SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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) IDENTIFICATION NUMBER)
3000 TECHNOLOGY DRIVE 77515
ANGLETON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(409) 849-6550
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 X No
As of May 14, 1998 there were 11,580,368 shares of Common Stock, par value
$0.10 per share, outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $5,695 $21,029
Accounts receivable, net 72,472 39,772
Income taxes receivable - 314
Inventories 88,185 61,134
Prepaid expenses and other assets 1,564 1,545
Deferred tax asset 4,011 1,359
------ -------
Total current assets 171,927 125,153
------- -------
Property, plant and equipment, at cost 72,125 54,061
Accumulated depreciation (25,792) (23,245)
Net property, plant and equipment 46,333 30,816
------ -------
Other assets, net 604 241
Marketable securities - 11,431
Goodwill, net 51,598 22,681
------ -------
$270,462 $190,322
====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $8,139 $ 155
Accounts payable 61,335 31,694
Income taxes payable 1,703 -
Accrued liabilities 8,217 5,425
------ -------
Total current liabilities 79,394 37,274
Long term debt, less current portion 62,294 30,330
Deferred income taxes 4,107 1,846
Shareholders' equity:
Preferred shares, $0.10 par value;
5,000,000 shares authorized,
none issued - -
Common shares, $0.10 par value;
30,000,000 shares authorized;
issued - 11,626,252 and
11,623,252, respectively;
outstanding - 11,576,768 and
11,573,768, respectively 1,158 1,157
Additional paid-in capital 69,460 69,408
Retained earnings 54,169 50,427
Less treasury shares, at cost;
49,484 shares (120) (120)
------ -------
Total shareholders' equity 124,667 120,872
Commitments and contingencies ------ -------
$270,462 $190,322
====== =======
See accompanying notes to condensed consolidated financial statements.
2
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
1998 1997
------ ------
Sales $108,046 $75,724
Cost of sales 97,141 66,482
------ ------
Gross profit 10,905 9,242
Selling, general and administrative expense 3,526 3,180
Amortization expense 585 417
------ ------
Income from operations 6,794 5,645
Interest income 168 236
Interest expense (902) (614)
Other income (expense) 47 41
------ ------
Income before income tax expense 6,107 5,308
Income tax expense 2,365 2,017
------ ------
Net income $ 3,742 $ 3,291
====== ======
Earnings per share:
Basic $0.32 $ 0.29
Diluted $0.31 $ 0.28
==== ====
Weighted average number of shares outstanding:
Basic 11,575 11,476
Diluted 12,263 11,752
====== ======
See accompanying notes to condensed consolidated financial statements.
3
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------
1998 1997
------ ------
Cash flows from operating activities:
Net Income $3,742 $3,291
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense 3,435 3,008
Deferred income taxes 320 (118)
Gain on sale of property, plant and equipment (7) (26)
Tax benefit of employee stock options exercised 20 13
Amortization of premiums on marketable securities 46 74
Changes in operating assets and liabilities, net of effects
from acquisition of business:
Accounts receivable (7,890) (922)
Inventories (3,536) (956)
Prepaid expenses and other assets 7 (887)
Accounts payable 8,919 3,626
Accrued liabilities (304) (1,095)
Income taxes 2,017 1,898
------ ------
Net cash provided by operations 6,769 7,906
------ ------
Cash flows from investing activities:
Capital expenditures, net (2,433) (1,343)
Redemption of marketable securities 11,385 -
Acquisition, net of cash acquired (70,646) -
------- ------
Net cash used in investing activities (61,694) (1,343)
Cash flows from financing activities:
Proceeds from exercise of employee stock options 33 63
Stock offering expenses - (52)
Debt issuance costs (390) -
Proceeds from issuance of long term debt 40,000 -
Principal payments on long term debt (52) (58)
------ ------
Net cash provided by (used in) financing activities 39,591 (47)
Net increase (decrease) in cash (15,334) 6,516
Cash at beginning of year 21,029 13,800
------ ------
Cash at March 31 $5,695 $20,316
====== =======
Supplemental disclosures of cash flow information:
Income taxes paid $ 9 $ 224
====== =====
Interest paid $1,217 $1,261
====== ======
See accompanying notes to condensed consolidated financial statements.
