BENCHMARK ELECTRONICS INC quarterly report, Q3 FY2012

Benchmark Electronics, Inc. — Q3 2012 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2012. The interim financial statements are unaudited. Benchmark provides worldwide electronics manufacturing and related engineering services to OEMs across computing, industrial, telecommunications, medical, and testing and instrumentation markets.

Financial performance and position

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Sales	$610.8 million	$570.1 million	$1,834.2 million	$1,693.9 million
Gross profit / margin	$44.8 million / 7.3%	$34.6 million / 6.1%	$131.3 million / 7.2%	$110.0 million / 6.5%
Income from operations	$24.9 million	$11.6 million	$51.0 million	$41.6 million
Net income	$19.3 million	$19.9 million	$38.5 million	$49.1 million
Diluted EPS	$0.34	$0.34	$0.67	$0.81

Q3 sales increased 7%; nine-month sales increased 8%. Growth came primarily from existing customers and new program wins. Nine-month sales rose in computing, telecommunications, medical devices, and industrial control, while testing and instrumentation fell 26%.
Q3 operating income improved substantially, while net income was slightly lower year over year. Nine-month net income declined largely because 2011 included significant tax benefits, including a valuation-allowance reduction.
Cash from operations was $70.3 million for the first nine months, versus $0.2 million in 2011. The 2012 total included a $29.4 million decrease in prepaid expenses and other assets, primarily associated with Thailand flood insurance recoveries; accounts receivable growth used $30.8 million.
Cash was $325.8 million at September 30, up from $283.9 million at year-end 2011. Working capital was $869.0 million. Cash outside the U.S. was $225.0 million and was generally intended to remain invested in foreign operations.
Investing activities used $1.9 million and financing activities used $29.1 million in the first nine months. Capital expenditures were $34.5 million; share repurchases were $31.4 million.
No borrowings were outstanding under the $200 million U.S. revolving credit facility, which matures July 2017; the company reported compliance with its covenants. Thailand also had an approximately $11.3 million working-capital facility with no borrowings. Capital lease obligations totaled approximately $10.7 million.

Material changes and unusual items

Gross margin improved year over year, reflecting higher sales, new programs, cost controls, and the absence of $3.5 million in 2011 settlement costs associated with transferring a major program. Management cautioned that early-stage programs, product mix, utilization, and competitive pricing can pressure margins.
Thailand flood-related charges, net of insurance, were a $3.1 million credit in Q3 and an $11.8 million expense for the first nine months. The company recorded $16.0 million of additional charges and $4.2 million of related insurance recoveries during the nine-month period. It had collected the insurance receivable recorded for previously identified property losses and flood costs, but said timing of further recoveries was uncertain.
The effective tax rate was 24.4% for the first nine months of 2012, versus a 17.0% benefit in 2011. 2011 included material deferred-tax valuation-allowance benefits and other discrete tax items. 2012 foreign tax incentives reduced tax expense by approximately $5.9 million.
The company repurchased 2.2 million shares for $31.4 million during the first nine months. At September 30, $3.8 million remained under the 2010 repurchase authorization; a further $100 million program had been approved in June 2012.

Outlook, risks, and contingencies

No specific sales or earnings guidance is provided. Management expected capital expenditures of approximately $35–$45 million over the next 12 months, plus up to $5 million for Thailand facility recovery, and said cash and operating funds should meet liquidity needs over the next 12 months.
Management did not expect significant additional Thailand flood charges. However, the company could not obtain adequate cost-effective flood insurance for its Thailand assets; a significant uninsured loss could materially affect results and financial condition.
Customer concentration is significant: the top ten customers generated 55% of Q3 sales and 57% of nine-month sales; the largest customer represented 20% in both periods. Demand fluctuations, customer loss or nonpayment, component shortages, and product obsolescence are risks.
Testing and instrumentation demand weakened amid a semiconductor-industry slowdown and global economic uncertainty. The company also cited risks from international operations, foreign exchange, political and economic conditions, and natural disasters.
Approximately $14.0 million fair value of auction-rate securities remained illiquid, with $17.0 million par value and maturities over ten years. The company reported a $3.0 million unrealized loss and no identified credit loss.
Uncertain tax-benefit reserves, including interest and penalties, totaled $21.4 million. Thailand tax authorities rejected an $8.3 million refund claim for prior-year taxes; the company had reserved $7.1 million for the claim and planned to appeal. Management said ordinary-course legal matters were not expected to have a material adverse effect.

Important facts for investors to verify

Whether new-program growth and improved gross margins are sustainable, especially given weakness in testing and instrumentation and potential pricing pressure.
Customer concentration, particularly the largest customer’s 20% contribution to sales, and subsequent demand or program changes.
Further Thailand insurance recoveries, remaining flood-related costs, and the availability and cost of replacement flood-risk coverage.
Tax developments, including the Thailand refund appeal, uncertain-tax reserves, foreign tax incentives, and the effect of tax items on reported earnings.
Cash generation and working-capital requirements as receivables rise, alongside planned capital spending and share repurchases.