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 JUNE 30, 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 August 10, 2001 there were 19,644,128 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)
JUNE 30, DECEMBER 31,
2001 2000
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 25,043 $ 23,541
Accounts receivable, net 192,034 277,620
Income taxes receivable 3,950 --
Inventories, net 262,948 346,463
Prepaid expenses and other assets 13,438 18,412
Deferred tax asset 2,664 3,135
--------- ---------
Total current assets 500,077 669,171
--------- ---------
Property, plant and equipment 230,719 202,404
Accumulated depreciation (101,052) (66,016)
--------- ---------
Net property, plant and equipment 129,667 136,388
--------- ---------
Other assets, net 17,905 19,148
Goodwill, net 159,200 166,514
--------- ---------
$ 806,849 $ 991,221
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of other long-term debt $ 21,619 $ 20,275
Accounts payable 158,232 268,358
Income taxes payable -- 1,911
Accrued liabilities 23,867 31,309
--------- ---------
Total current liabilities 203,718 321,853
Revolving line of credit 41,000 93,500
Convertible subordinated notes 80,200 80,200
Other long-term debt, excluding current installments 56,050 67,094
Other long-term liability 7,495 6,957
Deferred tax liability 9,947 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 - 19,693 and 19,643, respectively;
outstanding - 19,644 and 19,594, respectively 1,964 1,959
Additional paid-in capital 318,697 317,849
Retained earnings 101,694 98,675
Accumulated other comprehensive loss (13,796) (6,418)
Less treasury shares, at cost; 49 shares (120) (120)
--------- ---------
Total shareholders' equity 408,439 411,945
Commitments and contingencies
--------- ---------
$ 806,849 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Sales $ 317,433 $ 406,572 $ 749,338 $ 755,726
Cost of sales 295,381 376,868 695,123 702,376
--------- --------- --------- ---------
Gross profit 22,052 29,704 54,215 53,350
Selling, general and administrative expenses 14,666 13,432 28,825 26,113
Restructuring charges 3,347 -- 4,613 --
Amortization of goodwill 3,223 3,100 6,445 6,320
--------- --------- --------- ---------
Income from operations 816 13,172 14,332 20,917
Interest expense (4,600) (7,050) (10,313) (12,613)
Other income (expense) 794 (648) 294 181
--------- --------- --------- ---------
Income (loss) before income taxes (2,990) 5,474 4,313 8,485
Income tax expense (benefit) (897) 1,869 1,294 2,902
--------- --------- --------- ---------
Net income (loss) $ (2,093) $ 3,605 $ 3,019 $ 5,583
========= ========= ========= =========
Earnings (loss) per share:
Basic $ (0.11) $ 0.22 $ 0.15 $ 0.34
Diluted $ (0.11) $ 0.21 $ 0.15 $ 0.32
========= ========= ========= =========
Weighted average number of shares outstanding:
Basic 19,605 16,297 19,601 16,272
Diluted 19,605 17,547 20,312 17,330
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
3
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 3,019 $ 5,583
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 26,927 25,681
Deferred income taxes 1,276 264
Loss on the sale of property, plant and equipment 7 51
Federal tax benefit of stock options exercised 33 461
Accrued compensation expense 361 --
Changes in operating assets and liabilities:
Accounts receivable 84,019 (45,821)
Inventories 80,928 (64,420)
Prepaid expenses and other assets 5,564 (2,706)
Accounts payable (109,394) 78,994
Accrued liabilities (7,021) (152)
Income taxes (5,861) 2,947
--------- ---------
Net cash provided by operations 79,858 882
--------- ---------
Cash flows from investing activities:
Capital expenditures, net (13,763) (19,780)
Additions to capitalized software (954) (1,529)
Acquisitions -- (35,303)
--------- ---------
Net cash used in investing activities (14,717) (56,612)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance (repayment) of revolving line of credit, net (52,500) 80,100
Debt issuance cost -- (1,383)
Proceeds from employee stock purchase plan 703 --
Proceeds from stock options exercised 117 935
Principal payments on other long-term debt (9,700) (9,380)
--------- ---------
Net cash provided by (used in) financing activities (61,380) 70,272
--------- ---------
Effect of exchange rate changes (2,259) (1,132)
--------- ---------
Net increase in cash and cash equivalents 1,502 13,410
Cash and cash equivalents at beginning of year 23,541 9,437
--------- ---------
Cash and cash equivalents at June 30 $ 25,043 $ 22,847
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid (refunded) $ 4,847 $ (1,721)
========= =========
Interest paid $ 10,283 $ 12,211
========= =========
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 1.1 million for the six months ended June 30, 2001 and 2000,
respectively and 1.3 million for the three months ended June 30, 2000 were used
in the calculation of diluted earnings per share. For the three-month period
ended June 30, 2001, a total of 0.7 million options were not included in the
calculation of diluted earnings per share because the effect would have been
antidilutive. Options to purchase 0.8 million and 36 thousand shares of common
stock for the six months ended June 30, 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.