4
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Benchmark Electronics, Inc. (the Company) is a Texas corporation which
provides contract electronics manufacturing and design services to original
equipment manufacturers (OEMs) in select industries, including medical devices,
communications equipment, industrial and business computers, testing
instrumentation, and industrial controls.
The condensed consolidated financial statements included herein have been
prepared by the Company without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. The financial statements reflect all
normal and recurring adjustments which in the opinion of management are
necessary 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 Report on Form
10-K for the fiscal year ended December 31, 1997.
NOTE 2 - 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 options to purchase common stock. Incremental
shares of 688,305 and 275,906 in 1998 and 1997, respectively, were used in the
calculation of diluted earnings per share. Options to purchase 147,000 shares of
common stock in 1998 were not included in the computation of diluted earnings
per share because the option exercise price was greater than the average market
price of the common stock.
NOTE 3 - INDEBTEDNESS
In order to finance a portion of the cash consideration for the
acquisition of EMD Technologies, Inc. (EMD) on July 30, 1996, the Company issued
a $30 million, 8.02% Senior Note due 2006 (the Senior Note) to Northwestern
Mutual Life Insurance Company. The Senior Note is unsecured and guaranteed by
each of the Company's United States subsidiaries. Principal on the Senior Note
is payable in annual installments of $5.0 million beginning July 31, 2001 with a
final installment on the unpaid principal amount due July 31, 2006. Interest on
the Senior Note is payable semi-annually on January 31st and July 31st. The
purchase agreement relating to the Senior Note (the Purchase Agreement) includes
customary affirmative and negative covenants and restricts the ability of the
Company to incur additional debt and to pay dividends. Upon any prepayment of
all or a portion of the Senior Note, the Company is obligated to pay the holder
a premium on the amount prepaid. The Purchase Agreement contains a provision
that in the event of a change of control (defined generally to mean the
acquisition by a person or group (as defined in the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder) of beneficial
ownership of more than 50% of the total voting power of the outstanding voting
stock of the Company), the Company must offer to repurchase the Senior Note at
par plus any prepayment penalty.
5
In connection with the acquisition of Lockheed Commercial Electronics
Company (LCEC) on February 23, 1998, the Company obtained $40 million through
borrowings under a five-year term loan (the Term Loan) with a commercial bank.
Principal on the Term Loan is payable in quarterly installments of $2.0 million
beginning June 30, 1998 with a final installment of the unpaid principal amount
due March 31, 2003. The Term Loan bears interest, at the Company's option, at
either the bank's Eurodollar rate plus .625% to 1.375% or its prime rate, and
interest is payable quarterly. The margin on the Eurodollar rate fluctuates with
the Company's ratio of debt to earnings before interest, taxes, depreciation and
amortization (EBITDA). The Term Loan includes customary affirmative and negative
covenants and restricts the Company's ability to incur additional indebtedness
and to pay dividends.
The Company has a $25 million revolving line of credit with a commercial
bank. The Company is entitled to borrow under the line of credit up to the
lesser of $25 million or the sum of 75% of its eligible accounts receivable and
25% of its eligible inventories. Interest on the line of credit is payable
quarterly, at the Company's option, at either the bank's Eurodollar rate plus
.625% to 1.375% or its prime rate. A commitment fee of 0.25% per annum on the
unused portion of the line of credit is payable quarterly in arrears. The line
of credit agreement contains certain financial covenants and restricts the
ability of the Company to incur additional debt without the consent of the bank
and to pay dividends. The line of credit matures on March 31, 2003. As of March
31, 1998, the Company had no borrowings outstanding under this line of credit.
