Benchmark Electronics, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet amounts are as of March 31, 2011. Benchmark provides global electronics manufacturing, engineering, and precision technology services. Financial amounts below are in millions unless otherwise noted.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Sales | $538.3 | $571.9; down 6% |
| Gross profit / margin | $38.5 / 7.1% | $45.3 / 7.9% |
| Operating income / margin | $16.6 / 3.1% | $21.1 / 3.7% |
| Net income | $15.3 | $18.3 |
| Diluted EPS | $0.25 | $0.29 |
| Cash from operations | $14.2 | $5.9 |
| Cash and cash equivalents | $333.5 | $346.3 at Dec. 31, 2010 |
- Operating cash flow reflected a $38.6 decrease in receivables, partly offset by a $31.1 increase in inventory and a $12.6 decrease in accounts payable. Working capital was $895.5, compared with $897.7 at year-end.
- Investing cash outflow was $24.3, including $25.6 of property, plant and equipment additions, primarily to expand precision technology capabilities in Penang, Malaysia. Financing cash outflow was $3.8, including $4.6 of share repurchases.
- Total assets were $1,477.8 and shareholders’ equity was $1,138.7. The company had no borrowings under its $100 revolving credit facility, with the full amount available; it was in covenant compliance. Capital lease obligations totaled $11.3.
- Long-term auction rate securities had a $33.8 fair value versus $37.4 par value and remained illiquid. The company reported $3.6 of cumulative unrealized losses and no identified credit loss.
Material changes versus the prior comparable period
- Lower customer demand reduced sales, gross profit, operating income, and net income. Gross margin fell 0.8 percentage points, primarily from lower volume and under-absorbed manufacturing overhead.
- Sales declined in computers and related products for business enterprises (18%), telecommunications (32%), and medical devices (3%); increases in testing and instrumentation (26%) and industrial control equipment (9%) partly offset the declines.
- Americas segment sales were $320.5 versus $362.2; Asia sales were $205.6 versus $207.2; and Europe sales were $42.8 versus $46.3, before intersegment eliminations. Segment operating income declined in each region.
- There were no restructuring charges in Q1 2011, compared with $1.7 in Q1 2010. SG&A decreased 3% to $21.8, although it rose to 4.1% of sales from 3.9%.
- The effective tax rate was 5.6% versus 12.2%. Q1 2011 included a $0.6 discrete China tax benefit; management said the rate excluding it would have been 9.4%. Foreign tax incentives reduced tax expense by approximately $2.6 in Q1 2011.
Outlook, risks, contingencies, and unusual items
- Management estimated capital expenditures of approximately $40–$50 over the next 12 months and said cash balances and operating cash generation should meet liquidity needs over that period. The filing provides no specific sales or earnings forecast.
- Key operating risks include demand fluctuations, low facility utilization, competitive pressure on margins, customer concentration, component shortages, and inventory obsolescence. The ten largest customers generated 53% of quarterly sales; IBM represented 13%.
- International operations accounted for 51% of sales. The company had no foreign currency hedges at quarter-end and identified currency, regulatory, inflation, and political risks.
- A lawsuit by Power Paper seeks up to $22.8 for alleged breach of contract. Trial was scheduled to begin September 12, 2011. Management considered a plaintiff victory not probable, recorded no accrual, and said any liability could not be reasonably estimated.
- The reserve for uncertain tax benefits, including interest and penalties, was $18.2. A $7.8 Thailand tax refund claim was under examination. The company also noted potential future environmental, health, and safety liabilities, though related costs had not been material to date.
- The company repurchased 257,500 shares for $4.6 in March; $86.9 remained under its repurchase authorization. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether weaker demand and lower utilization persist, especially in telecommunications, computers, and medical devices, and how this affects margins.
- Whether inventory growth, component availability, and customer forecast changes create additional working-capital or obsolescence pressure.
- Progress on Malaysia capacity investments, actual capital spending against the $40–$50 estimate, and resulting returns.
- Liquidity and valuation developments for the illiquid auction rate securities, and any change in the company’s tax reserves or Thailand refund claim.
- Developments in the Power Paper litigation and any change to management’s assessment of probability or potential exposure.