For the three-month period ended June 30, 2000, no options were excluded in the
computation of diluted earnings per share since the option exercise price was
lower 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 and six-month periods
ended June 30, 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 June 30,
2001, the Company had $72.5 million outstanding under the Term Loan, bearing
interest at rates ranging from 5.8125% to 6.34%.
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
5
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
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 June
30, 2001, the Company had $41 million outstanding under the Revolving Credit
Facility, bearing interest at 7.25%, $4.9 million outstanding letters of credit
and $129.1 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 $36 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:
JUNE 30, DECEMBER 31,
2001 2000
------------ -------------
Raw materials $ 225,094 $ 273,758
Work in process 33,732 64,727
Finished goods 13,144 16,204
Obsolescence reserve (9,022) (8,226)
--------- ---------
$ 262,948 $ 346,463
========= =========
6
NOTE 5 - INCOME TAXES
Income tax expense consists of the following:
SIX MONTHS ENDED
JUNE 30,
2001 2000
------- -------
Federal - Current $ 460 $ 911
Foreign - Current (711) 1,440
State - Current 269 287
Deferred 1,276 264
------- -------
Total $ 1,294 $ 2,902
======= =======
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 three and
six-month periods ended June 30, 2001 is approximately $0.1 million
(approximately $0.01 per share diluted) and $0.4 million (approximately $0.02
per share diluted), respectively, lower than the amount computed by applying the
statutory tax rate (20% in 2001). Income tax expense for the three and six-month
periods ended June 30, 2000 is approximately $56 (approximately $0.01 per share
diluted) and $0.1 million (approximately $0.01 per share diluted), respectively,
lower than the amount computed by applying the statutory tax rate (24% in 2000).
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
7
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 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 three
and six-month periods ended June 30, 2001, the Company recognized $167 and $187
in losses, included in interest expense, on the interest rate swap attributable
to interest costs occurring during the first six months 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 $1.2 million as of June 30, 2001.
Approximately $1.1 million (which includes $0.5 million 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 5.2% and 5.9% of the Company's sales and 19.7% and 27.2% of its
operating income for the three and six-month periods ended June 30, 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
8
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.
