Benchmark Electronics, Inc. — Q2 2013 Form 10-Q
Business context and period. Benchmark provides integrated electronics manufacturing services to OEMs across computer and enterprise products, industrial control and aerospace/defense, telecommunications, medical devices, and testing and instrumentation. This unaudited report covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless stated otherwise. Financial statement amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $607.5 | $630.0 | $1,150.0 | $1,223.4 |
| Gross profit / margin | $44.4 / 7.3% | $46.0 / 7.3% | $81.2 / 7.1% | $86.5 / 7.1% |
| Operating income / margin | $12.8 / 2.1% | $18.3 / 2.9% | $26.8 / 2.3% | $26.1 / 2.1% |
| Net income | $8.5 | $13.6 | $19.9 | $19.2 |
| Diluted EPS | $0.16 | $0.24 | $0.36 | $0.33 |
- Q2 sales fell 4% and net income fell 38% year over year. For the first half, sales declined 6%, while net income rose 4%; the filing attributes the year-to-date improvement primarily to Thailand flood-related charges in 2012.
- Six-month operating cash flow was $61.2, versus $17.6 in 2012. Cash and equivalents were $398.9 at June 30, 2013, up from $384.6 at year-end 2012. Working capital was $898.3.
- At June 30, current assets were $1,258.5 and current liabilities $360.2. The company had no borrowings under its $200 million U.S. revolving facility; $199.2 was available after letters of credit. Capital lease obligations totaled $10.4, including current installments.
- Six-month investing cash use was $30.9, including $19.3 for Suntron net of acquired cash and $11.9 in property and equipment additions. Financing cash use was $15.5, including $21.2 in share repurchases.
Material changes and notable items
- Lower demand, particularly in computers/enterprise and testing/instrumentation, and lower telecommunications sales drove the revenue decline. Q2 computer/enterprise sales fell 10%, telecommunications 14%, and testing/instrumentation 20%; medical devices rose 15% and industrial control rose 12%.
- Sales to the ten largest customers were 53% of Q2 sales, compared with 58% a year earlier; the largest customer accounted for 18%, compared with 21%. International operations generated 52% of first-half sales.
- Benchmark acquired Suntron on June 3 for $19.3 million cash, adding facilities in Phoenix and Tijuana and strengthening aerospace/defense capabilities. Suntron contributed approximately $7.4 million in reported-period sales; its net income was not significant.
- First-half restructuring and integration charges were $6.1 million, mainly associated with capacity reductions and closures in Brazil and Singapore. The company also recorded a $3.8 million non-cash impairment on a Tianjin, China facility held for sale, and a $1.2 million gain on a Thailand property disposal.
- Q2 operating income included $5.7 million of restructuring/integration charges and $2.6 million of impairment and other charges. In 2012, the comparable periods included Thailand flood-related charges of $4.7 million in Q2 and $14.9 million for the first half.
Outlook, risks, and contingencies
- Management expected $1–$2 million of additional restructuring charges in the second half of 2013, approximately $4 million in annualized savings from the 2013 initiatives, and savings to begin appearing in Q4 2013. Planned capital expenditures for the next 12 months were approximately $35–$45 million.
- Management said existing cash and operating cash generation should meet liquidity needs for at least the next 12 months. The company had $66.8 million remaining under its share repurchase authorization at June 30; repurchases are discretionary.
- The first-half effective tax rate was 24.4%, versus 26.2% in 2012. A $0.8 million discrete tax benefit related to the American Taxpayer Relief Act was recorded in 2013. Tax incentives reduced first-half tax expense by approximately $2.4 million, compared with $3.9 million in 2012; China’s incentive had expired, and Benchmark planned to apply for a new one in the second half of 2013.
- Uncertain tax benefits, including interest and penalties, totaled $21.3 million. A Thailand subsidiary’s $8.4 million tax refund claim for 2004–2005 had been rejected and was under appeal; a $7.1 million reserve had been recorded against the claim.
- Thailand flood damage disrupted operations in 2011. The company said it could not obtain adequate cost-effective flood insurance for its Thailand facilities and could not estimate the timing of any additional insurance recoveries. A significant uninsured loss could materially harm results.
- Auction-rate securities had a $10.6 million fair value, were illiquid, and were valued using Level 3 inputs; the filing reported a $1.6 million unrealized loss and no identified credit loss. The company also cited customer concentration, demand and component-supply uncertainty, foreign currency and geopolitical exposure, and the risk that new programs or lower utilization pressure margins.
- Management reported no material adverse effect expected from ordinary-course legal proceedings, no significant off-balance-sheet arrangements, and effective disclosure controls as of period-end. The filing does not provide a numerical full-year sales or earnings forecast.
Important facts for investors to verify
- Whether demand and program timing improve in the weaker computer, telecom, and testing/instrumentation markets, and how customer concentration evolves.
- Whether the projected restructuring savings are realized on schedule and exceed the remaining restructuring costs.
- Suntron’s final purchase-price allocation and subsequent contribution to revenue and profitability.
- Liquidity and realizable value of auction-rate securities, and status of the Thailand tax refund appeal and uncertain-tax-benefit reserves.
- Progress on a replacement Chinese tax incentive and the effect of expiring or changing foreign tax incentives on the effective tax rate.
- Thailand flood-risk mitigation and whether the company obtains adequate insurance or other protection for its facilities.