Benchmark Electronics, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results; dollar amounts below are in millions unless otherwise noted. Benchmark provides global electronics manufacturing and related engineering services across the Americas, Asia and Europe.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $599.7 | $610.8 | $1,749.6 | $1,834.2 |
| Gross profit / margin | $45.4 / 7.6% | $44.8 / 7.3% | $126.6 / 7.2% | $131.3 / 7.2% |
| Operating income / margin | $29.5 / 4.9% | $24.9 / 4.1% | $56.2 / 3.2% | $51.0 / 2.8% |
| Net income | $23.7 | $19.3 | $43.7 | $38.5 |
| Diluted EPS | $0.43 | $0.34 | $0.80 | $0.67 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $99.9 | $70.3 |
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $426.6, up from $384.6 at year-end 2012. Working capital was $924.7.
- Current assets were $1,288.3 and current liabilities $363.7. Inventories rose to $395.0 from $324.0 at December 2012; accounts receivable was $423.6.
- No borrowings were outstanding under the $200 million U.S. revolving facility; $199.2 million was available, net of letters of credit. The company reported compliance with its covenants. Capital lease obligations totaled approximately $10.2 million; no other outstanding borrowings are reported.
- Nine-month investing cash use was $37.6, including $19.3 for Suntron and $18.3 of property, plant and equipment. Financing cash use was $20.4, including $30.7 of share repurchases, partly offset by $10.4 of option-exercise proceeds.
Changes versus comparable periods
- Q3 sales fell 2% year over year; nine-month sales declined 5%. Lower demand and timing of program ramps were cited, particularly in telecommunications and enterprise computing.
- Q3 gross margin improved 0.3 percentage points, primarily from program mix and Suntron. Nine-month gross margin was unchanged, while gross profit dollars declined 4% with lower sales.
- Q3 net income rose 23% and nine-month net income rose 13%. Results benefited materially from Thailand flood-insurance recoveries, alongside improved operating income and lower share counts.
- By industry, Q3 industrial controls, medical devices, and testing/instrumentation grew 12%, 11%, and 40%, respectively; telecommunications fell 29%. For the nine months, industrial controls and medical devices increased 8% and 18%, while telecommunications and enterprise computing declined 17% and 12%.
Outlook, commentary, risks and unusual items
- Management expected 2013 restructuring actions to generate about $4 million in annualized savings, with some savings beginning in Q4 2013; it anticipated approximately $2 million of additional restructuring charges in Q4. These actions included Brazil and Singapore facility closures.
- Expected capital expenditures for the next 12 months were $35–$45 million. Management said existing cash and operating cash flow should meet liquidity needs over the next 12 months. No specific revenue or earnings guidance is provided in the filing.
- Thailand flood-related items provided a $9.7 million benefit in both Q3 and the nine-month period, reflecting insurance proceeds, against $0.1 million of flood costs during the nine months. Further recoveries remained under negotiation, with timing and ultimate amount uncertain. The company said it could not obtain adequate, cost-effective flood insurance for its Thailand facilities.
- Suntron was acquired June 3 for $19.3 million cash, adding facilities in Arizona and Mexico and expanding aerospace and defense capabilities. CTS’s EMS segment was acquired October 2, after quarter-end, for $75 million; it adds five locations and approximately 1,000 employees.
- Other unusual items included a non-cash impairment related to a Tianjin, China facility held for sale and a $1.2 million gain on disposal of a Thailand facility. The filing gives different impairment figures in its financial statement line item and narrative; see verification points below.
- Customer concentration remains significant: the largest customer represented 15% of Q3 sales and 16% of nine-month sales; the ten largest represented 52% in each 2013 period. Risks also include demand volatility, component shortages, inventory obsolescence, international operations and currency exposure; the company reported no foreign-currency hedges.
- Uncertain tax benefits, including interest and penalties, totaled $21.3 million. A Thailand subsidiary’s $8.4 million tax refund claim had been rejected and was under appeal; a $7.1 million reserve had been recorded against the claim. Management said ordinary-course legal proceedings were not expected to materially affect results.
Important facts for investors to verify
- How much of Q3 earnings and operating margin reflects the $9.7 million Thailand insurance benefit, and whether additional recoveries will be recognized.
- Reconciliation of the Tianjin impairment disclosures: the income statement reports $2.6 million for “asset impairment charge and other,” while the MD&A describes a $3.8 million impairment and the cash-flow statement lists $4.8 million of asset impairments.
- Whether the planned $4 million annualized restructuring savings are achieved, and the final costs and timing of facility closures.
- Integration, purchase accounting and financing effects of Suntron and the post-quarter CTS acquisition, including CTS’s impact on liquidity and future results.
- Inventory growth, customer concentration, demand trends in telecommunications and enterprise computing, and the status of tax incentives and the Thailand tax appeal.