Information about operating segments for the three and six-month periods
ended June 30, 2001 and 2000 was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales:
Americas $ 279,933 405,090 666,688 721,911
Europe 50,646 67,040 130,656 144,225
Asia 9,966 10,028 18,449 19,070
Elimination of intersegment sales (23,112) (75,586) (66,455) (129,480)
--------- --------- --------- ---------
$ 317,433 406,572 749,338 755,726
========= ========= ========= =========
Depreciation and amortization:
Americas $ 8,571 7,428 17,438 14,496
Europe 1,270 2,110 2,614 4,507
Asia 214 183 430 358
Corporate - goodwill 3,223 3,100 6,445 6,320
--------- --------- --------- ---------
$ 13,278 12,821 26,927 25,681
========= ========= ========= =========
Income (loss) from operations:
Americas $ 7,725 11,793 23,193 18,836
Europe (1,512) 4,150 1,863 8,219
Asia 1,444 822 1,981 1,965
Corporate and intersegment eliminations (6,841) (3,593) (12,705) (8,103)
--------- --------- --------- ---------
$ 816 13,172 14,332 20,917
========= ========= ========= =========
JUNE 30, DECEMBER 31,
2001 2000
---------- -------------
Total assets:
Americas $649,245 812,882
Europe 116,273 143,265
Asia 19,944 16,537
Corporate 21,387 18,537
-------- --------
$806,849 991,221
======== ========
9
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales derived from:
Printed circuit boards $260,179 379,085 623,868 721,338
Systems integration and box build 57,254 27,487 125,470 34,388
-------- -------- -------- --------
$317,433 406,572 749,338 755,726
======== ======== ======== ========
Geographic net sales:
United States $234,770 291,054 570,294 512,373
Europe 48,464 40,926 105,102 115,790
Asia and other 34,199 74,592 73,942 127,563
-------- -------- -------- --------
$317,433 406,572 749,338 755,726
======== ======== ======== ========
JUNE 30, DECEMBER 31,
2001 2000
------------ -------------
Long-lived assets:
United States $106,465 108,415
Europe 17,280 18,539
Asia and other 23,827 28,582
-------- --------
$147,572 155,536
======== ========
NOTE 9 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which includes net income (loss), the change in the
cumulative translation adjustment and the effect of accounting for cash flow
hedging derivatives, for the three and six-month periods ended June 30, 2001 and
2000, was $(2.9) million and $0.5 million and $(4.4) million and $2.3 million,
respectively. Total comprehensive loss for the three and six-month periods ended
June 30, 2001 and 2000 was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2001 2000 2001 2000
------- ------- ------- -------
Net income (loss) $(2,093) 3,605 3,019 5,583
Cumulative translation adjustment (917) (3,115) (6,758) (3,252)
Hedge accounting for derivative financial
instruments, net of tax 141 -- (218) --
Cumulative effect attributable to adoption of
SFAS No. 133 (See note 6), net of tax -- -- (402) --
------- ------- ------- -------
Comprehensive income (loss) $(2,869) 490 (4,359) 2,331
======= ======= ======= =======
Included in the hedge accounting for derivative financial instruments of $141
and $(218) are reclassification adjustments of approximately $90 and $102,
respectively.
10
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 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. On March 29, 2001,
the Court granted the defendants' Motion to Stay and ordered that the lawsuit be
stayed pending the entry of a final non-appealable judgment in the cases filed
by Cognex and Symbol. 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 six months period ended June 30, 2001, the Company recorded
restructuring charges of $4.6 million ($3.2 million after-tax). These charges
related to reductions in the Company's cost structure, including reductions in
force and included costs resulting from payment of employee
11
severance, consolidation of facilities and abandonment of leased equipment.
These restructuring costs included asset write-offs of $0.2 million, severance
costs of $3.8 million and losses from lease commitments of $0.6 million. Cash
paid for severance costs and leasing expenses during the six months ended June
30, 2001 totaled $2.6 million and $0.1 million, respectively. As of June 30,
2001, the Company has included in accrued liabilities $1.8 million related to
restructuring costs.
NOTE 12 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated or completed after June 30, 2001, and
specifies criteria for the recognition and reporting of intangible assets apart
from goodwill. Under SFAS No. 142, beginning January 1, 2002, the Company will
no longer amortize goodwill and intangible assets with indefinite useful lives,
but instead will test those assets for impairment at least annually. SFAS No.
142 will also require that intangible assets with definite useful lives be
amortized over such lives to their estimated residual values.
The Company is required to adopt SFAS No. 141 immediately and SFAS No. 142
effective January 1, 2002. Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that are acquired in a purchase
business combination completed after June 30, 2001 will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized through December 31, 2001.
