SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001.
__ 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) Identification Number)
3000 TECHNOLOGY DRIVE 77515
ANGLETON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
(979) 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, 2001 there were 19,604,653 shares of Benchmark
Electronics, Inc. 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,
2001 2000
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 22,646 $ 23,541
Accounts receivable, net 235,280 277,620
Inventories, net 309,652 346,463
Prepaid expenses and other assets 17,019 18,412
Deferred tax asset 3,467 3,135
---------- ----------
Total current assets 588,064 669,171
---------- ----------
Property, plant and equipment 222,075 202,404
Accumulated depreciation (93,022) (66,016)
---------- ----------
Net property, plant and equipment 129,053 136,388
---------- ----------
Other assets, net 18,069 19,148
Goodwill, net 162,214 166,514
---------- ----------
$897,400 $991,221
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of other long-term debt $ 21,134 $ 20,275
Accounts payable 204,987 268,358
Income taxes payable 3,707 1,911
Accrued liabilities 25,183 31,309
---------- ----------
Total current liabilities 255,011 321,853
Revolving line of credit 73,000 93,500
Convertible subordinated notes 80,200 80,200
Other long-term debt, excluding current installments 61,716 67,094
Other long-term liability 7,079 6,957
Deferred tax liability 9,836 9,672
Shareholders' equity:
Preferred shares, $0.10 par value; 5,000 shares
authorized, none issued - -
Common shares, $0.10 par value; 30,000 shares
authorized; issued - 19,651 and 19,643, respectively;
outstanding - 19,602 and 19,594, respectively 1,960 1,959
Additional paid-in capital 317,951 317,849
Retained earnings 103,787 98,675
Accumulated other comprehensive loss (13,020) (6,418)
Less treasury shares, at cost; 49 shares (120) (120)
---------- ----------
Total shareholders' equity 410,558 411,945
Commitments and contingencies
---------- ----------
$897,400 $991,221
======== ========
See accompanying notes to condensed consolidated financial statements.
2
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
---- ----
Sales $431,905 $ 349,155
Cost of sales 399,742 325,509
------- ---------
Gross profit 32,163 23,646
Selling, general and administrative expenses 14,159 12,681
Restructuring charges 1,266 -
Amortization of goodwill 3,222 3,220
-------- ---------
Income from operations 13,516 7,745
Interest expense (5,713) (5,563)
Other income (expense) (500) 828
-------- ---------
Income before income taxes 7,303 3,010
Income tax expense 2,191 1,033
-------- ---------
Net income $5,112 $ 1,977
======== =========
Earnings per share:
Basic $ 0.26 $ 0.12
Diluted $ 0.25 $ 0.12
======== ========
Weighted average number of shares outstanding:
Basic 19,597 16,248
Diluted 20,324 17,173
======== =========
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,
------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 5,112 $ 1,977
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 13,649 12,860
Deferred income taxes 334 91
(Gain) loss on the sale of property, plant and equipment 14 (9)
Federal tax benefit of stock options exercised 20 249
Changes in operating assets and liabilities:
Accounts receivable 43,743 (27,122)
Inventories 38,607 (34,754)
Prepaid expenses and other assets 1,647 49
Accounts payable (65,980) (384)
Accrued liabilities (7,226) (682)
Income taxes 1,796 (634)
-------- ----------
Net cash provided by (used in) operations 31,716 (48,359)
-------- ----------
Cash flows from investing activities:
Capital expenditures, net (3,435) (9,359)
Additions to capitalized software - (466)
-------- ----------
Net cash used in investing activities (3,435) (9,825)
-------- ----------
Cash flows from financing activities:
Proceeds from issuance (repayment) of revolving line of credit, net (20,500) 53,600
Proceeds from stock options exercised 83 507
Principal payments on other long-term debt (4,519) (4,673)
-------- ---------
Net cash provided by (used in) financing activities (24,936) 49,434
--------- ---------
Effect of exchange rate changes (4,240) 386
--------- ---------
Net decrease in cash and cash equivalents (895) (8,364)
Cash and cash equivalents at beginning of year 23,541 9,437
-------- --------
Cash and cash equivalents at March 31 $ 22,646 $ 1,073
======== =========
Supplemental disclosures of cash flow information:
Income taxes paid (refunded) $ (618) $ 18
======== =========
Interest paid $ 6,545 $ 6,223
======== =========
See accompanying notes to condensed consolidated financial statements.
4
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Benchmark Electronics, Inc. (the Company) is a Texas corporation which
provides electronics manufacturing and design services to original equipment
manufacturers (OEMs) of telecommunication equipment, computers and related
products for business enterprises, video/ audio/entertainment products,
industrial control equipment, testing and instrumentation products, personal
computer and medical devices. The Company has manufacturing operations located
in the Americas, Europe and Asia.
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, 2000.
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 0.7
million and 0.9 million for the three months ended March 31, 2001 and 2000,
respectively, were used in the calculation of diluted earnings per share.
Options to purchase 0.8 million and 0.6 million shares of common stock for the
three months ended March 31, 2001 and 2000, respectively, 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. The effect of the
if-converted method for the 6% Convertible Subordinated Notes is antidilutive
and approximately 2.0 million of potential common shares has not been considered
in computing diluted earnings per share for the three-month periods ended March
31, 2001 and 2000.
