UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
_______________
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20192020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to________________
Commission File Number: 1-10560
BENCHMARK ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Texas | 74-2211011 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization)
| Identification No.) | |
56 South Rockford Drive | 85281 | |
Tempe, Arizona | (Zip Code) | |
(Address of principal executive offices) |
|
(623) 300-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.10 per share | BHE | New York Stock Exchange, Inc. |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
|
|
Large accelerated filer ☑ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Smaller reporting company ☐ |
Emerging growth company ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Act). Yes ☐ No ☑
As of NovemberAugust 4, 20192020, there were 36,917,31636,460,944 shares of common stock of Benchmark Electronics, Inc., par value $0.10 per share, outstanding.
TABLE OF CONTENTS
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PART I—FINANCIAL INFORMATION | ||
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1 | ||
| 1 | |
| 2 | |
| Condensed Consolidated Statements of Comprehensive Income (Loss) | 3 |
| 4 | |
| 6 | |
| 7 | |
Management’s Discussion and Analysis of Financial Condition and |
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PART II—OTHER INFORMATION | ||
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36 | ||
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38 | ||
39 | ||
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40 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
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|
| September 30, | December 31, |
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| June 30, |
|
| December 31, | |||||||
(in thousands, except par value) | (in thousands, except par value) |
| 2019 |
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| 2018 | (in thousands, except par value) |
| 2020 |
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| 2019 | ||||||
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Assets | Assets |
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| Assets |
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| Current assets: |
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| Current assets: |
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| Cash and cash equivalents | $ | 351,167 |
| $ | 347,558 | |||||
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| Cash and cash equivalents | $ | 348,042 |
| $ | 458,102 |
| Restricted cash |
| 5,252 |
|
| 16,398 | ||||
|
| Accounts receivable, net of allowance for doubtful accounts of $69 |
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| Accounts receivable, net of allowance for doubtful accounts of $12,192 |
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| ||||
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| and $1,733, respectively |
| 348,099 |
|
| 468,161 |
| and $10,085, respectively |
| 302,068 |
|
| 324,424 | ||||
|
| Contract assets |
| 161,068 |
|
| 140,082 |
| Contract assets |
| 153,641 |
|
| 161,061 | ||||
|
| Inventories |
| 315,835 |
|
| 309,975 |
| Inventories |
| 363,665 |
|
| 314,956 | ||||
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| Prepaid expenses and other assets |
| 24,017 |
|
| 27,024 |
| Prepaid expenses and other current assets |
| 31,777 |
|
| 29,566 | ||||
|
| Income taxes receivable |
| 1,054 |
|
| 206 |
| Income taxes receivable |
| 549 |
|
| 1,119 | ||||
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| Total current assets |
| 1,198,115 |
|
| 1,403,550 |
| Total current assets |
| 1,208,119 |
|
| 1,195,082 | ||||
| Property, plant and equipment, net of accumulated depreciation of |
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| Property, plant and equipment, net of accumulated depreciation of |
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| $471,987 and $460,708, respectively |
| 199,256 |
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| 210,954 |
| $480,970 and $460,708, respectively |
| 198,001 |
|
| 205,819 | ||||
| Operating lease right-of-use assets |
| 79,854 |
|
| — | Operating lease right-of-use assets |
| 74,170 |
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| 76,859 | ||||||
| Goodwill |
| 192,116 |
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| 192,116 | Goodwill |
| 192,116 |
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| 192,116 | ||||||
| Deferred income taxes |
| 2,257 |
|
| 2,478 | Deferred income taxes |
| 5,336 |
|
| 5,274 | ||||||
| Other, net |
| 87,148 |
|
| 90,685 | Other assets, net |
| 80,293 |
|
| 84,724 | ||||||
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| $ | 1,758,746 |
| $ | 1,899,783 |
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| $ | 1,758,035 |
| $ | 1,759,874 | ||||
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Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity |
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| Liabilities and Shareholders’ Equity |
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| Current liabilities: |
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| Current liabilities: |
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| Current installments of long-term debt | $ | 8,784 |
| $ | 6,793 |
| Current installments of long-term debt | $ | 8,912 |
| $ | 8,825 | ||||
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| Accounts payable |
| 295,693 |
|
| 422,053 |
| Accounts payable |
| 304,601 |
|
| 302,994 | ||||
|
| Income taxes payable |
| 8,892 |
|
| 10,435 |
| Income taxes payable |
| 5,207 |
|
| 7,895 | ||||
|
| Accrued liabilities |
| 127,868 |
|
| 97,878 |
| Accrued liabilities |
| 145,900 |
|
| 139,531 | ||||
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| Total current liabilities |
| 441,237 |
|
| 537,159 |
| Total current liabilities |
| 464,620 |
|
| 459,245 | ||||
| Long-term debt, less current installments |
| 141,017 |
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| 147,277 | Long-term debt, less current installments |
| 164,664 |
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| 138,912 | ||||||
| Operating lease liabilities |
| 70,167 |
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| — | Operating lease liabilities |
| 64,768 |
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| 67,898 | ||||||
| Other long-term liabilities |
| 64,722 |
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| 68,799 | Other long-term liabilities |
| 67,848 |
|
| 65,483 | ||||||
| Deferred income taxes |
| 12,831 |
|
| 14,323 | Deferred income taxes |
| 11,775 |
|
| 13,504 | ||||||
| Shareholders’ equity: |
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| Shareholders’ equity: |
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| Preferred stock, $0.10 par value; 5,000 shares authorized, none issued |
| — |
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| — |
| Preferred stock, $0.10 par value; 5,000 shares authorized, none issued |
| — |
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| — | ||||
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| Common stock, $0.10 par value; 145,000 shares authorized; issued |
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| Common stock, $0.10 par value; 145,000 shares authorized; issued |
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| ||||
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| and outstanding – 37,036 and 41,357, respectively |
| 3,704 |
|
| 4,136 |
| and outstanding – 36,461 and 36,957, respectively |
| 3,646 |
|
| 3,696 | ||||
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| Additional paid-in capital |
| 512,401 |
|
| 554,939 |
| Additional paid-in capital |
| 508,555 |
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| 512,019 | ||||
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| Retained earnings |
| 530,660 |
|
| 584,274 |
| Retained earnings |
| 493,451 |
|
| 515,876 | ||||
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| Accumulated other comprehensive loss |
| (17,993) |
|
| (11,124) |
| Accumulated other comprehensive loss |
| (21,292) |
|
| (16,759) | ||||
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| Total shareholders’ equity |
| 1,028,772 |
|
| 1,132,225 |
| Total shareholders’ equity |
| 984,360 |
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| 1,014,832 | ||||
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| Commitments and contingencies |
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| Commitments and contingencies |
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| ||||
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| $ | 1,758,746 |
| $ | 1,899,783 |
|
| $ | 1,758,035 |
| $ | 1,759,874 |
See accompanying notes to condensed consolidated financial statements.
1
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Loss)
(unaudited)
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| Three Months Ended | Nine Months Ended |
| Three Months Ended | Six Months Ended | ||||||||||||
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| September 30, | September 30, |
| June 30, | June 30, | ||||||||||||
(in thousands, except per share data) | (in thousands, except per share data) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | (in thousands, except per share data) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
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Sales | Sales | $ | 555,229 | $ | 640,688 | $ | 1,759,651 | $ | 1,909,415 | Sales | $ | 490,966 | $ | 601,602 | $ | 1,005,930 | $ | 1,204,422 |
Cost of sales | Cost of sales |
| 502,346 |
| 587,911 |
| 1,599,970 |
| 1,744,021 | Cost of sales |
| 456,294 |
| 552,379 |
| 927,897 |
| 1,105,162 |
| Gross profit |
| 52,883 |
| 52,777 |
| 159,681 |
| 165,394 | Gross profit |
| 34,672 |
| 49,223 |
| 78,033 |
| 99,260 |
Selling, general and administrative expenses | Selling, general and administrative expenses |
| 34,875 |
| 37,607 |
| 103,927 |
| 109,182 | Selling, general and administrative expenses |
| 28,516 |
| 31,507 |
| 60,091 |
| 61,514 |
Amortization of intangible assets | Amortization of intangible assets |
| 2,367 |
| 2,368 |
| 7,095 |
| 7,101 | Amortization of intangible assets |
| 2,371 |
| 2,361 |
| 4,752 |
| 4,728 |
Restructuring charges and other costs | Restructuring charges and other costs |
| 5,843 |
| 1,845 |
| 10,833 |
| 5,838 | Restructuring charges and other costs |
| 5,657 |
| 3,414 |
| 8,572 |
| 4,990 |
| Income from operations |
| 9,798 |
| 10,957 |
| 37,826 |
| 43,273 | Income (loss) from operations |
| (1,872) |
| 11,941 |
| 4,618 |
| 28,028 |
Interest expense | Interest expense |
| (1,687) |
| (3,822) |
| (5,014) |
| (8,543) | Interest expense |
| (2,351) |
| (1,718) |
| (4,053) |
| (3,327) |
Interest income | Interest income |
| 734 |
| 1,619 |
| 3,084 |
| 5,197 | Interest income |
| 287 |
| 1,053 |
| 886 |
| 2,350 |
Other income (expense) | Other income (expense) |
| (136) |
| 1,139 |
| 2,276 |
| 827 | Other income (expense) |
| 32 |
| 808 |
| (630) |
| 2,412 |
| Income before income taxes |
| 8,709 |
| 9,893 |
| 38,172 |
| 40,754 | Income (loss) before income taxes |
| (3,904) |
| 12,084 |
| 821 |
| 29,463 |
Income tax expense |
| 1,573 |
| 2,094 |
| 7,816 |
| 45,653 | ||||||||||
Income tax expense (benefit) | Income tax expense (benefit) |
| (497) |
| 2,637 |
| 376 |
| 6,243 | |||||||||
| Net income (loss) | $ | 7,136 | $ | 7,799 | $ | 30,356 | $ | (4,899) | Net income (loss) | $ | (3,407) | $ | 9,447 | $ | 445 | $ | 23,220 |
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Earnings (loss) per share: | Earnings (loss) per share: |
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| Earnings (loss) per share: |
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| Basic | $ | 0.19 | $ | 0.17 | $ | 0.78 | $ | (0.10) | Basic | $ | (0.09) | $ | 0.25 | $ | 0.01 | $ | 0.59 |
| Diluted | $ | 0.19 | $ | 0.17 | $ | 0.77 | $ | (0.10) | Diluted | $ | (0.09) | $ | 0.24 | $ | 0.01 | $ | 0.58 |
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Weighted-average number of shares outstanding: | Weighted-average number of shares outstanding: |
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| Weighted-average number of shares outstanding: |
|
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| ||||
| Basic |
| 37,419 |
| 46,301 |
| 38,813 |
| 47,415 | Basic |
| 36,439 |
| 38,426 |
| 36,614 |
| 39,522 |
| Diluted |
| 37,645 |
| 46,455 |
| 39,184 |
| 47,415 | Diluted |
| 36,439 |
| 38,583 |
| 36,863 |
| 39,843 |
See accompanying notes to condensed consolidated financial statements.
2
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
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| Three Months Ended |
| Nine Months Ended |
|
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| Three Months Ended |
| Six Months Ended | ||||||||||||||||
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|
| September 30, |
| September 30, |
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|
| June 30, |
| June 30, | ||||||||||||||||
(in thousands) | (in thousands) |
| 2019 |
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| 2018 |
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| 2019 |
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| 2018 | (in thousands) |
| 2020 |
|
| 2019 |
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| 2020 |
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| 2019 | ||||||
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Net income (loss) | Net income (loss) | $ | 7,136 |
| $ | 7,799 |
| $ | 30,356 |
| $ | (4,899) | Net income (loss) | $ | (3,407) |
| $ | 9,447 |
| $ | 445 |
| $ | 23,220 | ||||||
Other comprehensive income (loss): | Other comprehensive income (loss): |
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| Other comprehensive income (loss): |
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| ||||||
| Foreign currency translation adjustments |
| (1,470) |
|
| (249) |
|
| (1,718) |
|
| (1,569) | Foreign currency translation adjustments |
| 866 |
|
| 585 |
|
| (391) |
|
| (248) | ||||||
| Unrealized gain on investments, net of tax |
| — |
|
| — |
|
| — |
|
| 41 | Unrealized loss on derivative, net of tax |
| (264) |
|
| (2,261) |
|
| (4,358) |
|
| (3,546) | ||||||
| Unrealized gain (loss) on derivative, net of tax |
| (853) |
|
| 82 |
|
| (4,399) |
|
| 1,159 | Other |
| 101 |
|
| (191) |
|
| 216 |
|
| (206) | ||||||
| Other |
| (546) |
|
| — |
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| (752) |
|
| — | ||||||||||||||||||
Other comprehensive loss |
| (2,869) |
|
| (167) |
|
| (6,869) |
|
| (369) | |||||||||||||||||||
Other comprehensive income (loss): | Other comprehensive income (loss): |
| 703 |
|
| (1,867) |
|
| (4,533) |
|
| (4,000) | ||||||||||||||||||
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| Comprehensive income (loss) | $ | 4,267 |
| $ | 7,632 |
| $ | 23,487 |
| $ | (5,268) |
|
| Comprehensive income (loss) | $ | (2,704) |
| $ | 7,580 |
| $ | (4,088) |
| $ | 19,220 | ||
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See accompanying notes to condensed consolidated financial statements.
3
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(unaudited)
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| Accumulated |
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| Accumulated |
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| Common Stock |
| Additional |
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| Other |
| Total |
|
| Common Stock |
| Additional |
|
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| Other |
| Total | ||||||||||||
|
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| Shares |
| Par |
| Paid-in |
| Retained |
| Comprehensive | Shareholders’ |
|
| Shares |
| Par |
| Paid-in |
| Retained |
| Comprehensive |
| Shareholders’ | |||||||||
(in thousands) | (in thousands) |
| Outstanding |
| Value |
| Capital |
| Earnings |
| Loss |
| Equity | (in thousands) |
| Outstanding |
| Value |
| Capital |
| Earnings |
| Loss |
| Equity | ||||||||
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Balances, December 31, 2018 | 41,357 |
|
| $ 4,136 |
| $ 554,939 |
| $ 584,274 |
|
| $ (11,124) |
|
| $ 1,132,225 | ||||||||||||||||||||
Balances, December 31, 2019 | Balances, December 31, 2019 | 36,957 |
|
| $ 3,696 |
| $ 512,019 |
| $ 515,876 |
|
| $ (16,759) |
|
| $ 1,014,832 | |||||||||||||||||||
Stock-based compensation expense | Stock-based compensation expense |
| — |
|
| — |
| 8,461 |
| — |
| — |
| 8,461 | Stock-based compensation expense |
| — |
| — |
| 6,044 |
| — |
| — |
| 6,044 | |||||||
Shares repurchased and retired | Shares repurchased and retired |
| (4,590) |
|
| (459) |
| (51,004) |
| (66,887) |
| — |
| (118,350) | Shares repurchased and retired |
| (724) |
| (73) |
| (8,048) |
| (11,208) |
| — |
| (19,329) | |||||||
Stock options exercised | Stock options exercised |
| 65 |
|
| 6 |
| 1,344 |
| — |
| — |
| 1,350 | Stock options exercised |
| 17 |
| 2 |
| 362 |
| — |
| — |
| 364 | |||||||
Vesting of restricted stock units | Vesting of restricted stock units |
| 252 |
|
| 25 |
| (25) |
| — |
| — |
| — | Vesting of restricted stock units |
| 283 |
| 28 |
| (28) |
| — |
| — |
| — | |||||||
Shares withheld for taxes | Shares withheld for taxes |
| (48) |
|
| (4) |
| (1,314) |
| — |
| — |
| (1,318) | Shares withheld for taxes |
| (72) |
| (7) |
| (1,794) |
| — |
| — |
| (1,801) | |||||||
Dividends declared | Dividends declared |
| — |
|
| — |
| — |
| (17,083) |
| — |
| (17,083) | Dividends declared |
| — |
| — |
| — |
| (11,662) |
| — |
| (11,662) | |||||||
Net income | Net income |
| — |
|
| — |
| — |
| 30,356 |
| — |
| 30,356 | Net income |
| — |
| — |
| — |
| 445 |
| — |
| 445 | |||||||
Other comprehensive loss | Other comprehensive loss |
|
| — |
|
| — |
| — |
| — |
| (6,869) |
| (6,869) | Other comprehensive loss |
|
| — |
|
| — |
| — |
| — |
| (4,533) |
| (4,533) | ||||
Balances, September 30, 2019 |
|
| 37,036 |
|
| $ 3,704 |
| $ 512,401 |
| $ 530,660 |
|
| $ (17,993) |
|
| $ 1,028,772 | ||||||||||||||||||
Balances, June 30, 2020 | Balances, June 30, 2020 |
|
| 36,461 |
|
| $ 3,646 |
| $ 508,555 |
| $ 493,451 |
|
| $ (21,292) |
|
| $ 984,360 | |||||||||||||||||
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| ||
Balances, June 30, 2019 | 37,679 |
|
| $ 3,768 |
| $ 516,663 |
| $ 539,743 |
|
| $ (15,124) |
|
| $ 1,045,050 | ||||||||||||||||||||
Balances, March 31, 2020 | Balances, March 31, 2020 | 36,415 |
|
| $ 3,642 |
| $ 505,283 |
| $ 502,692 |
|
| $ (21,995) |
|
| $ 989,622 | |||||||||||||||||||
Stock-based compensation expense | Stock-based compensation expense |
| — |
|
| — |
| 2,741 |
| — |
| — |
|
| 2,741 | Stock-based compensation expense |
| — |
| — |
| 3,305 |
| — |
| — |
|
| 3,305 | |||||
Shares repurchased and retired |
| (682) |
|
| (68) |
| (7,580) |
| (10,663) |
| — |
|
| (18,311) | ||||||||||||||||||||
Stock options exercised | Stock options exercised |
| 32 |
|
| 3 |
| 654 |
| — |
| — |
|
| 657 | Stock options exercised |
| 1 |
| — |
| 5 |
| — |
| — |
|
| 5 | |||||
Vesting of restricted stock units | Vesting of restricted stock units |
| 10 |
|
| 1 |
| (1) |
| — |
| — |
|
| — | Vesting of restricted stock units |
| 47 |
| 4 |
| (4) |
| — |
| — |
|
| — | |||||
Shares withheld for taxes | Shares withheld for taxes |
| (3) |
|
| — |
| (76) |
| — |
| — |
|
| (76) | Shares withheld for taxes |
| (2) |
| — |
| (34) |
| — |
| — |
|
| (34) | |||||
Dividends declared | Dividends declared |
| — |
|
| — |
| — |
| (5,556) |
| — |
|
| (5,556) | Dividends declared |
| — |
| — |
| — |
| (5,834) |
| — |
|
| (5,834) | |||||
Net income |
| — |
|
| — |
| — |
| 7,136 |
| — |
|
| 7,136 | ||||||||||||||||||||
Other comprehensive loss |
|
| — |
|
| — |
| — |
| — |
| (2,869) |
|
| (2,869) | |||||||||||||||||||
Balances, September 30, 2019 |
|
| 37,036 |
|
| $ 3,704 |
| $ 512,401 |
| $ 530,660 |
|
| $ (17,993) |
|
| $ 1,028,772 | ||||||||||||||||||
Net loss | Net loss |
| — |
| — |
| — |
| (3,407) |
| — |
|
| (3,407) | ||||||||||||||||||||
Other comprehensive income | Other comprehensive income |
|
| — |
|
| — |
| — |
| — |
| 703 |
|
| 703 | ||||||||||||||||||
Balances, June 30, 2020 | Balances, June 30, 2020 |
|
| 36,461 |
|
| $ 3,646 |
| $ 508,555 |
| $ 493,451 |
|
| $ (21,292) |
|
| $ 984,360 |
See accompanying notes to condensed consolidated financial statements.