SFAS No. 142 will require the Company to perform a transitional goodwill
impairment evaluation as of the date of adoption. To accomplish this the Company
must identify its reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of the date of
adoption. The Company will then have up to six months from the date of adoption
to determine the fair value of each reporting unit and compare it to the
reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS No. 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $152.8 million which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $6.4 million and $12.8 million for the six months ended June 30, 2001 and
the year ended December 31, 2000, respectively. Management has completed an
evaluation of the effects of Statement 141 and believes that it will not have a
material effect on the Company's consolidated financial statements. Because of
the extensive effort needed to comply with adopting Statement 142, it is not
practicable to reasonably estimate the impact of adopting this Statement on the
Company's financial statements at the date of this report, including
12
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle.
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 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
13
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.
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 six months ended June 30, 2001, our two largest customers
each represented in excess of 10% of our sales and together represented 36.4% of
our sales, and our largest customer accounted for approximately 18.3% 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 six months ended June 30, 2001 and 2000, 21.7% and 31.5%,
respectively, of our sales were from our international 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
14
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 5.2% and 5.9% of our sales and 19.7% and 27.2% of our operating
income for the three and six-month periods ended June 30, 2000.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2001 2000 2001 2000
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 93.1 92.7 92.8 92.9
----- ----- ----- -----
Gross profit 6.9 7.3 7.2 7.1
Selling, general and administrative expense 4.6 3.3 3.8 3.5
Restructuring charges 1.1 0.0 0.6 0.0
Amortization of goodwill 1.0 0.8 0.9 0.8
----- ----- ----- -----
Income from operations 0.2 3.2 1.9 2.8
Interest expense (1.4) (1.7) (1.4) (1.7)
Other income (expense) 0.3 (0.2) 0.0 0.0
----- ----- ----- -----
Income (loss) before income taxes (0.9) 1.3 0.6 1.1
Income tax expense (benefit) (0.3) 0.4 0.2 0.4
----- ----- ----- -----
Net income (loss) (0.6)% 0.9% 0.4% 0.7%
===== ===== ===== =====
Sales for the second quarter of 2001 were approximately $317.4 million, a
21.9% decrease from sales of approximately $406.6 million for the same quarter
in 2000. Primarily as a result of recent unfavorable economic conditions and a
decline in demand due to the downturn experienced by the electronics industry,
our sales have decreased in the second quarter compared to the first quarter of
2001 and the comparable quarter of 2000. Of this net decrease, there is a 23.7%
decrease resulting from the sale of the Swedish operations, a 41.0% increase
attributable to the operation of the new facilities added during the fourth
quarter of 2000 and the Manassas, Virginia acquisition, and an approximately
117.3% net decrease in sales volume resulting from the continued slowdown in the
technology marketplace. Sales for the first six months of 2001 were
approximately $749.3 million, a 0.8% decrease from sales of approximately $755.7
million for the same period of 2000. Of this net decrease, there is a 692.8%
decrease resulting from the sale of the Swedish operations, a 1159.8% increase
attributable to the operation of the new facilities added during the fourth
quarter of 2000 and the Manassas, Virginia acquisition, and an approximately
567.0% net decrease in sales volumes resulting from the continued slowdown in
the technology marketplace. Our facilities in the Americas provided 85.4% and
86.4% of net sales, respectively, during the second quarters of 2001 and 2000,
and 85.7% and 82.7% of net sales, respectively, during the first six months of
2001 and
15
2000. Our facilities in Europe provided 11.7% and 11.3% of net sales,
respectively during the second quarters of 2001 and 2000, and 11.9% and 14.9% of
net sales, respectively, during the first six months of 2001 and 2000. Our
facilities in Asia provided 2.9% and 2.3% of net sales, respectively during the
second quarters of 2001 and 2000, and 2.4% and 2.4% of net sales, respectively,
during the first six months of 2001 and 2000.
