Benchmark Electronics, Inc. — Q3 2015 Form 10-Q
Business and period: Benchmark provides integrated manufacturing, design and engineering services to OEMs in industrial, telecommunications, computing, medical, and test and instrumentation markets. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $630.2m | $731.3m | $1,915.2m | $2,087.5m |
| Gross profit / margin | $54.3m / 8.6% | $55.3m / 7.6% | $161.8m / 8.4% | $164.2m / 7.9% |
| Operating income / margin | $26.1m / 4.1% | $21.9m / 3.0% | $71.1m / 3.7% | $71.5m / 3.4% |
| Net income | $20.6m | $16.9m | $56.0m | $57.9m |
| Diluted EPS | $0.40 | $0.31 | $1.07 | $1.06 |
- Cash flow: Nine-month operating cash flow was $118.7m, versus $113.4m in 2014. Investing used $32.2m, including $32.0m of property, plant and equipment additions; financing used $50.8m, including $52.3m of share repurchases. Cash increased $34.7m from year-end 2014.
- Liquidity and debt: September 30 cash was $462.1m, current assets $1,392.2m, current liabilities $341.2m, and working capital approximately $1.1bn. No borrowings were outstanding under the $200m revolving facility; $198.4m was available, net of letters of credit. Capital lease obligations totaled $9.0m. The company reported compliance with credit covenants.
- Balance sheet and capital returns: Total assets were $1,667.1m and shareholders’ equity $1,298.3m. The company repurchased $52.3m of shares in the first nine months and had $50.7m remaining under its repurchase authorization at quarter-end.
Material changes and operating trends
- Sales declined 14% in Q3 and 8% year to date. Telecommunications sales fell 36% in Q3 and 19% year to date; computing and industrial sales also declined. Medical sales rose 15% in Q3 and 13% year to date. Test and instrumentation sales rose 17% in Q3 but declined 15% year to date, partly because a customer filed for bankruptcy in 2014.
- Management attributed telecommunications weakness to a major customer’s product lifecycle transition and broader order declines. The ten largest customers represented 48% of nine-month sales; IBM was the largest at 10%.
- Q3 gross margin improved from 7.6% to 8.6%; management noted the 2014 comparison included a $2.3m inventory write-down. Excluding that charge, Q3 margin was 7.9% in 2014. Nine-month 2015 margin of 8.4% compared with 8.0% in 2014 excluding the write-down. Management cited operational improvements, utilization, and revenue diversification.
- Q3 net income increased despite lower sales, while nine-month net income declined 3%. Nine-month diluted EPS was slightly higher, partly alongside a lower average share count.
- Restructuring charges and integration costs were $7.6m year to date, primarily associated with facility closures in the Americas. SG&A decreased year over year in dollars, but as a percentage of sales increased after excluding the prior-year receivables provision related to GT Advanced Technologies’ bankruptcy.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expected further Q4 telecommunications declines amid weak infrastructure spending and cautious customer demand. It estimated capital expenditures of $40m–$50m over the next 12 months and said existing cash and operating cash flow should meet expected liquidity needs.
- On October 20, 2015, Benchmark agreed to acquire Secure Technology for approximately $230m cash, debt-free and cash-free, subject to working-capital adjustment and customary closing conditions. The acquisition was expected to close in Q4 2015 and be funded through the bank credit facility. The company was negotiating an extension of that facility, potentially including a term loan.
- Approximately $408.8m of cash was held outside the U.S. and intended to remain invested abroad; repatriation could trigger additional U.S. and foreign taxes. Foreign tax incentives reduced nine-month tax expense by approximately $7.1m, and the China incentive was due to expire in December 2015 unless extended or renegotiated.
- Uncertain tax benefits, including interest and penalties, totaled $17.2m. Tax examinations remain open in multiple jurisdictions. Management said ordinary-course legal matters were not expected to materially affect financial position or results.
- Key risks include customer concentration, demand and program transitions, component shortages, manufacturing utilization and margin pressure, foreign exchange and international operating exposure, and potential uninsured losses. The company said it had not obtained adequate cost-effective flood insurance for its Thailand facilities.
- The filing corrected an immaterial foreign-currency receivable remeasurement error in previously reported 2014 figures. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether telecommunications demand and customer order weakness worsened in Q4, and the pace of program transitions.
- Secure Technology’s closing, final purchase price and working-capital adjustment, financing terms, and resulting leverage and liquidity.
- Whether China tax incentives were extended and how their expiration affects the effective tax rate.
- Whether margin gains persist as sales mix, production volumes, restructuring actions, and competitive pressures change.
- Cash availability and potential tax costs associated with foreign-held funds, alongside capital spending and continued share repurchases.
- Potential outcomes of uncertain tax positions, legal matters, component shortages, and uninsured exposure in Thailand.