NOTE 4 - INVENTORIES
Inventory costs are summarized as follows:
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(UNAUDITED)
Raw materials $59,215,416 $41,837,205
Work in process 28,969,526 19,296,758
---------- ----------
$88,184,942 $61,133,963
NOTE 5 - INCOME TAXES
Income tax expense (benefit) consists of the following (unaudited):
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
Federal - Current $1,860,200 $1,909,248
State - Current 185,245 226,047
Federal/State - Deferred 320,000 (118,217)
-------- ---------
Total $2,365,445 $2,017,078
========== ==========
Income tax expense differs from the amount computed by applying the U.S.
federal statutory income tax rate to pretax income due to the impact of
nondeductible amortization of goodwill, state income taxes, net of federal
benefit and the benefit from the use of a foreign sales corporation and
non-taxable interest earned on municipal investments.
6
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company currently does not have any items that would
require additional presentation of Comprehensive Income and operates in a single
business segment. Accordingly, adoption of these standards as of January 1, 1998
did not effect the Company's consolidated financial statements.
NOTE 7 - STOCK SPLIT
In July 1997, the Board of Directors approved a two-for-one stock split
effected in the form of a stock dividend effective for shareholders of record as
of August 7, 1997. Shareholders' equity has been restated to give retroactive
recognition to the stock split in prior periods by reclassifying from additional
paid-in capital to common stock the par value of the additional shares arising
from the split. All share and per share data appearing in the consolidated
financial statements and notes thereto have been retroactively adjusted for the
stock split.
NOTE 8 - ACQUISITION
On February 23, 1998, the Company completed its acquisition of LCEC for
$70.6 million in cash. LCEC, situated in Hudson, New Hampshire, is one of New
England's largest electronics manufacturing services companies, providing a
broad range of services including printed circuit board assembly and test,
system assembly and test, prototyping, depot repair, materials procurement, and
engineering support services. The transaction was accounted for under the
purchase method of accounting, and, accordingly, the results of operations of
LCEC since February 23, 1998 have been included in the accompanying condensed
consolidated statement of operations. The acquisition resulted in goodwill of
approximately $29.5 million which will be amortized on a straight-line basis
over 15 years.
The net purchase price was allocated as follows:
Working capital, other than cash $30,575,000
Property, plant and equipment 15,905,000
Goodwill 29,503,000
Other liabilities (3,096,000)
Deferred income taxes (2,241,000)
----------
Purchase price, net of cash received $70,646,000
The following summary pro forma condensed consolidated financial
information reflects the acquisition as if it had occurred on January 1, 1997
for purposes of the statements of operations. The summary pro forma information
is not necessarily representative of what the Company's results of operations
would have been had the acquisition in fact had occurred on January 1, 1997 and
is not intended to project the Company's results of operations for any future
period or date.
7
Pro forma condensed consolidated financial information for the periods
ended March 31, 1998 and 1997 (unaudited):
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
Net sales $132,316,000 $150,728,000
Gross profit $9,285,000 $11,600,000
Income from operations $3,082,000 $5,119,000
Net income $1,168,000 $2,509,000
Earnings per common share:
Basic $0.10 $0.22
Diluted $0.10 $0.21
Weighted average number of shares outstanding:
Basic 11,575,000 11,476,000
Diluted 12,263,000 11,752,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements regarding
future financial condition and results of operations and the Company's business
operations. The words "expect," "estimate," "anticipate," "predict," and similar
expressions are intended to identify forward-looking statements. Such statements
involve risks, uncertainties and assumptions, including, but not limited to,
industry and economic conditions and customer actions and other factors
discussed in this Form 10-Q and in the Company's other filings with the
Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
GENERAL
The Company provides contract electronics manufacturing and design
services to OEMs in select industries, including medical devices, communications
equipment, industrial and business computers, testing instrumentation and
industrial controls. The Company specializes in manufacturing high quality,
technologically complex printed circuit board assemblies with computer-automated
equipment using surface mount and pin-through-hole interconnection technologies
for customers requiring low to medium volume production runs. The Company
frequently works with customers from product design and prototype stages through
ongoing production and, in some cases, final assembly of the customers' products
and provides manufacturing services for successive product generations. As a
result, the Company believes that it is often an integral part of its customers'
operations.
