Benchmark Electronics, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter ended September 30, 2014; comparisons are with the quarter and nine months ended September 30, 2013, unless noted. Benchmark provides global electronics manufacturing and related engineering services. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales | $731.3 | $599.7 | $2,087.5 | $1,749.6 |
| Gross profit / margin | $55.3 / 7.6% | $45.4 / 7.6% | $164.2 / 7.9% | $126.6 / 7.2% |
| Operating income / margin | $21.9 / 3.0% | $29.5 / 4.9% | $71.5 / 3.4% | $56.2 / 3.2% |
| Net income | $17.2 | $23.7 | $58.4 | $43.7 |
| Diluted EPS | $0.32 | $0.43 | $1.07 | $0.80 |
- Q3 sales grew 22%; nine-month sales grew 19%. Management attributed growth mainly to demand from existing customers, new programs and customers, and the Suntron and CTS acquisitions.
- Q3 net income fell 28% year over year despite higher sales. Operating income declined about 26%, in part because the prior-year quarter included a $9.7 million net Thailand flood-related insurance benefit; Q3 2014 had no such benefit. The 2014 quarter also included a $5.0 million GT Advanced Technologies-related charge.
- Excluding the $2.3 million inventory write-down related to GT Advanced Technologies, Q3 gross margin was 7.9%, versus 7.6% a year earlier. Nine-month gross margin was 7.9% as reported, or 8.0% excluding that charge, versus 7.2% in 2013.
- Nine-month income tax expense was $12.4 million, an effective rate of 17.5%, versus $12.7 million and 22.6% in 2013. Management cited foreign tax incentives and income mix. Tax incentives reduced nine-month 2014 tax expense by approximately $10.0 million, or $0.18 per diluted share.
Cash, liquidity and capital
- At September 30, cash and cash equivalents were $420.2 million, up from $345.6 million at year-end 2013; $362.4 million was held outside the United States and was generally intended to remain invested in foreign operations.
- Nine-month operating cash flow was $113.9 million, versus $99.9 million. Capital expenditures were $35.7 million; operating cash flow less capital expenditures was approximately $78.2 million. Inventory increased $38.6 million and accounts receivable decreased $24.7 million in the period.
- Working capital was $1,005.5 million, compared with $944.5 million at December 31, 2013. Current assets were $1,424.8 million and current liabilities $419.3 million.
- No borrowings were outstanding on the $200 million revolving credit facility; $198.8 million was available after letters of credit. Capital lease obligations totaled approximately $9.7 million. The company reported compliance with credit-facility covenants.
- Nine-month financing cash outflow was $13.2 million, including $25.0 million of share repurchases and $11.7 million of stock-option exercise proceeds. The repurchase authorization had $21.8 million remaining at September 30.
Changes, outlook and risks
- Sales increased across most end markets, led in Q3 by telecommunications equipment (+91%) and industrial control equipment (+20%); computer and related business-enterprise sales fell 14%. Two customers each exceeded 10% of Q3 sales and together represented 25%; the ten largest customers accounted for 51%.
- Management expected capital expenditures of approximately $45 million to $55 million over the next 12 months, principally for machinery and equipment. It stated that cash and expected operating cash flows should meet liquidity needs for the next 12 months. No specific revenue or earnings guidance is provided in the filing.
- On October 6, 2014, GT Advanced Technologies filed for bankruptcy. Benchmark recorded a $2.3 million inventory write-down and $2.7 million accounts-receivable provision in Q3; management said actual losses could differ and it continued to monitor the matter.
- Other disclosed risks include customer concentration and demand volatility, competitive pressure and capacity utilization affecting margins, component shortages, international and foreign-exchange exposure, and limited access to cost-effective flood insurance for Thai facilities. The company had no foreign-currency hedges at period-end. It also reported $21.3 million in reserves for uncertain tax benefits, including interest and penalties, and an appealed Thai tax refund claim.
- The company planned to adopt the new revenue-recognition standard on January 1, 2017, was evaluating its effects and had not selected a transition method. Management said no other recently issued accounting standards were expected to have a material impact.
- Management described ordinary-course legal matters as not expected to have a material adverse effect and reported no material changes to the risk factors in its 2013 Form 10-K. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Assess whether the Q3 earnings decline reflects the prior-year Thailand insurance benefit, the GT Advanced Technologies charge, ongoing costs, or a combination of factors.
- Verify the recoverability of the GT Advanced Technologies receivable and inventory balances and any further exposure after the bankruptcy.
- Monitor customer concentration, end-market mix, program transitions and margin performance, especially given the gap between sales growth and Q3 operating-income growth.
- Track inventory growth, working-capital requirements, cash generation and planned capital spending.
- Review the sustainability of tax benefits, expiring foreign tax incentives, uncertain tax positions and the disputed Thai refund claim.
- Consider the location and potential repatriation tax costs of foreign-held cash, alongside the company’s insurance, currency, component-supply and credit-covenant exposures.