are rounded to millions. Prior-year comparisons are presented as adjusted for ASC 606 revenue accounting.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $660.6M | $619.6M | $1,268.7M | $1,177.5M |
| Gross profit / margin | $54.3M / 8.2% | $59.5M / 9.6% | $112.6M / 8.9% | $107.0M / 9.1% |
| Operating income / margin | $14.3M / 2.2% | $23.1M / 3.7% | $32.3M / 2.5% | $34.0M / 2.9% |
| Net income (loss) | $10.9M | $18.1M | $(12.7)M | $26.6M |
| Diluted EPS | $0.23 | $0.36 | $(0.26) | $0.53 |
| Operating cash flow | Not separately stated | Not separately stated | $(16.2)M | $92.5M |
- Q2 sales grew 7%; first-half sales grew 8%. Q2 sector sales changes included industrials down 6%, aerospace and defense up 2%, medical up 12%, test and instrumentation up 19%, computing up 13%, and telecommunications approximately flat.
- Management attributed growth principally to computing demand from legacy storage and data-security customers, test and instrumentation demand tied to semiconductor capital equipment, and medical program ramps. Lower-margin computing mix, medical transitions, engineering investments and new-program ramp costs pressured gross margin.
- First-half income tax expense was $43.6M, producing a 141.1% effective tax rate. Benchmark recorded $30.7M of foreign withholding tax and $9.4M of U.S. state tax expense after changing its assertion on reinvestment of prior foreign earnings. Excluding these items, management reported a 14.1% effective rate.
- Six-month investing cash outflow was $40.6M, including $36.7M of property, plant and equipment additions. Financing cash outflow was $89.5M, including $65.9M of share repurchases, a $10.0M equity-forward payment, $7.1M of dividends and net debt principal payments of approximately $9.1M.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $595.6M at June 30, down from $742.5M at December 31, 2017. Working capital was approximately $1.0B, versus $1.2B at year-end. Cash from operations was negative as inventory rose $52.1M, primarily to support new-program ramps.
- At June 30, borrowings under the term loan were $198.4M; $197.2M remained available under the existing revolving facility, with $2.8M of letters of credit outstanding. The company reported compliance with debt covenants.
- On July 20, 2018, Benchmark replaced that facility with a five-year $650M credit agreement: a $500M revolver and $150M term loan, maturing July 20, 2023. As of August 6, it had $150M drawn on the term loan and $497.2M available on the revolver.
- Benchmark repatriated $522M of foreign earnings during the first half. It began quarterly dividends in 2018 and stated the Board intends to continue them, but payments are not guaranteed. At June 30, $237.6M remained under the share-repurchase authorization.
Outlook, risks and unusual items
- Management expected approximately $50M–$60M of capital expenditures over the next 12 months and approximately $1.0M–$1.5M of additional restructuring charges in Q3 2018. No revenue or earnings guidance was provided in the supplied filing text.
- First-half restructuring charges were $2.2M; Benchmark also incurred $1.8M of corporate-headquarters transition costs. A non-significant acquisition closed in Q2 for $2.7M; its purchase-price allocation remained preliminary.
- Customer concentration is notable: the 10 largest customers represented 45% of sales in both first-half 2018 and 2017. The filing also cites demand volatility, customer/program transitions, component shortages, international and currency exposure, and sensitivity to manufacturing utilization and mix.
- Management said ordinary-course legal matters were not expected to materially adversely affect financial position or results. It reported no material change to 2017 10-K risk factors, no significant off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether sales growth converts into improved gross and operating margins, particularly as new programs ramp and sector mix changes.
- Whether inventory growth and negative operating cash flow reverse as program ramps progress and working-capital demands normalize.
- The ongoing tax effects of foreign-earnings repatriation, GILTI, and the expiration or renewal of foreign tax incentives.
- Terms and utilization of the replacement credit facilities, including leverage, interest costs, covenant compliance and available liquidity.
- Capital spending, restructuring execution, customer concentration, and the sustainability of dividends and repurchases.