Substantially all of the Company's manufacturing services are provided on
a turnkey basis, whereby the Company purchases customer-specified components
from its extensive network of suppliers, assembles the components on finished
printed circuit boards, performs post-production testing and provides the
customer with production process and testing documentation. The Company offers
its customers flexible, "just-in-time" delivery programs allowing product
shipments to be closely coordinated with the customers' inventory requirements.
In certain instances, the Company completes the assembly of its customers'
products at the Company's
8
facilities by integrating printed circuit board assemblies into other elements
of the customers' products. The Company also provides manufacturing services on
a consignment basis, whereby the Company, utilizing components provided by the
customer, provides only assembly and post-production testing services. The
Company operates a total of 45 surface mount production lines at its facilities
in Angleton, Texas, Beaverton, Oregon, Hudson, New Hampshire and Winona,
Minnesota.
Revenues are recognized at the time products are shipped to customers and
may vary depending on the timing of customers' orders, product mix and
availability of component parts. Substantially all of the Company's business is
performed on a turnkey basis, which involves the procurement of component parts.
The gross profit margin for such materials is generally lower than the gross
profit associated with the manufacturing process and other value-added services.
The level and timing of purchase orders placed by the Company's customers
are affected by a number of factors not within the control of the Company,
including variation in demand for customers' products, customer attempts to
manage inventory and changes in customers' manufacturing strategies. The Company
typically does not obtain long-term purchase orders or commitments but instead
works with its customers to develop nonbinding forecasts of the future volume of
orders. Based on such nonbinding forecasts, the Company makes commitments
regarding the level of business that it will seek and accept, the timing of
production schedules and the levels and utilization of personnel and other
resources. A variety of conditions, both specific to each individual customer
and generally affecting each customer's industry, may cause customers to cancel,
reduce or delay purchase orders and commitments without penalty, except for
payment for services rendered, materials purchased and, in certain
circumstances, charges associated with such cancellation, reduction or delay.
Significant or numerous cancellations, reductions or delays in orders by
customers, or any inability of customers to pay for services provided by the
Company or to pay for components and materials purchased by the Company on such
customers' behalf, could have an adverse effect on the Company's business,
financial condition and results of operations.
The Company seeks to serve a sufficiently large number of customers to
minimize dependence on any one customer or industry. This strategy was enhanced
by the acquisition of LCEC, as there was no customer overlap between the Company
and LCEC. Although historically a substantial percentage of the Company's sales
have been to a small number of customers, by successfully undertaking the
transition to serve a much larger and more diversified customer base, the
Company has been able to reduce its dependence on certain significant customers
and lessen the impact of a substantial reduction in business from one such
customer. Nevertheless, during the three months ended March 31, 1998, the
Company's three largest customers accounted for 53% of the Company's sales. On a
pro forma basis for the quarter ended March 31, 1998, the three largest
customers of the Company and LCEC accounted for 53% of sales. Although the loss
of a major customer could have an adverse effect on the Company, the Company
does not believe that any such effect would be material unless the Company were
unable to replace such customer's business. The Company's future sales are
dependent on the success of its customers, some of which operate in businesses
associated with rapid technological change, vigorous competition, short product
life cycles and pricing and margin pressures. Additionally, certain of the
industries served by the Company are subject to economic cycles and have in the
past experienced, and are likely in the future to experience, recessionary
periods. Developments adverse to the Company's major customers or their products
could have an adverse effect on the Company.
The acquisition of LCEC represents a significant expansion in the scope of
the Company's operations, and the integration and consolidation of LCEC into the
Company has and will require
9
substantial management, financial and other resources. During the integration
process, the financial performance of the Company will be subject to the risks
commonly associated with the acquisition of businesses, including the impact of
expenses incurred in connection with an acquisition and the potential
disruptions associated with the integration of businesses. The integration
process may place a significant strain on the Company's management, production,
technical, financial and other resources, and may pose a risk with respect to
production, customer service and market share.
