Benchmark Electronics, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Benchmark provides global electronics manufacturing, engineering, fulfillment and precision technology services to OEMs.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Sales | $2.253 billion | $2.402 billion |
| Gross profit / margin | $138.8 million / 6.2% | $187.4 million / 7.8% |
| Operating income / margin | $41.3 million / 1.8% | $88.4 million / 3.7% |
| Net income | $52.0 million | $79.8 million |
| Diluted EPS | $0.87 | $1.27 |
| Cash from operations | $54.8 million | $5.2 million |
| Capital expenditures | $71.4 million | $35.8 million |
- Sales fell 6% year over year; gross profit declined 26% and net income declined 35%. Management attributed weaker results to lower demand, Thailand flood disruption, unfavorable mix, program start-up and expansion costs, and under-absorbed overhead.
- Fourth-quarter 2011 sales were $559.1 million, gross profit $28.8 million and net income $2.9 million, compared with $626.9 million, $48.7 million and $19.0 million, respectively, in fourth-quarter 2010.
- Year-end cash and equivalents were $283.9 million, down from $346.3 million. Working capital was $849.1 million. Total assets were $1.500 billion and shareholders’ equity $1.116 billion.
- Total debt was $11.0 million, consisting of capital lease obligations. No borrowings were outstanding under the $100 million revolving credit facility; the full facility was available. The company reported compliance with its covenants.
- Operating cash flow improved, but was below net income; inventory increased $72.7 million. Investing cash outflow was $60.5 million and financing cash outflow was $54.1 million, including $56.3 million of share repurchases.
Material changes and unusual items
- Thailand flooding: Ayudhaya facilities were closed from October 13 through December 20, 2011, after producing about 24% of revenue in the first nine months. The company recorded $59.5 million of flood losses and costs, offset by an estimated $56.2 million insurance recovery, for a net charge of $3.4 million. Recovery proceeds’ timing and ultimate amount remained uncertain.
- Flood-related asset impairments of $46.5 million are reflected in the cash-flow reconciliation. The company spent about $10 million on recovery-related capital purchases in Q4 and expected up to $25 million more in the first half of 2012.
- Restructuring charges were $4.5 million, primarily related to workforce reductions and the closure of the Dublin, Ireland facility. A major-program transfer also incurred $4.4 million of settlement costs included in the gross-profit discussion.
- A $19.1 million U.S. deferred-tax valuation-allowance reduction contributed to the $10.8 million income-tax benefit and negative 26.3% effective tax rate. Excluding specified tax benefits, management reported an effective rate of 14.7%.
- The company corrected immaterial prior-period inventory accounting errors: reported 2010 net income was reduced by $1.3 million and 2009 net income by $0.5 million. Cash flows were unaffected.
Outlook, risks and contingencies
- Management anticipated Ayudhaya returning to full operations by the end of Q1 2012, while warning that restoration, component availability, customer retention and facility under-absorption could affect results. It expected cash flow to be negative in Q1 2012 and possibly beyond.
- Management estimated ordinary capital expenditures of $30–$35 million over the following 12 months, excluding up to $25 million for Thailand recovery. It believed cash balances and operating cash flows would meet liquidity needs over the next 12 months.
- Year-end backlog was approximately $1.6 billion versus $1.5 billion a year earlier. Management cautioned that orders may be changed, delayed or cancelled and that backlog is not a meaningful indicator of future results. No specific sales or earnings guidance was provided.
- Customer concentration increased: the ten largest customers represented 53% of sales, and IBM represented 14%. The largest customer was 21% of gross receivables at year-end.
- Other notable exposures include component shortages and price increases, economic and industry cyclicality, international and currency risks, customer credit and inventory exposure, and natural-disaster disruption. The company held $28.0 million par value of illiquid auction-rate securities, carried at $24.7 million, with a $3.3 million unrealized loss.
- An $8.2 million Thailand tax refund receivable was under examination; a $7.1 million reserve was recorded. Unrecognized tax benefits, including interest and penalties, totaled $21.3 million. Management said ordinary-course legal matters were not expected to materially affect results; a jury verdict in a separate Power Paper suit favored the company.
- Cary T. Fu retired as CEO effective December 31, 2011 and continued as chairman; Gayla J. Delly became CEO. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Key investor verification points
- Track actual insurance collections and any further Thailand flood charges, and confirm the pace and economics of returning Ayudhaya to full production.
- Assess whether sales, gross margins and capacity utilization recover, especially in light of lower demand and program ramp costs.
- Monitor customer concentration, order cancellations and the quality and collectibility of receivables and backlog.
- Review cash conversion, inventory growth, recovery and expansion capital spending, and liquidity after share repurchases.
- Verify the valuation and liquidity of auction-rate securities and the outcome of the Thailand tax refund examination and other tax matters.