Business context and reporting period
Benchmark Electronics, Inc. provides global electronics manufacturing and related engineering services to OEMs in computing, industrial control, telecommunications, medical, and testing and instrumentation markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $630.0m | $585.5m | $1,223.4m | $1,123.9m |
| Gross profit / margin | $46.0m / 7.3% | $37.8m / 6.4% | $86.5m / 7.1% | $75.4m / 6.7% |
| Operating income | $18.3m | $14.2m | $26.1m | $29.9m |
| Net income | $13.6m | $14.7m | $19.2m | $29.2m |
| Diluted EPS | $0.24 | $0.24 | $0.33 | $0.48 |
- Q2 sales rose 8%; six-month sales rose 9%. Q2 gross margin improved, while six-month operating income and net income declined.
- Six-month income tax expense was $6.8m (26.2% effective rate), versus $1.2m (4.0%) a year earlier. Management cited prior-year tax benefits and a shift toward income earned in higher-tax jurisdictions; foreign tax incentives reduced 2012 six-month tax expense by about $3.9m.
- Six-month operating cash flow was $17.6m, compared with $11.7m in 2011. Accounts receivable increased $33.5m and was a significant cash use. Capital expenditures were $20.4m; cash declined $3.1m to $280.8m.
- At June 30, cash was $280.8m, working capital was $857.2m, and current assets and liabilities were $1,201.2m and $344.0m, respectively. No borrowings were outstanding on the $100m U.S. revolver at quarter-end; $100m was available. Capital lease obligations totaled $10.8m, including current installments.
- Long-term investments were $15.7m fair value, comprising illiquid auction-rate securities with $19.0m par value. The company reported a $3.2m cumulative unrealized loss and no identified credit loss.
Material changes versus prior period
- Q2 operating income rose about 29%, while six-month operating income fell about 13%. Six-month earnings fell primarily amid higher tax expense and $14.9m of Thailand flood-related charges; the comparable 2011 period had no such charges.
- For the first half, sales growth was strongest in computers and related products (+22%), telecommunications (+19%), medical devices (+10%), and industrial control equipment (+3%); testing and instrumentation sales fell 27%.
- Sales concentration increased: the ten largest customers generated 58% of Q2 sales versus 53% in Q2 2011; the largest customer represented 21% of Q2 sales. For the first half, the top ten represented 58% and the largest customer 19%.
- The company repurchased 1.6m shares for $23.3m during the first half and retired them. A new $100m repurchase authorization was approved in June, in addition to the existing program.
Outlook, risks and unusual items
- Management said Thailand flood recovery would continue to negatively affect operations through the rest of 2012. The company expected up to $11m of additional Thailand recovery capital spending and estimated total next-12-month capital expenditures of $30m–$35m, excluding that recovery spending.
- Thailand flood charges of $14.9m in the first half were described as costs expected to be recovered through insurance. At June 30, an estimated $31.2m insurance receivable remained; $16.6m was collected August 1, and management expected to collect the balance in Q3. Recovery timing may be delayed.
- Following the 2011 Thailand flooding, the company said it could not obtain adequate, cost-effective flood insurance for its Thai facilities. Significant uninsured losses could materially harm results. The Ayudhaya facilities had generated about 24% of 2011 revenue before the flood.
- On July 30, 2012, the company replaced its $100m revolver with a five-year $200m facility, with a possible $100m accordion subject to conditions and lender approval. No borrowings were outstanding and the full $200m was available as of August 7.
- Other risks include dependence on a limited number of customers, customer demand and forecast changes, component shortages, low production utilization, competitive pressure on margins, international and foreign-exchange exposure, and tax uncertainty. The company had no foreign-currency hedges at June 30.
- Uncertain tax-benefit reserves, including interest and penalties, were $21.4m. Ordinary-course legal matters 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.
Key facts for investors to verify
- Whether the remaining Thailand insurance receivable was collected as expected and whether flood-related costs or recovery delays changed.
- Subsequent sales, margin, and utilization trends, including the trajectory of testing and instrumentation demand and exposure to major customers.
- Cash conversion and receivables growth, capital spending against the stated range, and any share repurchases under the expanded authorization.
- Availability and covenant compliance under the new $200m credit facility, and developments in tax examinations or uncertain tax positions.
- Any deterioration in liquidity or fair value of the illiquid auction-rate securities, and progress on obtaining flood-risk protection in Thailand.