4
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| ||
|
|
| Common Stock |
| Additional |
|
|
| Other |
| Total |
|
| Common Stock |
| Additional |
|
|
| Other |
| Total | ||||||||||||
|
|
| Shares |
| Par |
| Paid-in |
| Retained |
| Comprehensive | Shareholders’ |
|
| Shares |
| Par |
| Paid-in |
| Retained |
| Comprehensive |
| Shareholders’ | |||||||||
(in thousands) | (in thousands) |
| Outstanding |
| Value |
| Capital |
| Earnings |
| Loss |
| Equity | (in thousands) |
| Outstanding |
| Value |
| Capital |
| Earnings |
| Loss |
| Equity | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balances, December 31, 2017 | 49,143 |
|
| $ 4,914 |
| $ 634,192 |
| $ 708,181 |
|
| $ (8,149) |
|
| $ 1,339,138 | ||||||||||||||||||||
Stock-based compensation expense |
| — |
|
| — |
| 8,229 |
| — |
| — |
| 8,229 | |||||||||||||||||||||
Shares repurchased and retired |
| (4,401) |
|
| (440) |
| (48,913) |
| (72,700) |
| — |
| (122,053) | |||||||||||||||||||||
Stock options exercised |
| 187 |
|
| 19 |
| 3,444 |
| — |
| — |
| 3,463 | |||||||||||||||||||||
Vesting of restricted stock units |
| 229 |
|
| 23 |
| (23) |
| — |
| — |
| — | |||||||||||||||||||||
Shares withheld for taxes |
| (28) |
|
| (3) |
| (819) |
| — |
| — |
| (822) | |||||||||||||||||||||
Dividends declared |
| — |
|
| — |
| — |
| (21,005) |
| — |
| (21,005) | |||||||||||||||||||||
Net loss |
| — |
|
| — |
| — |
| (4,899) |
| — |
| (4,899) | |||||||||||||||||||||
Other comprehensive loss |
|
| — |
|
| — |
| — |
| — |
| (369) |
| (369) | ||||||||||||||||||||
Balances, September 30, 2018 |
|
| 45,130 |
|
| $ 4,513 |
| $ 596,110 |
| $ 609,577 |
|
| $ (8,518) |
|
| $ 1,201,682 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balances, June 30, 2018 | 47,334 |
|
| $ 4,733 |
| $ 607,984 |
| $ 639,779 |
|
| $ (8,351) |
|
| $ 1,244,145 | ||||||||||||||||||||
Balances, December 31, 2018 | Balances, December 31, 2018 | 41,357 |
|
| $ 4,136 |
| $ 554,939 |
| $ 584,274 |
|
| $ (11,124) |
|
| 1,132,225 | |||||||||||||||||||
Stock-based compensation expense | Stock-based compensation expense |
| — |
|
| — |
| 2,824 |
| — |
| — |
|
| 2,824 | Stock-based compensation expense |
| — |
|
| — |
| 5,720 |
| — |
| — |
| 5,720 | |||||
Shares repurchased and retired | Shares repurchased and retired |
| (2,227) |
|
| (223) |
| (14,730) |
| (31,232) |
| — |
|
| (46,185) | Shares repurchased and retired |
| (3,908) |
|
| (391) |
| (43,424) |
| (56,224) |
| — |
| (100,039) | |||||
Stock options exercised | Stock options exercised |
| 5 |
|
| 1 |
| 85 |
| — |
| — |
|
| 86 | Stock options exercised |
| 33 |
|
| 3 |
| 690 |
| — |
| — |
| 693 | |||||
Vesting of restricted stock units | Vesting of restricted stock units |
| 20 |
|
| 2 |
| (2) |
| — |
| — |
|
| — | Vesting of restricted stock units |
| 242 |
|
| 24 |
| (24) |
| — |
| — |
| — | |||||
Shares withheld for taxes | Shares withheld for taxes |
| (2) |
|
| — |
| (51) |
| — |
| — |
|
| (51) | Shares withheld for taxes |
| (45) |
|
| (4) |
| (1,238) |
| — |
| — |
| (1,242) | |||||
Dividends declared | Dividends declared |
| — |
|
| — |
| — |
| (6,769) |
| — |
|
| (6,769) | Dividends declared |
| — |
|
| — |
| — |
| (11,527) |
| — |
| (11,527) | |||||
Net income | Net income |
| — |
|
| — |
| — |
| 7,799 |
| — |
|
| 7,799 | Net income |
| — |
|
| — |
| — |
| 23,220 |
| — |
| 23,220 | |||||
Other comprehensive loss | Other comprehensive loss |
|
| — |
|
| — |
| — |
| — |
| (167) |
|
| (167) | Other comprehensive loss |
|
| — |
|
| — |
| — |
| — |
| (4,000) |
| (4,000) | |||
Balances, September 30, 2018 |
|
| 45,130 |
|
| $ 4,513 |
| $ 596,110 |
| $ 609,577 |
|
| $ (8,518) |
|
| $ 1,201,682 | ||||||||||||||||||
Balances, June 30, 2019 | Balances, June 30, 2019 |
|
| 37,679 |
|
| $ 3,768 |
| $ 516,663 |
| $ 539,743 |
|
| $ (15,124) |
|
| $ 1,045,050 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balances, March 31, 2019 | Balances, March 31, 2019 | 39,169 |
|
| $ 3,917 |
| $ 530,261 |
| $ 557,804 |
|
| $ (13,257) |
|
| $ 1,078,725 | |||||||||||||||||||
Stock-based compensation expense | Stock-based compensation expense |
| — |
|
| — |
| 2,948 |
| — |
| — |
|
| 2,948 | |||||||||||||||||||
Shares repurchased and retired | Shares repurchased and retired |
| (1,525) |
|
| (152) |
| (16,951) |
| (21,856) |
| — |
|
| (38,959) | |||||||||||||||||||
Stock options exercised | Stock options exercised |
| 20 |
|
| 2 |
| 412 |
| — |
| — |
|
| 414 | |||||||||||||||||||
Vesting of restricted stock units | Vesting of restricted stock units |
| 15 |
|
| 1 |
| (1) |
| — |
| — |
|
| — | |||||||||||||||||||
Shares withheld for taxes | Shares withheld for taxes |
| — |
|
| — |
| (6) |
| — |
| — |
|
| (6) | |||||||||||||||||||
Dividends declared | Dividends declared |
| — |
|
| — |
| — |
| (5,652) |
| — |
|
| (5,652) | |||||||||||||||||||
Net income | Net income |
| — |
|
| — |
| — |
| 9,447 |
| — |
|
| 9,447 | |||||||||||||||||||
Other comprehensive loss | Other comprehensive loss |
|
| — |
|
| — |
| — |
| — |
| (1,867) |
|
| (1,867) | ||||||||||||||||||
Balances, June 30, 2019 | Balances, June 30, 2019 |
|
| 37,679 |
|
| $ 3,768 |
| $ 516,663 |
| $ 539,743 |
|
| $ (15,124) |
|
| $ 1,045,050 |
See accompanying notes to condensed consolidated financial statements.
5
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
| Nine Months Ended |
|
| Six Months Ended | ||||||||||||
|
|
| September 30, |
|
| June 30, | ||||||||||||
(in thousands) | (in thousands) |
| 2019 |
| 2018 | (in thousands) |
| 2020 |
| 2019 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flows from operating activities: | Cash flows from operating activities: |
|
|
|
| Cash flows from operating activities: |
|
|
|
| ||||||||
| Net income (loss) | $ | 30,356 |
| $ | (4,899) | Net income | $ | 445 |
| $ | 23,220 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by |
|
|
|
| Adjustments to reconcile net income to net cash provided by |
|
|
|
| ||||||||
|
| operating activities: |
|
|
|
|
| operating activities: |
|
|
|
| ||||||
|
| Depreciation |
| 27,920 |
|
| 29,104 |
| Depreciation |
| 18,813 |
|
| 18,420 | ||||
|
| Amortization |
| 8,469 |
|
| 10,539 |
| Amortization |
| 5,718 |
|
| 5,705 | ||||
|
| Provision for doubtful accounts |
| (1,462) |
|
| 1,714 |
| Provision for doubtful accounts |
| 2,107 |
|
| (1,462) | ||||
|
| Deferred income taxes |
| 206 |
|
| 11,863 |
| Deferred income taxes |
| (330) |
|
| 1,555 | ||||
|
| Gain on the sale of property, plant and equipment |
| (60) |
|
| (215) |
| Gain on the sale of property, plant and equipment |
| (139) |
|
| (25) | ||||
|
| Asset impairments |
| 834 |
|
| 96 |
| Asset impairments |
| 1,214 |
|
| 834 | ||||
|
| Stock-based compensation expense |
| 8,461 |
|
| 8,229 |
| Stock-based compensation expense |
| 6,044 |
|
| 5,720 | ||||
|
| Other, net |
| 652 |
|
| — | Changes in operating assets and liabilities: |
|
|
|
| ||||||
| Changes in operating assets and liabilities: |
|
|
|
|
| Accounts receivable |
| 20,356 |
|
| 106,749 | ||||||
|
| Accounts receivable |
| 121,171 |
|
| (21,733) |
| Contract assets |
| 7,420 |
|
| (15,464) | ||||
|
| Contract assets |
| (20,986) |
|
| (9,402) |
| Inventories |
| (48,668) |
|
| (6,327) | ||||
|
| Inventories |
| (6,557) |
|
| (54,342) |
| Prepaid expenses and other assets |
| (1,234) |
|
| 1,559 | ||||
|
| Prepaid expenses and other assets |
| 2,944 |
|
| 2,493 |
| Accounts payable |
| 6,980 |
|
| (49,428) | ||||
|
| Accounts payable |
| (122,156) |
|
| 12,620 |
| Accrued liabilities |
| 3,091 |
|
| (13,243) | ||||
|
| Accrued liabilities |
| 16,301 |
|
| 2,170 |
| Operating leases |
| 236 |
|
| 574 | ||||
|
| Income taxes |
| (8,779) |
|
| (5,530) |
| Income taxes |
| (2,135) |
|
| (9,615) | ||||
|
| Net cash provided by (used in) operations |
| 57,314 |
|
| (17,293) |
| Net cash provided by operations |
| 19,918 |
|
| 68,772 | ||||
Cash flows from investing activities: | Cash flows from investing activities: |
|
|
|
| Cash flows from investing activities: |
|
|
|
| ||||||||
| Proceeds from sales of investments at par |
| 50 |
|
| 522 | Proceeds from sales of investments at par |
| — |
|
| 50 | ||||||
| Additions to property, plant and equipment |
| (23,746) |
|
| (50,437) | Additions to property, plant and equipment |
| (21,402) |
|
| (14,163) | ||||||
| Proceeds from the sale of property, plant and equipment |
| 231 |
|
| 237 | Proceeds from the sale of property, plant and equipment |
| 307 |
|
| 28 | ||||||
| Additions to purchased software |
| (2,196) |
|
| (2,496) | Additions to purchased software |
| (1,888) |
|
| (1,332) | ||||||
| Business acquisition, net of cash acquired |
| — |
|
| (2,731) | Cash received from business divestitures |
| 2,214 |
|
| — | ||||||
| Other |
| (29) |
|
| (130) | Other |
| 55 |
|
| (29) | ||||||
|
| Net cash used in investing activities |
| (25,690) |
|
| (55,035) |
| Net cash used in investing activities |
| (20,714) |
|
| (15,446) | ||||
Cash flows from financing activities: | Cash flows from financing activities: |
|
|
|
| Cash flows from financing activities: |
|
|
|
| ||||||||
| Proceeds from stock options exercised |
| 1,350 |
|
| 3,463 | Proceeds from stock options exercised |
| 364 |
|
| 693 | ||||||
| Employee taxes paid for shares withheld |
| (1,318) |
|
| (822) | Employee taxes paid for shares withheld |
| (1,801) |
|
| (1,242) | ||||||
| Dividends paid |
| (17,731) |
|
| (14,235) | Dividends paid |
| (11,365) |
|
| (12,079) | ||||||
| Borrowings under credit agreement |
| — |
|
| 50,000 | Borrowings under credit agreement |
| 110,000 |
|
| — | ||||||
| Principal payments on long-term debt |
| (4,614) |
|
| (107,758) | Principal payments on long-term debt |
| (84,392) |
|
| (2,441) | ||||||
| Share repurchases |
| (118,350) |
|
| (122,053) | Share repurchases |
| (19,329) |
|
| (100,039) | ||||||
| Debt issuance costs |
| — |
|
| (2,303) |
| Net cash used in financing activities |
| (6,523) |
|
| (115,108) | |||||
|
| Net cash used in financing activities |
| (140,663) |
|
| (193,708) | |||||||||||
Effect of exchange rate changes | Effect of exchange rate changes |
| (1,021) |
|
| (797) | Effect of exchange rate changes |
| (218) |
|
| 293 | ||||||
Net decrease in cash and cash equivalents |
| (110,060) |
|
| (266,833) | |||||||||||||
Net decrease in cash and cash equivalents and restricted cash | Net decrease in cash and cash equivalents and restricted cash |
| (7,537) |
|
| (61,489) | ||||||||||||
| Cash and cash equivalents at beginning of year |
| 458,102 |
|
| 742,546 | Cash and cash equivalents and restricted cash at beginning of year |
| 363,956 |
|
| 458,102 | ||||||
| Cash and cash equivalents at end of period | $ | 348,042 |
| $ | 475,713 | Cash and cash equivalents and restricted cash at end of period | $ | 356,419 |
| $ | 396,613 |
See accompanying notes to condensed consolidated financial statements.
6
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(amounts in thousands, except per share data, unless otherwise noted)
(unaudited)
Note 1 – Basis of Presentation
Benchmark Electronics, Inc. (the Company) is a Texas corporation that provides innovative product design, engineering services, technology solutions and advanced manufacturing services. From initial product concept to volume production, including direct order fulfillment and aftermarket services, the Company has been providing integrated services and solutions to original equipment manufacturers (OEMs) since 1979. The Company serves the following industries: aerospace and defense (A&D), medical technologies, complex industrials, semiconductor capital equipment (Semi-Cap), next-generation telecommunications and advanced computing. The Company has manufacturing operations located in the United States and Mexico (the Americas), Asia and Europe.
The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The financial statements reflect all normal and recurring adjustments necessary in the opinion of management for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s annual reportAnnual Report on Form 10-K for the year ended December 31, 20182019 (the 20182019 10-K).
Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Actual with consideration given to the potential impacts of the coronavirus disease 2019 (COVID-19) pandemic. However, actual results could differ materially from thosethese estimates and assumptions.be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that results from the pandemic.
For comparative purposes and based on ongoing evaluation of personnel roles involved in the production process, prior year expenses associated with certain personnel have been reclassified from selling, general and administrative expenses to cost of goods sold to conform to the current year presentation.
Note 2 – New Accounting Pronouncements
Adopted in 20192020
In FebruaryJune 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,2016-13, LeasesFinancial Instruments – Credit Losses (Topic 842)326): Measurement of Credit Losses on Financial Instruments, amended by ASU 2018-01, Land Easement Practical Expedient for Transition to ASU 842, ASU No. 2018-10, Codification Improvements to ASU 842 and ASU No. 2018-11, Targeted Improvements. The new standard established a right-to-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.
The Company adopted this standard on its effective date of January 1, 2019 using the effective date as its date of initial application under the modified retrospective approach. Therefore, financial information for prior periods were not restated. Management elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019, which permits the Company to carry forward its original assessment about lease identification, lease classification and initial directs costs. For all new and modified leases after adoption, management elected the short-term lease recognition exemption for all of the Company’s leases that qualify, in addition to the practical expedient to not separate lease and nonlease components.
Lease assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate, unless the implicit rate is readily determinable. Our incremental borrowing rate represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. Lease assets also include any upfront lease payments made and exclude lease incentives.
7
Lease terms include options to extend orterminate the lease when it is reasonably certain that those options will be exercised. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. See Note 19.
Not Yet Adopted
In June 2016, the FASB issued an accounting standards update, which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update is effective for annual reporting periods beginning after December 15, 2019. The Company does not expectadopted this update effective January 1, 2020 and the implementation of this update todid not have a material impact on its consolidated financial position, results of operations or cash flows, and will adopt this update effective January 1, 2020.flows.
Not Yet Adopted
The Company has determined that other recently issued accounting standards will either not have noa material impact on its consolidated financial position, results of operations or cash flows, or will not apply to its operations.
7
Note 3 – Contract Assets
As of June 30, 2020 and December 31, 2019, the Company had $153.6 million and $161.1 million, respectively, in contract assets from contracts with customers. The contract assets primarily relate to the Company’s right to consideration for work completed but not billed at the reporting date. The contract assets are transferred to accounts receivable when the rights become unconditional.
Significant changes in the contract asset balance during the period are as follows:
| Six Months Ended | ||||
| June 30, | ||||
(in thousands) |
| 2020 |
|
| 2019 |
Beginning balance as of December 31, | $ | 161,061 |
| $ | 140,082 |
Revenue recognized |
| 915,600 |
|
| 1,109,396 |
Amounts collected or invoiced |
| (923,020) |
|
| (1,093,932) |
Ending balance as of June 30, | $ | 153,641 |
| $ | 155,546 |
Note 4 – Inventories | |||||
Inventory costs are summarized as follows: | |||||
| June 30, | December 31, | |||
(in thousands) |
| 2020 |
|
| 2019 |
|
|
|
|
| |
Raw materials | $ | 349,069 |
| $ | 304,069 |
Work in process |
| 9,929 |
|
| 8,282 |
Finished goods |
| 4,667 |
|
| 2,605 |
| $ | 363,665 |
| $ | 314,956 |
Note 5 – Goodwill and Other Intangible Assets
Goodwill allocated to the Company’s reportable segments was as follows:
(in thousands) |
| Americas |
| Asia |
| Total |
Goodwill as of December 31, 2019 and June 30, 2020 | $ | 154,014 | $ | 38,102 | $ | 192,116 |
Other assets, net consist primarily of acquired identifiable intangible assets and capitalized purchased software costs. Intangible assets as of June 30, 2020 and December 31, 2019 were as follows:
|
| As of June 30, 2020 | ||||||
|
| Gross |
|
|
|
|
| Net |
|
| Carrying |
| Accumulated |
| Carrying | ||
(in thousands) |
| Amount |
| Amortization |
| Amount | ||
Customer relationships | $ | 100,124 |
| $ | (50,154) |
| $ | 49,970 |
Purchased software costs |
| 43,365 |
|
| (32,637) |
|
| 10,728 |
Technology licenses |
| 28,800 |
|
| (25,669) |
|
| 3,131 |
Trade names and trademarks |
| 7,800 |
|
| — |
|
| 7,800 |
Other |
| 868 |
|
| (321) |
|
| 547 |
Total | $ | 180,957 |
| $ | (108,781) |
| $ | 72,176 |
|
|
|
|
|
|
|
|
|
8
|
| As of December 31, 2019 | ||||||
|
| Gross |
|
|
|
|
| Net |
|
| Carrying |
| Accumulated |
| Carrying | ||
(in thousands) |
| Amount |
| Amortization |
| Amount | ||
Customer relationships | $ | 100,123 |
| $ | (46,981) |
| $ | 53,142 |
Purchased software costs |
| 41,604 |
|
| (32,012) |
|
| 9,592 |
Technology licenses |
| 28,800 |
|
| (24,100) |
|
| 4,700 |
Trade names and trademarks |
| 7,800 |
|
| — |
|
| 7,800 |
Other |
| 868 |
|
| (309) |
|
| 559 |
Total | $ | 179,195 |
| $ | (103,402) |
| $ | 75,793 |
Customer relationships are being amortized on a straight-line basis over a period of 10 to 14 years. Capitalized purchased software costs are amortized straight-line over the estimated useful life of the related software, which ranges from 2 to 10 years. Technology licenses are being amortized over their estimated useful lives in proportion to the economic benefits consumed. The Company’s acquired trade names and trademarks have been determined to have an indefinite life. Amortization on the statements of cash flow for the six months ended June 30, 2020 and 2019 was as follows:
| Six Months Ended | ||||
| June 30, | ||||
(in thousands) |
| 2020 |
|
| 2019 |
Amortization of intangible assets | $ | 4,752 |
| $ | 4,728 |
Amortization of capitalized purchased software costs |
| 736 |
|
| 747 |
Amortization of debt costs |
| 230 |
|
| 230 |
| $ | 5,718 |
| $ | 5,705 |
The estimated future amortization expense of acquired intangible assets for each of the next five years is as follows (in thousands):
Year ending December 31, |
| Amount |
2020 (remaining six months) | $ | 5,330 |
2021 |
| 8,142 |
2022 |
| 8,001 |
2023 |
| 6,755 |
2024 |
| 5,581 |
Note 6—Borrowing Facilities
Long-term debt outstanding as of June 30, 2020 and December 31, 2019 consists of the following:
|
| June 30, |
| December 31, | ||
(in thousands) | 2020 |
|
| 2019 | ||
| Revolving credit facility, due 2023 | $ | 30,000 |
| $ | — |
| Term loan, due 2023 |
| 140,625 |
|
| 144,375 |
| Less unamortized debt issuance costs |
| (1,387) |
|
| (1,616) |
| Long-term debt | $ | 169,238 |
| $ | 142,759 |
On July 20, 2018, the Company entered into a $650 million credit agreement (the Credit Agreement) by and among the Company, certain of its subsidiaries, the lenders party thereto and Bank of America, N.A., as Administrative Agent, Swingline Lender and a L/C Issuer. The Credit Agreement is comprised of a 5
9
-year $500 million revolving credit facility (the Revolving Credit Facility) and a 5-year $150 million term loan facility (the Term Loan Facility), both with a maturity date of July 20, 2023. The Term Loan Facility proceeds were used to (i) refinance a portion of existing indebtedness and terminate all commitments under the Company’s prior $430 million credit agreement and (ii) pay the fees, costs and expenses associated with the foregoing and the negotiation, execution and delivery of the Credit Agreement.
The Revolving Credit Facility is available for general corporate purposes. The Credit Agreement includes an accordion feature pursuant to which the Company is permitted to add one or more incremental term loan and/or increase commitments under the Revolving Credit Facility in an aggregate amount not exceeding $275 million, subject to the satisfaction of certain conditions.
