Benchmark Electronics, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. Benchmark provides global electronics manufacturing, precision technology manufacturing, and engineering services to OEMs across industrial, telecom, enterprise computing, medical, and testing and instrumentation markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Sales | $620.9 | $639.3 |
| Gross profit / gross margin | $51.8 / 8.3% | $51.1 / 8.0% |
| Operating income / operating margin | $18.7 / 3.0% | $22.4 / 3.5% |
| Net income | $14.2 | $19.1 |
| Diluted EPS | $0.27 | $0.35 |
| Cash from operating activities | $(10.9) | $60.7 |
| Cash and cash equivalents | $383.6 at March 31, 2015 | $427.4 at December 31, 2014 |
Cost of sales was $569.1 million; SG&A was $28.2 million. Restructuring charges and integration costs totaled $4.9 million, versus $2.1 million a year earlier. Q1 2014 also included a $1.6 million net benefit from Thailand flood-related items. The effective tax rate was 19.5%, compared with 15.0%; excluding a discrete retroactive China tax benefit recorded in Q1 2014, the comparable 2014 rate was 19.5%.
Operating cash use reflected working-capital movements, including a $26.9 million inventory increase, a $33.0 million accounts-payable decrease, and a $28.4 million accounts-receivable decrease. Management said the inventory build supported higher business levels expected in Q2. Investing cash use was $16.4 million, primarily capital spending; financing cash use was $14.8 million, including $15.8 million of share repurchases. Cash declined by $43.8 million during the quarter. Working capital was approximately $1.0 billion.
There were no borrowings under the $200 million revolving credit facility; $198.8 million remained available after $1.2 million of letters of credit. The facility matures July 30, 2017, and the company reported compliance with its covenants. Capital lease obligations totaled $9.4 million, including $0.7 million current. No significant off-balance-sheet arrangements were reported.
Changes, segment and market trends
- Sales declined 3%, primarily because a testing and instrumentation customer declared bankruptcy in 2014. That industry’s sales fell 32%; enterprise computing declined 9% and telecom declined 2%. Industrial control sales rose 7% and medical devices rose 11%.
- Gross margin improved by 0.3 percentage points, which management attributed to operational-excellence initiatives, improved utilization, restructuring and a diversified revenue base. Operating income nevertheless fell 17%, reflecting higher restructuring and integration costs and the absence of the prior-year Thailand-related benefit.
- Americas and Asia operating income declined to $12.5 million and $16.2 million, respectively, from $15.6 million and $18.2 million. Europe operating income increased to $1.5 million from $0.8 million.
- Sales to the ten largest customers were 47% of revenue, down from 50%; no customer exceeded 10% of Q1 2015 sales. International operations represented 53% of sales.
- Foreign currency translation reduced other comprehensive income by $3.5 million. The company reported a $(1.1) million net other expense, compared with $0.03 million net other income a year earlier.
Outlook, risks and contingencies
Management expected capital expenditures of approximately $40–$50 million over the next 12 months, principally for machinery and equipment. It believed cash balances and operating cash generation would be sufficient for liquidity needs over the next 12 months. No numerical revenue or earnings guidance was provided. Management noted that Q2 business levels were expected to be higher, but results are not necessarily indicative of full-year performance.
- Demand, customer product success, program mix, capacity utilization and competitive pricing can affect sales and margins. A substantial portion of revenue comes from a limited number of customers; loss of a major customer could be adverse.
- Component shortages or allocation, inventory exposure, and timing of customer orders and supplier payments may disrupt production or cash flows.
- The company had been unable to renew or obtain adequate, cost-effective flood insurance for its Thailand facilities; a significant uninsured loss could materially harm results.
- Foreign operations expose the company to currency, regulatory, political, economic and natural-disaster risks. The company used natural hedging and a forward contract for certain currency exposures.
- Tax incentives lowered Q1 2015 tax expense by approximately $1.7 million, versus $3.2 million in Q1 2014; China incentives were due to expire in 2015 unless extended or renegotiated. Reserves for uncertain tax benefits, including interest and penalties, totaled $18.0 million at March 31, 2015.
- Ordinary-course legal matters were assessed by management as not expected to have a material adverse effect. The filing reported no material change to the risk factors in the 2014 10-K.
- The company was evaluating the new revenue recognition standard and expected adoption on January 1, 2018 under the proposed deferral; its impact and transition method had not yet been determined.
Most important facts for investors to verify
- Whether the Q1 cash outflow and inventory build convert into operating cash as expected, given the Q2 demand outlook.
- Whether restructuring delivers sustained utilization and margin benefits, and how the $4.9 million of Q1 charges affects future periods.
- Whether sales recover or weaken further in testing and instrumentation and other declining markets, and whether customer concentration changes.
- The durability of tax incentives and exposure from the $18.0 million uncertain-tax-benefit reserve.
- Insurance availability and potential uninsured exposure at Thailand facilities, alongside foreign exchange and component-supply risks.
- Execution of the $40–$50 million capital-spending plan and remaining share-repurchase authorization of $87.3 million at quarter-end.