NOTE 3 - BORROWING FACILITIES
The Company has a five-year term loan (the Term Loan) through a syndicate of
commercial banks. Principal on the Term Loan is payable in quarterly
installments in annual amounts of $18 million in 2001, $20 million in 2002, $22
million in 2003 and $21 million in 2004. The Term Loan bears interest, at the
Company's option, at either the bank's Eurodollar rate plus 1.25% to 3.00% or
its prime rate plus 0.00% to 1.75%, based upon the Company's debt ratio as
specified in the agreement and interest is payable quarterly. As of March 31,
2001, the Company had $77 million outstanding under the Term Loan, bearing
interest at rates ranging from 8.2925% to 8.75%.
The Company has a $175 million revolving line of credit facility (the
Revolving Credit Facility) with a commercial bank. The Company is entitled to
borrow under the Revolving Credit Facility up to the lesser of $175 million or
the sum of 75% of its eligible accounts receivable, 45% of its eligible
inventories and 50% of its eligible fixed assets. Interest on the Revolving
Credit Facility is payable quarterly, at the Company's option, at either the
bank's Eurodollar rate plus 1.25% to 3.00% or its prime rate plus 0.00% to
1.75%, based upon the Company's debt ratio as
5
specified in the agreement. A commitment fee of 0.375% to 0.500% per annum on
the unused portion of the Revolving Credit Facility is payable quarterly in
arrears. The Revolving Credit Facility matures on September 30, 2004. As of
March 31, 2001, the Company had $73.0 million outstanding under the Revolving
Credit Facility, bearing interest at 8.5%, $4.9 million outstanding letters of
credit and $97.1 million was available for future borrowings.
The Term Loan and the Revolving Credit Facility (collectively the
Facility) are secured by the Company's domestic inventory and accounts
receivable, 100% of the stock of the Company's domestic subsidiaries, and 65% of
the voting capital stock of each direct foreign subsidiary and substantially all
of the other tangible and intangible assets of the Company and its domestic
subsidiaries. The Facility contains customary financial covenants and restricts
the ability of the Company to incur additional debt, pay dividends, sell assets,
and to merge or consolidate with other persons, without the consent of the bank.
The Company has outstanding $80.2 million principal amount of 6%
Convertible Subordinated Notes due August 15, 2006 (the Notes). The indenture
relating to the Notes contains affirmative and negative covenants including
covenants restricting the Company's ability to merge or engage in certain other
extraordinary corporate transactions unless certain conditions are satisfied.
Upon the occurrence of a change of control of the Company (as defined in the
indenture relating to the Notes), each holder of Notes will have the right to
require the Company to repurchase all or part of the Holder's notes at 100% of
the face amount thereof, plus accrued and unpaid interest.
The Notes are convertible, unless previously redeemed or repurchased,
at the option of the holder at any time prior to maturity, into shares of the
Company's common stock at an initial conversion price of $40.20 per share,
subject to adjustment in certain events. The Notes are convertible into a total
of 1.995 million shares of the Company's common stock. Interest is payable
February 15 and August 15 each year.
The Company currently has an interest rate swap transaction agreement
for a notional amount of $38.3 million under which it pays a fixed rate of
interest of 6.63% plus 1.25% to 3.00% based upon its debt ratio as specified in
the debt agreement, hedging against the variable interest rates charged by the
term loan. The receive rate under the swap is based on LIBOR. The interest rate
swap expires in the year 2003.
NOTE 4 - INVENTORIES
Inventory costs are summarized as follows:
MARCH 31, DECEMBER 31,
2001 2000
---- ----
Raw materials $ 239,933 $ 273,758
Work in process 51,783 64,727
Finished goods 26,472 16,204
Obsolescence reserve (8,536) (8,226)
----------- -----------
$ 309,652 $ 346,463
=========== ===========
6
NOTE 5 - INCOME TAXES
Income tax expense consists of the following:
THREE MONTHS ENDED
MARCH 31,
2001 2000
---- ----
Federal - Current $ 1,284 $ 278
Foreign - Current 246 554
State - Current 327 108
Deferred 334 93
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Total $ 2,191 $ 1,033
======== ========
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, foreign income taxes, state income
taxes, net of federal benefit and the benefit from the use of a foreign sales
corporation.
The Company considers earnings from its foreign subsidiaries to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been made for these earnings. Upon distribution of
foreign subsidiary earnings in the form of dividends or otherwise, such
distributed earnings would be reportable for U.S. income tax purposes (subject
to adjustment for foreign tax credits).
The Company's manufacturing operations in Ireland are subject to a 10%
tax rate through December 2010. Thereafter, the applicable tax rate will be
12.5%. As a result of these reduced rates, income tax expense for the quarters
ended March 31, 2001 and 2000 is approximately $314 (approximately $0.02 per
share diluted) and $64 (approximately $0.01 per share diluted), respectively,
lower than the amount computed by applying the statutory tax rates.