The Term Loan Facility is payable in quarterly principal installments of $1.9 million with the balance payable on July 20, 2023.
Interest on outstanding borrowings under the Credit Agreement (other than swingline loans) accrues, at the Company’s option, at (a) the London Interbank Offered Rate (LIBOR) plus 1.0% to 2.0% or (b) the base rate plus 0.0% to 1.0%.
As of June 30, 2020, $140.6 million of the outstanding debt under the Credit Agreement is effectively at a fixed interest rate of 2.928% (plus the applicable margin) as a result of a $140.6 million notional interest rate swap contract discussed in Note 16. A commitment fee of 0.20% to 0.30% per annum (based on the debt to EBITDA ratio) on the unused portion of the revolving credit line is payable quarterly in arrears.
The Credit Agreement is generally secured by a pledge of (a) all the capital stock of the Company’s domestic subsidiaries and 65% of the capital stock of its directly owned foreign subsidiaries, (b) all or substantially all other personal property of Benchmark and its domestic subsidiaries (including, but not limited to, accounts receivable, contract assets, inventory, intellectual property and fixed assets of Benchmark and its domestic subsidiaries), in each case, subject to customary exceptions and limitations, and (c) all proceeds and products of the property and assets described in (a) and (b) above.
The Credit Agreement contains certain financial covenants as to interest coverage and debt leverage, and certain customary affirmative and negative covenants, including restrictions on the Company’s ability to incur additional debt and liens, pay dividends, repurchase shares, sell assets and merge or consolidate with other persons. Amounts due under the Credit Agreement could be accelerated upon specified events of default, including a failure to pay amounts due, breach of a covenant, material inaccuracy of a representation, or occurrence of bankruptcy or insolvency, subject, in some cases, to cure periods.
As of June 30, 2020, the Company had $140.6 million in borrowings outstanding under the Term Loan Facility and $30.0 million in borrowings and $3.7 million in letters of credit outstanding under the Revolving Credit Facility, respectively. The Company had $466.3 million available for future borrowings under the Revolving Credit Facility subject to compliance with financial covenants as to interest coverage and debt leverage, in addition to other debt covenant restrictions.
Note 7 – Leases
The Company determines if a contract is or contains a lease at inception. The Company has entered into leases for certain facilities, vehicles and other equipment. The Company’s leases consist mainly of operating leases which expire at various dates through 2036. Variable lease payments are generally expensed as incurred and include certain index-based changes in rent, certain nonlease components, such as maintenance and other services provided by the lessor, and other charges included in the lease.
10
The components of lease expense were as follows:
|
|
| Three Months Ended |
| Six Months Ended | ||||||
|
|
| June 30, |
|
| June 30, | |||||
(in thousands) |
| 2020 |
|
| 2019 |
|
| 2020 |
| 2019 | |
Finance lease cost: |
|
|
|
|
|
|
|
|
|
| |
| Amortization of right-to-use assets (included in depreciation expense) | $ | 177 |
| $ | 178 |
| $ | 355 | $ | 356 |
| Interest on lease liabilities |
| 109 |
|
| 141 |
|
| 227 |
| 287 |
Operating lease cost |
| 3,997 |
|
| 4,232 |
|
| 8,138 |
| 8,680 | |
Short-term lease cost |
| 137 |
|
| 121 |
|
| 378 |
| 321 | |
Variable lease cost |
| 406 |
|
| 371 |
|
| 916 |
| 737 | |
| Total lease cost | $ | 4,826 |
| $ | 5,043 |
| $ | 10,014 | $ | 10,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended | ||||||||
|
|
| June 30, 2020 |
| June 30, 2019 | ||||||
Other information: |
|
|
|
|
|
|
|
|
|
| |
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
| |
| Operating cash flows used for finance lease |
|
|
| $ | 244 |
|
|
| $ | 303 |
| Operating cash flows used for operating leases |
|
|
| $ | 7,897 |
|
|
| $ | 7,447 |
| Financing cash flows used for finance lease |
|
|
| $ | 642 |
|
|
| $ | 566 |
| Right-to-use assets obtained in exchange for new operating lease liabilities |
| $ | 4,504 |
|
|
| $ | 15,206 |
The lease assets and liabilities were as follows (in thousands):
|
|
|
| June 30, | December 31, | |||||
|
|
|
| 2020 | 2019 | |||||
Finance lease right-of-assets (included in other assets) |
|
|
| $ | 1,956 |
|
| $ | 2,311 | |
Operating lease right-of-use assets |
|
|
| $ | 74,170 |
|
| $ | 76,859 | |
Finance lease liability, current (included in current installments of long-term debt) |
|
|
| $ | 1,412 |
|
| $ | 1,325 | |
Finance lease liability, noncurrent (included in long-term debt) |
|
|
| $ | 2,926 |
|
| $ | 3,654 | |
Operating lease liabilities, current (included in accrued liabilities) |
|
|
| $ | 11,720 |
|
| $ | 11,043 | |
Operating lease liabilities, noncurrent |
|
|
| $ | 64,768 |
|
| $ | 67,898 | |
Weighted average remaining lease term – finance leases |
|
|
| 3.0 years |
|
| 3.5 years | |||
Weighted average remaining lease term – operating leases |
|
|
| 9.8 years |
|
| 10.2 years | |||
Weighted average discount rate – finance leases |
|
|
|
| 10.1% |
|
|
| 10.1% | |
Weighted average discount rate – operating leases |
|
|
|
| 4.7% |
|
|
| 4.7% |
11
Future annual minimum lease payments and finance lease commitments as of June 30, 2020 were as follows (in thousands):
|
| Operating |
| Finance | ||
Year ending December 31, |
| Leases |
|
| Leases | |
| 2020 (remaining six months) | $ | 7,658 |
| $ | 895 |
| 2021 |
| 13,898 |
|
| 1,816 |
| 2022 |
| 10,936 |
|
| 1,853 |
| 2023 |
| 10,109 |
|
| 465 |
| 2024 |
| 8,623 |
|
| — |
| 2025 and thereafter |
| 46,026 |
|
| — |
| Total minimum lease payments | $ | 97,250 |
| $ | 5,029 |
| Less: imputed interest |
| (20,762) |
|
| (691) |
| Present value of lease liabilities | $ | 76,488 |
| $ | 4,338 |
As of June 30, 2020, the Company’s future operating leases that have not yet commenced are immaterial.
Note 8 – Common Stock and Stock-Based Awards Plans
Dividends
The Company began declaring and paying quarterly dividends during the first quarter of 2018. For the six months ended June 30, 2020, cash dividends paid totaled $11.4 million. On June 15, 2020, the Company declared a quarterly cash dividend of $0.16 per share of the Company’s common stock to shareholders of record as of June 30, 2020. The dividend in the aggregate amount of $5.8 million was paid on July 14, 2020. The Company’s future dividend policy is subject to the Company’s compliance with applicable law, and depending on, among other things, the Company’s results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in the Company’s debt agreements, and other factors that the Board of Directors may deem relevant, including the impact of the COVID-19 pandemic. Dividend payments are not mandatory or guaranteed; there can be no assurance that the Company will continue to pay a dividend in the future.
Share Repurchase Authorization
On February 19, 2020, the Board of Directors authorized a $150 million increase to its existing stock repurchase program. On October 26, 2018, the Board of Directors authorized the repurchase of $100 million of the Company’s common stock in addition to the $250 million previously approved on March 6, 2018. As of June 30, 2020, the Company had an aggregate $210.1 million remaining under its stock repurchase program.
Stock-Based Compensation
The Company’s 2019 Omnibus Incentive Compensation Plan (the 2019 Plan) authorizes the Company, upon approval of the Compensation Committee of the Board of Directors, to grant a variety of awards, including stock options, restricted shares and restricted stock units (both time-based and performance-based) and other forms of equity awards, or any combination thereof, to any director, officer, employee or consultant (including any prospective director, officer, employee or consultant) of the Company. Stock options (which have not been awarded since 2015) are granted to employees with an exercise price equal to the market price of the Company’s common stock on the date of grant, generally vest over a four-year period from the date of grant and have a term of 10 years. Time-based restricted stock units granted to employees generally vest over a four-year period from the date of grant, subject to the continued employment of the employee by the Company. Performance-based restricted stock units generally vest over a three-year performance cycle, which includes the year of the grant, and are based upon the Company’s achievement of specified performance metrics. Awards under the 2019 Plan to non-employee directors
12
have been in the form of restricted stock units, which vest in equal annual installments over a one-year period, starting on the grant date.
As of June 30, 2020, 2.7 million additional common shares were available for issuance under the Company’s 2019 Plan.
All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their grant date fair values. The total compensation cost recognized for stock-based awards was $3.3 million and $6.0 million for the three and six months ended June 30, 2020, respectively, and $2.9 million and $5.7 million for the three and six months ended June 30, 2019, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Income (Loss) for stock-based awards was $0.8 million and $1.4 million for the three and six months ended June 30, 2020, respectively, and $0.7 million and $1.4 million for the three and six months ended June 30, 2019, respectively. Awards of restricted stock units and performance-based restricted stock units are valued at the closing market price of the Company’s common stock on the date of grant. For performance-based restricted stock units, compensation expense is based on the probability that the performance goals will be achieved, which is monitored by management throughout the requisite service period. When it becomes probable, based on the Company’s expectation of performance during the measurement period, that more or less than the previous estimate of the awarded shares will vest, an adjustment to stock-based compensation expense is recognized as a change in accounting estimate.
As of June 30, 2020, the unrecognized compensation cost and remaining weighted-average amortization period related to stock-based awards were as follows:
|
|
|
|
|
| Performance- | ||
|
|
|
| Time-based |
| based | ||
|
|
|
| Restricted |
| Restricted | ||
|
|
|
| Stock |
| Stock | ||
(in thousands, except remaining period data) |
|
|
| Units |
| Units(1) | ||
Unrecognized compensation cost |
|
|
| $ 25,414 |
| $ 6,296 | ||
Remaining weighted-average |
|
|
|
|
|
|
|
|
amortization period |
|
|
| 2.7 years |
| 2 years | ||
|
|
|
|
|
|
|
|
|
(1) Based on the probable achievement of the performance goals identified in each award. |
The total cash received by the Company as a result of stock option exercises for the six months ended June 30, 2020 and 2019 was approximately $0.4 million and $0.7 million, respectively. The actual tax benefit realized as a result of stock option exercises and the vesting of other share-based awards during the six months ended June 30, 2020 and 2019 was $1.7 million and $1.6 million, respectively. For the six months ended June 30, 2020 and 2019, the total intrinsic value of stock options exercised was $0.1 million and $0.2 million, respectively.
The Company awarded performance-based restricted stock units to employees during the six months ended June 30, 2020 and 2019. The number of performance-based restricted stock units that will ultimately be earned will not be determined until the end of the corresponding performance periods, and may vary from as low as zero to as high as 2.5 times the target number depending on the level of achievement of certain performance goals. The level of achievement of these goals is based upon the financial results of the Company for the last full calendar year within the performance period. The performance goals consist of certain levels of achievement using the following financial metrics: revenue, operating income margin, and return on invested capital. If the performance goals are not met based on the Company’s financial results, the applicable performance-based restricted stock units will not vest and will be forfeited. Shares subject to forfeited performance-based restricted stock units will be available for issuance under the Company’s 2019 Plan.
13
The following table summarizes activities relating to the Company’s stock options:
|
|
|
|
|
| Weighted- |
|
|
|
|
|
| Weighted- |
| Average |
| Aggregate |
|
| Number of |
| Average |
| Remaining |
| Intrinsic |
|
| Options |
| Exercise |
| Contractual |
| Value |
|
| (in thousands) |
| Price |
| Term (Years) |
| (in thousands) |
Outstanding as of December 31, 2019 |
| 270 |
| $20.02 |
|
|
|
|
Exercised |
| (20) |
| 22.74 |
|
|
|
|
Outstanding and exercisable as of June 30, 2020 |
| 250 |
| $19.80 |
| 2.91 |
| $ 621 |
The aggregate intrinsic value in the table above is before income taxes and is calculated as the difference between the exercise price of the underlying options and the Company’s closing stock price as of the last business day of the period ended June 30, 2020 for options that had exercise prices that were below the closing price.
The following table summarizes the activities related to the Company’s time-based restricted stock units:
|
|
|
|
| Weighted- |
|
| Number of |
|
| Average |
|
| Units |
|
| Grant Date |
|
| (in thousands) |
|
| Fair Value |
Non-vested awards outstanding as of December 31, 2019 |
| 893 |
|
| $28.06 |
Granted |
| 525 |
|
| 26.61 |
Vested |
| (283) |
|
| 27.56 |
Forfeited |
| (41) |
|
| 28.56 |
Non-vested awards outstanding as of June 30, 2020 |
| 1,094 |
|
| $27.47 |
The following table summarizes the activities related to the Company’s performance-based restricted stock units:
|
|
|
|
|
| Weighted- |
|
|
| Number of |
|
| Average |
|
|
| Units |
|
| Grant Date |
|
|
| (in thousands) |
|
| Fair Value |
Non-vested awards outstanding as of December 31, 2019 |
|
| 384 |
|
| $28.89 |
Granted (1) |
|
| 165 |
|
| 28.02 |
Forfeited |
|
| (181) |
|
| 30.04 |
Non-vested awards outstanding as of June 30, 2020 |
|
| 368 |
|
| $27.93 |
(1) Represents target number of units that can vest based on the achievement of the performance goals.
14
Note 9 – Income Taxes | |||||
Income tax expense (benefit) consists of the following: | |||||
| Six Months Ended | ||||
| June 30, | ||||
(in thousands) |
| 2020 |
|
| 2019 |
Federal – current | $ | 237 |
| $ | 62 |
Foreign – current |
| 426 |
|
| 3,747 |
State – current |
| 43 |
|
| 879 |
Deferred |
| (330) |
|
| 1,555 |
| $ | 376 |
| $ | 6,243 |
Income tax expense differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income taxes primarily due to the mix of taxable income by taxing jurisdiction, the impact of tax incentives and tax holidays in foreign locations, state income taxes (net of federal benefit) and the U.S. tax under the global intangible low-taxed income (GILTI) provisions. GILTI requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiaries tangible fixed assets. The taxable earnings can be offset by a limited deemed paid foreign tax credit with no carrybacks or carryforwards available. The Company accounts for the GILTI as a period cost and does not include it as a factor in the determination of deferred taxes.
As of December 31, 2019, the Company had approximately $313.9 million in cumulative undistributed foreign earnings of its foreign subsidiaries. These earnings would not be subject to U.S. income tax, if distributed to the Company. During 2018, the Company changed its assertion on its foreign subsidiaries earnings that are permanently reinvested. A certain amount of earnings from specific foreign subsidiaries are permanently reinvested, and certain foreign earnings from other specific foreign subsidiaries are considered to be non-permanently reinvested and are available for immediate distribution to the Company. Income taxes have been accrued on the non-permanently reinvested foreign earnings including any applicable local withholding taxes.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in the United States in response to the COVID-19 pandemic. The CARES Act among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021, and contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The Company has evaluated the impact of these provisions and has determined these provisions did not have any impact on the six months ended June 30, 2020. In addition, the CARES Act allows for employee retention tax credits to be taken in U.S. payroll tax filings and allows for the deferral of the employer portion of social security taxes with 50% to be paid at the end of calendar years 2021 and 2022, respectively. Accordingly, the Company has deferred the payment of the employer portion of social security taxes for the three months ended June 30, 2020 until the end of 2021 and 2022, respectively. The Company has also determined it is entitled to employee retention credits and has filed for the credits in the second quarter payroll tax reports pursuant to the guidance provided by the Internal Revenue Service. The amount of credits has been recorded in operating expenses for the three months ended June 30, 2020.
The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in Malaysia and Thailand that will expire at various dates, unless extended or otherwise renegotiated, through 2021 in Malaysia and 2028 in Thailand, and are subject to certain conditions with which the Company expects to comply.
15
The net impact of these tax incentives was to lower foreign income tax expense for the six months ended June 30, 2020 and 2019 by approximately $2.3 million (approximately $0.06 per dilutedshare) and $3.0 million (approximately $0.08 per diluted share), respectively, as follows:
| Six Months Ended | ||||
| June 30, | ||||
(in thousands) |
| 2020 |
|
| 2019 |
Malaysia |
| 1,293 |
|
| 1,486 |
Thailand |
| 966 |
|
| 1,542 |
| $ | 2,259 |
| $ | 3,028 |
As of June 30, 2020, the total amount of the reserve for uncertain tax benefits including interest and penalties was $0.6 million. The reserve is classified as a current or long-term liability in the Condensed Consolidated Balance Sheets based on the Company’s expectation of when the items will be settled. The Company records interest expense and penalties accrued in relation to uncertain income tax benefits as a component of current income tax expense.
The Company and its subsidiaries in Brazil, China, Ireland, Malaysia, Mexico, the Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 2012 to 2019. Currently, the Company does not have any ongoing income tax examinations by any jurisdiction. During such income tax examinations, disputes may occur as to matters of fact or law. Also, in most tax jurisdictions, the passage of time without examination will result in the expiration of applicable statutes of limitations thereby precluding examination of the tax period(s) for which such statute of limitation has expired. The Company believes that it has adequately provided for its tax liabilities.
Note 10 – Revenue
The Company’s revenues are generated primarily from the sale of manufactured products built to customer specifications. The Company also generates revenue from design, development and engineering services, in addition to the sale of other inventory.
Revenue is measured based on consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a manufactured product to a customer. The Company’s contracts with customers are generally short-term in nature. Customers are generally billed when the product is shipped or as services are performed. Under the majority of the Company’s manufacturing contracts with customers, the customer controls all of the work-in-progress as products are being built. Revenues under these contracts are recognized progressively based on the cost-to-cost method. For other manufacturing contracts, the customer does not take control of the product until it is completed. Under these contracts, the Company recognizes revenue upon transfer of control of product to the customer. Revenue from design, development and engineering services is recognized over time as the services are performed. The Company assumes no significant obligations after shipment as it typically warrants workmanship only. Therefore, the warranty provisions are generally not significant.
If the Company records revenue, but does not issue an invoice, a contract asset is recognized. The contract asset is transferred to accounts receivable when the entitlement to payment becomes unconditional.
Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of sales.