The Company's future success is dependent upon its ability to effectively
integrate LCEC into the Company, including its ability to implement potentially
available marketing and cost saving opportunities, some of which may involve
operational changes. There can be no assurance as to the timing or amount of any
marketing opportunities or cost savings that may be realized as the result of
operational changes implemented during the integration process. Further, there
can be no assurance that the Company will not experience difficulties with
customers, personnel and business prospects or that the combination of the
Company and LCEC will be successful.
The following discussion should be read in conjunction with the unaudited
financial statements of the Company included elsewhere in this report.
ACQUISITION
On February 23, 1998, the Company completed its acquisition of LCEC for
$70.6 million in cash. LCEC, situated in Hudson, New Hampshire, is one of New
England's largest electronics manufacturing services companies, providing a
broad range of services including printed circuit board assembly and test,
system assembly and test, prototyping, depot repair, materials procurement, and
engineering support services. The transaction was accounted for under the
purchase method of accounting, and, accordingly, the results of operations of
LCEC since February 23, 1998 have been included in the accompanying condensed
consolidated statement of operations. The acquisition resulted in goodwill of
approximately $29.5 million which will be amortized on a straight-line basis
over 15 years. See Note 8 of Notes to Condensed Consolidated Financial
Statements.
In connection with the acquisition of LCEC, the Company obtained $40
million through borrowings under a five-year Term Loan with a commercial bank.
See Note 3 of Notes to Condensed Consolidated Financial Statements and
"Liquidity and Capital Resources".
Completion of the acquisition of LCEC on February 23, 1998 and the
inclusion of LCEC's operations in the Company's accounts subsequent to that date
is responsible for a substantial portion of the variation in the results of the
Company's operations (including components thereof) for the three months ended
March 31, 1998, as compared to the same period during the prior year. The
effects of the acquisition of LCEC on the Company's financial condition as of
March 31, 1998, and its reported results of operations for the three months then
ended, should be considered when reviewing the financial information contained
herein.
10
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items in
the Company's Condensed Consolidated Statements of Operations as a percentage of
sales:
THREE MONTHS ENDED
MARCH 31,
1998 1997
Sales 100.0% 100.0%
Cost of sales 89.9 87.8
----- -----
Gross profit 10.1 12.2
Selling, general and administrative expense 3.3 4.2
Amortization of goodwill 0.5 0.6
----- ------
Income from operations 6.3 7.4
Interest income 0.2 0.4
Interest expense (0.8) (0.8)
----- ------
Income before income tax expense 5.7 7.0
Income tax expense 2.2 2.7
Net income 3.5% 4.3%
===== =====
Sales for the first quarter of 1998 were approximately $108.0 million, a
42.7% increase from sales of approximately $75.7 million for the same quarter of
1997. Approximately $23.0 million of the sales increase was attributable to the
acquisition of LCEC. The increase in sales also resulted from increased sales
volume from existing customers, and the addition of new customers.
Gross profit increased 18.0% to approximately $10.9 million in the first
quarter of 1998 from approximately $9.2 million in the same quarter of 1997.
Gross profit as a percentage of sales decreased from 12.2% for the first quarter
of 1997 to 10.1% for the first quarter of 1998. The increase in gross profit was
due primarily to higher sales volumes and normal changes in product mix and
customer mix. The Company's gross margin reflects a number of factors, including
product mix, the level of start up costs and efficiencies associated with new
programs, capacity utilization of surface mount and other equipment, and pricing
within the electronics industry. All of these factors are continually changing
and are interrelated, making it impracticable to determine separately the effect
of each factor. The decrease in gross profit as a percentage of sales during the
quarter ended March 31, 1998 as compared to the same period in 1997 was due to
lower margins on LCEC programs and changes in the product mix and the initiation
of new programs.
Selling, general and administrative expenses were $3.5 million in the
first quarter, an increase of 10.9% from $3.2 million for the same quarter of
1997. Selling, general and administrative expenses as a percentage of sales
decreased from 4.2% for the first quarter of 1997 to 3.3% for the first quarter
of 1998. In order to satisfy the increased level of business activity and to
continue the development and improvement of the systems and processes necessary
to accommodate future growth, the Company has continued to add personnel. The
increase in selling, general and administrative expenses during the three month
period of 1998 reflects these additional personnel and related departmental
expense, as well as the additional administrative expenses resulting from the
inclusion of LCEC in 1998. The Company anticipates selling, general and
administrative expenses will continue to increase in nominal terms as the
Company continues to build the internal management and support systems necessary
to support higher revenue levels.
