Benchmark Electronics, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. Benchmark provides product design, engineering, technology solutions and manufacturing services to OEMs. Its principal markets include industrials, aerospace and defense (A&D), medical, semiconductor capital equipment (semi-cap), computing and telecommunications.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Sales | $2,268.1 million | $2,566.5 million |
| Gross profit / margin | $200.4 million / 8.8% | $220.6 million / 8.6% |
| Operating income | $28.5 million | $58.5 million |
| Net income | $23.4 million | $22.8 million |
| Diluted EPS | $0.60 | $0.49 |
| Cash from operations | $93.1 million | $76.7 million |
- Operating margin declined to 1.3% from 2.3%, despite a modest improvement in gross margin. Lower sales and higher SG&A as a share of revenue contributed to lower operating income.
- Cash and cash equivalents plus restricted cash were $364.0 million at year-end, versus $458.1 million a year earlier. Working capital was $735.8 million, down from $866.4 million.
- Capital expenditures were $32.6 million; investing activities used $34.9 million. Financing activities used $152.8 million, including $122.1 million of share repurchases and $23.3 million of dividends.
- Term-loan borrowings were $144.4 million; $497.0 million remained available under the revolving facility, with $3.0 million of letters of credit outstanding. The term loan was effectively fixed at 2.928% through an interest-rate swap. The company reported compliance with debt covenants.
- Operating cash flow benefited from a $134.9 million reduction in accounts receivable, partly offset by a $121.9 million reduction in accounts payable. Management said cash balances and expected operating cash flow should meet liquidity needs for the next 12 months.
Changes versus the prior year
- Sales fell 12%. Computing sales declined 38%, including the planned exit of a legacy contract that generated $324 million of 2018 revenue; semi-cap sales fell 22%, and telecommunications declined 12%.
- Medical sales rose 14% and A&D rose 6%. Higher-value markets represented 71% of sales, up from 64%; computing and telecommunications together fell to 29% from 36%.
- Gross margin improved to 8.8% from 8.6%, principally because the exited computing contract had been margin-dilutive. Operating income nevertheless fell by about half.
- Net income increased slightly, while diluted EPS rose from $0.49 to $0.60, supported in part by a lower share count following repurchases. The 2018 effective tax rate was unusually high at 58.9% due mainly to tax effects of foreign-earnings repatriation; the 2019 rate was 14.1%.
- Sales to the ten largest customers declined to 38% of revenue from 44%. No individual customer exceeded 10% of 2019 sales; IBM represented 13% in 2018.
Outlook, commentary and material risks
- Management expected capital expenditures of approximately $50–$55 million over the next 12 months, principally for machinery and equipment. The filing provides no specific revenue or earnings guidance.
- Year-end backlog was approximately $1.8 billion, down from $2.1 billion. Management cautioned that orders and forecasts can be changed, delayed or canceled and that backlog is not a meaningful predictor of future results.
- A fourth-quarter ransomware incident disrupted systems and customer access, reduced the company’s ability to fulfill some demand and contributed to a fourth-quarter net loss. 2019 costs were $7.7 million net of $5.0 million in estimated insurance recoveries; additional 2020 costs were expected but not expected to be significant. The company reported no evidence of customer or employee data exfiltration; insurance recovery remained subject to the claims process.
- Quarterly results were uneven: Q4 2019 sales were $508.4 million and net loss was $6.9 million, compared with Q4 2018 sales of $657.1 million and net income of $27.7 million.
- The company recorded $13.1 million in restructuring and other costs, including $8.5 million for facility closures and workforce reductions and $4.6 million primarily related to the CEO transition and proxy activity. It also recorded $11.0 million of charges related to a customer insolvency, including inventory and receivables provisions.
- Key risks include customer concentration and short order commitments, component shortages and price increases, weakness in semi-cap markets, international and trade-policy exposure, and execution costs on new programs. The filing also identified the then-recent coronavirus outbreak as a potentially material risk to China operations, suppliers and demand; its impact was described as uncertain.
- The company paid $0.60 per share in dividends during 2019 and announced an intended increase in the quarterly dividend from $0.15 to $0.16. Dividend payments are not guaranteed. The board authorized an additional $150 million share-repurchase program in February 2020.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective at year-end.
Important facts for investors to verify
- Whether medical and A&D growth and the higher-value-market mix can offset continued weakness in semi-cap, computing and telecommunications.
- Whether operating margins and cash generation improve after the contract exit, restructuring, customer insolvency charges and ransomware disruption.
- Actual insurance recoveries and any further costs, operational effects or disclosures arising from the ransomware incident.
- Customer order changes, concentration, backlog conversion and exposure to component shortages and customer-specific inventory.
- Cash deployment among capital spending, dividends, repurchases and debt repayment, alongside covenant headroom and the $57.5 million remaining deemed-repatriation tax liability.
- Impacts of the coronavirus outbreak, trade measures and other disruptions on facilities, suppliers, customers and demand.