Business context and reporting period
Benchmark Electronics, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. It provides product design, engineering, technology and manufacturing services to OEMs, with operations across the Americas, Asia and Europe. Its target markets include aerospace and defense, medical, industrials and semiconductor capital equipment.
Key financial metrics
Unless otherwise noted, figures are in U.S. dollars; annual comparisons are 2020 versus 2019.
| Metric | 2020 | 2019 |
|---|---|---|
| Sales | $2,053.1 million | $2,268.1 million |
| Gross profit / margin | $175.0 million / 8.5% | $185.5 million / 8.2% |
| Operating income / margin | $25.1 million / 1.2% | $28.5 million / 1.3% |
| Net income / diluted EPS | $14.1 million / $0.38 | $23.4 million / $0.60 |
| Cash from operations | $120.4 million | $93.1 million |
| Capital expenditures | $34.6 million for PP&E | $32.6 million for PP&E |
| Cash and restricted cash, year-end | $396.0 million | $364.0 million |
| Working capital, year-end | $721.2 million | $735.8 million |
| Total debt, selected balance-sheet data | $140.2 million | $147.7 million |
Current assets were $1.202 billion and current liabilities $481.1 million at year-end 2020 (about 2.5x current ratio). Term-loan borrowings were $136.9 million, with $496.3 million available on the revolving facility, subject to covenants. Interest expense was $8.4 million; a swap effectively fixed the term loan rate at 2.928%. The company reported a 18.3% effective tax rate.
Fourth-quarter 2020 sales were $521.3 million and net income was $7.7 million ($0.21 per diluted share), compared with $508.4 million and a net loss of $6.9 million ($0.19 loss per diluted share) in fourth-quarter 2019.
Material changes versus the prior comparable period
- Annual sales declined 9%; net income fell $9.4 million and diluted EPS declined from $0.60 to $0.38.
- COVID-19-related shutdowns, supply constraints, labor limitations and reduced productivity weighed on revenue and margins, alongside added labor, PPE and fixed-cost under-absorption costs.
- Higher-value market revenue increased 3% year over year and represented 81% of sales, versus 71% in 2019. Medical sales rose 11% and semi-cap sales rose 33%; industrials fell 18%, A&D 2%, computing 53% and telecommunications 26%.
- Computing sales were affected by the completed exit of a legacy contract. Applied Materials accounted for 12% of 2020 sales; the ten largest customers represented 41%, up from 38%.
- Operating cash flow increased to $120.4 million, supported in part by a $46.6 million increase in customer advance payments. Cash and restricted cash rose by $32.0 million.
- Restructuring and other costs increased to $20.0 million, including $13.2 million of restructuring costs and $6.7 million of asset impairments. Debt declined year over year; repurchases were $25.2 million versus $122.1 million in 2019.
Outlook, management commentary, risks and unusual items
- Management expects 2021 capital expenditures of approximately $45–$50 million, primarily for machinery and equipment. It gave no specific revenue or earnings guidance in the provided filing text.
- Management believes cash, operating cash flow and available revolver capacity are sufficient for liquidity needs over the next 12 months. The company intends to continue quarterly dividends, but payments are not guaranteed. The quarterly dividend was raised to $0.16 per share in 2020.
- COVID-19 continued to affect operations into 2021; management cautioned that the duration and economic effects remain uncertain. The Malaysia tax holiday was due to expire in 2021; management expected an extension through 2026, which remained subject to renewal.
- Cash dividends paid in 2020 were $23.0 million. The company repurchased 1.0 million shares for $25.2 million and had $204.2 million remaining under its repurchase authorization.
- The 2019 ransomware incident disrupted operations and adversely affected fourth-quarter 2019 revenue. The company reported no evidence of data exfiltration; it collected $6.6 million in insurance recoveries during 2020, with further recoveries recognized only when probable.
- Key risks include pandemic and supply-chain disruption, customer concentration and volatile order patterns, component shortages and price increases, international and currency exposure, government-contract funding and compliance, product quality/regulatory claims, cybersecurity, and variable-rate debt and LIBOR transition risks. Legal matters were described as ordinary-course matters not expected by management to materially affect financial position or results.
- The company had $51.9 million of remaining U.S. transition-tax liability at year-end, payable over the remaining statutory period. The auditor issued unqualified opinions on the financial statements and internal controls; income tax expense was identified as a critical audit matter.
Important facts for investors to verify
- Whether revenue and margins recover as pandemic disruptions ease, and whether higher-value market growth offsets declines in traditional markets.
- Customer concentration and exposure to Applied Materials, as well as the sustainability of customer advance payments and operating cash flow.
- Progress on restructuring, including realized savings and the risk of further impairment or exit costs.
- Liquidity, debt covenant headroom, scheduled debt payments, and the effect of interest-rate benchmark transition despite the existing swap.
- Renewal of the Malaysia tax incentive and the timing and cash impact of transition-tax payments.
- Whether the company continues dividends and repurchases while funding planned capital expenditures and managing pandemic-related uncertainty.