NOTE 6 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain
Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of SFAS 133." These
statements establish accounting and reporting standards requiring that
derivative instruments, including certain derivative instruments embedded in
other contracts, be recorded on the balance sheet at fair value as either assets
or liabilities. The accounting for changes in the fair value of a derivative
instrument depends on the intended use and designation of the derivative at its
inception. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results of the hedged item in the statements of
operations, and requires the Company to formally document, designate and assess
the effectiveness of the hedge transaction to receive hedge accounting. For
derivatives designated as cash-flow hedges, changes in fair value, to the extent
the hedge is effective, are recognized in other comprehensive income until the
hedged item is recognized in earnings. Overall hedge effectiveness is measured
at least quarterly. Any changes in the fair value of the derivative instrument
resulting from hedge ineffectiveness, as defined by SFAS No. 133 and measured
based on the cumulative changes in the fair value of the derivative instrument
and the cumulative changes in the estimated future cash flows of the hedged
item, are recognized immediately in earnings.
The Company has designated its swap agreement as a cash flow hedge.
Adoption of SFAS No. 133 at January 1, 2001 resulted in recognition of
approximately $0.7 million of derivative
7
liabilities on the Company's balance sheet in accrued liabilities and $0.7
million of hedging losses included in accumulated other comprehensive income as
the cumulative effect of a change in accounting principle. Amounts were
determined as of January 1, 2001 based on market quotes of the Company's
interest rate swap agreement. During the quarter ended March 31, 2001, the
Company recognized $19.6 thousand in losses, included in interest expense, on
the interest rate swap attributable to interest costs occurring in the first
quarter of 2001. No gain or loss on ineffectiveness was required to be
recognized. The fair value of the interest rate swap agreement was a loss of
$1.3 million as of March 31, 2001. Approximately $0.7 million (which includes
$78.4 thousand related to the cumulative effect adjustment) of such amount is
anticipated to be transferred into earnings over the next twelve months as
interest costs on the term loan are recognized.
The Company has utilized and expects to continue to utilize derivative
financial instruments with respect to a portion of its interest rate risks to
achieve a more predictable cash flow by reducing its exposure to interest rate
fluctuations. These transactions generally are swaps and are entered into with
major financial institutions. Derivative financial instruments related to the
Company's interest rate risks are intended to reduce the Company's exposure to
increases in the benchmark interest rates underlying the Company's variable rate
Facility.
NOTE 7 - ACQUISITIONS AND DISPOSITIONS
On October 2, 2000, the Company acquired substantially all of the assets and
properties, net of assumed liabilities, of the MSI Division of Outreach
Technologies, Inc. This operation in Manassas, Virginia was acquired for $3.5
million, as adjusted. The transaction was accounted for under the purchase
method of accounting, and, accordingly, the results of operations of the
Manassas division since October 2, 2000 have been included in the accompanying
consolidated statements of income. The acquisition resulted in goodwill of
approximately $0.4 million that is being amortized on a straight-line basis over
15 years. The acquisition was allocated $1.9 million to inventories, $2.1
million to accounts receivable, $0.1 million to prepaid expenses and other
current assets, $0.8 million to equipment, $1.1 million to accounts payable,
$0.3 million to accrued liabilities, $0.4 million to other long-term debt and
$0.4 million to goodwill.
On September 15, 2000, the Company closed the previously announced sale
of its Swedish operations for $19.6 million, as adjusted. The Swedish operations
accounted for 6.6% of the Company's sales and 39.8% of its operating income for
the quarter ended March 31, 2000.
NOTE 8 - BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company has 16 manufacturing facilities in the Americas, Europe and Asia to
serve its customers. The Company is operated and managed geographically. The
Company's management evaluates performance and allocates the Company's resources
on a geographic basis. Intersegment sales, primarily constituting sales from the
Americas to Europe, are generally recorded at prices that approximate arm's
length transactions. Operating segments' measure of profitability is based on
income from operations (prior to amortization of goodwill and unallocated
corporate expenses). Certain corporate expenses, including items such as
insurance and software licensing costs, are allocated to these operating
segments and are included for performance evaluation. Amortization expense
associated with capitalized software costs is allocated to these operating
segments, but the related assets are not allocated. Amortization expense
associated with goodwill is not allocated to the results of operations in
analyzing segments, but the related balances are allocated to the segments. The
accounting policies for the reportable operating segments are the same as for
the Company taken as a whole.
8
Information about operating segments for the three-month periods ended
March 31, 2001 and 2000 was as follows:
THREE MONTHS ENDED
MARCH 31,
---------
2001 2000
---- ----
Net sales:
Americas $ 386,755 316,822
Europe 80,010 77,185
Asia 8,483 9,042
Elimination of intersegment sales (43,343) (53,894)
----------- ---------
$ 431,905 349,155
========== =========
Depreciation and amortization:
Americas $ 8,867 7,068
Europe 1,344 2,397
Asia 216 175
Corporate - goodwill 3,222 3,220
---------- -----
$ 13,649 12,860
========== ======
Income from operations:
Americas $ 15,468 7,043
Europe 3,375 4,069
Asia 537 1,143
Corporate and intersegment eliminations (5,864) (4,510)
---------- ---------
$ 13,516 7,745
========== =========
MARCH 31, DECEMBER 31,
2001 2000
---- ----
Total assets:
Americas $ 720,828 812,882
Europe 140,041 143,265
Asia 18,701 16,537
Corporate 17,830 18,537
---------- ---------
$ 897,400 991,221
========== =======
The following enterprise-wide information is provided in accordance
with SFAS No. 131. Geographic net sales information reflects the destination of
the product shipped. Long-lived assets information is based on the physical
location of the asset.