816
Disaggregation of revenue
In the following tables, revenue is disaggregated by market sector. The tables also include a reconciliation of the disaggregated revenue with the reportable operating segments.
|
|
| Reportable Operating Segments |
|
| Reportable Operating Segments | ||||||||||||
|
|
| Three Months Ended September 30, 2019 |
|
| Three Months Ended June 30, 2020 | ||||||||||||
(in thousands) | (in thousands) |
| Americas |
| Asia |
| Europe |
| Total | (in thousands) |
| Americas |
| Asia |
| Europe |
| Total |
Market Sector: | Market Sector: |
|
|
|
|
|
|
|
| Market Sector: |
|
|
|
|
|
|
|
|
| Industrials | $ | 41,328 |
| 55,454 |
| 18,191 | $ | 114,973 | Industrials | $ | 24,298 |
| 49,379 |
| 13,453 | $ | 87,130 |
| A&D |
| 108,101 |
| — |
| 7,253 |
| 115,354 | A&D |
| 80,939 |
| — |
| 7,585 |
| 88,524 |
| Medical |
| 79,201 |
| 44,582 |
| 3,990 |
| 127,773 | Medical |
| 72,434 |
| 55,890 |
| 6,427 |
| 134,751 |
| Semi-Cap |
| 23,998 |
| 31,332 |
| 12,721 |
| 68,051 | Semi-Cap |
| 37,321 |
| 37,151 |
| 12,379 |
| 86,851 |
| Computing |
| 47,364 |
| 12,158 |
| — |
| 59,522 | Computing |
| 35,487 |
| 8,366 |
| — |
| 43,853 |
| Telecommunication |
| 33,793 |
| 35,459 |
| 304 |
| 69,556 | Telecommunication |
| 21,020 |
| 28,789 |
| 48 |
| 49,857 |
| External revenue |
| 333,785 |
| 178,985 |
| 42,459 |
| 555,229 | External revenue |
| 271,499 |
| 179,575 |
| 39,892 |
| 490,966 |
| Elimination of intersegment sales |
| 10,576 |
| 9,107 |
| 182 |
| 19,865 | Elimination of intersegment sales |
| 17,301 |
| 8,804 |
| 332 |
| 26,437 |
| Segment revenue | $ | 344,361 | $ | 188,092 | $ | 42,641 | $ | 575,094 | Segment revenue | $ | 288,800 | $ | 188,379 | $ | 40,224 | $ | 517,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, 2019 |
|
| Six Months Ended June 30, 2020 | ||||||||||||
|
|
| Americas |
| Asia |
| Europe |
| Total |
|
| Americas |
| Asia |
| Europe |
| Total |
Market Sector: | Market Sector: |
|
|
|
|
|
|
|
| Market Sector: |
|
|
|
|
|
|
|
|
| Industrials | $ | 127,714 | $ | 162,681 | $ | 55,615 | $ | 346,010 | Industrials | $ | 58,243 | $ | 97,604 | $ | 34,109 | $ | 189,956 |
| A&D |
| 302,961 |
| — |
| 23,247 |
| 326,208 | A&D |
| 193,951 |
| — |
| 13,773 |
| 207,724 |
| Medical |
| 205,575 |
| 126,486 |
| 13,377 |
| 345,438 | Medical |
| 141,813 |
| 100,093 |
| 10,821 |
| 252,727 |
| Semi-Cap |
| 78,536 |
| 79,801 |
| 38,185 |
| 196,522 | Semi-Cap |
| 67,770 |
| 74,443 |
| 27,358 |
| 169,571 |
| Computing |
| 277,538 |
| 38,899 |
| 85 |
| 316,522 | Computing |
| 65,561 |
| 14,893 |
| — |
| 80,454 |
| Telecommunication |
| 111,422 |
| 116,090 |
| 1,439 |
| 228,951 | Telecommunication |
| 47,669 |
| 57,448 |
| 381 |
| 105,498 |
| External revenue |
| 1,103,746 |
| 523,957 |
| 131,948 |
| 1,759,651 | External revenue |
| 575,007 |
| 344,481 |
| 86,442 |
| 1,005,930 |
| Elimination of intersegment sales |
| 36,835 |
| 25,714 |
| 551 |
| 63,100 | Elimination of intersegment sales |
| 28,189 |
| 15,507 |
| 782 |
| 44,478 |
| Segment revenue | $ | 1,140,581 | $ | 549,671 | $ | 132,499 | $ | 1,822,751 | Segment revenue | $ | 603,196 | $ | 359,988 | $ | 87,224 | $ | 1,050,408 |
|
|
| Reportable Operating Segments | ||||||
|
|
| Three Months Ended September 30, 2018 | ||||||
(in thousands) |
| Americas |
| Asia |
| Europe |
| Total | |
Market Sector: |
|
|
|
|
|
|
|
| |
| Industrials | $ | 45,334 | $ | 67,969 | $ | 15,001 | $ | 128,304 |
| A&D |
| 97,141 |
| — |
| 7,847 |
| 104,988 |
| Medical |
| 58,725 |
| 34,404 |
| 3,171 |
| 96,300 |
| Semi-Cap |
| 32,016 |
| 30,494 |
| 14,098 |
| 76,608 |
| Computing |
| 125,110 |
| 18,018 |
| 2,258 |
| 145,386 |
| Telecommunication |
| 37,846 |
| 50,716 |
| 540 |
| 89,102 |
| External revenue |
| 396,172 |
| 201,601 |
| 42,915 |
| 640,688 |
| Elimination of intersegment sales |
| 7,965 |
| 8,552 |
| 139 |
| 16,656 |
| Segment revenue | $ | 404,137 | $ | 210,153 | $ | 43,054 | $ | 657,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917
|
|
| Nine Months Ended September 30, 2018 | ||||||
|
|
| Americas |
| Asia |
| Europe |
| Total |
Market Sector: |
|
|
|
|
|
|
|
| |
| Industrials | $ | 141,966 | $ | 180,195 | $ | 49,887 | $ | 372,048 |
| A&D |
| 278,191 |
| — |
| 23,093 |
| 301,284 |
| Medical |
| 173,192 |
| 106,769 |
| 10,142 |
| 290,103 |
| Semi-Cap |
| 125,603 |
| 111,280 |
| 48,393 |
| 285,276 |
| Computing |
| 352,747 |
| 50,446 |
| 6,368 |
| 409,561 |
| Telecommunication |
| 123,386 |
| 125,708 |
| 2,049 |
| 251,143 |
| External revenue |
| 1,195,085 |
| 574,398 |
| 139,932 |
| 1,909,415 |
| Elimination of intersegment sales |
| 22,115 |
| 28,505 |
| 273 |
| 50,893 |
| Segment revenue | $ | 1,217,200 | $ | 602,903 | $ | 140,205 | $ | 1,960,308 |
|
|
| Reportable Operating Segments | ||||||
|
|
| Three Months Ended June 30, 2019 | ||||||
(in thousands) |
| Americas |
| Asia |
| Europe |
| Total | |
Market Sector: |
|
|
|
|
|
|
|
| |
| Industrials | $ | 43,618 | $ | 51,645 | $ | 19,401 | $ | 114,664 |
| A&D |
| 98,523 |
| — |
| 8,442 |
| 106,965 |
| Medical |
| 67,962 |
| 41,446 |
| 4,779 |
| 114,187 |
| Semi-Cap |
| 26,139 |
| 23,726 |
| 12,585 |
| 62,450 |
| Computing |
| 119,907 |
| 12,731 |
| 52 |
| 132,690 |
| Telecommunication |
| 34,855 |
| 35,375 |
| 416 |
| 70,646 |
| External revenue |
| 391,004 |
| 164,923 |
| 45,675 |
| 601,602 |
| Elimination of intersegment sales |
| 13,158 |
| 9,247 |
| 223 |
| 22,628 |
| Segment revenue | $ | 404,162 | $ | 174,170 | $ | 45,898 | $ | 624,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2019 | ||||||
|
|
| Americas |
| Asia |
| Europe |
| Total |
Market Sector: |
|
|
|
|
|
|
|
| |
| Industrials | $ | 86,386 | $ | 107,227 | $ | 37,424 | $ | 231,037 |
| A&D |
| 194,860 |
| — |
| 15,994 |
| 210,854 |
| Medical |
| 126,374 |
| 81,904 |
| 9,387 |
| 217,665 |
| Semi-Cap |
| 54,538 |
| 48,469 |
| 25,464 |
| 128,471 |
| Computing |
| 230,174 |
| 26,741 |
| 85 |
| 257,000 |
| Telecommunication |
| 77,629 |
| 80,631 |
| 1,135 |
| 159,395 |
| External revenue |
| 769,961 |
| 344,972 |
| 89,489 |
| 1,204,422 |
| Elimination of intersegment sales |
| 26,259 |
| 16,607 |
| 369 |
| 43,235 |
| Segment revenue | $ | 796,220 | $ | 361,579 | $ | 89,858 | $ | 1,247,657 |
For the ninesix months ended SeptemberJune 30, 2020 and 2019, 91% and 2018, 92% and 93%, respectively, of the Company’s revenue was recognized as products and services transferred over time.
Note 4 – Stock-Based Compensation
The Company’s 2019 Omnibus Incentive Compensation Plan (the 2019 Plan) was approved by shareholders on May 15, 2019 and replaced the Company’s 2010 Omnibus Incentive Compensation Plan (the 2010 Plan). The 2010 Plan terminated upon shareholder approval of the 2019 Plan and no further awards will be granted under the 2010 Plan. The 2010 Plan will continue to govern awards previously granted under the 2010 Plan. The Company’s 2019 Plan authorizes the Company, upon approval of the Compensation Committee of the Board of Directors, to grant a variety of awards, including stock options, restricted share awards and restricted stock units (both time-based and performance-based) and other forms of equity awards, or any combination thereof, to any director, officer, employee or consultant (including any prospective director, officer, employee or consultant) of the Company. Stock options (which have not been awarded since 2015) are granted to employees with an exercise price equal to the market price of the Company’s common stock on the date of grant, generally vest over a 4-year period from the date of grant and have a term of 10 years. Time-based restricted stock units granted to employees generally vest over a 4-year period from the date of grant, subject to the continued employment of the employee by the Company. Performance-based restricted stock units generally vest over a 3-year performance cycle, which includes the year of the grant, and are based upon the Company’s achievement of specified performance metrics. Awards under the 2010 Plan to non-employee directors were in the form of restricted stock units, which vested in equal quarterly installments over a 1-year period, starting on the grant date. Awards under the 2019 Plan to non-employee directors have been in the form of restricted stock units, which vest one-year from the grant date.
As of September 30, 2019, 3.1 million additional shares of common stock were available for issuance under the Company’s 2019 Plan.
All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their grant date fair values. The total compensation cost recognized for stock-based awards was $2.7 million and $8.5 million for the three and nine months ended September 30, 2019, respectively, and $2.8 million and $8.2 million for the three and nine months ended September 30, 2018, respectively. The total income tax benefit recognized in the condensed income statements for stock-based awards was $0.7 million and $2.0 million for the three and nine months ended September 30, 2019, respectively, and $0.7 million and $2.0 million for the three and nine months ended September 30, 2018, respectively. Awards of restricted stock units and performance-based restricted stock units are valued at the closing market price of the Company’s common stock on the date of grant. For performance-based
10
restricted stock units, compensation expense is based on the probability that the performance goals will be achieved, which is monitored by management throughout the requisite service period. When it becomes probable, based on the Company’s expectation of performance during the measurement period, that more or less than the previous estimate of the awarded shares will vest, an adjustment to stock-based compensation expense is recognized as a change in accounting estimate.
As of September 30, 2019, the unrecognized compensation cost and remaining weighted-average amortization related to stock-based awards were as follows:
|
|
|
|
|
| Performance- | ||
|
|
|
| Time-based |
| based | ||
|
|
|
| Restricted |
| Restricted | ||
|
|
|
| Stock |
| Stock | ||
(in thousands, except remaining period data) |
|
|
| Units |
| Units(1) | ||
Unrecognized compensation cost |
|
|
| $ 21,561 |
| $ 5,241 | ||
Remaining weighted-average |
|
|
|
|
|
|
|
|
amortization period |
|
|
| 2.6 years |
| 1.3 years | ||
|
|
|
|
|
|
|
|
|
(1) Based on the probable achievement of the performance goals identified in each award. |
The total cash received by the Company as a result of stock option exercises for the nine months ended September 30, 2019 and 2018 was approximately $1.3 million and $3.5 million, respectively. The actual tax benefit realized as a result of stock option exercises and the vesting of other share-based awards during the nine months ended September 30, 2019 and 2018 was $1.7 million and $2.1 million, respectively. For the nine months ended September 30, 2019 and 2018, the total intrinsic value of stock options exercised was $0.4 million and $2.2 million, respectively.
The Company awarded performance-based restricted stock units to employees during the nine months ended September 30, 2019 and 2018. The number of performance-based restricted stock units that will ultimately be earned will not be determined until the end of the corresponding performance periods, and may vary from as low as zero to as high as 2.5 times the target number depending on the level of achievement of certain performance goals. The level of achievement of these goals is based upon the financial results of the Company for the last full calendar year within the performance period. The performance goals consist of certain levels of achievement using the following financial metrics: revenue growth, operating margin expansion, and return on invested capital. If the performance goals are not met based on the Company’s financial results, the applicable performance-based restricted stock units will not vest and will be forfeited. Shares subject to forfeited performance-based restricted stock units will be available for issuance under the Company’s 2019 Plan.
The following table summarizes activities relating to the Company’s stock options:
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
| Weighted- |
| Average |
| Aggregate |
|
| Number of |
|
| Average |
| Remaining |
| Intrinsic |
|
| Options |
|
| Exercise |
| Contractual |
| Value |
|
| (in thousands) |
|
| Price |
| Term (Years) |
| (in thousands) |
Outstanding as of December 31, 2018 |
| 374 |
|
| $20.35 |
|
|
|
|
Exercised |
| (76) |
|
| 21.86 |
|
|
|
|
Forfeited or expired |
| (2) |
|
| 23.07 |
|
|
|
|
Outstanding as of September 30, 2019 |
| 296 |
|
| $19.94 |
| 3.50 |
| $ 2,696 |
Exercisable as of September 30, 2019 |
| 296 |
|
| $19.94 |
| 3.50 |
| $ 2,696 |
11
The aggregate intrinsic value in the table above is before income taxes and is calculated as the difference between the exercise price of the underlying options and the Company’s closing stock price as of the last business day of the period ended September 30, 2019 for options that had exercise prices that were below the closing price.
As of September 30, 2019 and December 31, 2018, the Company had no restricted shares outstanding. Restricted stock units, time-based and performance-based, remain outstanding as detailed below.
The following table summarizes the activities related to the Company’s time-based restricted stock units:
|
|
|
|
| Weighted- |
|
| Number of |
|
| Average |
|
| Units |
|
| Grant Date |
|
| (in thousands) |
|
| Fair Value |
Non-vested awards outstanding as of December 31, 2018 |
| 595 |
|
| $28.93 |
Granted |
| 630 |
|
| 27.34 |
Vested |
| (195) |
|
| 27.84 |
Forfeited |
| (54) |
|
| 29.34 |
Non-vested awards outstanding as of September 30, 2019 |
| 976 |
|
| $28.09 |
The following table summarizes the activities related to the Company’s performance-based restricted stock units:
|
|
|
|
|
| Weighted- |
|
|
| Number of |
|
| Average |
|
|
| Units |
|
| Grant Date |
|
|
| (in thousands) |
|
| Fair Value |
Non-vested awards outstanding as of December 31, 2018 |
|
| 319 |
|
| $29.19 |
Granted (1) |
|
| 198 |
|
| 27.45 |
Vested |
|
| (57) |
|
| 31.40 |
Forfeited |
|
| (74) |
|
| 24.41 |
Non-vested awards outstanding as of September 30, 2019 |
|
| 386 |
|
| $28.90 |
(1) Represents target number of units that can vest based on the achievement of the performance goals.
12
Note 5 – Earnings Per Share
Basic earnings per share is computed using the weighted-average number of shares outstanding. Diluted earnings per share is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding stock equivalents. Stock equivalents include common stock issuable upon the exercise of stock options and other equity instruments, and are computed using the treasury stock method. Under the treasury stock method, the exercise price of a share and the amount of compensation cost, if any, for future service that the Company has not yet recognized are assumed to be used to repurchase shares in the current period.
The following table sets forth the calculation of basic and diluted earnings per share:
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
|
| September 30, |
| September 30, | ||||||||
(in thousands, except per share data) |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 | |
|
|
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 7,136 |
| $ | 7,799 |
| $ | 30,356 |
| $ | (4,899) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
| |
| weighted-average number of common |
|
|
|
|
|
|
|
|
|
|
|
|
| shares outstanding during the period |
|
| 37,419 |
|
| 46,301 |
|
| 38,813 |
|
| 47,415 |
Incremental common shares attributable to |
|
|
|
|
|
|
|
|
|
|
|
| |
| exercise of dilutive options |
|
| 80 |
|
| 90 |
|
| 77 |
|
| — |
Incremental common shares attributable |
|
|
|
|
|
|
|
|
|
|
|
| |
| to outstanding restricted stock units |
|
| 146 |
|
| 64 |
|
| 294 |
|
| — |
Denominator for diluted earnings per share |
|
| 37,645 |
|
| 46,455 |
|
| 39,184 |
|
| 47,415 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
| $ | 0.19 |
| $ | 0.17 |
| $ | 0.78 |
| $ | (0.10) | |
Diluted earnings (loss) per share |
| $ | 0.19 |
| $ | 0.17 |
| $ | 0.77 |
| $ | (0.10) |
Restricted stock units totaling 0.1 million and 0.2 million shares, respectively, for the three and nine months ended September 30, 2019 were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. Potentially dilutive securities totaling 0.3 million common shares for the nine months ended September 30, 2018 were not included in the computation of diluted loss per share because their effect would have decreased the loss per share.
Note 6 – Goodwill and Other Intangible Assets
Goodwill allocated to the Company’s reportable segments was as follows:
(in thousands) |
| Americas |
| Asia |
| Total |
Goodwill as of December 31, 2018 and September 30, 2019 | $ | 154,014 | $ | 38,102 | $ | 192,116 |
13
Other assets consist primarily of acquired identifiable intangible assets and capitalized purchased software costs. Intangible assets as of September 30, 2019 and December 31, 2018 were as follows:
|
| As of September 30, 2019 | ||||||
|
| Gross |
|
|
|
|
| Net |
|
| Carrying |
| Accumulated |
| Carrying | ||
(in thousands) |
| Amount |
| Amortization |
| Amount | ||
Customer relationships | $ | 100,094 |
| $ | (45,366) |
| $ | 54,728 |
Purchased software costs |
| 41,250 |
|
| (31,641) |
|
| 9,609 |
Technology licenses |
| 28,800 |
|
| (23,325) |
|
| 5,475 |
Trade names and trademarks |
| 7,800 |
|
| — |
|
| 7,800 |
Other |
| 868 |
|
| (303) |
|
| 565 |
Total | $ | 178,812 |
| $ | (100,635) |
| $ | 78,177 |
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2018 | ||||||
|
| Gross |
|
|
|
|
| Net |
|
| Carrying |
| Accumulated |
| Carrying | ||
(in thousands) |
| Amount |
| Amortization |
| Amount | ||
Customer relationships | $ | 100,146 |
| $ | (40,661) |
| $ | 59,485 |
Purchased software costs |
| 39,069 |
|
| (30,626) |
|
| 8,443 |
Technology licenses |
| 28,800 |
|
| (21,006) |
|
| 7,794 |
Trade names and trademarks |
| 7,800 |
|
| — |
|
| 7,800 |
Other |
| 868 |
|
| (285) |
|
| 583 |
Total | $ | 176,683 |
| $ | (92,578) |
| $ | 84,105 |
Customer relationships are being amortized on a straight-line basis over a period of 10 to 14 years. Capitalized purchased software costs are amortized straight-line over the estimated useful life of the related software, which ranges from 2 to 10 years. Technology licenses are being amortized over their estimated useful lives in proportion to the economic benefits consumed. The Company’s acquired trade names and trademarks have been determined to have an indefinite life. Amortization on the statements of cash flow for the nine months ended September 30, 2019 and 2018 was as follows:
| Nine Months Ended | ||||
| September 30, | ||||
(in thousands) |
| 2019 |
|
| 2018 |
Amortization of intangible assets | $ | 7,095 |
| $ | 7,101 |
Amortization of capitalized purchased software costs |
| 1,029 |
|
| 836 |
Amortization of debt costs |
| 345 |
|
| 2,602 |
| $ | 8,469 |
| $ | 10,539 |
14
The estimated future amortization expense of acquired intangible assets for each of the next five years is as follows (in thousands):
Year ending December 31, |
| Amount |
2019 (remaining three months) | $ | 2,997 |
2020 |
| 10,706 |
2021 |
| 7,699 |
2022 |
| 7,621 |
2023 |
| 6,463 |
Note 7 – Borrowing Facilities
On July 20, 2018, the Company entered into a $650 million credit agreement (the Credit Agreement) by and among the Company, certain of its subsidiaries, the lenders party thereto and Bank of America, N.A., as Administrative Agent, Swingline Lender and a L/C Issuer. The Credit Agreement is comprised of a 5-year $500 million revolving credit facility (the Revolving Credit Facility) and a 5-year $150 million term loan facility (the Term Loan Facility), both with a maturity date of July 20, 2023. The Term Loan Facility proceeds were used to (i) refinance a portion of existing indebtedness and terminate all commitments under the Company’s prior $430 million credit agreement and (ii) pay the fees, costs and expenses associated with the foregoing and the negotiation, execution and delivery of the Credit Agreement.
The Revolving Credit Facility is available for general corporate purposes. The Credit Agreement includes an accordion feature pursuant to which the Company is permitted to add one or more incremental term loan and/or increase commitments under the Revolving Credit Facility in an aggregate amount not exceeding $275 million, subject to the satisfaction of certain conditions.
The Term Loan Facility is payable in quarterly principal installments of $1.9 million with the balance payable on July 20, 2023.
Interest on outstanding borrowings under the Credit Agreement (other than swingline loans) accrues, at the Company’s option, at (a) the London Interbank Offered Rate (LIBOR) plus 1.0% to 2.0% or (b) the base rate plus 0.0% to 1.0%.
As of September 30, 2019, $146.3 million of the outstanding debt under the Credit Agreement is effectively at a fixed interest rate of 2.928% as a result of a $146.3 million notional interest rate swap contract discussed in Note 16. A commitment fee of 0.20% to 0.30% per annum (based on the debt to EBITDA ratio) on the unused portion of the revolving credit line is payable quarterly in arrears.
The Credit Agreement is generally secured by a pledge of (a) all the capital stock of the Company’s domestic subsidiaries and 65% of the capital stock of its directly owned foreign subsidiaries, (b) all or substantially all other personal property of Benchmark and its domestic subsidiaries (including, but not limited to, accounts receivable, contract assets, inventory, intellectual property and fixed assets of Benchmark and its domestic subsidiaries), in each case, subject to customary exceptions and limitations, and (c) all proceeds and products of the property and assets described in (a) and (b) above.
The Credit Agreement contains certain financial covenants as to interest coverage and debt leverage, and certain customary affirmative and negative covenants, including restrictions on the Company’s ability to incur additional debt and liens, pay dividends, repurchase shares, sell assets and merge or consolidate with other persons. Amounts due under the Credit Agreement could be accelerated upon specified events of default, including a failure to pay amounts due, breach of a covenant, material inaccuracy of a representation, or occurrence of bankruptcy or insolvency, subject, in some cases, to cure periods.
15
As of September 30, 2019, the Company was in compliance with all of these covenants and restrictions.
As of September 30, 2019, the Company had $146.3 million in borrowings outstanding under the Term Loan Facility and $3.0 million in letters of credit outstanding under the Revolving Credit Facility. The Company had $497.0 million available for future borrowings under the Revolving Credit Facility.
