Benchmark Electronics, Inc. — 2014 Form 10-K
Business and period: Benchmark provides electronic manufacturing, engineering, precision technology and fulfillment services to OEMs in industrial control, telecommunications, enterprise computing, medical devices, and testing and instrumentation markets. This 10-K covers the fiscal year ended December 31, 2014; quarterly data below identifies the fourth quarter where relevant. Amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Sales | $2.797 billion | $2.506 billion |
| Gross profit / margin | $219.9 million / 7.9% | $186.5 million / 7.4% |
| Operating income / margin | $100.1 million / 3.6% | $116.5 million / 4.6% |
| Net income / diluted EPS | $82.4 million / $1.52 | $111.2 million / $2.03 |
| Cash from operations | $136.7 million | $99.1 million |
| Cash and cash equivalents at year-end | $427.4 million | $345.6 million |
| Working capital at year-end | $1.029 billion | $944.5 million |
| Total debt reported in selected data | $9.5 million | $10.1 million |
- Sales grew 12% and gross profit increased 18%. Gross margin improved with higher volume, program mix and acquisitions.
- Operating income fell 14% and net income fell 26%. SG&A increased to $115.7 million, including a $2.7 million provision related to former customer GT Advanced Technologies’ bankruptcy. Operating results also reflected acquisition integration and restructuring costs.
- Operating cash flow increased to $136.7 million, including a $37.9 million cash benefit from lower accounts receivable, partly offset by a $36.6 million decline in accounts payable. Capital expenditures were $44.2 million.
- The company had no borrowings under its $200 million revolving credit facility and $198.8 million was available, net of letters of credit. Reported debt primarily reflects capital leases. Cash balances included $333.3 million held outside the U.S.
Material changes and unusual items
- Industrial control sales rose 19% to $845.9 million; telecommunications sales rose 39% to $807.2 million. Enterprise-computing sales fell 22% to $577.1 million, mainly due to program transitions and lower customer demand. Medical-device sales rose 10%; testing and instrumentation sales rose 31%.
- Acquisitions of Suntron and CTS, completed in 2013, contributed to 2014 sales growth and costs. 2014 restructuring and integration/acquisition-related charges were $7.1 million, primarily CTS integration, versus $9.3 million in 2013.
- 2014 included a $1.6 million net gain from Thailand flood insurance proceeds and a $1.5 million gain on the sale of the Tianjin subsidiary. The Thailand insurance recovery process was completed in early 2014.
- For fourth-quarter context, 2014 sales were $709.5 million and net income was $24.0 million, versus $756.8 million and $67.5 million, respectively, in fourth-quarter 2013. The prior-year quarter benefited materially from a $41.3 million Thailand flood-related gain and discrete tax benefits; the comparison is therefore affected by unusual items.
- The 2014 effective tax rate was 17.4%, versus 4.3% in 2013. The 2013 rate included significant discrete tax benefits; excluding specified tax items, management reported rates of 18.7% for 2014 and 19.1% for 2013. Tax incentives reduced 2014 tax expense by approximately $12.7 million.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management expected to spend approximately $45–$55 million on capital expenditures over the next 12 months and said existing cash and operating cash flows should meet near-term liquidity needs.
- Year-end backlog was approximately $1.6 billion, down from $1.7 billion in 2013. Management expected to fill substantially all of it during 2015 but cautioned that orders can be canceled, changed or delayed and that backlog is not a meaningful indicator of future results.
- Customer concentration remains significant: the ten largest customers generated 50% of 2014 sales; Arris and IBM each represented 11%. Two customers each accounted for approximately 14% of gross receivables at year-end. Customer demand volatility, short order commitments and component shortages can affect utilization, margins and cash flow.
- About 53% of sales came from international operations. Risks include currency movements, geopolitical and regulatory changes, supply-chain interruptions and restrictions or taxes on repatriating foreign cash. Approximately $717 million of foreign subsidiary earnings were considered indefinitely reinvested.
- Benchmark reported it could not obtain adequate cost-effective flood insurance for its Thailand facilities. A significant uninsured loss could materially harm results. Other stated risks include competition and pricing pressure, acquisition integration, product or process defects, tax-incentive expirations, and uncertain tax positions.
- Contractual obligations totaled $55.6 million, comprising $41.3 million of operating leases and $14.3 million of capital leases. Unrecognized tax benefits, including interest and penalties, were $18.0 million. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether revenue and margin trends persisted after the 2014 acquisition-related growth, particularly in telecommunications and enterprise computing.
- The quality and collectibility of receivables, including exposure to GT Advanced Technologies and the two large year-end receivable concentrations.
- How much of reported earnings and cash generation reflects recurring operations versus insurance recoveries, tax incentives and other unusual items.
- The availability and terms of tax incentives after their stated expirations, foreign-cash repatriation implications, and resolution of the $18.0 million uncertain-tax-benefit reserve.
- Whether backlog converts to shipments and cash, and the effect of customer cancellations, component availability and program transitions.
- Thailand facility exposure without adequate flood insurance, along with planned capital spending and execution of restructuring and CTS integration.