Business context and reporting period
Benchmark Electronics, Inc. provides product design, engineering, technology solutions and advanced manufacturing services to aerospace and defense, medical, industrial, semiconductor capital equipment, computing and telecommunications customers. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. COVID-19 materially disrupted operations and demand.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $491.0m | $601.6m | $1,005.9m | $1,204.4m |
| Gross profit / margin | $34.7m / 7.1% | $49.2m / 8.2% | $78.0m / 7.8% | $99.3m / 8.2% |
| Operating income (loss) | ($1.9m) | $11.9m | $4.6m | $28.0m |
| Net income (loss) | ($3.4m) | $9.4m | $0.4m | $23.2m |
| Diluted EPS | ($0.09) | $0.24 | $0.01 | $0.58 |
- Q2 sales declined 18% year over year; six-month sales fell 16%. Q2 gross margin contracted 1.1 percentage points. Management attributed margin pressure chiefly to COVID-related productivity losses, supply constraints, higher labor and protective-equipment costs, and under-absorbed fixed costs.
- Six-month operating cash flow was $19.9m, versus $68.8m in 2019. Inventory increased $48.7m and was the main working-capital cash outflow. Investing used $20.7m, including $21.4m of property, plant and equipment purchases; financing used $6.5m.
- Cash and restricted cash totaled $356.4m at June 30, 2020, down from $364.0m at year-end 2019. Current assets were $1,208.1m and current liabilities $464.6m.
- Debt was $169.2m, including $30.0m drawn on the revolving facility and $140.6m on the term loan. The company reported $466.3m of additional revolver availability, subject to covenants, and said it was in compliance with its debt covenants.
- Shareholders’ equity was $984.4m, compared with $1,014.8m at December 31, 2019. Six-month dividends paid were $11.4m. No shares were repurchased during Q2; $210.1m remained under the authorization.
Material changes versus the prior comparable period
- Traditional-market revenue fell 54% in Q2, mainly reflecting the completed exit from a legacy computing contract: computing sales fell 67%. Telecommunications declined 29%.
- Higher-value markets were flat in aggregate in Q2: medical sales rose 18% and Semi-Cap rose 39%, while industrials fell 24% and aerospace and defense fell 17%.
- Six-month net income decreased $22.8m, primarily due to lower gross profit and higher restructuring and other costs. Restructuring charges and other costs were $8.6m in the first half of 2020, including $7.3m of restructuring charges and $1.0m of Asia asset impairment costs.
- Six-month interest expense rose to $4.1m from $3.3m, reflecting revolving borrowings and higher rates associated with the debt leverage ratio. Interest income fell to $0.9m from $2.4m.
Outlook, management commentary and risks
- Management expected revenue to remain negatively affected in Q3 and beyond by COVID-related operating inefficiencies, supply constraints, elevated labor costs and fluctuations in customer demand. It provided no specific revenue or earnings forecast in the supplied filing text.
- At filing, Tijuana and Guadalajara operations were returning to production in phases and operating at approximately 75% of capacity due to high-risk employee rules. Management also cited continuing labor and supply-chain constraints.
- In response, Benchmark reduced executive and director compensation temporarily, applied other workforce and discretionary-cost measures, reduced planned capital spending, deferred certain investments and suspended share repurchases. Management estimated next-12-month capital expenditures of $30m–$35m and believed cash, operating cash flow and available borrowing capacity would meet liquidity needs for the next 12 months.
- Key risks include the uncertain course of COVID-19, facility restrictions, customer-demand weakness, supply shortages, labor constraints, collection risk, inventory obsolescence, foreign-exchange and interest-rate exposure, and potential debt-covenant pressure. Sales to the ten largest customers were 43% of first-half revenue.
- Legal proceedings arose in the ordinary course; management did not expect their disposition to materially adversely affect financial position or results. The filing reported no significant off-balance-sheet arrangements. The 2019 ransomware incident had disrupted operations; the company reported no evidence of data exfiltration and collected $3.0m of recorded insurance receivables in the first half of 2020.
- The quarterly dividend was $0.16 per share, declared in June and paid in July. Future dividends are not guaranteed and depend on business conditions, indebtedness, contractual restrictions and other factors, including COVID-19.
Important facts for investors to verify
- Whether COVID-related restrictions, supply constraints and labor availability continue to limit production, particularly in Mexico, and how quickly affected sites return to full capacity.
- Whether stronger medical and Semi-Cap demand can offset weakness in traditional markets and other pressured sectors.
- Inventory levels, operating cash flow and working-capital conversion after the first-half inventory build.
- Debt, covenant headroom and the conditions attached to the stated $466.3m of revolver availability.
- Progress on restructuring and cost reductions, planned capital expenditures, dividend policy and any resumption of share repurchases.
- Insurance recoveries related to the ransomware incident, and the effect of expiring Malaysia and Thailand tax incentives on future tax expense.