THREE MONTHS ENDED
MARCH 31,
---------
2001 2000
---- ----
Net sales derived from:
Printed circuit boards $ 363,689 322,393
Systems integration and box build 68,216 26,762
---------- ---------
$ 431,905 349,155
========== =========
Geographic net sales:
United States $ 330,113 218,274
Europe 62,049 76,381
Asia and other 39,743 54,500
---------- ---------
$ 431,905 349,155
========== =======
9
MARCH 31, DECEMBER 31,
2001 2000
---- ----
Long-lived assets:
United States $ 102,418 108,415
Europe 17,566 18,539
Asia and other 27,138 28,582
---------- ----------
$ 147,122 155,536
========== ==========
NOTE 9 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which includes net income, the change in the
cumulative translation adjustment and the effect of accounting for cash flow
hedging derivatives, for the three-month periods ended March 31, 2001 and 2000,
was $(1.5) million and $1.8 million, respectively. Total comprehensive loss for
the three months ended March 31, 2001 is as follows:
Net income $ 5,112
Cumulative translation adjustment (5,841)
Hedge accounting for derivative financial
instruments, net of tax (359)
Cumulative effect attributable to adoption of
SFAS No. 133 (See note 6), net of tax (402)
-----------
Comprehensive loss $ (1,490)
===========
Included in the hedge accounting for derivative financial instruments of $5.8
million are reclassification adjustments of approximately $11.8 thousand.
NOTE 10- CONTINGENCIES
On October 18, 1999, the Company announced that its third quarter earnings
announcement would be delayed and subsequently, on October 22, the Company
announced its earnings for the third quarter were below the level of the same
periods during 1998 and were below expectations. Several class action lawsuits
were filed in federal district court in Houston, Texas against the Company and
two of its officers and directors alleging violations of the federal securities
laws. These lawsuits were consolidated in February 2000. The lawsuits seek to
recover unspecified damages. The Company denies the allegations in the lawsuits,
however, and further denies that such allegations provide a basis for recovery
of damages as the Company believes that it has made all required disclosures on
a timely basis. Management is vigorously defending against these actions. At the
present time, the Company is unable to reasonably estimate the possible loss, if
any, associated with these matters.
The Company filed suit against J.M. Huber Corporation (the Seller) in
the United States District Court for the Southern District of Texas for breach
of contract, fraud and negligent misrepresentation on December 14, 1999 and is
seeking an unspecified amount of damages in connection with the Amended and
Restated Stock Purchase Agreement dated August 12, 1999 between the parties
whereby the Company acquired all of the stock of AVEX from Seller. On January 5,
2000, Seller filed suit in the United States District Court for the Southern
District of New York alleging that the Company failed to comply with certain
obligations under the contract requiring the Company to register shares of its
common stock issued to Seller as partial
10
consideration for the acquisition. Seller's suit has been consolidated with the
Company's suit in the United States District Court for the Southern District of
Texas. The Company intends to vigorously pursue its claims against Seller and
defend against Seller's allegations. At the present time, the Company is unable
to reasonably estimate the possible loss, if any, associated with these matters.
During the second quarter of 2000, the Company, along with numerous
other companies, was named as a defendant in a lawsuit brought by the Lemelson
Medical, Education & Research Foundation (the Foundation). The lawsuit alleges
that the Company has infringed certain of the Foundation's patents relating to
machine vision and bar code technology utilized in machines the Company has
purchased. On November 11, 2000, the Company filed an Answer, Affirmative
Defenses, and a Motion to Stay based upon Declaratory Judgment Actions filed by
Cognex and Symbol, manufacturers of the equipment at issue. The Company
continues to explore any indemnity or similar rights the Company may have
against manufacturers of the machines or other third parties. The Company
intends to vigorously defend against such claim and pursue all rights it has
against third parties. At the present time, the Company is unable to reasonably
estimate the possible loss, if any, associated with these matters.
The Company is also involved in various other 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.
NOTE 11- RESTRUCTURING CHARGES
During the quarter ended March 31, 2001, the Company recorded restructuring
charges of $1.3 million related to reductions in force and included costs
resulting from payment of employee severance. All such amounts were paid by
March 31, 2001.
NOTE 12- SUBSEQUENT EVENT
In April 2001, the Company announced that it had begun undertaking steps to
align its cost structure due to the slowdown in the technology marketplace.
Delayed delivery dates and cancellations from customers have continued to mount
as a result of the weaker demand and high levels of inventory for end products.
Additionally, the pace of new program rampings has been slower than anticipated
because of the reduced levels of demand for customers' products. The new program
revenues have not grown at a pace sufficient to offset the downturn experienced
in the existing customer programs. Based on current demand forecasts from
customers for the second quarter, the Company anticipates sales for the second
quarter to be approximately 10 - 15% below the first quarter.