As of September 30, 2019, the Company’s Thailand subsidiary had a multi-purpose credit facility with Kasikornbank Public Company Limited (Thai Credit Facility) that provided for 350 million Thai baht (approximately $11.4 million) working capital availability. The Thai Credit Facility was secured by land and buildings in Thailand owned by the Company’s Thailand subsidiary. This Thai Credit Facility expired in October 2019 and was not renewed. As of both September 30, 2019 and December 31, 2018, there were no working capital borrowings outstanding under the facility.
Note 8 – Contract Assets
As of September 30, 2019 and December 31, 2018, the Company had $161.1 million and $140.1 million, respectively, in contract receivables from contracts with customers. The contract receivables primarily relate to the Company’s right to consideration for work completed but not billed at the reporting date. The contract receivables are transferred to accounts receivable when the rights become unconditional.
Significant changes in the contract asset balance during the period are as follows:
| Nine Months Ended | ||||
| September 30, | ||||
(in thousands) |
| 2019 |
|
| 2018 |
Beginning balance as of December 31, | $ | 140,082 |
| $ | 146,496 |
Revenue recognized |
| 1,613,047 |
|
| 1,774,620 |
Amounts collected or invoiced | (1,592,061) |
| (1,765,218) | ||
Ending balance as of September 30, | $ | 161,068 |
| $ | 155,898 |
Note 9 – Inventories | |||||
Inventory costs are summarized as follows: | |||||
| September 30, | December 31, | |||
(in thousands) |
| 2019 |
|
| 2018 |
|
|
|
|
| |
Raw materials | $ | 303,177 |
| $ | 300,439 |
Work in process |
| 9,533 |
|
| 7,321 |
Finished goods |
| 3,125 |
|
| 2,215 |
| $ | 315,835 |
| $ | 309,975 |
Note 1011 – Accounts Receivable Sale Program
As of SeptemberJune 30, 2019,2020, in connection with three trade accounts receivable sale programs with unaffiliated financial institutions, the Company may elect to sell, at a discount, on an ongoing basis, up to a maximum of $120.0 million of specific accounts receivable at any one time.
During the three months ended SeptemberJune 30, 20192020 and 2018,2019, the Company sold $75.1$77.9 million and $40.0$77.7 million, respectively, of accounts receivable under this program, and in exchange, the Company received cash proceeds of $74.9$77.7 million and $39.9$77.4 million, respectively, net of the discount. During the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, the Company sold $205.7$154.3 million and $120.0$130.6 million, respectively, of accounts receivable under this program, and in exchange, the Company received cash proceeds of $205.1
16
$154.0 million and $119.7$130.2 million, respectively, net of the discount. The loss on the sale resulting from the discount was recorded to other expenseincome (expense), net within the Condensed Consolidated Statements of Income.
Note 11 – Income Taxes | |||||
Income tax expense consists of the following: | |||||
| Nine Months Ended | ||||
| September 30, | ||||
(in thousands) |
| 2019 |
|
| 2018 |
|
|
|
|
| |
Federal – current | $ | 907 |
| $ | 223 |
Foreign – current |
| 5,607 |
|
| 25,894 |
State – current |
| 1,096 |
|
| 7,673 |
Deferred |
| 206 |
|
| 11,863 |
| $ | 7,816 |
| $ | 45,653 |
The U.S. Tax Cuts and Jobs Act (U.S. Tax Reform), which was signed into law on December 22, 2017, significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system, adding a global intangible taxation regime and imposing a transition (Transition Tax) tax on deemed repatriated cumulative earnings of foreign subsidiaries.
To minimize tax base erosion with a territorial tax system, the U.S. Tax Reform enacted a new global intangible low-taxed income (GILTI) provision that requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiaries tangible assets. The taxable earnings can be offset by a limited deemed paid foreign tax credit with no carrybacks or carryforwards available. The Company is subject to the GILTI provisions. The Company elected to account for the GILTI as a period cost and include the effect in the period in which it is incurred and not include it as a factor in the determination of deferred taxes.
As of December 31, 2018, the Company had approximately $330 million in cumulative undistributed foreign earnings of its foreign subsidiaries. These earnings would not be subject to U.S. income tax, if distributed to the Company. During 2018, the Company changed its assertion on its foreign subsidiaries earnings that are permanently reinvested. A certain amount of earnings from specific foreign subsidiaries are permanently reinvested, and certain foreign earnings from other specific foreign subsidiaries are considered to be non-permanently reinvested and are available for immediate distribution to the Company. Income taxes were accrued on the non-permanently reinvested foreign earnings including the 2017 Transition Tax, the U.S. tax on GILTI, and any applicable local withholding taxes. As a result of this change in assertion for undistributed earnings prior to December 31, 2017, the Company recorded $30.7 million of deferred tax expense for foreign withholding tax from Asia and $9.4 million of deferred U.S. state income tax expense in the first three months of 2018.
Excluding the impact of these items, income tax expense differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income taxes primarily due to the mix of taxable income by taxing jurisdiction, the impact of tax incentives and tax holidays in foreign locations, state income taxes (net of federal benefit) and the U.S. tax under GILTI.
Note 12 – Contingencies
The Company has been granted certain tax incentives, including tax holidays, for its subsidiariesis involved in Malaysia and Thailand that will expire at various dates, unless extended or otherwise renegotiated, through 2021legal actions arising in Malaysia and 2028 in Thailand, and are subject to certain conditions with which the Company expects to comply.
17
The net impactordinary course of business. In the opinion of management, the ultimate disposition of these tax incentives was to lower income tax expense for the ninemonths ended September 30, 2019 and 2018 by approximately $4.0 million (approximately $0.10 per diluted share) and $8.2 million (approximately $0.17 per diluted share), respectively, as follows:
| Nine Months Ended | ||||
| September 30, | ||||
(in thousands) |
| 2019 |
|
| 2018 |
China | $ | — |
| $ | 1,449 |
Malaysia |
| 2,294 |
|
| 3,219 |
Thailand |
| 1,705 |
|
| 3,579 |
| $ | 3,999 |
| $ | 8,247 |
The Company’s Chinese subsidiary hadmatters will not have a tax incentive that expired in 2018 and has submitted an application for a new tax incentive in China during the third quarter of 2019.
As of September 30, 2019, the total amount of the reserve for uncertain tax benefits including interest and penalties was $0.4 million. The reserve is classified as a current or long-term liability in the condensed consolidated balance sheets basedmaterial adverse effect on the Company’s expectationconsolidated financial position or results of when the items will be settled. The Company records interest expense and penalties accrued in relation to uncertain income tax benefits as a component of current income tax expense. The amount of accrued potential interest and penalties on unrecognized tax benefits included in the reserve as of September 30, 2019 was $0.1 million.
The Company and its subsidiaries in Brazil, China, Ireland, Malaysia, Mexico, the Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 2012 to 2018. Currently, the Company does not have any ongoing income tax examinations by any jurisdiction. During the course of such income tax examinations, disputes may occur as to matters of fact or law. Also, in most tax jurisdictions, the passage of time without examination will result in the expiration of applicable statutes of limitations thereby precluding examination of the tax period(s) for which such statute of limitation has expired. The Company believes that it has adequately provided for its tax liabilities.operations.
18
Note 13 – Restructuring Charges
The Company has undertaken initiatives to restructure its business operations to improve utilization and realize cost savings. These initiatives have included changing the number and location of production facilities, largely to align capacity and infrastructure with current and anticipated customer demand. This alignment includes transferring programs from higher cost geographies to lower cost geographies. The process of restructuring entails moving production between facilities, reducing staff levels, realigning our business processes, reorganizing our management and other activities.
The Company recognized restructuring charges during 2020 and 2019 primarily related to facility transitions in the Americas, capacity reduction and reductions in workforce in certain facilities across various regions. The following table summarizes the 2020 activity in the accrued restructuring balances related to the restructuring activities initiated prior to June 30, 2020:
|
|
| Balance as of |
|
|
|
|
|
|
|
| Foreign |
| Balance as of | ||||
|
|
| December 31, |
| Restructuring |
| Cash | Non-Cash |
| Exchange |
| June 30, | ||||||
(in thousands) |
|
| 2019 |
|
|
| Charges |
|
| Payment | Activity |
| Adjustments |
| 2020 | |||
2020 Restructuring: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Severance |
| $ | — |
|
| $ | 4,486 |
| $ | (1,317) | — |
| $ | — |
| $ | 3,169 |
| Leased facilities and equipment |
|
| — |
|
|
| 148 |
|
| — | (145) |
|
| — |
|
| 3 |
| Other exit costs |
|
| — |
|
|
| 73 |
|
| (40) | — |
|
| — |
|
| 33 |
|
|
| — |
|
|
| 4,707 |
|
| (1,357) | (145) |
|
| — |
|
| 3,205 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Restructuring: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Severance |
|
| 3,956 |
|
|
| (1,183) |
|
| (2,013) | (72) |
|
| — |
|
| 688 |
| Leased facilities and equipment |
|
| — |
|
|
| 2,550 |
|
| (843) | (1,144) |
|
| — |
|
| 563 |
| Other exit costs |
|
| — |
|
|
| 1,238 |
|
| (251) | (729) |
|
| — |
|
| 258 |
|
|
| 3,956 |
|
|
| 2,605 |
|
| (3,107) | (1,945) |
|
| — |
|
| 1,509 | |
Total |
| $ | 3,956 |
|
| $ | 7,312 |
| $ | (4,464) | (2,090) |
| $ | — |
| $ | 4,714 |
In addition, during the six months ended June 30, 2020, we incurred $1.0 million in costs related to an asset impairment in Asia.
Note 14 —Ransomware Incident
During the fourth quarter ended December 31, 2019, some of the Company’s systems were affected by a ransomware incident that encrypted information on its systems and disrupted customer and employee access to its applications and services. The Company immediately took steps to isolate the impact and implemented measures to prevent additional systems from being affected, including taking its network offline as a precaution. In connection with this incident, third party consultants and forensic experts were engaged to assist with the restoration and remediation of the Company’s systems and, with the assistance of law enforcement, to investigate the incident. The Company has found no evidence that customer or employee data was exfiltrated from its network.
The Company restored connectivity and resumed operations quickly following the ransomware incident. However, fourth quarter 2019 operations were adversely affected by the inefficiencies caused by taking the network offline for a period of time. As a result, the Company’s fourth quarter 2019 revenue was also adversely affected as the Company was unable to fulfill a portion of customer demand during the quarter.
19
We do have insurance coverage, including cyber insurance, and are working diligently with our insurance carriers on claims to recover costs incurred. We expect that the insurance recovery process will be ongoing throughout 2020.
In 2019, ransomware incident related costs incurred totaled $7.7 million, net of estimated insurance recoveries of $5.0 million. These costs were primarily comprised of certain employee related expenses and various third party consulting services including forensic experts, legal counsel and other IT professional expenses. Further insurance recoveries will be recorded when considered probable. During the six months ended June 30, 2020, the Company collected $3.0 million of its recorded insurance receivable.
Note 1215 – Earnings Per Share
Basic earnings per share is computed using the weighted-average number of shares outstanding. Diluted earnings per share is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding stock equivalents. Stock equivalents include common stock issuable upon the exercise of stock options and other equity instruments and are computed using the treasury stock method. Under the treasury stock method, the exercise price of a share and the amount of compensation cost, if any, for future service that the Company has not yet recognized are assumed to be used to repurchase shares in the current period. In periods when losses are reported, the weighted-average number of shares outstanding excludes stock equivalents because their inclusion would have an anti-dilutive effect.
The following table sets forth the calculation of basic and diluted earnings per share:
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
|
| June 30, |
| June 30, | ||||||||
(in thousands, except per share data) |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 | |
|
|
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | (3,407) |
| $ | 9,447 |
| $ | 445 |
| $ | 23,220 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - |
|
|
|
|
|
|
|
|
|
|
|
| |
| weighted-average number of common |
|
|
|
|
|
|
|
|
|
|
|
|
| shares outstanding during the period |
|
| 36,439 |
|
| 38,426 |
|
| 36,614 |
|
| 39,522 |
Incremental common shares attributable to |
|
|
|
|
|
|
|
|
|
|
|
| |
| exercise of dilutive options |
|
| — |
|
| 74 |
|
| 49 |
|
| 75 |
Incremental common shares attributable |
|
|
|
|
|
|
|
|
|
|
|
| |
| to outstanding restricted stock units |
|
| — |
|
| 83 |
|
| 200 |
|
| 246 |
Denominator for diluted earnings per share |
|
| 36,439 |
|
| 38,583 |
|
| 36,863 |
|
| 39,843 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
| $ | (0.09) |
| $ | 0.25 |
| $ | 0.01 |
| $ | 0.59 | |
Diluted earnings (loss) per share |
| $ | (0.09) |
| $ | 0.24 |
| $ | 0.01 |
| $ | 0.58 |
Potentially dilutive securities totaling 0.3 million shares for the three months ended June 30, 2020 were not included in the computation of diluted loss per share because their effect would have decreased the loss per share. Restricted stock units totaling 0.5 million shares for the six months ended June 30, 2020 were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. Restricted stock units totaling 0.4 million and 0.1 million shares, respectively, for the three and six months ended June 30, 2019 were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.
20
Note 16 – Financial Instruments
The Company’s financial instruments include cash equivalents, accounts receivable, other receivables, accounts payable, accrued liabilities and long-term debt. The Company believes that the carrying values of these instruments approximate fair value. The Company uses derivative instruments to manage the variability of foreign currency obligations and interest rates. The Company does not enter into derivatives for speculative purposes. As of June 30, 2020, all the Company’s derivative instruments were recorded at fair value using Level 3 inputs.
The forward currency exchange contract in place as of June 30, 2020 has not been designated as an accounting hedge and, therefore, changes in fair value are recorded within the Condensed Consolidated Statements of Income.
The Company has an interest rate swap agreement, with a notional amount of $140.6 million and $144.4 million as of June 30, 2020 and December 31, 2019, respectively, to hedge a portion of its interest rate exposure on outstanding borrowings under the Credit Agreement. Under this interest rate swap agreement, the Company receives variable rate interest payments based on the one-month LIBOR rate and pays fixed rate interest payments. The fixed interest rate for the contract is 2.928%. The effect of this swap is to convert a portion of the floating rate interest expense to fixed interest rate expense. Based on the terms of the interest rate swap contract and the underlying borrowings outstanding under the Credit Agreement, the interest rate contract was determined to be highly effective, and thus qualifies and has been designated as a cash flow hedge. As such, changes in the fair value of the interest rate swap are recorded in other comprehensive income (loss) on the accompanying Condensed Consolidated Balance Sheets until earnings are affected by the variability of cash flows.
The fair value of the interest rate swap was an $11.2 million liability as of June 30, 2020 and a $6.3 million liability as of December 31, 2019 recorded in other long-term liabilities. During the six months ended June 30, 2020, the Company recorded an unrealized loss of $4.9 million ($3.7 million net of tax) on the swap in other comprehensive income (loss).
As of December 31, 2017, the Company had an interest rate swap agreement with a notional amount of $155.3 million with a fixed interest rate of 1.4935% which was terminated in October 2018 for $3.5 million. This gain is being amortized to offset interest expense over the original term of the swap agreement. During the six months ended June 30, 2020, the Company transferred unrealized gains of $0.9 million ($0.7 million net of tax) on the terminated swap to interest expense. See Note 17.
Note 17 – Accumulated Other Comprehensive LossThe changes in accumulated other comprehensive loss by component were as follows:
|
|
|
| Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
| currency |
|
| Derivative |
|
|
|
|
|
|
|
|
|
| translation |
|
| instruments, |
|
|
|
|
|
|
(in thousands) |
|
| adjustments |
|
| net of tax |
|
| Other |
|
| Total | |
Balances, December 31, 2019 |
| $ | (12,425) |
| $ | (3,600) |
| $ | (734) |
| $ | (16,759) | |
| Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| before reclassifications |
|
| (391) |
|
| (3,686) |
|
| 216 |
|
| (3,861) |
| Amounts reclassified from accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
| other comprehensive income (loss) |
|
| — |
|
| (672) |
|
| — |
|
| (672) |
Net current period other comprehensive income (loss) |
|
| (391) |
|
| (4,358) |
|
| 216 |
|
| (4,533) | |
Balances, June 30, 2020 |
| $ | (12,816) |
| $ | (7,958) |
| $ | (518) |
| $ | (21,292) |
21
See Note 16 for further explanation of the change in derivative instruments that is recorded in Accumulated Other Comprehensive Loss. Amounts reclassified from accumulated other comprehensive loss during 2020 primarily affected interest expense.
Note 18 – Segment and Geographic Information
The Company currently has manufacturing facilities in the Americas, Asia and Europe to serve its customers. The Company is operated and managed geographically, and management evaluates performance and allocates the Company’s resources on a geographic basis. Intersegment sales are generally recorded at prices that approximate arm’s length transactions. Operating segments’ measure of profitability is based on income from operations, which includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. The operating margin of each segment reflects the cost structure of the segments and are not comparable. The accounting policies for the reportable operating segments are the same as for the Company taken as a whole. The Company has three reportable operating segments: Americas, Asia and Europe. Information about operating segments is as follows:
|
| Three Months Ended | Nine Months Ended | ||||||||
|
| September 30, | September 30, | ||||||||
(in thousands) |
| 2019 |
| 2018 |
|
| 2019 |
|
| 2018 | |
|
|
|
|
|
|
|
|
|
| ||
Net sales: |
|
|
|
|
|
|
|
|
|
| |
| Americas | $ | 344,361 | $ | 404,137 |
| $ | 1,140,581 |
| $ | 1,217,200 |
| Asia |
| 188,092 |
| 210,153 |
|
| 549,671 |
|
| 602,903 |
| Europe |
| 42,641 |
| 43,054 |
|
| 132,499 |
|
| 140,205 |
| Elimination of intersegment sales |
| (19,865) |
| (16,656) |
|
| (63,100) |
|
| (50,893) |
|
| $ | 555,229 | $ | 640,688 |
| $ | 1,759,651 |
| $ | 1,909,415 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
| |
| Americas | $ | 5,646 | $ | 5,746 |
| $ | 16,323 |
| $ | 17,171 |
| Asia |
| 2,820 |
| 2,967 |
|
| 8,363 |
|
| 8,660 |
| Europe |
| 750 |
| 860 |
|
| 2,322 |
|
| 2,644 |
| Corporate |
| 3,048 |
| 4,987 |
|
| 9,381 |
|
| 11,168 |
|
| $ | 12,264 | $ | 14,560 |
| $ | 36,389 |
| $ | 39,643 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations: |
|
|
|
|
|
|
|
|
|
| |
| Americas | $ | 10,877 | $ | 9,586 |
| $ | 48,437 |
| $ | 41,845 |
| Asia |
| 13,209 |
| 18,963 |
|
| 41,666 |
|
| 53,441 |
| Europe |
| 1,871 |
| 2,242 |
|
| 5,095 |
|
| 7,437 |
| Corporate and intersegment eliminations |
| (16,159) |
| (19,834) |
|
| (57,372) |
|
| (59,450) |
|
| 9,798 |
| 10,957 |
|
| 37,826 |
|
| 43,273 | |
| Interest expense |
| (1,687) |
| (3,822) |
|
| (5,014) |
|
| (8,543) |
| Interest income |
| 734 |
| 1,619 |
|
| 3,084 |
|
| 5,197 |
| Other income (expense) |
| (136) |
| 1,139 |
|
| 2,276 |
|
| 827 |
| Income before income taxes | $ | 8,709 | $ | 9,893 |
| $ | 38,172 |
| $ | 40,754 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
| |
| Americas | $ | 4,210 | $ | 8,975 |
| $ | 11,910 |
| $ | 34,369 |
| Asia |
| 3,965 |
| 3,898 |
|
| 7,901 |
|
| 12,548 |
| Europe |
| 1,304 |
| 651 |
|
| 2,035 |
|
| 2,303 |
| Corporate |
| 968 |
| 1,046 |
|
| 4,096 |
|
| 3,713 |
|
| $ | 10,447 | $ | 14,570 |
| $ | 25,942 |
| $ | 52,933 |
|
| Three Months Ended | Six Months Ended | ||||||||
|
| June 30, | June 30, | ||||||||
(in thousands) |
| 2020 |
| 2019 |
|
| 2020 |
|
| 2019 | |
|
|
|
|
|
|
|
|
|
| ||
Net sales: |
|
|
|
|
|
|
|
|
|
| |
| Americas | $ | 288,800 | $ | 404,162 |
| $ | 603,196 |
| $ | 796,220 |
| Asia |
| 188,379 |
| 174,170 |
|
| 359,988 |
|
| 361,579 |
| Europe |
| 40,224 |
| 45,898 |
|
| 87,224 |
|
| 89,858 |
| Elimination of intersegment sales |
| (26,437) |
| (22,628) |
|
| (44,478) |
|
| (43,235) |
|
| $ | 490,966 | $ | 601,602 |
| $ | 1,005,930 |
| $ | 1,204,422 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
| |
| Americas | $ | 5,762 | $ | 5,296 |
| $ | 11,347 |
| $ | 10,677 |
| Asia |
| 2,732 |
| 2,732 |
|
| 5,446 |
|
| 5,543 |
| Europe |
| 700 |
| 758 |
|
| 1,425 |
|
| 1,572 |
| Corporate |
| 3,145 |
| 3,167 |
|
| 6,313 |
|
| 6,333 |
|
| $ | 12,339 | $ | 11,953 |
| $ | 24,531 |
| $ | 24,125 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations: |
|
|
|
|
|
|
|
|
|
| |
| Americas | $ | (787) | $ | 17,332 |
| $ | 11,638 |
| $ | 37,560 |
| Asia |
| 17,024 |
| 13,072 |
|
| 28,022 |
|
| 28,457 |
| Europe |
| 686 |
| 2,284 |
|
| 2,875 |
|
| 3,224 |
| Corporate and intersegment eliminations |
| (18,795) |
| (20,747) |
|
| (37,917) |
|
| (41,213) |
|
| (1,872) |
| 11,941 |
|
| 4,618 |
|
| 28,028 | |
| Interest expense |
| (2,351) |
| (1,718) |
|
| (4,053) |
|
| (3,327) |
| Interest income |
| 287 |
| 1,053 |
|
| 886 |
|
| 2,350 |
| Other income (expense) |
| 32 |
| 808 |
|
| (630) |
|
| 2,412 |
| Income before income taxes | $ | (3,904) | $ | 12,084 |
| $ | 821 |
| $ | 29,463 |
|
|
|
|
|
|
|
|
|
|
| �� |
Capital expenditures: |
|
|
|
|
|
|
|
|
|
| |
| Americas | $ | 6,598 | $ | 2,947 |
| $ | 15,858 |
| $ | 7,700 |
| Asia |
| 791 |
| 1,098 |
|
| 3,316 |
|
| 3,936 |
| Europe |
| 196 |
| 343 |
|
| 1,042 |
|
| 731 |
| Corporate |
| 2,809 |
| 1,033 |
|
| 3,074 |
|
| 3,128 |
|
| $ | 10,394 | $ | 5,421 |
| $ | 23,290 |
| $ | 15,495 |
1922
|
| September 30, | December 31, |
|
|
| June 30, |
| December 31, | |||||
(in thousands) | (in thousands) |
|
| 2019 |
|
| 2018 | (in thousands) |
|
| 2020 |
|
| 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total assets: | Total assets: |
|
|
|
|
|
| Total assets: |
|
|
|
|
|
|
| Americas |
| $ | 811,158 |
| $ | 852,776 | Americas |
| $ | 792,837 |
| $ | 792,180 |
| Asia |
|
| 535,687 |
|
| 540,094 | Asia |
|
| 535,741 |
|
| 533,508 |
| Europe |
|
| 127,603 |
|
| 113,165 | Europe |
|
| 127,069 |
|
| 139,977 |
| Corporate and other |
|
| 284,298 |
|
| 393,748 | Corporate and other |
|
| 302,388 |
|
| 294,209 |
|
|
| $ | 1,758,746 |
| $ | 1,899,783 |
|
| $ | 1,758,035 |
| $ | 1,759,874 |
Geographic net sales information reflects the destination of the product shipped. Long-lived assets information is based upon the physical location of the asset.