11
The amortization of goodwill for the three month period ended March 31,
1998 was $585,000 compared to $417,000 for the same period of 1997. The increase
is due to the acquisition of LCEC on February 23, 1998.
Interest expense for the three month periods ended March 31, 1998 and 1997
was $902,000 and $614,000, respectively. The increase is due to the additional
debt incurred in connection with the acquisition of LCEC on February 23, 1998.
Interest income was approximately $168,000 and $236,000, respectively, for
the three month periods ended March 31, 1998 and 1997. The decrease is due to
the decrease in available cash and cash equivalents and marketable securities as
a result of the acquisition of LCEC on February 23, 1998.
Income tax expense of $2,365,000 represented an effective tax rate of
38.7% for the quarter ended March 31, 1998, compared to 38.0% for the same
period in 1997. The increase is due to nondeductible amortization of goodwill
partially offset by the benefit from the use of a foreign sales corporation and
non-taxable interest earned on municipal investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and operations through funds generated
from operations, proceeds from the sale of its common stock and funds borrowed
under its credit facilities. Prior to the second quarter of 1996 the Company had
never borrowed any amounts under its available line of credit.
Cash provided by operating activities was $6.8 million for the three
months ended March 31, 1998. Cash provided by operations was primarily the
result of increases in net income, depreciation and amortization, accounts
payable, and income taxes payable offset by increases in inventories, and
accounts receivable. The Company's accounts payable, accounts receivables, and
inventories have increased $8.9 million, $7.9 million, and $3.5 million (net of
effects from acquisition of LCEC), respectively, during the first three months
of 1998, reflecting the Company's increased sales and backlog during this
period. The Company expects continued increases in accounts payable and
inventories to support the anticipated growth in sales. The Company is
continuing the practice of purchasing components only after customer orders 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 the Company that may not meet
Company requirements. The Company has not experienced significant supply
constraints in the recent past nor does it expect to in the near future.
Cash used in investing activities was $61.7 million for the three months
ended March 31, 1998. On February 23, 1998, the Company completed the
acquisition of LCEC for approximately $70.6 million in cash. See Note 8 of Notes
to Condensed Consolidated Financial Statements. Capital expenditures of $2.4
million for the three months ended March 31, 1998 were primarily concentrated in
test equipment. In connection with the acquisition of LCEC, the Company redeemed
$11.3 million in marketable securities during the three months ended March 31,
1998.
12
Cash provided by financing activities was $39.6 million for the three
months ended March 31, 1998. In connection with the acquisition of LCEC on
February 23, 1998, the Company obtained $40 million through borrowings under the
Term Loan. Principal on the Term Loan is payable in quarterly installments of
$2.0 million beginning June 30, 1998 with a final installment of the unpaid
principal amount due March 31, 2003. The Term Loan bears interest, at the
Company's option, at either the bank's Eurodollar rate plus .625% to 1.375% or
its prime rate, and interest is payable quarterly. The margin on the Eurodollar
rate fluctuates with the Company's ratio of debt to EBITDA. The Term Loan
includes customary affirmative and negative covenants and restricts the
Company's ability to incur additional indebtedness and to pay dividends.
The Company has a $25 million revolving line of credit with a commercial
bank. The Company is entitled to borrow under the line of credit up to the
lesser of $25 million or the sum of 75% of its eligible accounts receivable and
25% of its eligible inventories. Interest on the line of credit is payable
quarterly, at the Company's option, at either the bank's Eurodollar rate plus
.625% to 1.375% or its prime rate. A commitment fee of 0.25% per annum on the
unused portion of the line of credit is payable quarterly in arrears. The line
of credit agreement contains certain financial covenants and restricts the
ability of the Company to incur additional debt without the consent of the bank
and to pay dividends. The line of credit matures on March 31, 2003. As of March
31, 1998, the Company had no borrowings outstanding under this line of credit.
