Benchmark Electronics, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are against December 31, 2013. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Benchmark provides electronics manufacturing and related engineering services to OEMs across industrial control, telecommunications, medical, testing and instrumentation, and business-computer markets. Q1 growth primarily reflected the Suntron and CTS acquisitions, new programs, and new customers.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Sales | $639.3 | $542.4 | +18% |
| Gross profit / margin | $51.1 / 8.0% | $36.8 / 6.8% | +39%; +1.2 percentage points |
| Operating income / margin | $22.4 / 3.5% | $14.0 / 2.6% | +60% |
| Net income / net margin | $19.1 / 3.0% | $11.5 / 2.1% | +66% |
| Diluted EPS | $0.35 | $0.21 | +$0.14 |
| Operating cash flow | $60.7 | $48.6 | +$12.1 |
Management attributed improved gross margin primarily to higher volumes, program mix, and acquisitions. Sales rose in industrial control (+19%), telecommunications (+22%), medical devices (+5%), and testing and instrumentation (+96%); business-computer sales fell 5%. The largest customer accounted for 10% of sales versus 15% a year earlier; the ten largest accounted for 50% versus 52%.
Cash, liquidity, debt, and investment
- Cash and equivalents were $394.2 million at March 31, up from $345.6 million at year-end; $336.2 million was held outside the U.S. and intended to remain invested in foreign operations.
- Current assets were $1,342.6 million and current liabilities $376.2 million, implying working capital of $966.4 million. The company reported working capital of $944.5 million at year-end.
- Operating cash flow of $60.7 million included a $94.8 million decrease in receivables, offset in part by a $46.5 million inventory increase and a $21.1 million decrease in accounts payable. Inventory rose to $443.2 million, supporting program ramps expected in Q2 and Q3.
- Investing cash use was $13.6 million, including $14.5 million of property, plant, and equipment purchases. Financing cash provided was $1.6 million, including $5.8 million from option exercises and $4.5 million of share repurchases.
- No borrowings were outstanding under the $200 million U.S. revolver; $199.2 million was available, with $0.8 million in letters of credit. The company was in covenant compliance. It also had no borrowings under its approximately $10.7 million Thai facility.
- Capital lease obligations totaled approximately $10.0 million. The filing reports no significant off-balance-sheet arrangements.
- Long-term auction-rate investments had a $9.9 million carrying value and $1.4 million cumulative unrealized loss; they were valued using Level 3 inputs and had contractual maturities exceeding ten years.
Material changes, outlook, and risks
- The Suntron and CTS acquisitions contributed to growth; CTS also drove most of the $2.1 million in restructuring, integration, and acquisition-related charges. Q1 included a $1.6 million Thailand flood insurance gain; the insurance recovery process was complete.
- The effective tax rate was 15.0%, compared with 19.5%. A retroactive extension of a Chinese tax incentive produced a $1.2 million discrete tax benefit. Tax incentives reduced Q1 tax expense by approximately $3.2 million, versus $1.3 million in Q1 2013.
- Management expected 2014 capital expenditures of approximately $40–$50 million, principally for machinery and equipment, and believed cash and operating cash flows would meet liquidity needs for the next twelve months. No specific sales or earnings guidance was provided.
- Risks include customer concentration and customer demand/product obsolescence, competitive pressure on margins, component shortages, international and foreign-exchange exposure, and the inability to obtain adequate cost-effective flood insurance for Thai facilities. The company had no foreign-currency hedges at quarter-end.
- The company carried a $21.3 million reserve for uncertain tax benefits, including interest and penalties. An $8.0 million Thai tax refund claim remained under appeal, with a $7.1 million reserve previously recorded against it. Management stated ordinary-course litigation was not expected to have a material adverse effect; it reported no material changes to previously disclosed risk factors.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported sales and profit growth came from acquisitions versus organic growth, and whether acquired programs sustain margins.
- Whether expected program ramps convert the higher inventory balance into sales and cash without excess or obsolete inventory.
- The durability of the improved gross margin and the effect of integration costs, restructuring, and competitive pricing.
- The sustainability of low tax expense given the discrete Chinese tax benefit and tax holidays, and the outcome of the Thai refund claim and uncertain tax positions.
- Exposure from customer concentration, component supply constraints, and uninsured natural-disaster risk in Thailand.
- Use of the remaining $42.3 million share-repurchase authorization and delivery of the stated $40–$50 million capital-expenditure plan.