Benchmark Electronics, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are to the corresponding 2019 periods. Benchmark provides product design, engineering, technology and advanced manufacturing services to aerospace and defense, medical, industrial, semiconductor capital equipment, computing and telecommunications customers.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $526.0 million | $555.2 million | $1,531.9 million | $1,759.7 million |
| Gross profit / margin | $46.4 million / 8.8% | $49.0 million / 8.8% | $124.4 million / 8.1% | $148.2 million / 8.4% |
| Operating income / margin | $8.7 million / 1.6% | $9.8 million / 1.8% | $13.3 million / 0.9% | $37.8 million / 2.1% |
| Net income | $5.9 million | $7.1 million | $6.4 million | $30.4 million |
| Diluted EPS | $0.16 | $0.19 | $0.17 | $0.77 |
- Cash flow: Nine-month operating cash flow was $25.6 million, down from $57.3 million. Investing activities used $26.5 million, including $26.1 million of property, plant and equipment additions; financing activities used $29.7 million. Cash, cash equivalents and restricted cash decreased $29.1 million to $334.8 million.
- Liquidity: Working capital was approximately $0.7 billion, broadly unchanged from year-end 2019. Cash and cash equivalents were $329.6 million, with another $5.3 million restricted. Management believes cash and operating cash flow will meet requirements for at least the next 12 months.
- Debt: Credit-agreement borrowings were $153.8 million: $138.8 million under the term loan and $15.0 million under the revolver. The company reported $481.3 million available under the revolving facility, subject to covenants, and said it was in compliance with covenants. The term loan matures in 2023; most of it was effectively fixed at 2.928% plus the applicable margin through an interest-rate swap.
- Shareholder returns: Nine-month dividends paid were $17.2 million; a $0.16-per-share quarterly dividend was paid October 14, 2020. The company repurchased $19.3 million of shares year to date, but none during Q3; $210.1 million remained authorized. Management noted dividends are not guaranteed and are subject to business conditions and debt restrictions.
Material changes and operating trends
- Sales declined 5% in Q3 and 13% for the first nine months. The year-to-date decline reflected COVID-19 disruption and the previously announced exit from a legacy computing contract.
- Q3 higher-value market revenue was broadly flat year over year: medical rose 5% and semiconductor capital equipment rose 45%, while industrials fell 25% and aerospace and defense fell 9%. Traditional markets declined 21%, including computing down 26% and telecommunications down 17%.
- For the first nine months, medical sales increased 12% and semiconductor capital equipment increased 37%; computing fell 61%, principally due to the legacy contract exit. Telecommunications declined 29%.
- Q3 gross margin remained 8.8%; year-to-date margin declined to 8.1% from 8.4%. Management attributed pressure primarily to lower sales, COVID-related productivity disruption, additional labor and protective-equipment costs, and under-absorbed fixed costs.
- Nine-month net income fell by $24.0 million, primarily from lower gross profit and higher restructuring and other costs. SG&A declined in dollars but rose as a share of sales, partly reflecting lower volume and a $2.2 million bad-debt provision.
Outlook, risks and unusual items
- Outlook: Management expected Q4 2020 revenue to be in line with Q3 levels and did not expect the usual seasonal increase, citing cautious customer demand signals and economic and geopolitical uncertainty. Planned capital expenditures for the next 12 months were approximately $45–50 million. The filing provides no numerical earnings guidance.
- COVID-19: Facility shutdowns and restrictions, supply-chain and labor constraints, lower productivity, added costs and fixed-cost under-absorption affected 2020 results. Operations had essentially returned to pre-pandemic productivity by the filing date, but management warned that renewed outbreaks or restrictions could disrupt operations and demand. The extent and duration of effects remained uncertain.
- Restructuring and impairments: Nine-month restructuring charges and other costs were $15.5 million in the income statement. Separately, the company disclosed $6.7 million of asset impairment costs ($5.7 million Americas and $1.0 million Asia); these were included in restructuring and other costs.
- Ransomware insurance recovery: The company collected $6.6 million in insurance recoveries during the first nine months and recorded net recovery of $1.3 million for the period. Further recoveries would be recorded only when considered probable. The company reported no evidence that customer or employee data was exfiltrated.
- Other risks: The ten largest customers represented 42% of nine-month sales. Risks include customer concentration and credit, component shortages, inventory obsolescence, international operations and currency exposure, and compliance with credit-facility covenants. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. No significant off-balance-sheet arrangements were reported.
- Controls: Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q4 sales tracked management’s expectation of Q3-like levels, and how COVID-19 affected customer demand, facility productivity and supply availability.
- Whether improving medical and semiconductor capital equipment demand offsets continued weakness in industrial, aerospace, computing and telecommunications markets.
- Cash generation and working-capital trends, especially inventory growth, customer deposits, and the impact on liquidity of ongoing capital expenditure and dividend plans.
- Debt levels, covenant headroom, revolver availability and interest costs, particularly if operating performance weakens.
- Progress on restructuring and impairment actions, and the timing and amount of any additional ransomware insurance recoveries.
- Customer concentration, bad-debt exposure and the sustainability of the dividend and any future share repurchases.