Benchmark Electronics, Inc. — Q3 2017 Form 10-Q
Business context and period. Benchmark provides electronics manufacturing, engineering and design, and precision machining services to OEMs worldwide. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $603.6m | $574.3m | $1,787.0m | $1,702.9m |
| Gross profit / margin | $58.2m / 9.6% | $52.8m / 9.2% | $165.8m / 9.3% | $156.0m / 9.2% |
| Operating income / margin | $20.8m / 3.4% | $18.1m / 3.1% | $55.5m / 3.1% | $52.1m / 3.1% |
| Net income | $17.5m | $21.7m | $44.4m | $45.5m |
| Diluted EPS | $0.35 | $0.44 | $0.88 | $0.91 |
Q3 sales rose 5% year over year, while net income fell about 19%, primarily amid a higher tax expense: Q3 2017 tax expense was $1.9m versus a $5.8m benefit in Q3 2016. Nine-month pretax income increased to $50.9m from $45.8m, but net income declined slightly as tax expense rose to $6.5m from $0.3m. The filing attributes the unusually low 2016 nine-month tax rate largely to an $8.3m release of uncertain tax benefits; the 2017 nine-month effective rate was 12.8%, versus 0.7% in 2016.
Cash flow and liquidity. Nine-month operating cash flow was $89.9m, down from $228.6m. The 2017 period included a $38.8m inventory build; cash flow also benefited from a $30.9m receivables decrease, partly driven by receivables sales. Investing used $37.4m, including $35.0m of PP&E additions; financing used $6.2m. Cash increased $48.7m to $730.1m. Working capital was $1.2bn. Cash included $75.0m available in the U.S.; substantially all cash held abroad was intended to remain invested in foreign operations.
At September 30, 2017, debt and capital lease obligations totaled approximately $214.6m, including $209.9m under the term loan. The company had $197.4m available on its revolving facility, after $2.6m of letters of credit. A $157.4m interest-rate swap hedged part of the floating-rate exposure. The company reported covenant compliance.
Material changes and operating trends
- Q3 sector sales rose in A&D (+16%), Medical (+17%), Test & Instrumentation (+34%) and Computing (+16%); Industrials fell 12% and Telecommunications fell 23%. For the first nine months, Test & Instrumentation grew 41%, while Industrials declined 10% and Telecommunications declined 16%.
- Higher-value markets represented 68% of Q3 sales, up from 65% a year earlier. Management cited better mix and higher sales as drivers of gross-margin improvement.
- SG&A increased 14% in both the quarter and nine-month period, driven by variable compensation, sales and marketing investment, and a $1.7m receivables provision tied to a customer insolvency.
- Q3 restructuring and other costs were $2.5m; nine-month charges were $5.6m, including restructuring and costs associated with moving the corporate headquarters. Nine-month charges were below the $9.9m reported in 2016.
- A customer insolvency resulted in a $5.1m initial inventory write-down and receivables provision in Q1; subsequent inventory recoveries totaled $2.2m. Net nine-month effects included $1.2m in cost of sales and $1.7m in SG&A.
Outlook, risks and contingencies
- Management expected capital expenditures of approximately $50m–$55m over the next 12 months and about $1.5m of additional capacity-alignment costs in Q4 2017. It believed cash and operating cash flow would meet liquidity needs over the next 12 months.
- The company planned to adopt the new revenue standard on January 1, 2018 using retrospective application. It expected most manufacturing revenue to shift from recognition at a point in time to recognition over time, with a potentially material effect on revenue timing and the balance sheet, including lower inventory and higher contract assets. The impact was still being quantified.
- Sales to the ten largest customers accounted for 44% of sales in both nine-month periods. Risks include customer demand and credit, component shortages, program mix and utilization, international operations and foreign exchange, and reliance on tax incentives that expire at different dates.
- The company had $86.9m remaining under its $100m share-repurchase authorization; repurchases are discretionary. It repurchased $3.9m of shares during Q3.
- Management said ordinary-course legal proceedings were not expected to materially affect financial position or results. No material changes to the risk factors in the 2016 Form 10-K were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether revenue growth and the shift toward higher-value markets continue, particularly given weakness in Industrials and Telecommunications.
- Whether operating cash flow recovers after the inventory build, and how receivables sales affect reported cash generation.
- The eventual effect of the 2018 revenue-standard adoption on reported sales, margins, inventories and contract assets.
- Customer-insolvency recoveries and any further credit exposure, alongside customer concentration and component-supply risks.
- Whether tax incentives, discrete stock-compensation tax benefits and tax examinations materially change future effective tax rates.
- Debt amortization, revolving-facility availability, covenant compliance, planned capital spending and discretionary share repurchases.