Benchmark Electronics, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing. Amounts are in U.S. dollars unless noted.
Business context
Benchmark provides engineering, technology design, electronics manufacturing, precision machining, testing and fulfillment services to OEMs in industrial, aerospace and defense, medical, test and instrumentation, computing, and telecommunications markets. In 2017, 65% of sales came from higher-value markets. Operations are managed across the Americas, Asia and Europe.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Sales | $2.467 billion | $2.310 billion |
| Gross profit / margin | $227.7 million / 9.2% | $213.5 million / 9.2% |
| Operating income / margin | $78.6 million / 3.2% | $75.6 million / 3.3% |
| Income before taxes | $72.8 million | $68.2 million |
| Income tax expense | $104.7 million | $4.1 million |
| Net income (loss) / diluted EPS | $(32.0) million / $(0.64) | $64.0 million / $1.29 |
| Cash from operating activities | $145.8 million | $273.1 million |
| Cash and cash equivalents at year-end | $742.5 million | $681.4 million |
| Working capital at year-end | $1.140 billion | $1.119 billion |
| Reported total debt at year-end | $211.7 million | $223.6 million |
2017 investing cash outflow was $56.1 million, including $50.8 million for property, plant and equipment. Financing cash outflow was $31.4 million, including $29.3 million of share repurchases and net debt principal payments. The company reported $207.0 million principal outstanding on its term loan, $2.6 million of revolving-credit letters of credit and $197.4 million available under the revolver. A $155.3 million interest-rate swap fixed the rate on part of its floating-rate debt.
Material changes versus the prior comparable period
- Sales rose 7% year over year. Test and instrumentation grew 42%, computing 22%, medical 9%, and aerospace and defense 10%; industrials fell 8% and telecommunications fell 17%.
- Gross profit increased with sales, while gross margin remained 9.2% (9.3% excluding a $1.0 million inventory charge related to a customer insolvency). SG&A rose to $130.4 million from $113.4 million, increasing from 4.9% to 5.3% of sales.
- The company recorded a $97.7 million estimated net tax expense from U.S. tax reform, chiefly the transition tax on foreign earnings and remeasurement of deferred taxes. This drove the annual net loss despite higher operating income and pretax income.
- Operating cash flow declined to $145.8 million from $273.1 million. The 2017 total included an $87.3 million increase in income tax liabilities, largely attributable to tax reform, and a $29.5 million increase in accounts payable.
- Cash increased year over year; $673.4 million was held outside the United States. Debt carrying value declined from 2016, and the company repurchased 1.0 million shares for $29.3 million during 2017.
Outlook, management commentary, risks and unusual items
- Quarter four: Sales were $679.9 million versus $607.5 million in fourth-quarter 2016; net loss was $76.3 million versus net income of $18.6 million, primarily reflecting the tax-reform charge.
- Outlook: No specific revenue or earnings guidance is provided. Management expected 2018 capital expenditures of approximately $50–$60 million and believed cash and operating cash flows would meet liquidity needs for at least the next 12 months. Year-end backlog was approximately $2.0 billion, but orders and forecasts may change or be cancelled and management cautioned that backlog is not a meaningful predictor of future results.
- Tax and accounting: Tax-reform accounting remained provisional, with finalization expected by the fourth quarter of 2018. The company adopted ASC 606 on January 1, 2018 using full retrospective adoption; it expected earlier revenue recognition for a significant portion of manufacturing contracts and material balance-sheet changes. Its preliminary estimate was a diluted EPS reduction of about $0.02 for 2017 and an increase of about $0.02 for 2016.
- Other unusual costs: 2017 included $4.9 million of restructuring charges, $3.7 million of headquarters relocation and transition costs, and $2.7 million of charges tied to a customer insolvency ($1.0 million in cost of sales and $1.7 million in SG&A).
- Key risks: Customer concentration is significant: the ten largest customers accounted for 46% of sales; IBM and Applied Materials accounted for 12% and 10%, respectively. Other material exposures include customer order volatility, component shortages and price increases, international operations and currency, government-contract requirements, competition, cybersecurity and systems upgrades, product defects and regulatory compliance, and variable-rate debt.
- Contingencies and controls: Management said ordinary-course legal matters were not expected to materially affect financial position or results. The external auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Final tax-reform accounting, the $87.7 million accrued transition-tax liability and its scheduled payments over eight years.
- Whether ASC 606’s actual retrospective effects match the company’s preliminary EPS and balance-sheet estimates.
- Customer concentration, especially IBM and Applied Materials, and the collectibility and inventory exposure associated with major accounts.
- Conversion of backlog into shipments and cash, given the short customer planning horizons and cancellation or delay risk.
- Operating cash flow quality, including the contribution from higher tax liabilities and accounts payable, alongside planned capital spending.
- Debt maturities, floating-rate exposure, revolving-credit availability and compliance with credit-agreement covenants.