Business context and reporting period
Benchmark Electronics, Inc. provides global electronics manufacturing, design, and related services to original equipment manufacturers in industrial control, enterprise computing, telecommunications, testing and instrumentation, and medical devices. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $585.5 million | $589.4 million | $1,123.9 million | $1,161.4 million |
| Gross profit / margin | $37.8 million / 6.4% | $46.3 million / 7.8% | $75.4 million / 6.7% | $91.5 million / 7.9% |
| Operating income | $14.2 million | $23.2 million | $29.9 million | $44.2 million |
| Net income | $14.7 million | $20.1 million | $29.2 million | $38.3 million |
| Diluted EPS | $0.24 | $0.32 | $0.48 | $0.60 |
For the six months, operating cash flow was $11.7 million, versus cash used of $18.5 million in 2010. Investing used $29.5 million, including $36.3 million of property and equipment additions; financing used $23.4 million, including $24.7 million of share repurchases. Cash fell to $306.5 million from $346.3 million at year-end 2010. Working capital was $892.9 million.
At June 30, 2011, the company had no borrowings under its $100 million revolving facility and the full amount was available; it was in covenant compliance. Thailand had no borrowings under its approximately $11.3 million facility. Balance-sheet capital lease obligations totaled approximately $11.2 million. Long-term investments were $28.9 million at fair value ($32.0 million par value), consisting of illiquid auction-rate securities; the company reported a $3.1 million accumulated unrealized loss and no identified credit loss.
Material changes versus prior period
- Q2 sales declined 1%; first-half sales declined 3%. First-half sales in enterprise computing, medical devices, and telecommunications fell 15%, 16%, and 2%, respectively, partly offset by growth in testing and instrumentation and industrial control.
- Gross profit fell 18% in both the quarter and first half. Management cited $3.1 million in settlement costs related to a major program transfer, new-program ramp costs, and capacity expansion costs that contributed to underabsorbed overhead.
- First-half net income declined $9.1 million. First-half effective tax rate was 4.0%, compared with 11.7% in 2010; a $0.6 million discrete China tax benefit contributed. Foreign tax incentives lowered first-half tax expense by approximately $5.5 million.
- Americas segment sales declined while Asia and Europe segment sales increased in Q2; Asia operating income fell to $8.2 million from $14.9 million. The company repurchased and retired 1.453 million shares during the first half.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management estimated next-12-month capital expenditures of $40 million to $50 million, principally for machinery and equipment, and said cash and expected operating cash flows should meet liquidity needs over the next 12 months.
- The company expected approximately $2.5 million of additional restructuring charges in the second half of 2011 related to closing its Dublin facility. Q2 included $0.5 million of restructuring charges.
- Customer concentration is significant: the ten largest customers accounted for 53% of Q2 sales and 53% of first-half sales; IBM represented 13% of Q2 sales. Demand changes, customer losses, component shortages, program transfers, utilization, and pricing pressure could affect results and cash flows.
- A lawsuit by Power Paper seeks up to $22.8 million. Trial was scheduled to begin September 12, 2011; management said a plaintiff recovery was not probable, recorded no accrual, and could not reasonably estimate any potential liability.
- During Q2, the company corrected immaterial inventory-costing and consigned-inventory errors in prior periods, including a $0.8 million increase in Q1 2011 cost of sales and decrease in net income. The revisions did not affect operating cash flows.
- The filing reported an $18.2 million reserve for uncertain tax benefits, including interest and penalties, and a pending $7.8 million Thailand tax refund claim under examination. It also noted foreign tax holidays expiring on various dates through 2015.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No significant off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether margins recover as program-transfer settlements, ramp-up costs, and capacity expansion effects subside.
- Customer demand, customer concentration, program transitions, component availability, and utilization trends.
- Execution and cost of the Dublin closure, and whether the anticipated restructuring charges remain within estimates.
- Cash conversion and inventory growth, capital spending, and the pace of share repurchases.
- Liquidity and valuation developments for auction-rate securities, plus outcomes of the Power Paper litigation and tax matters.
- Effects of tax incentives and any future changes in U.S. deferred-tax-asset valuation allowances.