Benchmark Electronics, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Fourth-quarter figures are unaudited. Benchmark provides global electronics manufacturing, engineering, precision technology, fulfillment and aftermarket services to OEMs across business computing, industrial controls, telecommunications, medical, and testing and instrumentation markets.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Sales | $2,506.5 million | $2,468.2 million |
| Gross profit / margin | $186.5 million / 7.4% | $176.7 million / 7.2% |
| Operating income / margin | $116.5 million / 4.6% | $75.6 million / 3.1% |
| Net income | $111.2 million | $56.6 million |
| Diluted EPS | $2.03 | $1.00 |
| Cash from operations | $99.1 million | $151.1 million |
| Cash and cash equivalents, year-end | $345.6 million | $384.6 million |
| Working capital, year-end | $944.5 million | $883.7 million |
| Total debt, principally capital leases | $10.1 million | $10.6 million |
- Fourth-quarter sales were $756.8 million, gross profit was $59.8 million, and net income was $67.5 million; diluted EPS was $1.24.
- Operating cash flow included $41.2 million of Thailand flood insurance recoveries. Receivables increased $56.6 million and inventories increased $17.8 million during the year, weighing on cash generation.
- Investing activities used $108.7 million, including $94.3 million for the Suntron and CTS acquisitions and $26.8 million for property, plant and equipment. Financing activities used $30.1 million, including $41.2 million of share repurchases.
- At year-end, $199.2 million was available under the $200 million U.S. revolving facility; there were no revolver borrowings. The company reported compliance with credit covenants. Management said existing cash and operating cash flows should meet liquidity needs for the next 12 months.
Material changes versus prior periods
- Sales increased 1.6% year over year. Industrial controls rose 11% and medical devices 15%, while business computing fell 4% and telecommunications fell 9%. Testing and instrumentation increased 11%.
- IBM sales declined to $430.2 million from $506.1 million, and its share of sales fell to 17% from 21%. The ten largest customers represented 53% of sales, down from 56%.
- Gross margin improved 0.2 percentage points, which management attributed primarily to program mix and the acquisitions. SG&A rose to $99.3 million from $90.0 million, mainly due to the acquisitions.
- Net income and operating income rose substantially, but results included a $41.3 million net gain from Thailand flood-related items, including $41.2 million of insurance proceeds. The 2013 effective tax rate was 4.3%, including a $17.5 million discrete U.S. tax benefit from reducing the valuation allowance and other tax benefits; excluding specified tax items, management reported a 20.1% effective rate.
- Suntron was acquired in June for approximately $19.3 million; CTS’s EMS business was acquired in October for approximately $75 million. Acquired businesses contributed $99.0 million of reported 2013 revenue after acquisition dates. Preliminary purchase accounting included $6.8 million of CTS goodwill; final allocations remained subject to completion.
- The company repurchased 2.1 million shares for $41.2 million during 2013. Year-end backlog rose to approximately $1.7 billion from $1.5 billion, but management cautioned that backlog is not a meaningful indicator of future results because orders can be changed or cancelled.
Outlook, commentary, and risks
- Management estimated capital expenditures of $40–$50 million over the next 12 months and expected approximately $4 million in annualized savings from 2013 restructuring activities. The filing gives no specific revenue or earnings guidance.
- Restructuring and integration/acquisition-related charges were $9.3 million in 2013, including facility closures and workforce reductions, principally associated with Brazil and Singapore and the acquisitions.
- Thailand flood insurance recovery was largely complete; management expected final resolution in the first quarter of 2014. Benchmark said it could not obtain adequate cost-effective flood insurance for its Thailand assets, leaving exposure to uninsured losses.
- Customer and market risks include short-term and cancellable orders, concentration (IBM was 17% of sales), demand volatility, pricing pressure, and technology and product transitions. Component shortages, supplier allocation, and price increases may also disrupt production or margins.
- Other material risks include acquisition integration, foreign-currency and international operating exposure, tax incentives that may expire, and $11.4 million par value of illiquid auction-rate securities. Their year-end fair value was $9.9 million, with $1.4 million of unrealized losses; the company reported no credit loss but noted limited near-term liquidity.
- Cash held outside the U.S. was $307.3 million and was generally intended to remain invested in foreign operations; repatriation could incur additional taxes. The company reported $21.4 million of unrecognized tax benefits, including interest and penalties, and an appealed Thailand tax-refund claim.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded Suntron and CTS, which together represented 7% of assets, 4% of sales, and 3% of operating income.
Important facts for investors to verify
- How much of 2013 earnings growth reflects recurring operations versus the Thailand insurance gain and discrete tax benefits; also verify the timing of those items within the fourth quarter.
- Whether acquired businesses deliver expected integration, customer retention, margins, and the projected $4 million annualized restructuring savings.
- Whether working-capital requirements—particularly receivables and inventory—convert into sustainable operating cash flow.
- Progress on final Thailand insurance settlement and the adequacy of flood-risk mitigation without cost-effective insurance.
- Customer concentration, including IBM’s reduced sales contribution, and the durability of backlog given cancellation and rescheduling rights.