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Some risk of costs and liabilities related to these matters is
inherent in the Company's business as with many similar businesses. Management
believes that the Company's business is operated in substantial compliance with
applicable environmental, waste management, health and safety regulations.
The Company may require additional capital to finance further enhancements
to or acquisitions or expansions of its manufacturing capacity. Management
believes that the level of working capital will continue to grow at a rate
generally consistent with the growth of the Company's operations. Although no
assurance can be given that future financing will be available on terms
acceptable to the Company, the Company may seek additional funds from time to
time through public or private debt or equity offerings or through bank
borrowings to the extent permitted by its existing debt agreements. Management
believes that the existing cash balances, funds generated from operations, and
borrowings under the Company's credit facility will be sufficient to permit the
Company to meet its liquidity requirements in 1998 and for the foreseeable
future.
The Company does not hold or issue derivative financial instruments in the
normal course of business. Inflation and changing prices have not significantly
affected the Company's operating results or the markets in which the Company
performs services.
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by Year 2000 software failures which
can arise in date-sensitive software applications which utilize a field of two
digits rather than four to define a specific year. Absent corrective actions,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions to various activities and operations.
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Many of the Company's business and operating systems are currently Year
2000 compliant, and the Company initiated research and development efforts
during 1997 to address those systems which are not currently Year 2000
compliant. In addition, the Company is in the process of selecting and
installing an Enterprise Resource Planning System which will be Year 2000
compliant. The Company is planning to complete all necessary Year 2000 upgrades
of its major systems in 1999, and is currently identifying and developing
conversion strategies for its remaining systems that may be impacted by the Year
2000 issue.
The Company currently does not have an overall estimate of the costs
associated with the purchase and implementation of the new Enterprise Resource
Planning System. The costs of this software will be capitalized and amortized
over the estimated useful life of the software, and costs associated with the
preliminary project stage and post-implementation stage will be expensed as
incurred. The year 2000 component of this system can not be readily segregated
from the total cost of the company-wide Enterprise Resource Planning System
implementation. The total cost to the Company of achieving Year 2000 compliant
systems is not expected to be material to the Company's operations, financial
condition or liquidity.
QUARTERLY RESULTS
Although Management does not believe that the Company's business is
affected by seasonal factors, the Company's sales and earnings may vary from
quarter to quarter, depending primarily upon the timing of manufacturing orders.
Therefore, the Company's operating results for any particular quarter may not be
indicative of the results for any future quarter or for the year.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits.
2.1 Purchase Agreement dated as of January 22, 1998 by and between
the Company and Lockheed Martin Corporation (incorporated
herein by reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated February 23, 1998).
10.1 Credit Agreement dated as of February 23, 1998 by and between
the Company and Chase Bank of Texas, N.A. (incorporated by
reference to Exhibit 99 to the Company's Current Report on
Form 8-K dated February 23, 1998).
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated February 23,
1998, as amended by Form 8-KA filed on March 30, 1998, with the
Securities and Exchange Commission during the quarter ended March
31, 1998 which Report reported the Company's acquisition of LCEC and
includes certain historical financial statements of LCEC and certain
pro forma financial statements of the Company giving effect to the
acquisition of LCEC.
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 May 15, 1998.
BENCHMARK ELECTRONICS, INC.
(Registrant)
By: /s/ DONALD E. NIGBOR
Donald E. Nigbor
President
(Principal Executive Officer)
By: /s/ CARY T. FU
Cary T. Fu
Executive Vice President
(Principal Financial Officer)
15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2.1 Purchase Agreement dated as of January 22, 1998 by and between the
Company and Lockheed Martin Corporation (incorporated herein by
reference to Exhibit 2 to the Company's Current Report on Form 8-K
dated February 23, 1998).
10.1 Credit Agreement dated as of February 23, 1998 by and between the
Company and Chase Bank of Texas, N.A. (incorporated by reference to
Exhibit 99 to the Company's Current Report on Form 8-K dated
February 23, 1998).
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
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