Benchmark Electronics, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; quarterly figures below compare the fourth quarter with the fourth quarter of 2014. Benchmark provides global electronics manufacturing, engineering, design, precision manufacturing and related services to OEMs. Its end markets include industrial, aerospace and defense, medical, testing and instrumentation, telecommunications, and computing.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change or context |
|---|---|---|---|
| Sales | $2,540.9 million | $2,797.1 million | Down 9% |
| Gross profit / margin | $218.6 million / 8.6% | $219.9 million / 7.9% | Profit roughly flat; margin improved |
| Operating income / margin | $93.0 million / 3.7% | $100.1 million / 3.6% | Income down about 7% |
| Net income / diluted EPS | $95.4 million / $1.83 | $81.2 million / $1.50 | Net income up about 17%; tax benefits materially affected results |
| Operating cash flow | $146.8 million | $135.4 million | Increase of about 8% |
| Cash and cash equivalents | $466.0 million | $427.4 million | $424.0 million held outside the U.S., substantially intended for permanent reinvestment |
| Debt | $238.9 million principal and capital-lease obligations | $9.5 million | New term loan financed the Secure Technology acquisition; reported debt carrying value was $235.2 million after unamortized issuance costs |
| Working capital | $1,055.5 million | $1,019.5 million | Current assets were $1,388.6 million and current liabilities $333.1 million |
Fourth-quarter sales were $625.7 million versus $709.5 million in Q4 2014. Fourth-quarter net income was $39.4 million versus $23.3 million. The filing attributes a substantial FY 2015 tax benefit to discrete tax items, including a $19.6 million reduction in the U.S. deferred-tax valuation allowance and a $1.7 million release of tax reserves; these items should be distinguished from recurring earnings.
Cash used in investing activities was $266.8 million, primarily for the Secure acquisition, net of cash acquired ($229.6 million), and property, plant and equipment ($37.1 million). Cash provided by financing activities was $159.6 million, including $250.0 million of credit-agreement borrowings and $68.4 million of share repurchases. The company had $198.4 million available under its revolving facility at year-end. Its $230 million term loan matures in 2020; a $172.5 million interest-rate swap fixed the rate on that portion of borrowings. The company reported compliance with credit covenants.
Material changes versus prior year
- Revenue fell 9%. Telecommunications sales declined 26%, mainly from a major customer’s product-life-cycle transition and weaker infrastructure spending; industrials fell 3%, computing 4%, and testing and instrumentation 13%. Medical sales grew 13% on new programs.
- Sales mix shifted toward higher-value markets, which accounted for 55% of sales versus 50% in 2014. Management cited this mix, operational improvements and utilization benefits from restructuring as drivers of the gross-margin increase.
- Despite higher gross margin, operating income declined, with $13.9 million of restructuring, integration and acquisition-related costs and lower sales contributing to results. Interest expense increased to $3.0 million from $1.9 million after acquisition-related borrowing.
- In November 2015, Benchmark acquired Secure Technology for approximately $230.5 million. Preliminary purchase accounting included $153.3 million of goodwill and $90.4 million of acquired identifiable intangible assets. Secure contributed $12.8 million of revenue after acquisition during 2015.
- Year-end backlog rose to approximately $1.7 billion from $1.6 billion, but orders can be canceled, changed or delayed; management cautioned that backlog is not a meaningful indicator of future results.
- Benchmark repurchased 3.1 million shares for $68.4 million during 2015. It has not paid cash dividends and does not expect to do so in the foreseeable future.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected capital expenditures of approximately $40 million to $50 million over the next 12 months and stated that cash, operating cash flow and available credit should meet near-term liquidity needs.
- Management described cautious near-term conditions in telecommunications, including reduced customer infrastructure spending. The broader EMS industry experienced revenue declines in 2015 amid global economic uncertainty.
- Customer concentration is significant: the ten largest customers represented 47% of sales, and IBM represented 11%. Most customers do not provide firm production commitments far in advance, leaving results exposed to order changes and cancellations.
- Half of 2015 sales came from international operations. Foreign exchange, geopolitical, regulatory, tax, supply-chain and operating risks apply. The company also relies on customer-specified components, which may be subject to shortages, allocation or price increases.
- Thailand flood risk remains notable: Benchmark said it had been unable to obtain adequate, cost-effective flood insurance for its Thailand facilities following the 2011 floods.
- Other key risks include variable-rate debt, competition and pricing pressure, integration of acquired operations, customer credit and inventory exposure, product or regulatory failures, and dependence on government-contract funding and compliance.
- Management identified an immaterial foreign-currency receivable remeasurement error and revised previously reported 2014 and 2013 figures. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the control assessment excluded Secure Technology.
Investor verification priorities
- Assess how much of FY 2015 earnings growth and Q4 profit reflects the discrete tax benefits, and whether the lower reported tax burden is sustainable.
- Review Secure Technology’s final purchase-price allocation, integration progress, contribution to growth and returns on acquisition-related goodwill and intangibles.
- Track telecommunications demand, customer program transitions, medical program growth and the sustainability of improved gross margins amid lower sales.
- Evaluate customer concentration, receivable exposure and the quality of backlog, given limited long-term commitments and cancellation rights.
- Confirm debt amortization, variable-rate exposure, covenant headroom and the availability of cash held overseas, including potential costs or restrictions on repatriation.
- Monitor restructuring execution, planned capital spending, component availability and uninsured disaster exposure in Thailand.