Benchmark Electronics, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Benchmark provides global electronics manufacturing, design, engineering and related services. Financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $664.0 million | $716.9 million | $1,285.0 million | $1,356.2 million |
| Gross profit / margin | $55.7 million / 8.4% | $57.8 million / 8.1% | $107.5 million / 8.4% | $108.9 million / 8.0% |
| Operating income / margin | $26.2 million / 3.9% | $27.1 million / 3.8% | $44.9 million / 3.5% | $49.6 million / 3.7% |
| Net income | $21.2 million | $22.2 million | $35.4 million | $41.3 million |
| Diluted EPS | $0.40 | $0.41 | $0.67 | $0.76 |
- Q2 sales fell 7%; six-month sales fell 5%. Six-month net income declined about 14%.
- Q2 gross margin improved year over year, which management attributed to operational excellence, better utilization, restructuring and revenue diversification. Six-month operating margin nevertheless declined.
- Six-month operating cash flow was $41.1 million, down from $85.7 million a year earlier. The $44.4 million inventory increase was the principal working-capital use cited; accounts receivable decreased $18.6 million.
- Cash and cash equivalents were $409.3 million at June 30, versus $427.4 million at year-end. Working capital was approximately $1.04 billion. The current ratio was approximately 3.9.
- No revolving-credit borrowings were outstanding; $198.4 million was available under the $200 million facility, subject to its terms. Capital-lease obligations totaled approximately $9.2 million. The company reported compliance with credit covenants.
- Six-month capital expenditures were $24.3 million. Cash used in financing was $33.1 million, including $34.6 million of share repurchases. The company repurchased 798,875 shares in Q2 for $18.8 million; $68.5 million remained under its repurchase authorization.
Material changes and business drivers
- Sales weakness reflected the loss of a Test & Instrumentation customer that filed for bankruptcy in 2014, along with reduced Telecommunications demand versus strong prior-year program-driven demand. Q2 sector sales declined in Industrial Controls (5%), Telecommunications (14%), Computing (7%) and Test & Instrumentation (17%); Medical increased 11%.
- For the first six months, Medical sales rose 11%, while Test & Instrumentation fell 25%, Telecommunications and Computing each fell 8%, and Industrial Controls rose 1%.
- Restructuring charges and integration costs were $6.5 million for the first half of 2015, mainly associated with facility closures in the Americas, versus $4.0 million in the first half of 2014.
- The effective tax rate was 20.0% for the first half, compared with 17.3% in 2014; the prior period benefited from a discrete tax incentive adjustment. Foreign tax incentives reduced first-half 2015 tax expense by approximately $4.6 million, compared with $6.5 million in 2014.
Outlook, risks and unusual items
- Management expected capital expenditures of approximately $40–$50 million over the next 12 months and said cash, operating cash flows and available credit were expected to meet liquidity needs for at least 12 months. The filing does not provide specific revenue or earnings guidance.
- Management cited customer demand and concentration, new-program ramp costs, competitive margin pressure, manufacturing utilization, component shortages, foreign currency and international operating risks. The ten largest customers represented 48% of first-half sales; no customer exceeded 10% in that period.
- Cash held outside the U.S. was $352.6 million and was intended to be permanently reinvested; repatriation could result in additional U.S. and foreign withholding taxes. China tax incentives were due to expire in 2015 unless extended or renegotiated.
- The company had a $17.9 million reserve for uncertain tax benefits, including interest and penalties. Tax examinations remained open across multiple jurisdictions and years. Management believed tax liabilities were adequately provided for.
- Benchmark said it had been unable to obtain adequate cost-effective flood insurance for its Thailand facilities and warned that a significant uninsured loss could materially affect results. Ordinary-course legal matters were not expected by management to have a material adverse effect. No material changes to the 2014 Form 10-K risk factors were reported.
- The company was evaluating new inventory and revenue-recognition accounting standards. The new revenue standard was scheduled for adoption on January 1, 2018; the company had not selected a transition method.
Important facts for investors to verify
- Whether demand recovers in Telecommunications, Computing and Test & Instrumentation, and how the bankruptcy-related customer loss affects future sales.
- Whether higher gross margins can be sustained despite lower sales, restructuring costs and competitive pressure.
- Whether inventory levels convert to cash and operating cash flow improves after the first-half increase in inventory.
- Whether China tax incentives are extended and how tax audits or uncertain tax positions affect cash taxes and earnings.
- Progress and returns from restructuring, capital spending and the remaining share-repurchase authorization; also review the risks from uninsured Thailand exposure and foreign-held cash.