|
| Three Months Ended |
| Nine Months Ended | |||||||
|
| September 30, |
| September 30, | |||||||
(in thousands) |
| 2019 |
| 2018 |
|
| 2019 |
|
| 2018 | |
|
|
|
|
|
|
|
|
|
| ||
Geographic net sales: |
|
|
|
|
|
|
|
|
|
| |
| United States | $ | 362,136 | $ | 438,461 |
| $ | 1,196,965 |
| $ | 1,280,026 |
| Asia |
| 100,200 |
| 105,422 |
|
| 278,569 |
|
| 328,327 |
| Europe |
| 64,592 |
| 69,289 |
|
| 202,985 |
|
| 222,870 |
| Other Foreign |
| 28,301 |
| 27,516 |
|
| 81,132 |
|
| 78,192 |
|
| $ | 555,229 | $ | 640,688 |
| $ | 1,759,651 |
| $ | 1,909,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, | December 31, | |||
|
|
|
|
|
|
|
| 2019 |
|
| 2018 |
Long-lived assets: |
|
|
|
|
|
|
|
|
|
| |
| United States |
|
|
|
|
| $ | 243,633 |
| $ | 190,056 |
| Asia |
|
|
|
|
|
| 77,599 |
|
| 79,051 |
| Europe |
|
|
|
|
|
| 19,570 |
|
| 9,537 |
| Other |
|
|
|
|
|
| 25,456 |
|
| 22,945 |
|
|
|
|
|
|
| $ | 366,258 |
| $ | 301,589 |
|
|
|
|
|
|
|
|
|
|
|
|
Note 13 – Supplemental Cash Flow and Non-Cash Information | ||||||||||||
The following information concerns supplemental disclosures of cash payments. | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 | |
Income taxes paid, net | $ | 2,091 |
| $ | 15,544 |
| $ | 16,375 |
| $ | 39,296 | |
Interest paid |
| 2,333 |
|
| 1,845 |
|
| 6,355 |
|
| 6,163 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activity: |
|
|
|
|
|
|
|
|
|
|
| |
Additions to property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
| |
in accounts payable |
|
|
|
|
|
| $ | 2,370 |
| $ | 6,629 |
20
Note 14 – Contingencies
The Company is involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
|
| Three Months Ended |
| Six Months Ended | |||||||
|
| June 30, |
| June 30, | |||||||
(in thousands) |
| 2020 |
| 2019 |
|
| 2020 |
|
| 2019 | |
|
|
|
|
|
|
|
|
|
| ||
Geographic net sales: |
|
|
|
|
|
|
|
|
|
| |
| United States | $ | 318,509 | $ | 416,465 |
| $ | 654,876 |
| $ | 834,829 |
| Singapore |
| 55,917 |
| 41,687 |
|
| 110,538 |
|
| 84,404 |
| Asia |
| 40,207 |
| 50,058 |
|
| 78,526 |
|
| 93,965 |
| Europe |
| 55,756 |
| 65,048 |
|
| 122,279 |
|
| 138,393 |
| Other Foreign |
| 20,577 |
| 28,344 |
|
| 39,711 |
|
| 52,831 |
|
| $ | 490,966 | $ | 601,602 |
| $ | 1,005,930 |
| $ | 1,204,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, | December 31, | |||
|
|
|
|
|
|
|
| 2020 |
|
| 2019 |
Long-lived assets: |
|
|
|
|
|
|
|
|
|
| |
| United States |
|
|
|
|
| $ | 238,139 |
| $ | 247,074 |
| Asia |
|
|
|
|
|
| 71,472 |
|
| 76,507 |
| Europe |
|
|
|
|
|
| 19,027 |
|
| 20,258 |
| Other |
|
|
|
|
|
| 23,826 |
|
| 23,563 |
|
|
|
|
|
|
| $ | 352,464 |
| $ | 367,402 |
|
|
|
|
|
|
|
|
|
|
|
|
Note 19 – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income taxes paid, net | $ | 932 | $ | 12,042 | $ | 2,967 | $ | 14,284 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest paid | 2,488 | 2,032 | 4,427 | 4,022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash investing activity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additions to property, plant and equipment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
in accounts payable | $ | 3,677 | $ | 5,660 |
23
The components of lease expense were as follows:
|
|
| Three Months Ended |
| Nine Months Ended | |||||
(in thousands) |
| September 30, 2019 | ||||||||
Finance lease cost: |
|
|
|
|
|
|
|
|
| |
| Amortization of right-to-use assets (included in depreciation expense) | $ | 178 |
|
| $ | 534 | |||
| Interest on lease liabilities |
|
|
|
| 135 |
|
|
| 422 |
Operating lease cost |
|
|
|
| 4,181 |
|
|
| 12,861 | |
Short-term lease cost |
|
|
|
| 131 |
|
|
| 452 | |
Variable lease cost |
|
|
|
| 595 |
|
|
| 1,391 | |
| Total lease cost |
|
|
| $ | 5,220 |
|
| $ | 15,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended | |||
|
|
|
|
|
|
| September 30, 2019 | |||
Other information: |
|
|
|
|
|
|
|
|
| |
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
| |
| Operating cash flows used for finance lease |
|
|
|
|
|
|
| $ | 444 |
| Operating cash flows used for operating leases |
|
|
|
|
|
|
| $ | 11,142 |
| Financing cash flows used for finance lease |
|
|
|
|
|
|
| $ | 864 |
| Right-to-use assets obtained in exchange for new operating lease liabilities |
|
|
|
|
| $ | 15,282 |
The lease assets and liabilities as of September 30, 2019 were as follows (in thousands):
|
|
|
| September 30, | ||
|
|
|
|
|
| 2019 |
Finance lease right-of-assets (included in other assets) |
|
|
| $ | 2,489 | |
Operating lease right-of-use assets |
|
|
| $ | 79,854 | |
Finance liability, current (included in current installments of long-term debt) |
|
|
| $ | 1,284 | |
Finance lease liability, noncurrent (included in long-term debt) |
|
|
| $ | 4,000 | |
Operating lease liability, current (included in other accrued liabilities) |
|
|
| $ | 11,394 | |
Operating lease liability, noncurrent |
|
|
| $ | 70,167 | |
Weighted average remaining lease term – finance leases |
|
|
| 3.8 years | ||
Weighted average remaining lease term – operating leases |
|
|
| 10.3 years | ||
Weighted average discount rate – finance leases |
|
|
|
| 10.1% | |
Weighted average discount rate – operating leases |
|
|
|
| 4.7% |
24
Future annual minimum lease payments and finance lease commitments as of September 30, 2019 were as follows (in thousands):
|
| Operating |
| Finance | ||
Year ending December 31, |
| Leases |
|
| Leases | |
| 2019 (remaining three months) | $ | 4,006 |
| $ | 439 |
| 2020 |
| 14,359 |
|
| 1,781 |
| 2021 |
| 12,075 |
|
| 1,816 |
| 2022 |
| 10,339 |
|
| 1,853 |
| 2023 |
| 9,709 |
|
| 465 |
| 2024 and thereafter |
| 54,454 |
|
| — |
| Total minimum lease payments | $ | 104,942 |
| $ | 6,354 |
| Less: imputed interest |
| (23,381) |
|
| (1,070) |
| Present value of lease liabilities | $ | 81,561 |
| $ | 5,284 |
As of September 30, 2019, the Company’s future operating leases that have not yet commenced are immaterial.
Future annual minimum lease payments and capital lease commitments in effect as of December 31, 2018 having a noncancelable term in excess of one year as determined prior to the adoption of ASU 842 were as follows (in thousands):
|
|
| Operating |
|
| Capital |
Year ending December 31, |
| Leases |
|
| Leases | |
| 2019 | $ | 15,272 |
| $ | 1,746 |
| 2020 |
| 14,518 |
|
| 1,781 |
| 2021 |
| 12,203 |
|
| 1,816 |
| 2022 |
| 10,466 |
|
| 1,853 |
| 2023 |
| 9,890 |
|
| 465 |
| Thereafter |
| 47,868 |
|
| — |
| Total minimum lease payments | $ | 110,217 |
| $ | 7,661 |
| Less: amount representing interest |
|
|
|
| (1,514) |
| Present value of minimum lease payments |
|
|
|
| 6,147 |
| Less: current installments |
|
|
|
| (1,168) |
| Capital lease obligations, less current installments |
|
|
| $ | 4,979 |
Note 20 – Subsequent Event
During the fourth quarter of 2019, some of the Company’s systems were affected by a ransomware incident that encrypted information on the Company’s systems and disrupted customer and employee access to the Company’s systems and services. The Company carries insurance, including cyber insurance. The full scope of the costs and related impacts of this incident, including the availability of insurance to offset some of these costs, cannot be estimated at this time.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report (this Report) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts and may include words such as “anticipate,” “believe,” “intend,” “plan,” “projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” “will,” or the negative or other variations thereof. In particular, statements, express or implied, concerning future operating results, or theincluding guidance for third quarter 2020 results and beyond, our ability to generate sales, income or cash flow, the anticipated impact of the COVID-19 pandemic, our anticipated plans and responses to the COVID-19 pandemic, our expected revenue mix, our business strategy and strategic initiatives, our repurchases of shares of our common stock and our intentions concerning the payment of dividends, among others, are forward-looking statements. Undue reliance should not be placed on any forward-looking statements. Forward-lookingAlthough we believe these statements are not guarantees of performance. Theybased upon reasonable assumptions, they involve risks, uncertainties and assumptions that are beyond our ability to control or predict, relating to operations, markets and the business environment generally, including those discussed in Part I, Item 1A of the 20182019 10-K, in Part II, Item 1A of this Report and in any of our subsequent reports filed with the SEC. In particular, these statements also depend on the duration, severity and evolution of the COVID-19 pandemic and related risks, including government and other third-party responses to it and the consequences for the global economy, our business and the businesses of our suppliers and customers, as well as our ability (or inability) to execute on its plans to respond to the COVID-19 pandemic. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes, including the future results of our operations, may vary materially from those indicated. Undue reliance should not be placed on any forward-looking statements. Forward-looking statements are not guarantees of performance. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes, and the 20182019 10-K. All forward-looking statements included in this document are based upon information available to the company as of the date of this document, and it assumes no obligation to update them.
OVERVIEW
We are a worldwide provider of innovative product design, engineering services, technology solutions and advanced manufacturing services (both electronic manufacturing services (EMS) and precision technology machining services). In this Report, references to Benchmark, the Company or use of the words “we”, “our” and “us” include Benchmark’s subsidiaries unless otherwise noted.
From initial product concept to volume production, including direct order fulfillment and aftermarket services, Benchmark has been providing integrated services and solutions to original equipment manufacturers (OEMs) since 1979. Today, Benchmark proudly serves the following industries: aerospace and defense (A&D), medical technologies, complex industrials, semiconductor capital equipment (Semi-Cap), next-generation telecommunications and advanced computing.
Our customer engagement focuses on three principal areas:
•Engineering Services, which includes turnkey product design, design for manufacturability, manufacturing process and test development, concurrent and sustaining engineering and regulatory services. Our engineering services may be for systems, sub-systems, printed circuit boards and assemblies, and components. We provide these services across all the industries we serve, but focus primarily in regulated industries such as medical, complex industrials, aerospace and defense, and next-generation telecommunications.
24
•Technology Solutions, which involve developing a library of building blocks or reference designs primarily in defense solutions, surveillance systems, radio frequency and high-speed design, and front-end managed connectivity data collection systems. We often merge these technology solutions with engineering services in order to support manufacturing services. Our reference designs can be utilized across a variety of industries, but we have significant capabilities in the aerospace and defense and next-generation telecommunications markets. We have also developed stronger capabilities in radio frequency (RF) and high speedhigh-speed design for both components and substrates. The need to reduce Size, Weight, and Power (SWaP) to accommodate embedding high frequency electronic communications into specific designs is important to customers in the aerospace and defense, medical, and next-generation telecommunications markets.
26
•Manufacturing Services, which include producing printed circuit board assemblies (PCBAs) using both traditional surface mount technologies (SMT) and microelectronics are then often integrated into a subsystem assembly, or a box build as part of systems integration. Systems integration often involves building a finished assembly that includes PCBAs, complex subsystem assemblies, mechatronics, displays, optics, and other components. These final products may be configured to order and delivered directly to the end-customer across all the industries we serve. Manufacturing services also includes precision technology manufacturing comprised of precision machining, advanced metal joining, assembly and functional testing primarily for customers in the semiconductor capital equipment as well as the medical and aerospace and defense markets.
Our core strength lies in our ability to provide concept-to-production solutions in support of our customers. Our global manufacturing presence increases our ability to respond to our customers’ needs by providing accelerated time-to-market and time-to-volume production of high-quality products – especially for complex products with lower volume and higher mix in regulated markets. These capabilities enable us to build strong strategic relationships with our customers and to become an integral part of their business.
We believe our primary competitive advantages are our engineering services (including product design), technology solutions, and manufacturing services (including electronics and precision technology capabilities) provided by highly skilled personnel. We continue to invest in our business to expand our skills and service offerings from direct customer inputs. We have a closed-loop feedback system in place to respond to customer ideas to enhance our future designs and manufacturing solutions in support of the full life cycle of their products. These solutions offload the electronics design work from our customers so they can focus on product areas where they can provide more value add and, in the process, accelerate their time-to-market and reduce their product development costs. Working closely with our customers and responding promptly to their needs, we become an integral part of their development process helping them bring products to market faster and more economically.
In addition, we believe that a strong focus on human capital through the talent we hire and retain is critical to maintaining our competitiveness. We are driving a customer-centric organization with a high degree of accountability and ownership to develop processes necessary to exceed customer expectations and deliver financial performance aligned to our goals. Through our employee feedback process, we solicit and act upon information to improve our company and better support our customers and business processes in the future. We have taken steps to attract the best leaders into our business and we are accelerating our efforts to mentor and develop key leaders for the future.
Our customers often face challenges in designing supply chains, demand planning, procuring materials and managing their inventories efficiently due to fluctuations in their customer demand, product design changes, short product life cycles and component price fluctuations.
25
We employ enterprise resource planning (ERP) systems and lean manufacturing principles to manage procurement and manufacturing processes in an efficient and cost-effective manner so that, where possible, components arrive on a just-in-time, as-and-when-needed basis. Because we are a significant purchaser of electronic components and other raw materials, we are able to capitalize on the economies of scale associated with our relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. Our agility and expertise in supply chain management and our relationships with suppliers across the supply chain enable us to help reduce our customers’ cost of goods sold and inventory exposure.
We recognize revenue as the customer takes control of the manufactured products built to customer specifications. We also generate revenue from our design, development and engineering services, in
27
addition to the sale of other inventory.
Revenue is measured based on the consideration specified in a contract with a customer. Under the majority of our manufacturing contracts with customers, the customer controls all of the work-in-progress as products are being built. Revenues under these contracts are recognized over time based on the cost-to-cost method. Under other manufacturing contracts, the customer does not take control of the product until it is completed. Under these contracts, we recognize revenue upon transfer of control of product to the customer, which is generally when the goods are shipped. Revenue from engineering services that include design and development elements also continues to be recognized over time as the services are performed. We assume no significant obligations after shipment as we typically warrant workmanship only. Therefore, the warranty provisions are generally not significant.
ThirdCOVID-19 Pandemic Update
In late 2019, there was an outbreak of a new strain of coronavirus (COVID-19) first identified in Wuhan, Hubei Province, China, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Further, the COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home,” total lock-down orders, business limitations or shutdowns and similar orders. As a result, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and created significant volatility and disruption of financial markets. In an effort to first and foremost protect the health and safety of our employees, we also took proactive action to adopt social distancing policies at our locations globally, including working from home for certain employees, limiting the number of employees attending meetings, reducing the number of people in our locations at any one time, and suspending employee travel.
Benchmark provides critical infrastructure products and essential services in each of our locations. However, as a result of the COVID-19 pandemic, including the related responses from government authorities, the Company’s operations were impacted worldwide starting in the first quarter of 2020. These impacts began with a shut-down of the Company’s manufacturing facilities in Suzhou, China early in the first quarter of 2020 (which ramped back to full capacity by mid-March).
However, the disruptive impacts caused by the COVID-19 pandemic have since affected and continue to affect our operations in all other regions. For example, starting in mid-March, our Penang, Malaysia operation, which includes our largest precision machining facility, was significantly disrupted. As a result, our Penang, Malaysia operation had been operating at approximately 30% of capacity through the end of the first quarter of 2020, at approximately 50% of capacity through April of 2020 and subsequently ramped to full production capacity within a couple of weeks thereafter. Our California operations experienced significant disruptions through April 2020 due to “shelter-in-place” and “stay-at-home” orders and
26
ordinances. Also, our operations in Tijuana and Guadalajara, Mexico have experienced and continue to experience significant disruptions due to similar “shelter-in-place” and “stay-at-home” orders and ordinances.We resumed operations in Tijuana and Guadalajara during the middle of May of 2020 and are returning to full production in phases. We continue to operate at approximately 75% of capacity due to high risk employee regulations.
Further, we have experienced, and continue to experience, a challenging supply chain environment and labor constraints due to the COVID-19 pandemic.
As a result of the COVID-19 pandemic, our revenue for the first six months of 2020 was negatively impacted primarily as a result of operational inefficiencies relating to reduced productivity levels throughout our facilities and supply chain constraints, which affected our ability to support customer demand. Additionally, the COVID-19 pandemic negatively impacted our first and second quarter results due to increased direct costs associated with labor expenses and personal protective equipment for our employees, as well as under absorption of fixed costs.