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, and the discussion of market risks and legal proceedings
elsewhere, contains certain 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. These forward-looking statements
are identified as any statement that does not relate strictly to historical or
current facts. They use words such as "anticipate," "believe," "intend," "plan,"
"projection," "forecast," "strategy," "position," "continue," "estimate,"
"expect," "may," "will," or the negative of those terms or other variations of
them or by comparable terminology. In particular, statements, express or
implied, concerning future operating results or the ability to generate sales,
income or cash flow are
11
forward-looking statements. Forward-looking statements are not guarantees of
performance. They involve risks, uncertainties and assumptions. The future
results of our operations may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results are beyond our ability to control or predict. Specific factors which
could cause actual results to differ from those in the forward-looking
statements, include:
o availability and cost of customer specified components;
o loss of one or more of our major customers;
o delays, reductions and cancellations of orders forecasted by
customers;
o absence of long-term sales contracts with our customers;
o our substantial indebtedness;
o a decline in the condition of the capital markets or a substantial
rise in interest rates;
o our dependence on the industries we serve;
o competition from other providers of electronics manufacturing
services;
o inability to maintain technical and manufacturing process expertise;
o risks associated with international operations;
o our dependence on certain key executives;
o resolution of the pending legal proceedings;
o integration of the operations of acquired companies;
o effects of domestic and foreign environmental laws;
o fluctuations in our quarterly results of operations; and
o volatility of the price of our common stock.
You should not put undue reliance on any forward-looking statements. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated.
The following discussion should be read in conjunction with the unaudited
financial statements of the Company included elsewhere in this report.
GENERAL
We are in the business of manufacturing electronics and provide our services to
original equipment manufacturers of telecommunication equipment, computers and
related products for business enterprises, video/audio/entertainment products,
industrial control equipment, testing and instrumentation products, personal
computers and medical devices. The services that we provide are commonly
referred to as electronics manufacturing services. We offer our customers
comprehensive and integrated design and manufacturing services, from initial
product design to volume production and direct order fulfillment. We provide
specialized engineering services including product design, printed circuit board
layout, prototyping and test development. We believe that we have developed
strengths in the manufacturing process for large, complex, high-density printed
circuit boards as well as the ability to manufacture high and low volume
products in lower cost regions such as Latin America and Southeast Asia. As our
customers expand internationally, they increasingly require their electronics
manufacturing services partners to have strategic regional locations and global
procurement capabilities. We believe that our global manufacturing presence of
16 facilities in six countries increases our ability to be responsive to our
customers' needs by providing accelerated time-to-market and time-to-volume
production of high quality products. These capabilities should enable us to
build stronger strategic relationships with our customers and to become a more
integral part of their operations.
12
Substantially all of our manufacturing services are provided on a
turnkey basis, whereby we purchase customer-specified components from our
suppliers, assemble the components on finished printed circuit boards, perform
post-production testing and provide our customers with production process and
testing documentation. We offer our customers flexible, "just-in-time" delivery
programs allowing product shipments to be closely coordinated with our
customers' inventory requirements. Additionally, we complete the assembly of our
customers' products at our facilities by integrating printed circuit board
assemblies into other elements of our customers' products. We also provide
manufacturing services on a consignment basis, whereby we utilize components
supplied by the customer to provide assembly and post-production testing
services.
We do not typically obtain long-term purchase orders or commitments
from our customers. Instead we work with our customers to develop forecasts for
future orders, which are not binding. Customers may cancel their orders, change
their orders, change production quantities from forecast volumes or delay
production for a number of reasons beyond our control. Cancellations, reductions
or delays by a significant customer or by a group of customers would have an
adverse effect on us. In addition, as many of our costs and operating expenses
are relatively fixed, a reduction in customer demand can adversely affect our
gross margins and operating income.
A substantial percentage of our sales have been made to a small number
of customers, and the loss of a major customer, if not replaced, would adversely
affect us. During the three months ended March 31, 2001, our three largest
customers each represented in excess of 10% of our sales and together
represented 46.9% of our sales, and our largest customer accounted for
approximately 19.7% of our sales. Our future sales are dependent 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, could have an adverse effect on us.
During the quarter ended March 31, 2001 and 2000, 21.3% and 35.1%,
respectively, of our sales were from our international operations. The
decrease in the percentage of international sales for 2001 as compared to
2000 primarily reflects the sale of the Swedish operations.
RECENT ACQUISITIONS AND DISPOSITION
On October 2, 2000, we acquired substantially all of the assets and properties,
net of assumed liabilities, of the MSI Division of Outreach Technologies, Inc.
This operation in Manassas, Virginia was acquired for $3.5 million, as adjusted.
The transaction was accounted for under the purchase method of accounting, and,
accordingly, the results of operations of the Manassas division since October 2,
2000 have been included in our financial statements. The acquisition resulted in
goodwill of approximately $0.4 million that is being amortized on a
straight-line basis over 15 years.
On September 15, 2000, we closed the previously announced sale of our
Swedish operations for $19.6 million, as adjusted. The Swedish operations
accounted for 6.6% of our sales and 39.8% of our operating income for the
quarter ended March 31, 2000.