Sales in the Americas for the three-month period ended June 30, 2001
decreased $80.1 million compared to the same period of 2000. As a result of
recent unfavorable economic conditions and a decline in demand due to the
downturn experienced by the electronics industry, our sales in the Americas have
declined in the second quarter compared to the first quarter of 2001. Of this
net decrease, there is a 43.1% increase attributable to the operation of the new
facilities added during the fourth quarter of 2000 and the Manassas, Virginia
acquisition, and an approximately 143.1% net decrease in sales volume. Sales in
the Americas for the six-month period ended June 30, 2001 increased $17.3
million compared to the same period of 2000. Of this net increase, there is a
413.2% increase attributable to the operation of the new facilities added during
the fourth quarter of 2000 and the Manassas, Virginia acquisition, and an
approximately 313.2% net decrease in sales volume.
Sales in Europe decreased $8.9 million for the second quarter of 2001
compared to the same period of 2000 due primarily to the sale of the Swedish
operations in September 2000 (representing approximately 238.2% of this net
decrease). The remaining 138.2% of the net decrease in sales resulted from the
ramping up of new programs and increases in sales volume from both existing and
new customers. Sales in Europe for the six-month period ended June 30, 2001
decreased $23.2 million compared to the same period of 2000 due primarily to the
sale of the Swedish operations in September 2000 (representing approximately
190.9% of this net decrease). The remaining 90.9% of the net decrease in sales
resulted from the ramping up of new programs and increases in sales volumes from
both existing and new customers.
Sales in Asia decreased by $0.1 million and $0.5 million for the three and
six-month periods ended June 30, 2001 compared to 2000. This decrease in sales
was partially offset by additional sales resulting from the operation of the new
systems integration facility in Singapore.
During the three and six-month periods ended June 30, 2001, 22.4% and
21.7%, respectively, compared to 28.5% and 31.5%, respectively during the same
periods of 2000, 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 in September 2000
partially offset by additional sales resulting from the operation of the new
systems integration facility in Singapore.
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 six months ended June 30, 2001,
our two largest customers each represented in excess of 10% of our sales and
together represented 36.4% of our sales, and our largest customer accounted for
approximately 18.3% of our sales. The loss of a major customer, if not replaced,
would adversely affect us.
Gross profit decreased 25.8% to approximately $22.1 million in the second
quarter of 2001 from approximately $29.7 million in the same quarter in 2000.
The decrease in gross profit was due primarily to the lower sales volume. Gross
profit as a percentage of sales for the three months ended June 30, 2000 and
2001, respectively, decreased from 7.3% to 6.9%. The decrease was primarily
attributable to lower volumes and utilization rates as demand for our customers'
products continued to decline. Gross profit increased 1.6% to approximately
$54.2 million in the first six months of 2001 from approximately $53.4 million
in the same period in 2000. Gross profit as a percentage of sales for the six
months ended June 30, 2000 and 2001, respectively, was 7.1% and 7.2%. The
16
increase in gross profit for the six months ended June 30, 2001 compared to 2000
is a result of the combined effect of the operation of new facilities added
during the fourth quarter of 2000 and the Manassas, Virginia acquisition, the
sale of the Swedish operations, fluctuations in capacity utilization, changes in
product mix, favorable component market conditions, cost reductions, and efforts
to integrate recent acquisitions. We expect lower volumes and utilization rates
will exert continued 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 third quarter, we anticipate sales for the third quarter to be
consistent or slightly below the second quarter.
Selling, general and administrative expenses were $14.7 million in the
second quarter of 2001, an increase of 9.2% from $13.4 million for the same
quarter in 2000. Selling, general and administrative expenses as a percentage of
sales increased from 3.3% for the second quarter of 2000 to 4.6% for the second
quarter of 2001. Selling, general and administrative expenses were $28.8 million
in the first six months of 2001, an increase of 10.4% from $26.1 million for the
same period in 2000. Selling, general and administrative expenses as a
percentage of sales increased from 3.5% for first six months of 2000 to 3.8% for
the same period of 2001. The increase in selling, general and administrative
expenses during the three and six-month periods ended June 30, 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 three and six-month periods ended June 30, 2001, we recorded
restructuring charges of $3.3 million ($2.3 million after-tax) and $4.6 million
($3.2 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.