The COVID-19 pandemic continues to affect the Company’s operations into the third quarter of 2020, due in large part to government enacted plant shut-downs, stay-at-home or shelter-in-place or similar restrictions, particularly in our operations in Guadalajara and Tijuana, Mexico, as discussed above. As a result, we expect our revenue will continue to be negatively impacted during the third quarter of 2020 and beyond as a result of continued operational inefficiencies and supply chain constraints, in addition to elevated labor expenses, resulting from the COVID-19 pandemic. We also anticipate that we may experience customer demand fluctuation, particularly due to disruptions to the businesses and operations of our customers due to the COVID-19 pandemic.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in the United States in response to the COVID-19 pandemic. The CARES Act among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021, and contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The Company has evaluated the impact of these provisions and has determined these provisions did not have any impact on the six months ended June 30, 2020. In addition, the CARES Act allows for employee retention tax credits to be taken in U.S. payroll tax filings and allows for the deferral of the employer portion of social security taxes with 50% to be paid at the end of calendar years 2021 and 2022, respectively. Accordingly, the Company has deferred the payment of the employer portion of social security taxes for the three months ended June 30, 2020 until the end of 2021 and 2022, respectively. The Company has also determined it is entitled to employee retention credits and has filed for the credits in the second quarter payroll tax reports pursuant to the guidance provided by the Internal Revenue Service. The amount of credits has been recorded in operating expenses for the three months ended June 30, 2020.
International authorities in various jurisdictions have also allowed for cash grants, delay of tax filings, and delay of tax payments for future quarters. We have taken advantage of these benefits by delaying our tax filings and respective tax payments in various jurisdictions.
In response to uncertainties related to the impact of the COVID-19 virus, we have taken a series of actions to lower our cost structure and reduce capital expenditures. On April 29, 2020, the Company announced a temporary 10% salary reduction for all executive officers (including our named executive officers) effective April 27, 2020 through December 31, 2020 and the Company Board of Directors approved a temporary 10% reduction in their quarterly cash compensation effective April 27, 2020 through December 31, 2020. Other senior leaders in the Company have taken a 7% salary reduction through September 29, 2020. Additional cost reduction actions in our U.S. factories consist of employees taking rotating time off
27
depending on the factory loading levels. Cost reduction actions in our non-U.S. locations depend on local law requirements. Additionally, we have reduced variable compensation and other discretionary expenses, such as travel. We have also implemented actions to conserve our cash and cash equivalents such as reducing planned capital expenditures, deferring certain planned investments, suspending our share repurchase activity, and deferring payroll and income tax payments in accordance with the CARES Act. Finally, we have implemented certain other procedures to manage potential risks related to working capital such as closely monitoring the financial stability, payment terms and credit limits of our customers.
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, the exact extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations, is currently unknown and will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the COVID-19 pandemic, its severity, the actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume.
Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. See “Risk Factors” in Part II, Item 1A of this Report for additional risks we face due to the COVID-19 pandemic.
Second Quarter 20192020 Highlights
Sales for the three months ended SeptemberJune 30, 20192020 decreased 13%18% to $555.2$491.0 million compared to $640.7$601.6 million during the comparable 20182019 period. During the thirdsecond quarter of 2019,2020, sales to customers in our various industry sectors fluctuated from the comparable 20182019 period as follows:
Higher-Value Markets
Industrials decreased by 10%24%,
A&D increaseddecreased by 10%17%,
Medical increased by 33%18%, and
Semi-Cap decreasedincreased by 11%39%.
Traditional Markets
Computing decreased by 59%67%, and
Telecommunications decreased by 22%29%.
The overall revenue decrease was driven primarily by lower revenueOverall, higher-value market revenues during the second quarter were flat year-over-year. Demand strength in Computing due to our exit from a legacy Computing contract (as discussed below) which was dilutive to our gross margin, in addition to lower telecommunications revenue due to softer demand from legacy broad band productsMedical supporting COVID-19 solutions and certain advanced program ramp delays. These decreasesnew product ramps and the continued Semi-Cap recovery were partially offset by increased revenueweakness in the Medicalcommercial Aerospace and A&D sectors. Higher-value markets were up 5% primarily from the increased revenues in Medical and A&D, and traditionalIndustrials markets. Traditional market revenues were down 45%54% year-over-year primarily from lowerour exit of the legacy Computing and Telecommunications revenuescontract as described above.discussed below.
Our sales depend on the success of our customers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence. Developments adverse to our major customers or their products, or the failure of a major customer to pay for components or services, including in each case as a result of the COVID-19 pandemic, can adversely affect us. A substantial percentage of our sales are made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us. Sales to our 10ten largest customers represented 41%43% and 44%41% of our sales in the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively.
AsDuring 2018, as part of our ongoing process to review contracts that are marginal and dilutive to our gross margin, we made the decision to not renew the legacy contract with a large Computing customer that was
28
to expire at the end of 2019. During the second quarter of 2019, we completed the final build out of this legacy contract and in the third quarter of 2019 had an immaterial amount of revenue from this contract as the transition was completed.
During the three months ended September 30, 2019, we recovered $0.1 million from a favorable legal settlement that increased other income.
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We experience fluctuations in gross profit from period to period. Different programs contribute different gross margins depending on the type of services involved, location of production, size of the program, complexity of the product and level of material costs associated with the various products. Moreover, new programs can contribute relatively less to our gross profit in their early stages when manufacturing volumes are usually lower, resulting in inefficiencies and unabsorbed manufacturing overhead costs. In addition, a numberseveral of our new and higher-volume programs remain subject to competitive constraints that can exert downward pressure on our margins. During periods of low production volume and slow new program ramps, we generally have idle capacity and reduced gross margin. Gross profit can also be impacted by other situations, such as the current COVID-19 global pandemic discussed above and the ransomware incident experienced in 2019.
We have undertaken initiatives to restructure our business operations with the intention of improving utilization and reducing costs. During the first ninesix months of 2019,2020, we recognized $10.8$7.6 million of restructuring charges and other costs due in part to expenses associated with various site closureclosures and restructuring activities, in addition to our go to market changes. We expect to incur $3.5 million to $4.5In addition, during the first six months of 2020, we incurred $1.0 million in additional restructuring and transition charges in the fourth quarter of 2019costs related to final charges for our CEO transition and various other employee related activities. In July 2019, we announced that we have elected to close our San Jose, California and Guaymas, Mexico sites with customer transitions expected into other locationsan asset impairment in the Benchmark network by mid 2020. Total restructuring charges associated with these two closures are expected to be between $6 million and $8 million during 2019 and 2020 in total.Asia.
During the fourth quarter of fiscal 2019, some of our systems were affected by a ransomware incident that encrypted information on our systems and disrupted customer and employee access to our systems and services. We immediately took steps to isolate and implement measures to prevent additional systems from being affected, including taking the network offline as a precaution. As of the date of this Report, we have restored network connectivity to all of our sites and are in the process of resuming operations. In connection with this incident, third party consultants and forensic experts were engaged to assist with the restoration and remediation of systems and, with the assistance of law enforcement, to investigate the incident. Although to date we have found no evidence of customer or employee data exfiltration, our forensic investigation is ongoing. The Company carries insurance, including cyber insurance. The full scope of the costs and related impacts of this incident, including the availability of insurance to offset some of these costs, has not been fully determined. See “Risk Factors” in Part II, Item IA of this Report for additional information.
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RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain items in our Condensed Consolidated Statements of Income (Loss) bear to sales for the periods indicated. The financial information and the discussion below should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Report.
|
| Three Months Ended | Nine Months Ended |
|
| Three Months Ended | Six Months Ended |
| ||||||||||||
|
| September 30, | September 30, |
|
| June 30, | June 30, |
| ||||||||||||
|
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Sales | Sales |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | Sales |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of sales | Cost of sales |
| 90.5 |
| 91.8 |
| 90.9 |
| 91.3 |
| Cost of sales |
| 92.9 |
| 91.8 |
| 92.2 |
| 91.8 |
|
| Gross profit |
| 9.5 |
| 8.2 |
| 9.1 |
| 8.7 |
| Gross profit |
| 7.1 |
| 8.2 |
| 7.8 |
| 8.2 |
|
Selling, general and administrative expenses | Selling, general and administrative expenses |
| 6.3 |
| 5.9 |
| 5.9 |
| 5.7 |
| Selling, general and administrative expenses |
| 5.8 |
| 5.2 |
| 6.0 |
| 5.1 |
|
Amortization of intangible assets | Amortization of intangible assets |
| 0.4 |
| 0.4 |
| 0.4 |
| 0.4 |
| Amortization of intangible assets |
| 0.5 |
| 0.4 |
| 0.5 |
| 0.4 |
|
Restructuring charges and other costs | Restructuring charges and other costs |
| 1.1 |
| 0.3 |
| 0.6 |
| 0.3 |
| Restructuring charges and other costs |
| 1.2 |
| 0.6 |
| 0.9 |
| 0.4 |
|
| Income from operations |
| 1.8 |
| 1.7 |
| 2.1 |
| 2.3 |
| Income (loss) from operations |
| (0.4) |
| 2.0 |
| 0.5 |
| 2.3 |
|
Other income (expenses), net | Other income (expenses), net |
| 0.0 |
| (0.2) |
| - |
| (0.1) |
| Other income (expenses), net |
| (0.4) |
| 0.0 |
| (0.4) |
| 0.1 |
|
| Income before income taxes |
| 1.6 |
| 1.5 |
| 2.2 |
| 2.1 |
| Income (loss) before income taxes |
| (0.8) |
| 2.0 |
| 0.1 |
| 2.4 |
|
Income tax expense |
| 0.3 |
| 0.3 |
| 0.4 |
| 2.4 |
| |||||||||||
Income tax expense (benefit) | Income tax expense (benefit) |
| (0.1) |
| 0.4 |
| — |
| 0.5 |
| ||||||||||
| Net income (loss) |
| 1.3 | % | 1.2 | % | 1.7 | % | (0.3) | % | Net income (loss) |
| (0.7) | % | 1.6 | % | — | % | 1.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Sales for the thirdsecond quarter of 20192020 were $555.2$491.0 million, a 13%18% decrease from sales of $640.7$601.6 million for the same quarter in 20182019. Sales for the first ninesix months of 20192020 were $1.8$1.0 billion, a 8%16% decrease from sales of $1.9$1.2 billion for the same period in 20182019. Sales by industry sector were as follows:
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|
| Three Months Ended | Nine Months Ended |
| ||||||
|
| September 30, | September 30, |
| ||||||
(in thousands) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |
| Higher-Value Markets |
|
|
|
|
| ||||
Industrials | $ | 114,973 | $ | 128,304 | $ | 346,010 | $ | 372,048 |
| |
A&D |
| 115,354 |
| 104,988 |
| 326,208 |
| 301,284 |
| |
Medical |
| 127,773 |
| 96,300 |
| 345,438 |
| 290,103 |
| |
Semi-Cap |
| 68,051 |
| 76,608 |
| 196,522 |
| 285,276 |
| |
|
|
| 426,151 |
| 406,200 |
| 1,214,178 |
| 1,248,711 |
|
| Traditional Markets |
|
|
|
|
|
|
|
|
|
Computing |
| 59,522 |
| 145,386 |
| 316,522 |
| 409,561 |
| |
Telecommunications |
| 69,556 |
| 89,102 |
| 228,951 |
| 251,143 |
| |
|
|
| 129,078 |
| 234,488 |
| 545,473 |
| 660,704 |
|
| Total | $ | 555,229 | $ | 640,688 | $ | 1,759,651 | $ | 1,909,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | Six Months Ended |
| ||||||
|
| June 30, | June 30, |
| ||||||
(in thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |
| Higher-Value Markets |
|
|
|
|
| ||||
Industrials | $ | 87,130 | $ | 114,664 | $ | 189,956 | $ | 231,037 |
| |
A&D |
| 88,524 |
| 106,965 |
| 207,724 |
| 210,854 |
| |
Medical |
| 134,751 |
| 114,187 |
| 252,727 |
| 217,665 |
| |
Semi-Cap |
| 86,851 |
| 62,450 |
| 169,571 |
| 128,471 |
| |
|
|
| 397,256 |
| 398,266 |
| 819,978 |
| 788,027 |
|
| Traditional Markets |
|
|
|
|
|
|
|
|
|
Computing |
| 43,853 |
| 132,690 |
| 80,454 |
| 257,000 |
| |
Telecommunications |
| 49,857 |
| 70,646 |
| 105,498 |
| 159,395 |
| |
|
|
| 93,710 |
| 203,336 |
| 185,952 |
| 416,395 |
|
| Total | $ | 490,966 | $ | 601,602 | $ | 1,005,930 | $ | 1,204,422 |
|
|
|
|
|
|
|
|
|
|
|
|
Industrials. ThirdSecond quarter sales decreased 10%24% to $115.0$87.1 million from $128.3$114.7 million in 2018.2019. Sales during the first ninesix months of 20192020 decreased 7%18% to $346.0190.0 million from $372.0$231.0 million in the same period of 2018.2019. The decreases were primarily from softer demand from customers in the oil and gas industry and in both industrial commercial building and transportation market and themarkets, in addition to ramp delays from previously booked new programs.
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Aerospace and Defense. ThirdSecond quarter sales increased 10%decreased 17% to $115.3$88.5 million from $105.0$107.0 million in 20182019. Sales during the first ninesix months of 20192020 were $326.2$207.7 million compared to $301.3$210.8 million in the same period of 20182019. The increasesdecreases were due primarily due to overall demand strength for existing products for ground based and airborne vehicles.the weakness in the commercial Aerospace market.
Medical. ThirdSecond quarter sales increased 33%18% to $127.8$134.8 million from $96.3$114.2 million in 2018.2019. Sales increased 19%16% to $345.5$252.7 million during the first ninesix months of 20192020 from $290.1$217.7 million in the same period of 2018.2019. These increases were primarily due to strongnew program ramps and strength throughout our medical customers and increasing demand from cardiovascular programs, including a last time build in 2019 for an existingcritical devices supporting COVID-19 solutions and new product that is going end of life.ramps.
Semiconductor Capital Equipment. ThirdSecond quarter sales decreased 11%increased 39% to $68.0$86.9 million from $76.6$62.4 million in 2018.2019. Sales during the first ninesix months of 2019 decreased 312020 increased 32% to $196.5$169.6 million from $285.3$128.5 million in the same period of 20182019. These decreasesincreases were primarily fromdue to continued semi-cap softness. We have seen increased demand from some customers for new programs that are starting to ramp, but demand for overall semi-cap programs remains muted.Semi-Cap market recovery.
Computing. ThirdSecond quarter sales decreased 59%67% to $59.5$43.8 million from $145.4$132.7 million in 20182019, and decreased 23%69% to $316.5$80.4 million during the first ninesix months of 20192020 from $409.6$257.0 million in the same period of 2018.2019. These decreases were primarily related to our exit from a legacy contract as discussed above.
Telecommunications. ThirdSecond quarter sales decreased 22%29% to $69.6$49.9 million from $89.1$70.6 million in 20182019 and decreased 9%34% to $229.0$105.5 million during the first ninesix months of 20192020 from $251.1$159.4 million in the same period of 2018.2019. The decreases were primarily due to softer demand from legacy broadband products and advancedcommercial satellite program ramp delays.applications.
Our international operations are subject to the risks of doing business abroad. See Part I, Item 1A of our 20182019 10-K for factors pertaining to our international sales and fluctuations in the exchange rates of foreign currency and for further discussion of potential adverse effects in operating results associated with the risks
30
of doing business abroad. During the first ninesix months of 2020 and 2019, 50% and 2018, 46%44%, respectively of our sales were from our international operations.
Gross Profit
Gross profit increased slightlydecreased 30% to $52.9$34.6 million for the three months ended SeptemberJune 30, 20192020 from $52.8$49.2 million in the same quarter of 2018,2019, and decreased 3%21% to $159.7$78.0 million for the ninesix months ended SeptemberJune 30, 20192020 from $165.4$99.3 million in the same period of 2018.2019. For each of the ninethree and six months ended SeptemberJune 30, 2019 and 2018,2020, gross profit included a $0.4 million recovery associated with customer insolvencies in 2020. For the three and six months ended June 30, 2019, gross profit included a $16 thousand and $1.0 million recovery, and a $0.9 million charge, respectively, associated with customer insolvencies in 2019 and 2018.2019. In addition, gross profit for the three and ninesix months ended SeptemberJune 30, 2019 included a $0.8 million settlement accrual with a customer. Gross margin including these charges and recoveries was 9.5%7.1% and 9.1%7.8%, respectively, for the three and ninesix months ended SeptemberJune 30, 20192020 and 8.2% for each of the three and 8.7%six months ended June 30, 2019. Excluding these items, gross margin was 7.0% and 7.7%, respectively, for the three and ninesix months ended SeptemberJune 30, 2018. Excluding these items, gross margin was 9.5% and 9.1%, respectively, for the three and nine months ended September 30, 20192020 compared to 8.5%8.3% and 8.7%8.2%, respectively, in the same periods of 2018.2019. The improvementdeterioration in gross margin when comparing the periods is primarily attributable to operational improvementslower revenues and the disruptive impacts caused by the COVID-19 driven by reduced productivity levels throughout our global networkfacilities, supply chain constraints, increased direct costs associated with labor expenses and a better mix from higher-value market revenue, partially due topersonal protective equipment for our exit from the legacy Computing contract which was dilutive to our gross margin as discussed above.employees and under absorption of fixed costs.
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Selling, General and Administrative Expenses
SG&A decreased by 7%9.0% to $34.9$28.5 million in the thirdsecond quarter of 20192020 compared to $37.6$31.5 million in 2018,2019, and decreased by 5%2% to $103.9$60.1 million in the first ninesix months of 20192020 compared to $109.2$61.5 million in 2018.2019. During the ninesix months ended SeptemberJune 30, 2019, we had a $1.7 million recovery of a provision for accounts receivable associated with the insolvency of a customer. During the three and nine months ended September 30, 2018, we had $1.7 million in charges for a provision to accounts receivable associated with the insolvency of two customers. Including these adjustments to the provision to accounts receivable, SG&A increased to 6.3%5.8% of sales for the thirdsecond quarter of 20192020 from 5.9%5.2% in 2018, and increased to 5.9% of sales for the first nine months of 2019, from 5.7% in 2018. Excluding these items, SG&A increased to 6.3% of sales for the third quarter of 2019 from 5.6% in 2018, and increased to 6.0% of sales for the first ninesix months of 2020 from 5.1% in 2019. Excluding these adjustments to the provision to accounts receivable, SG&A increased to 5.8% of sales for the second quarter of 2020 from 5.2% in 2019, and increased to 6.0% of sales for the first six months of 2020 from 5.6%5.2% in 2018,2019, primarily due to lower sales.sales and a $2.1 million provision for bad debts recorded in 2020.
Amortization of Intangible Assets
Amortization of intangible assets was $4.8 million in the first six months of 2020 and compared to $4.7 million in 2019.
Restructuring Charges and Other Costs
During the first ninesix months of 2019,2020, we recognized $7.4$7.3 million of restructuring charges, primarily related to site closures and restructuring activities in certain facilities in the Americas and Asia. In addition, during the first six months of 2020, we incurred $1.0 million in costs related to an asset impairment in Asia. In the first six months of 2019, we recognized $2.3 million of restructuring charges, primarily related to reductions in workforce in certain facilities in the Americas and Asia. In addition, during the first ninesix months of 2019, we incurred $3.4$2.7 million in costs primarily related to fees and costs incurred in reaching the cooperation agreement with Engaged Capital and other proxy related activities as well as our CEO transition.
In the first nine months of 2018, we recognized $3.5 million of restructuring charges, primarily related to facility transition and closures in the Americas and reductions in workforce in certain facilities primarily in the Americas, and $2.3 million in costs related to the transition of our corporate headquarters to Arizona. See Note 1513 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Report.
Interest Expense
Interest expense decreasedincreased to $5.0$4.1 million during the first ninesix months of 20192020 from $8.5$3.3 million during the comparable 20182019 period due to write-off of existing deferred financing chargesthe outstanding amounts on the Revolving Credit facility in connection with the refinancing of2020 and increased interest rates based on our credit facilities offset by lowerhigher debt levels.leverage ratio.
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Interest Income
Interest income decreased to $3.1$0.9 million during the first ninesix months of 20192020 from $5.2$2.4 million during the comparable 20182019 period due primarily to lower invested cash equivalents.equivalents and the lower interest rate environment.
Income Tax Expense
Income tax expense of $7.8$0.4 million represented an effective tax rate of 20.5%45.8% for the first ninesix months of 2019,2020, compared with $45.7$6.2 million for the comparable 20182019 period, which represented an effective tax rate of 112.0%21.2%. During the first quarter of 2018, we changed our historical repatriation strategy. Previously, we had historically asserted our intention to indefinitely reinvest undistributed foreign earnings. As of March 31, 2018, we no longer consider the earnings prior to December 31, 2017 to be indefinitely reinvested in some of our foreign subsidiaries. As a result of this change in assertion for undistributed earnings, we recorded a $30.7 million tax expense for foreign withholding tax from Asia and $9.4 million for U.S. state income tax expense. In the second quarter of 2018 we recorded $0.4 million of additional U.S. tax for the distributions from our foreign subsidiaries. In addition, during 2018, we released $0.5 million of uncertain tax benefits from a U.S. Internal Revenue Service (IRS) audit related to the Secure Communication Systems, Inc. acquisition and we had additional tax benefits related to stock compensation and tax returns filed in the first quarter of 2018. Excluding the tax effects of the change in the assertion of undistributed foreign earnings and the various tax benefits recorded in the period ended March 31, 2018, the effective tax rate in the first nine months of 2018 would have been 13.7% compared to 20.5% in the first nine months of 2019. The increase in the effective tax rate was primarily a resultdue to the mix of higher taxable incomeprofits and losses in geographies with higher tax rate in 2019 and the expiration of a China tax incentive in December 2018.our worldwide operations.