13
RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain items in
the Company's Condensed Consolidated Statements of Income 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.
THREE MONTHS ENDED
MARCH 31,
---------
2001 2000
---- ----
Sales 100.0% 100.0%
Cost of sales 92.6 93.2
----- -----
Gross profit 7.4 6.8
Selling, general and administrative expense 3.3 3.6
Restructuring charges 0.3 0.0
Amortization of goodwill 0.7 0.9
----- -----
Income from operations 3.1 2.2
Interest expense (1.3) (1.6)
Other income (expense) (0.1) 0.2
------ -----
Income before income taxes 1.7 0.9
Income tax expense 0.5 0.3
---- -----
Net income 1.2% 0.6%
===== =====
Sales for the first quarter of 2001 were approximately $431.9 million,
a 23.7% increase from sales of approximately $349.2 million for the same quarter
in 2000. Of this total increase in sales, approximately 45.4% was attributable
to the operation of the new facilities added during the fourth quarter of 2000
and the Manassas, Virginia acquisition, and approximately 82.6% resulted from
the ramping up of new programs and increases in sales volume from both existing
and new customers. Of this net increase, there is a 28% decrease resulting from
the sale of the Swedish operations. However, based on delayed delivery dates and
cancellations of customer orders during the quarter ended March 31, 2001, we
anticipate sales for the second quarter to be approximately 10 - 15% below the
first quarter. Our facilities in the Americas provided 85.9% and 78.4% of net
sales, respectively, during the first quarters of 2001 and 2000. Our facilities
in Europe provided 12.1% and 19.1% of net sales, respectively during the first
quarters of 2001 and 2000. Our facilities in Asia provided 2.0% and 2.5% of net
sales, respectively during the first quarters of 2001 and 2000.
Sales in the Americas for the three-month period ended March 31, 2001
increased $97.4 million with approximately 37.8% of this increase resulting from
the operation of the new facilities added during the fourth quarter 2000 and the
acquisition of the Manassas, Virginia facility. The remaining 62.2% of the
increase was the result of demand increases from existing and new customers.
Sales in Europe decreased $14.3 million for the first quarter of 2001 due
primarily to the sale of the Swedish operations in September 2000 (representing
approximately 161.5% of this net decrease). The remaining 61.5% of the net
increase in sales resulted from the ramping up of new programs and increases in
sales volume from both existing and new customers. Sales in Asia decreased by
$0.3 million. This decrease in sales was partially offset by additional sales
resulting from the operation of the new systems integration facility in
Singapore.
During the quarters ended March 31, 2001 and 2000, 21.3% and 35.1%,
respectively, of our sales were from our international operations. The decrease
in the percentage of international sales for 2001 as compared to 2000 primarily
reflects the sale of the Swedish operations.
14
Our results of operations are dependent upon the success of our
customers, and a prolonged period of reduced demand for our customers' products
would have an adverse effect on our business. During the three months ended
March 31, 2001, our three largest customers each represented in excess of 10% of
our sales and represented 46.9% of our sales in the aggregate. The loss of a
major customer, if not replaced, would adversely affect us.
Gross profit increased 36.0% to approximately $32.2 million in the
first quarter of 2001 from approximately $23.6 million in the same quarter in
2000. The increase in gross profit was due primarily to the higher sales volume.
Gross profit as a percentage of sales for the three months ended March 31, 2000
and 2001, respectively, increased from 6.8% to 7.4%. The change in the gross
margin for the three-month period of 2001, as compared to the same period of
2000 is primarily attributable to increased capacity utilization, changes in
product mix, favorable component market conditions, cost reductions, and efforts
to integrate recent acquisitions. The combined effect of these factors, which
are continually changing and are interrelated, make it impracticable to
determine with precision the separate effect of each factor. We expect lower
volumes and utilization rates will exert downward pressure on our margins in the
near future.
For the foreseeable future, our gross margin is expected to depend
primarily on the general slowdown in the technology marketplaces, facility
utilization, product mix, start-up of new programs, pricing within the
electronics industry, and the integration of acquisitions. The gross margins at
each facility and for Benchmark as a whole are expected to continue to
fluctuate. Increases in start-up costs associated with new programs and pricing
within the electronics industry also could adversely impact our gross margin.
In April 2001, we announced that we had begun undertaking steps to
align our cost structure due to the slowdown in the technology marketplace.
Delayed delivery dates and cancellations from customers have continued to mount
as a result of the weaker demand and high levels of inventory for end products.
Additionally, the pace of new program rampings has been slower than anticipated
because of the reduced levels of demand for customers' products. The new program
revenues have not grown at a pace sufficient to offset the downturn experienced
in the existing customer programs. Based on current demand forecasts from
customers for the second quarter, we anticipate sales for the second quarter to
be approximately 10 - 15% below the first quarter.