Goodwill is amortized on a straight-line basis over an estimated useful
life of 15 years. The amortization of goodwill for the three and six-month
periods ended June 30, 2001, was $3.2 million and $6.4 million, respectively
compared to $3.1 million and $6.3 million, respectively, for the same periods of
2000.
17
Interest expense for the three and six-month periods ended June 30, 2001
was $4.6 million and $10.3 million, respectively compared to $7.1 million and
$12.6 million, respectively, for the same periods of 2000. The decrease is due
to decreasing interest rates and outstanding debt.
Income tax expense of approximately $1.3 million represented an effective
tax rate of 30.0% for the six-month period ended June 30, 2001, compared with an
effective tax rate of 34.2% for the six-month period ended June 30, 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 (loss) for the three and six-month periods ended
June 30, 2001 of approximately $(2.1) million and $3.0 million, or diluted
earnings (loss) of $(0.11) and $0.15 per share, respectively, compared with net
income of approximately $3.6 million and $5.6 million, or diluted earnings of
$0.21 and $0.32 per share, respectively for the same periods of 2000. The
decreases of $5.7 million and $2.6 million during the three and six months ended
June 30, 2001 were due to the factors discussed above.
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 operating activities was $79.9 million and $0.9 million
for the six months ended June 30, 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 June 30, 2001 decreased $84.0 million
and $80.9 million, respectively, over their levels at December 31, 2000,
reflecting our decreased backlog and effective working capital management during
the first six 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 $14.7 million and $56.6 million for
the six months ended June 30, 2001 and 2000, respectively. Capital expenditures
of $13.8 million for the six months ended June 30, 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 $(61.4) million and
$70.2 million for the six months ended June 30, 2001 and 2000, respectively.
During the six months of 2001, we decreased borrowings outstanding under our
revolving line of credit by $52.5 million (net) and made principal payments on
other long-term debt totaling $9.7 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 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
18
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 June 30, 2001, we had $41.0 million outstanding
under the revolving credit facility, bearing interest at 7.25%, $4.9 million
outstanding letters of credit and $129.1 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 June 30, 2001, our debt to total
capitalization ratio was 33%, 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 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;
19
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 $36.0 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. Management
is vigorously defend against these actions. No material developments occurred in
this proceeding during the period covered by this report.
20
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. On March 29, 2001,
the Court granted the defendants' Motion to Stay and ordered that the lawsuit be
stayed pending the entry of a final non-appealable judgment in the cases filed
by Cognex and Symbol. 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) - (c) At the Annual Meeting of Shareholders held on May 15, 2001, the
Company's nominees for directors to serve until the 2002 Annual Meeting of
Shareholders were elected, and the appointment of KPMG LLP as the independent
auditors for the Company for the fiscal year ended December 31, 2001 was
ratified. With respect to the election of directors, the voting was as follows:
NOMINEE FOR WITHHELD
---------- --------- ----------
John C. Custer 17,025,478 348,640
Donald E. Nigbor 15,753,673 1,620,445
Steven A. Barton 15,765,438 1,608,680
Cary T. Fu 15,775,808 1,598,310
Peter G. Dorflinger 17,056,688 317,430
David H. Arnold 16,523,764 850,354
21
With respect to the ratification of the appointment of KPMG LLP as the
independent auditors of the Company, the voting was as follows:
FOR AGAINST ABSTAIN NON-VOTE
----- ----------- --------- ------------
17,283,889 71,474 18,755 -0-
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
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 August 10, 2001.
BENCHMARK ELECTRONICS, INC.
(Registrant)
By: /s/ CARY T. FU
--------------------
Cary T. Fu
President
(Principal Executive Officer)
By: /s/ GAYLA J. DELLY
--------------------
Gayla J. Delly
Chief Financial Officer
(Principal Financial Officer)
22