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We have been granted certain tax incentives, including tax holidays, for our subsidiaries in Malaysia and Thailand that will expire at various dates, unless extended or otherwise renegotiated, through 2021 in Malaysia and 2028 in Thailand. Our Chinese subsidiary submitted an application for a new tax incentive in China during the third quarter of 2019. See Note 119 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Report.
Net Income (Loss)
We reported net income of $30.4$0.4 million, or $0.77$0.01 per diluted share, for the first ninesix months of 2019,2020, compared with a net lossincome of $4.9$23.2 million, or $0.10$0.58 per diluted share, for the same period in 2018.2019. The net increasedecrease of $35.3$22.8 million from 20182019 was primarily the result of the tax expense related to the changelower gross profit as well as higher restructuring charges and other costs in our historical repatriation strategy discussed above.2020.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our organic growth and operations through funds generated from operations and occasional borrowings under our revolving credit facility. Cash and cash equivalents and restricted cash totaled $348.0$356.4 million at SeptemberJune 30, 20192020 and $458.1$364.0 million at December 31, 2018,2019, of which $179.5$162.2 million and $154.4$197.8 million, respectively, were held outside the U.S. in various foreign subsidiaries.
Cash provided by operating activities during the first ninesix months of 2020 was $57.3$19.9 million for 2019 and consisted primarily of $30.4$0.4 million of net income adjusted for $36.4$24.5 million of depreciation and amortization, and a $121.2$20.4 million decrease in accounts receivable, offset by a $21.0$7.4 million increasedecrease in contract assets, a $6.6$7.0 million increase in inventories,accounts payable and a $122.2$3.1 million decreaseincrease in accounts payable.accrued liabilities, partially offset by a $48.7 million increase in inventories. The decrease in accounts receivable was attributable to lower sales. The decrease in contract assets was impacted by lower sales and an increase in the saletiming of accounts receivable when comparing the periods.work completed at period end. The increase in contract assets and inventories is primarily related to longer lead production timesmix changes from customers late in the first six months of 2020 and inventory to support of productionlong productions cycles for certain customers.products in our Semi-Cap and Medical sectors. The decreaseincrease in accounts payable was primarily a result of the leveltiming of inventory purchases due to lower sales volume.and the timing of payments. The increase in accrued liabilities was primarily a result of the timing of payments. Working capital was $0.8$0.7 billion at SeptemberJune 30, 20192020 and $0.9 billion at December 31, 2018.2019.
We purchase components only after customer orders or forecasts are received, which mitigates, but does not eliminate, the risk of loss on inventories. Supplies of electronic components and other materials used in operations are subject to industry-wide shortages. In certain instances, suppliers may allocate available quantities to us. If shortages of these components and other material supplies used in operations occur, vendors may not ship the quantities we need for production, and we may be forced to delay shipments, which can increase backorders and impact cash flows. We have also experienced, and continue to experience, a challenging supply chain environment, and labor constraints due to the COVID-19 virus.
Cash used in investing activities during the first ninesix months was $25.7$20.7 million for 2019,2020, primarily due to
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purchases of additional property, plant and equipment totaling $23.7$21.4 million. The purchases of property, plant and equipment were primarily for machinery and equipment in the Americas and Asia.
Cash used in financing activities during the first ninesix months of 20192020 was $140.7$6.5 million. Share repurchases totaled $118.4$19.3 million, net principal paymentsborrowing activities on long-term debt totaled $4.6$25.6 million, dividends totaled $17.7$11.4 million, and we received $1.4$0.4 million from the exercise of stock options.
Under the terms of our $650.0 million Credit Agreement, in addition to the Term Loan facility, we have a $500.0 million five-year revolving credit facility to be used for general corporate purposes (subject to compliance with financial covenants as to interest coverage and debt leverage, in addition to other debt covenant restrictions), both with a maturity date of July 20, 2023. The Credit Agreement includes an accordion feature pursuant to which total commitments under the facility may be increased by an additional $275.0 million, subject to satisfaction of certain conditions. As of SeptemberJune 30, 2019,2020, we had $146.3$140.6 million in borrowings outstanding under the Term Loan facilityFacility and $3.0$30.0 million in borrowings and $3.7 million in letters of credit outstanding under our revolving credit facility.the Revolving Credit Facility, respectively. See
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Note 76 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for more information regarding the terms of the Credit Agreement.
The Credit Agreement contains certain financial covenants as to interest coverage and debt leverage, and certain customary affirmative and negative covenants, including restrictions on our ability to incur additional debt and liens, pay dividends, repurchase shares, sell assets and merge or consolidate with other persons. Amounts due under the Credit Agreement could be accelerated upon specified events of default, including a failure to pay amounts due, breach of a covenant, material inaccuracy of a representation, or occurrence of bankruptcy or insolvency, subject, in some cases, to cure periods. As of SeptemberJune 30, 2019,2020, we were in compliance with all of these covenants and restrictions.
Our operations, and the operations of businesses we acquire, are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. We believe we operate in substantial compliance with all applicable requirements and we seek to ensure that newly acquired businesses comply or will comply substantially with applicable requirements. To date, the costs of compliance and workplace and environmental remediation have not been material to us. However, material costs and liabilities may arise from these requirements or from new, modified or more stringent requirements in the future. In addition, our past, current and future operations, and the operations of businesses we have or may acquire, may give rise to claims of exposure by employees or the public, or to other claims or liabilities relating to environmental, waste management or health and safety concerns.
As of SeptemberJune 30, 2019,2020, we had cash and cash equivalents and restricted cash totaling $348.0$356.4 million and $497.0$466.3 million available for borrowings under the Revolving Credit Facility.Facility, subject to compliance with financial covenants as to interest coverage and debt leverage, in addition to other debt covenant restrictions as described above. During the next 12 months, we believe our capital expenditures will approximate $40$30 million to $50$35 million, principally for machinery and equipment to support our ongoing business around the globe, in addition to expenditures for information technology infrastructure items and software.
On October 26, 2018, our Board of Directors approved an expanded stock repurchase program granting us the authority to repurchase up to $100 million in common stock in addition to the $250 million approved on March 6, 2018. On February 19, 2020, the Board of Directors authorized the repurchase of an additional $150 million of the Company’s common stock. As of SeptemberJune 30, 2019,2020, we had $83.2$210.1 million remaining under the share repurchase authorization to purchase additional shares. We are under no commitment or obligation to repurchase any particular amount of common stock.
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Management believes that our existing cash balances and funds generated from operations will be sufficientenough to permit us to meet our liquidity requirements over the next 12 months. Management further believes that our ongoing cash flows from operations and any borrowings we may incur under our Revolving Credit Facility will enable us to meet operating cash requirements in future years. If we consummated significant acquisitions in the future, our capital needs would increase and could possibly result in our need to increase available borrowings under our Credit Agreement or access public or private debt and equity markets. There can be no assurance, however, that we would be successful in raising additional debt or equity on acceptable terms.
CONTRACTUAL OBLIGATIONS
We have certain contractual obligations for operating and capital leases that were summarized in a table of Contractual Obligations in our 20182019 10-K. There have been no material changes to our contractual obligations, outside of the ordinary course of our business, since December 31, 2018.2019.
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OFF-BALANCE SHEET ARRANGEMENTS
As of SeptemberJune 30, 2019,2020, we did not have any significant off-balance sheet arrangements. See Note 16 to the Condensed Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND RECENTLY ENACTED ACCOUNTING PRINCIPLES
Management’s discussion and analysis is based upon our condensed consolidated financial statements,Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. See Note 2 to the Condensed Consolidated Financial Statements in Part 1, Item 1 of this Report for a discussion of recently enacted accounting principles. Also, our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements included in our 20182019 10-K.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Our international sales comprise a significant portion of our net sales. We are exposed to risks associated with operating internationally, including:
•Foreign currency exchange risk;
•Import and export duties, taxes and regulatory changes;
•Inflationary economies or currencies; and
•Economic and political instability.
Additionally, some of our operations are in developing countries. Certain events, including natural disasters, can impact the infrastructure of a developing country more severely than they would impact the infrastructure of a developed country. A developing country can also take longer to recover from such events, which could lead to delays in our ability to resume full operations.
We transact business in various foreign countries and are subject to foreign currency fluctuation risks. We use natural hedging and forward contracts to economically hedge transactional exposure primarily associated with trade accounts receivable, other receivables and trade accounts payable that are denominated in a currency other than the functional currency of the respective operating entity. We do not use derivative financial instruments for speculative purposes. The forward contract in place as of SeptemberJune 30, 20192020 has not been designated as an accounting hedge and, therefore, changes in fair value are recorded within our Condensed Consolidated Statements of Income (Loss).Income.
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Our sales are substantially denominated in U.S. dollars. Our foreign currency cash flows are generated in certain European and Asian countries and Mexico.
We are also exposed to market risk for changes in interest rates on our financial instruments, a portion of which relates to our invested cash balances. We do not use derivative financial instruments in our investing activities. We place cash and cash equivalents and investments with various major financial institutions. We protect our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by generally investing in investment-grade securities.
We are also exposed to interest rate risk on borrowings under our Credit Agreement. As of SeptemberJune 30, 20192020, we had $146.3$30.0 million outstanding on the floating rate revolving credit facility. In addition, we had $140.6 million outstanding on the floating rate term loan facility, and we have an interest rate swap agreement with a notional amount of $146.3$140.6 million. Under this swap agreement, we receive variable rate interest rate payments and pay fixed rate interest payments. The effect of this swap is to convert a portion our floating rate interest expense to fixed interest rate expense. The interest rate swap is designated
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as a cash flow hedge. For additional information, see Note 16 to the Condensed Consolidated Financial Statements in Item 1 of this Report.
Item 4 – Controls and Procedures
As of the end of the period covered by this Report, the Company’s management (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)) conducted an evaluation pursuant to Rule 13a-15 under the Exchange Act, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based on this evaluation, the CEO and CFO concluded that as of the end of the period covered by this Report such disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting (as defined in Rule13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the last fiscal quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by individuals’ acts, by collusion of two or more people, or by management overriding the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various legal actions arising in the ordinary course of business. Other than as described below, thereThere have been no material changes to the legal proceedings previously reported under Part I, Item 3 of our Annual Report on Form2019 10-K, for the year ended December 31, 2018, and, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position or results of operations.
We are plaintiffs in a multi-district class action filed in the US District Court for the District of Arizona on June 28, 2017, Case No. 2:17-cv-02058-DJH. The case was brought against eighteen worldwide manufacturers of aluminum, tantalum, and film capacitors. The plaintiffs, including the Company and several of its subsidiaries, allege that the manufacturers participated in a conspiracy to fix the prices of and allocate markets for the affected capacitors between 2001 and 2014. To date, seven defendant groups have settled out of court resulting in a net recovery of $3.0 million by Benchmark during the first nine months of 2019; litigation is ongoing against remaining defendant groups.
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Item 1A.Risk Factors
Except as set forth below, there have been no material changes to the risk factors previously disclosed in Part I, Item 1A of our 20182019 10-K.
Our business, financial condition and results of operations have been and are subjectexpected to cyberattacks that could have a material adverse effect on our business.continue to be adversely affected by the recent novel coronavirus (COVID-19) pandemic, the extent of which is uncertain and difficult to predict.
We are increasingly dependent on digital technologiesIn late 2019, there was an outbreak of a new strain of coronavirus (COVID-19) first identified in Wuhan, Hubei Province, China, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Further, the COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home,” total lock-down orders, business limitations or shutdowns and similar orders. As a result, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and created significant volatility and disruption of financial markets.
Benchmark provides critical infrastructure products and essential services in each of our locations. However, as a result of the COVID-19 pandemic, including the related responses from government authorities, the Company’s operations were impacted worldwide starting in the first quarter of 2020. For example, several of the Company’s facilities worldwide have been, or continue to conductbe, affected by government enacted plant shut-downs, stay-at-home or shelter-in-place or similar restrictions, which have resulted in reduced productivity levels throughout our business. We use these technologies for internal purposes, including data storage, processingfacilities. Additionally, the Company experienced, and transmissions,continues to experience, a challenging supply chain environment and labor constraints, as well as in our interactions with customersincreased direct costs and suppliers. Examplesunder absorption of these digital technologies include ERP, shop floor control and other similar business applications, our global infrastructure and networks as well as external systems, analytics, automation, and cloud services. Digital technologies and services are subjectfixed costs, due to the riskCOVID-19 pandemic. For additional information see “—COVID-19 Pandemic Update” in Part I, Item 2 of cyberattacksthis Report.
Additionally, our business, financial condition and given the natureresults of such attacks, some incidents can remain undetected for a period of time despite our efforts to detect and respond to them in a timely manner. In particular, as discussed further below, our operations have been and may be further impacted in several ways, including, but not limited to, the following:
further disruptions to our operations, including due to additional facility closures, restrictions on our operations and sales, marketing and distribution efforts and/or interruptions to our engineering and design processes and other important business activities;
reduced demand for our products and services, particularly due to disruptions to the businesses and operations of our customers;
interruptions, availability or delays in global shipping to transport our products;
further slowdown or stoppage in the supply chain for our products, in addition to higher costs;
limitations on employee resources and availability, including due to sickness, government restrictions, the desire of employees to avoid contact with large groups of people or mass transit disruptions;
greater difficulty in collecting customer receivables;
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a fluctuation in foreign currency exchange rates or interest rates could result from market uncertainties;
an increase in the cost or the difficulty to obtain debt or equity financing could affect our financial condition or our ability to fund operations or future investment opportunities;
any breach of financial covenants contained in the Credit Agreement;
current or near future trends may cause certain inventory to be subjectslow-moving and trigger the need to ransomwarereview for excess and obsolete inventory or cyber-extortion attacks, whichthe valuation of inventory;
changes to the carrying value of our goodwill and intangible assets; and
an increase in regulatory restrictions or continued market volatility could significantly disrupthinder our operations. Generally, such attacks involve restricting accessability to computer systems or vital data.execute strategic business activities, as well as negatively impact our stock price.
We routinely monitorThe spread of COVID-19 has caused us to modify our systems for cyber threatsbusiness practices (including employee travel, employee work locations, and have processescancellation of physical participation in place to detectmeetings, events and remediate vulnerabilities. Nevertheless,conferences), and we have experienced cyberattacks and attempted breaches, including phishing emails and other targeted attacks. In addition,may take further actions as may be required by government authorities or that we determine are in the fourth quarter of fiscal 2019, somebest interests of our systems were affectedemployees, customers, partners, and suppliers. There is no certainty that such measures will be enough to mitigate the risks posed by a ransomware incident that encrypted information onthe virus, and our systems and disrupted customer and employee accessability to our systems and services. The Company has incurred, and expects to continue to incur, costs relating to this event, including to retain third party consultants and forensic experts to assist with the restoration and remediation of systems and, with the assistance of law enforcement, to investigate the attack. Although to date we have found no evidence of customers or employee data exfiltration, our forensic investigation is ongoing. The Company carries insurance, including cyber insurance. The full scope of the costs and related impacts of this incident, including the availability of insurance to offset some of these costs, has not been fully determined. These costs and the interruption to our businessperform critical functions could have a material adverse effect on the Company’s results of operations and/or financial condition.be harmed.
Future cybersecurity incidents,Additionally, COVID-19 could impact our internal controls over financial reporting as well asa portion of our workforce is required to work from home and therefore new processes, procedures, and controls could be required to respond to changes in our business environment. Further, should any key employees become ill from COVID-19 and unable to work, the fourth quarter 2019 ransomware incident, could result in the misappropriation of confidential informationattention of the Company or thatmanagement team could be diverted.
Any of its customers, employees,the foregoing could adversely affect our business, partners or others; litigationfinancial condition and results of operations. The potential liability; enforcement actionseffects of COVID-19 may also impact many of our other risk factors discussed in “Risk Factors” in Part I, Item 1A in our 2019 10-K. The exact extent of the impact of the COVID-19 pandemic on our business, financial condition and investigations by regulatory authorities; lossresults of customersoperations will depend on future developments, which are highly uncertain, continuously evolving and contracts; damagecannot be predicted, including, but not limited to, the Company’s reputation and/duration and spread of the COVID-19 outbreak, its severity, the actions to contain the virus or otherwise harmtreat its business. We also expectimpact and how quickly and to incur substantial costs in the future to mitigate against cybersecurity attacks as threats are expected to continue to become more persistentwhat extent normal economic and sophisticated.operating conditions can resume.
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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table provides information for the quarter ended SeptemberJune 30, 20192020 about the Company’s repurchases of its equity securities registered pursuant to Section 12 of the Exchange Act, at a total cost of $18.3 million:Act:
ISSUER PURCHASES OF EQUITY SECURITIES | |||||||||
|
|
|
|
|
|
|
|
| (d) Maximum |
|
|
|
|
|
|
| (c) Total |
| Number (or |
|
|
|
|
|
|
| Number of |
| Approximate |
|
|
|
|
|
|
| Shares |
| Dollar Value) |
|
|
|
|
|
|
| (or Units) |
| of Shares |
|
|
|
|
|
|
| Purchased as |
| (or Units) that |
|
|
| (a) Total |
|
|
| Part of |
| May Yet Be |
|
|
| Number of |
|
|
| Publicly |
| Purchased |
|
|
| Shares (or |
| (b) Average |
| Announced |
| Under the |
|
|
| Units) | Price Paid per Share |
| Plans or |
| Plans or | |
Period |
| Purchased(1) |
| (or Unit)(2) |
| Programs |
| Programs(3) | |
July 1 to 31, 2019 |
| 53,891 |
| $24.73 |
| 53,891 |
| $100.2 million | |
August 1 to 31, 2019 |
| 360,084 |
| $26.34 |
| 360,084 |
| $90.7 million | |
September 1 to 30, 2019 |
| 267,839 |
| $27.92 |
| 267,839 |
| $83.2 million | |
Total |
| 681,814 |
| $26.84 |
| 681,814 |
|
|
ISSUER PURCHASES OF EQUITY SECURITIES | |||||||||
(d) Maximum | |||||||||
(c) Total | Number (or | ||||||||
Number of | Approximate | ||||||||
Shares | Dollar Value) | ||||||||
(or Units) | of Shares | ||||||||
Purchased as | (or Units) that | ||||||||
(a) Total | Part of | May Yet Be | |||||||
Number of | Publicly | Purchased | |||||||
Shares (or | (b) Average | Announced | Under the | ||||||
Units) | Price Paid per Share | Plans or | Plans or | ||||||
Period | Purchased(1) | (or Unit)(2) | Programs | Programs(3) | |||||
April 1 to 30, 2020 | — | — | — | $210.1 million | |||||
May 1 to 31, 2020 | — | — | — | $210.1 million | |||||
June 1 to 30, 2020 | — | — | — | $210.1 million | |||||
Total | — | — | — |
(1) All stock repurchases were made on the open market.
(2) Average price paid per share is calculated on a settlement basis and excludes commission.
(3) On October 26,30, 2018, the Company announced that the Board of Directors authorized the repurchase of $100 million of the Company’s common stock in addition to the $250 million previously approvedannounced on March 6,7, 2018. On February 24, 2020, the Company announced that the Board of Directors authorized the repurchase of an additional $150 million of the Company’s common stock. Net of shares repurchased to date, the total remaining authorization outstanding as of SeptemberJune 30, 20192020 is $83.2$210.1 million. Stock purchases may be made in the open market, in privately negotiated transactions or block transactions, at the discretion of the Company’s management and as market conditions warrant. Purchases are funded from available cash and may be commenced, suspended or discontinued at any time without prior notice. Shares of stock repurchased under the program are retired.
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Item 6.Exhibits
Exhibit |
|
|
Number |
| Description of Exhibit |
31.1 (1)Section 302 Certification of Chief Executive Officer
31.2 (1)Section 302 Certification of Chief Financial Officer
32.1 (2)Section 1350 Certification of Chief Executive OfficeOfficerr
32.2 (2)Section 1350 Certification of Chief Financial Officer
101.INS (1)XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH (1)Inline XBRL Taxonomy Extension Schema Document
101.CAL (1)Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF (1)Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB (1)Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE (1)Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 (1)Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
(1) Filed herewith.
(2) Furnished herewith
(3) Indicates management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on NovemberAugust 5, 20192020.
| BENCHMARK ELECTRONICS, INC. |
| (Registrant) |
| By: /s/ Jeffrey W. Benck |
| Jeffrey W. Benck |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
|
|
|
|
| By: /s/ Roop K. Lakkaraju |
| Roop K. Lakkaraju |
| Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
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