Selling, general and administrative expenses were $14.2 million in the
first quarter of 2001, an increase of 11.7% from $12.7 million for the same
quarter in 2000. Selling, general and administrative expenses as a percentage of
sales decreased from 3.6% for the first quarter of 2000 to 3.3% for the first
quarter of 2001. The increase in selling, general and administrative expenses
during the three-month period ended March 31, 2001 reflects the additional
administrative expenses resulting from the acquisition of the Manassas, Virginia
facility and the opening of additional facilities. Additionally, the increase
reflects the investment in personnel and the incurrence of related corporate and
administrative expenses necessary to support the increased size and complexity
of our business. We do not anticipate selling, general and administrative
expenses will continue to increase in absolute dollars as a result of on-going
efforts to manage operating expenses in response to the current business
environment.
During the quarter ended March 31, 2001, we recorded restructuring
charges of $1.3 million ($0.9 million after-tax) related to reductions in force
necessitated by the general slowdown in the technology marketplaces, which
affected not only existing customer programs but also the pace of the new
program rampings.
15
Goodwill is amortized on a straight-line basis over an estimated useful
life of 15 years. The amortization of goodwill for the three-month periods ended
March 31, 2001 and 2000, was $3.2 million.
Interest expense for the three-month periods ended March 31, 2001 and
2000, was $5.7 million and $5.6 million, respectively.
Income tax expense of approximately $2.2 million represented an
effective tax rate of 30.0% for the three-month period ended March 31, 2001,
compared with an effective tax rate of 34.3% for the three-month period ended
March 31, 2000. The decrease was due primarily to lower foreign tax rates
applicable to a portion of pretax income in 2001, partially offset by
nondeductible amortization of goodwill.
We reported net income for the three-month period ended March 31, 2001
of approximately $5.1 million, or diluted earnings of $0.25 per share, compared
with net income of approximately $2.0 million, or diluted earnings of $0.12 per
share for the same period of 2000. The approximate $3.1 million increase was a
result of the combined effects of the Manassas, Virginia facility acquisition
and the operation of new systems integration facilities, the restructuring
charges, and the ramping up of new projects.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our growth and operations through funds generated from
operations, proceeds from the sale of our securities and funds borrowed under
our credit facilities.
Cash provided by (used in) operating activities was $31.7 million and
$(48.4) million for the three months ended March 31, 2001 and 2000,
respectively. The increase in cash provided by operations was primarily the
result of decreases in accounts receivable and inventories partially offset by
decreases in accounts payable. Our accounts receivable and inventories at March
31, 2001 decreased $43.7 million and $38.6 million, respectively, over their
levels at December 31, 2000, reflecting our decreased backlog during the first
three months of 2001, as compared to the corresponding period in the prior year.
We expect continued decreases in accounts receivable and inventories to continue
in the near term as a result of the general slowdown in the technology
marketplaces.
Cash used in investing activities was $3.4 million and $9.8 million for
the three months ended March 31, 2001 and 2000, respectively. Capital
expenditures of $3.4 million for the three months ended March 31, 2001 were
primarily concentrated in test and manufacturing production equipment. We expect
continued decreases in capital expenditures as a result of the general slowdown
in the technology marketplaces.
Cash provided by (used in) financing activities was $(24.9) million and
$49.4 million for the three months ended March 31, 2001 and 2000, respectively.
During the three months of 2001, we decreased borrowings outstanding under our
revolving line of credit by $20.5 million (net) and made principal payments on
other long-term debt totaling $4.5 million.
Principal on the term loan is payable in quarterly installments of $4.5
million, $5 million and $5.5 million during 2001, 2001 and 2003, respectively.
The final three installments of $7 million are due on the last day of March,
June and September 2004.
We have a $175 million revolving line of credit facility with a
commercial bank. We are entitled to borrow under the revolving credit facility
up to the lesser of $175 million or the sum of
16
75% of our eligible accounts receivable, 45% of our eligible inventories and 50%
of our eligible fixed assets. Interest on the revolving credit facility and the
term loan is payable quarterly, at our option, at either the bank's Eurodollar
rate plus 1.25% to 3.00% or its prime rate plus 0.00% to 1.75%, based upon our
debt ratio as specified in the agreement. A commitment fee of 0.375% to 0.500%
per annum on the unused portion of the revolving credit facility is payable
quarterly in arrears. The revolving credit facility matures on September 30,
2004. As of March 31, 2001, we had $73.0 million outstanding under the revolving
credit facility, bearing interest at 8.5%, $4.9 million outstanding letters
of credit and $97.1 million was available for future borrowings.
The term loan and the revolving credit facility are secured by our
domestic inventory and accounts receivable, 100% of the stock of our domestic
subsidiaries, and 65% of the voting capital stock of each direct foreign
subsidiary and substantially all of our and our domestic subsidiaries other
tangible and intangible assets. The term loan and revolving credit facility
contain customary financial covenants and restricts our ability to incur
additional debt, pay dividends, sell assets, and to merge or consolidate with
other persons, without the consent of the bank.
We have outstanding $80.2 million principal amount of 6% Convertible
Subordinated Notes. The indenture relating to the notes contains affirmative and
negative covenants, including covenants restricting our ability to merge or
engage in certain other extraordinary corporate transactions unless certain
conditions are satisfied. Upon the occurrence of a change of control of our
Company (as defined in the indenture relating to the notes), each holder of
notes will have the right to require us to repurchase all or part of the
holder's notes at 100% of the face amount thereof, plus accrued and unpaid
interest. The notes are convertible into shares of our common stock at an
initial conversion price of $40.20 per share at the option of the holder at any
time prior to maturity, unless previously redeemed or repurchased.
