Business context and reporting period
Benchmark Electronics, Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. The company provides global electronics manufacturing, engineering, precision technology, fulfillment and aftermarket services to OEMs in business computing, industrial control, telecommunications, medical, and testing and instrumentation markets.
Financial performance and condition
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Sales | $2.402 billion | $2.089 billion |
| Gross profit / margin | $188.7 million / 7.9% | $146.6 million / 7.0% |
| Operating income | $89.7 million | $52.8 million |
| Net income | $81.0 million | $53.9 million |
| Diluted EPS | $1.29 | $0.83 |
| Cash from operations | $5.2 million | $123.6 million |
- Sales rose 15% year over year, attributed to new program wins, expanded services and improved business conditions. Gross margin improved with product mix, operating efficiencies and higher facility utilization. Operating margin was approximately 3.7%; net margin was approximately 3.4%.
- Operating cash flow fell sharply as accounts receivable and inventory increased and accounts payable declined. Cash and cash equivalents decreased to $346.3 million from $421.2 million.
- Investing activities used $24.9 million, including $35.8 million of property and equipment purchases; financing activities used $54.7 million, principally reflecting $58.9 million of share repurchases.
- Working capital was $897.7 million. The company had no borrowings under its $100 million revolving credit facility, with the full amount available. Reported total debt of $11.4 million consisted of capital lease obligations. Capital and operating lease commitments totaled $62.7 million.
- Long-term investments included auction-rate securities with a $39.2 million par value and $35.3 million carrying value; the market remained illiquid. The company reported $3.9 million of unrealized losses and no identified credit loss.
Material changes versus prior comparable period
- Net income increased $27.1 million; sales increased $312.9 million. Quarterly sales rose through 2010, from $571.9 million in Q1 to $626.9 million in Q4. Q4 net income was $19.0 million versus $16.7 million in Q4 2009; diluted EPS was $0.31 versus $0.26.
- Industry mix shifted: testing and instrumentation sales grew 193%, industrial control 41%, and telecommunications 11%; business computing declined 7% and medical devices declined 11%.
- Sales to the ten largest customers represented 47% of sales, down from 52%. No single customer accounted for 10% or more in 2010. The combined sales to Oneida Nation and its end-user customer were 13%.
- Year-end backlog increased to approximately $1.5 billion from $1.2 billion, but orders may be canceled, changed or delayed and management cautions backlog is not a meaningful indicator of future results.
Outlook, commentary, risks and unusual items
- Management expected to fill substantially all year-end backlog during 2011, forecast capital expenditures of $55–$65 million, and believed cash and operating cash generation would meet liquidity needs over the next 12 months. No earnings or revenue guidance was provided.
- Management cited component shortages and longer lead times, customer order volatility and concentration, pricing pressure, start-up program costs, and sensitivity of margins to utilization and product mix. International, currency, tax-incentive, supplier and customer credit risks also remain.
- Restructuring charges were $6.7 million in 2010, primarily for capacity reductions and workforce actions; 751 employees were affected. In January 2011, the company acquired facilities and assets in Penang, Malaysia to expand precision technology capabilities.
- A lawsuit acquired with Pemstar seeks up to $22.8 million. Trial was scheduled for May 2011; management said a loss was not probable, recorded no accrual, and could not reasonably estimate any potential liability.
- Foreign tax incentives reduced 2010 tax expense by approximately $8.7 million. The company disclosed $18.1 million of unrecognized tax benefits, including interest and penalties, and a $7.8 million Thai tax refund claim under examination.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether the 2010 increase in sales and gross margin is sustained, particularly as program mix and utilization change.
- Whether working-capital investment reverses and operating cash flow improves relative to reported net income.
- Customer concentration, order cancellations and delays, and the quality and conversion of backlog.
- Availability of critical components and the effect of shortages or price increases on delivery and margins.
- Recoverability and liquidity of auction-rate securities, and developments in the Power Paper litigation and tax matters.
- Capital spending, share repurchases and the execution and returns of the Malaysia expansion.