Benchmark Electronics, Inc. — Q1 2012 Form 10-Q
Business context and period. Benchmark provides worldwide electronics manufacturing, engineering, and related services to OEMs across computing, industrial control, telecommunications, medical, and testing and instrumentation markets. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless noted.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Sales | $593.4 million | $538.3 million | Up 10% |
| Gross profit / margin | $40.5 million / 6.8% | $37.6 million / 7.0% | Profit up 8%; margin down 0.2 percentage points |
| Operating income / margin | $7.8 million / 1.3% | $15.8 million / 2.9% | Lower, including $10.2 million of Thailand flood charges |
| Net income | $5.6 million | $14.5 million | Down $8.9 million |
| Diluted EPS | $0.10 | $0.24 | Down $0.14 |
| Income tax expense / effective rate | $2.6 million / 32.1% | $0.9 million / 5.9% | Higher rate in 2012 |
| Operating cash flow | $(23.8) million | $14.2 million | Cash use in 2012, principally reflecting higher receivables and inventory |
| Capital expenditures | $11.6 million of PP&E additions | $25.6 million of PP&E additions | Cash-flow statement amounts |
Sales growth came from computing (+25%), telecommunications (+19%), medical devices (+13%), and industrial control (+8%); testing and instrumentation sales fell 34%. Segment sales increased in the Americas and Asia and declined in Europe. Operating income by segment was $12.8 million in the Americas, $4.0 million in Asia, and $0.7 million in Europe; Asia operating income declined from $10.8 million.
Management attributed lower gross margin to sales mix, new-program ramp costs, and duplicative and transition costs associated with the Thailand flooding. SG&A rose 3% to $22.5 million, but declined to 3.8% of sales from 4.1%.
Financial position and liquidity
- At March 31, 2012, cash and equivalents were $256.7 million, versus $283.9 million at year-end 2011. Total current assets were $1.219 billion and current liabilities $365.5 million; working capital was $853.2 million.
- Cash declined $27.3 million during the quarter. Investing activities used $1.9 million and financing activities used $2.7 million. Financing included $3.9 million of share repurchases and $1.4 million of stock-option proceeds.
- No borrowings were outstanding under the $100 million U.S. revolving facility; the full amount was available. The facility matures December 21, 2012. The Thailand subsidiary also had no borrowings under its approximately $11.3 million working-capital facility. Capital lease obligations totaled $10.9 million; no other conventional debt balance is reported.
- Cash held outside the U.S. was $175.9 million and is generally intended to remain invested in foreign operations; repatriation could result in additional taxes. The company reported compliance with credit-facility covenants.
Material changes, outlook, and risks
- Thailand flooding: Ayudhaya facilities were closed from October 13 to December 20, 2011. Benchmark recorded $10.2 million of additional flood-related charges in Q1 2012, expected to be recoverable through insurance. It received $20.0 million of insurance proceeds during the quarter and reported a $36.2 million receivable for estimated unreimbursed recoveries. Timing and ultimate receipt are uncertain. Adequate cost-effective flood insurance for the Thailand facilities could not be renewed or obtained.
- Management outlook: No specific sales or earnings guidance is provided. Management expected cash flow for Q2 2012, and possibly beyond, to be negative due in part to Thailand recovery spending. It forecast $30–$35 million of capital expenditures over the next 12 months, plus up to $15 million for Thailand recovery. Management believed available cash and operating cash flows would meet liquidity needs over the next 12 months.
- Customer concentration: The ten largest customers accounted for 59% of Q1 sales, up from 53%; the largest customer represented 17%. Demand, customer financial health, product changes, and customer loss could materially affect results.
- Tax: Q1 2012 included a $0.6 million discrete tax expense; Q1 2011 included tax benefits related to valuation allowances and a China incentive. Foreign tax holidays lowered Q1 2012 tax expense by approximately $0.9 million. The reserve for uncertain tax benefits, including interest and penalties, was $21.4 million.
- Investments: Long-term investments included auction rate securities with $28.0 million par value and $25.3 million fair value. The market remained illiquid; the $2.7 million unrealized loss had persisted for over 12 months. The company reported no credit loss based on its expected cash flows.
- Other risks and items: Share repurchases totaled 255,600 shares for $3.9 million; $31.2 million remained under the repurchase authorization. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Prior-period correction: Q1 2011 comparative figures reflect correction of immaterial inventory-accounting errors: cost of sales increased $0.8 million and net income decreased $0.8 million, or $0.01 per diluted share; operating cash flow was unchanged.
Important facts for investors to verify
- Collection timing and amount of the $36.2 million Thailand insurance receivable, and the remaining recovery costs and operational impact.
- Whether management’s expected negative Q2 cash flow and capital-spending estimates materialized, and how working-capital needs evolved.
- Sales and margin trends by segment, particularly Asia’s operating-income decline and the effect of new-program ramps and customer mix.
- Customer concentration and changes in demand from major customers, including the largest customer’s 17% sales share.
- Renewal or extension of the U.S. revolving facility due December 2012, continued covenant compliance, and availability of Thailand financing.
- Liquidity and valuation of auction rate securities, as well as developments in uncertain tax positions and foreign tax incentives.