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, past,
current and future operations 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.
We may require additional capital to finance further enhancements to or
acquisitions or expansions of our manufacturing capacity. Management believes
that the level of working capital will continue to expand or constrict at a rate
generally consistent with our operations. Management continually evaluates
potential strategic acquisitions and investments, but at the present time, we
have no understandings, commitments or agreements with respect to any such
acquisition or investment. Although no assurance can be given that future
financing will be available on terms acceptable to us, we 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 our existing debt agreements.
Our acquisitions in 1999 have significantly increased our leverage
ratio and decreased our interest coverage ratio. At March 31, 2001, our debt to
total capitalization ratio was 37%, as compared to 39% at December 31, 2000, 44%
at December 31, 1999 and 11% at June 30, 1999, the last fiscal quarter end prior
to the AVEX acquisition. The level of indebtedness, among other
17
things, could make it difficult for us to obtain any necessary financing in the
future for other acquisitions, working capital, capital expenditures, debt
service requirements and other expenses; limit our flexibility in planning for,
or reacting to changes in, our business; and make us more vulnerable in the
event of an economic downturn in our business.
Management believes our existing cash balances, funds generated from
operations and available funds under our revolving credit facility will be
sufficient to permit us to meet our liquidity requirements for the next 9-12
months.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate risk under our variable rate revolving credit
and term loan facilities. These facilities are based on the spread over the
bank's Eurodollar rate or its prime rate. Inflation and changing prices have not
significantly affected our operating results or the markets in which we perform
services.
We currently have an interest rate swap transaction agreement for a
notional amount of $38.3 million under which we pay a fixed rate of interest of
6.63%, plus 1.25% to 3.00% based upon our debt ratio as specified in the debt
agreement, hedging against the variable interest rates charged by the term loan.
The interest rate swap expires in the year 2003. The receive rate under the swap
is based on LIBOR.
Our international sales are a significant portion of our net sales; we
are exposed to risks associated with operating internationally, including the
following:
o Foreign currency exchange risk;
o Import and export duties, taxes and regulatory changes;
o Inflationary economies or currencies;
o Economic and political instability.
We do not use derivative financial instruments for speculative
purposes. Our policy is to maintain a hedged position for certain significant
transaction exposures. These exposures are primarily, but not limited to, vendor
payments and inter-company balances in currencies other than the functional
currency of the operating entity. Our international operations in some instances
operate in a natural hedge because both operating expenses and a portion of
sales are denominated in local currency. During 2000, we had one foreign
currency hedging contract in place to support expansion of the Dublin, Ireland
facility. This contract expired in December 2000.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On October 18, 1999, we announced that our third quarter 1999 earnings
announcement would be delayed and subsequently, on October 22, we announced our
earnings for the third quarter 1999 were below the level of the same periods
during 1998 and were below expectations. Several class action lawsuits were
filed in federal district court in Houston, Texas against Benchmark and two of
its officers and directors alleging violations of the federal securities laws.
These lawsuits were consolidated in February 2000. The lawsuits seek to recover
unspecified damages. We deny the allegations in the lawsuits, however, and
further deny that such allegations provide a basis for recovery of damages as we
believe that we have made all required disclosures on a timely basis.
18
Management is vigorously defend against these actions. No material developments
occurred in this proceeding during the period covered by this report.
Benchmark filed suit against J.M. Huber Corporation (Seller) in the
United States District Court for the Southern District of Texas for breach of
contract, fraud and negligent misrepresentation on December 14, 1999 and is
seeking an unspecified amount of damages in connection with the contract between
Benchmark and Seller pursuant to which Benchmark acquired all of the stock of
AVEX and Kilbride Holdings B.V. On January 5, 2000, Seller filed suit in the
United States District Court for the Southern District of New York alleging that
Benchmark failed to comply with certain obligations under the contract requiring
Benchmark to register shares of its common stock issued to Seller as partial
consideration for the acquisition. Seller's suit has been consolidated with
Benchmark's suit in the United States District Court for the Southern District
of Texas. Benchmark intends to vigorously pursue its claims against Seller and
defend against Seller's allegations. No material developments occurred in this
proceeding during the period covered by this report.
During the second quarter of 2000, Benchmark, along with numerous other
companies, was named as a defendant in a lawsuit brought by the Lemelson
Medical, Education & Research Foundation (the Foundation). The lawsuit alleges
that Benchmark has infringed certain of the Foundation's patents relating to
machine vision and bar code technology utilized in machines the Company has
purchased. On November 11, 2000, Benchmark filed an Answer, Affirmative
Defenses, and a Motion to Stay based upon Declaratory Judgement Actions filed by
Cognex and Symbol, manufacturers of the equipment at issue. We continue to
explore any indemnity or similar rights Benchmark may have against manufacturers
of the machines or other third parties. Management intends to vigorously defend
against such claim and pursue all rights it has against third parties. No
material developments occurred in this proceeding during the period covered by
this report.
Benchmark is also involved in various other 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
Benchmark's consolidated financial position or results of operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
19
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, 2001.
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)
20