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 SEPTEMBER 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 November 13, 2001 there were 19,650,128 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)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 24,008 $ 23,541
Accounts receivable, net 176,629 277,620
Income taxes receivable 4,008 --
Inventories, net 237,219 346,463
Prepaid expenses and other assets 12,518 18,412
Deferred tax asset 7,587 3,135
--------- ---------
Total current assets 461,969 669,171
--------- ---------
Property, plant and equipment 210,069 202,404
Accumulated depreciation (109,797) (66,016)
--------- ---------
Net property, plant and equipment 100,272 136,388
--------- ---------
Other assets, net 13,206 19,148
Goodwill, net 122,820 166,514
--------- ---------
$ 698,267 $ 991,221
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of other long-term debt $ 22,119 $ 20,275
Accounts payable 130,529 268,358
Income taxes payable -- 1,911
Accrued liabilities 20,349 31,309
--------- ---------
Total current liabilities 172,997 321,853
Revolving line of credit 28,000 93,500
Convertible subordinated notes 80,200 80,200
Other long-term debt, excluding current installments 50,476 67,094
Other long-term liability 7,768 6,957
Deferred tax liability 9,713 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 - 19,694 and 19,643, respectively;
outstanding - 19,645 and 19,594, respectively 1,964 1,959
Additional paid-in capital 319,084 317,849
Retained earnings 44,679 98,675
Accumulated other comprehensive loss (16,494) (6,418)
Less treasury shares, at cost; 49 shares (120) (120)
--------- ---------
Total shareholders' equity 349,113 411,945
Commitments and contingencies
--------- ---------
$ 698,267 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Sales $ 257,969 $ 459,540 $ 1,007,307 $ 1,215,266
Cost of sales 239,071 425,640 934,194 1,128,016
----------- ----------- ----------- -----------
Gross profit 18,898 33,900 73,113 87,250
Selling, general and administrative expenses 12,581 15,523 41,406 41,636
Restructuring charges 481 -- 5,094 --
Asset write-offs 61,720 -- 61,720 --
Amortization of goodwill 3,222 3,096 9,667 9,416
----------- ----------- ----------- -----------
Income (loss) from operations (59,106) 15,281 (44,774) 36,198
Interest expense (3,862) (5,638) (14,175) (18,251)
Other income (expense) 719 (540) 1,013 (359)
----------- ----------- ----------- -----------
Income (loss) before income taxes (62,249) 9,103 (57,936) 17,588
Income tax expense (benefit) (5,234) 2,867 (3,940) 5,769
----------- ----------- ----------- -----------
Net income (loss) $ (57,015) $ 6,236 $ (53,996) $ 11,819
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ (2.90) $ 0.34 $ (2.75) $ 0.70
Diluted $ (2.90) $ 0.32 $ (2.75) $ 0.65
=========== =========== =========== ===========
Weighted average number of shares outstanding:
Basic 19,645 18,189 19,616 16,914
Diluted 19,645 19,770 19,616 18,148
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
3
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income (loss) $ (53,996) $ 11,819
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 40,372 39,401
Asset write-offs 61,720 --
Deferred income taxes (3,756) 469
Loss on the sale of property, plant and equipment 20 54
Federal tax benefit of stock options exercised 33 907
Accrued compensation expense 361 --
Changes in operating assets and liabilities:
Accounts receivable 98,132 (63,374)
Inventories 105,846 (104,316)
Prepaid expenses and other assets 7,492 (7,281)
Accounts payable (137,379) 87,416
Accrued liabilities (11,620) 5,950
Income taxes (5,919) 3,796
--------- ---------
Net cash provided by (used in) operations 101,306 (25,159)
--------- ---------
Cash flows from investing activities:
Capital expenditures, net (16,011) (36,909)
Additions to capitalized software (3,460) (1,529)
Acquisitions -- (35,303)
--------- ---------
Net cash used in investing activities (19,471) (73,741)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance (repayment) of revolving line of credit, net (65,500) 15,000
Net proceeds from stock offering -- 113,287
Debt issuance cost -- (1,383)
Proceeds from employee stock purchase plan 703 551
Proceeds from stock options exercised 143 1,531
Principal payments on other long-term debt (14,774) (15,176)
--------- ---------
Net cash provided by (used in) financing activities (79,428) 113,810
--------- ---------
Effect of exchange rate changes (1,940) (607)
--------- ---------
Net increase in cash and cash equivalents 467 14,303
Cash and cash equivalents at beginning of year 23,541 9,437
--------- ---------
Cash and cash equivalents at September 30 $ 24,008 $ 23,740
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid (refunded) $ 6,551 $ (3)
========= =========
Interest paid $ 15,613 $ 17,637
========= =========
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 1.2
million for the nine months ended September 30, 2000 and 1.6 million for the
three months ended September 30, 2000 were used in the calculation of diluted
earnings per share. For the three and nine-month periods ended September 30,
2001, a total of 0.5 million and 0.7 million options, respectively, were not
included in the calculation of diluted earnings per share because the effect
would have been antidilutive. Options to purchase 0.9 million and 0.8 million
shares of common stock for the three and nine-months ended September 30, 2001,
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 and nine-month periods ended September 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 nine-month periods ended September 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. The Term Loan
matures on September 30, 2004. As of September 30, 2001, the Company had $68.0
million outstanding under the Term Loan, bearing interest at rates ranging from
4.25% to 5.375%.
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 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 September 30, 2001, the Company
had $28.0 million outstanding under the Revolving Credit Facility, bearing
interest at 6.13%, $0.4 million outstanding letters of credit and $146.6 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:
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- ---------
Raw materials $ 206,482 $ 273,758
Work in process 27,871 64,727
Finished goods 12,311 16,204
Obsolescence reserve (9,445) (8,226)
--------- ---------
$ 237,219 $ 346,463
========= =========
6
NOTE 5 - INCOME TAXES
Income tax expense consists of the following:
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
------- -------
Federal - Current $(1,744) $ 1,344
Foreign - Current 1,793 3,552
State - Current (233) 404
Deferred (3,756) 469
------- -------
Total $(3,940) $ 5,769
======= =======
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, tax losses for which no benefit was
recognized, 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
nine-month periods ended September 30, 2001 is approximately $0.2 million
(approximately $0.01 per share diluted) and $0.6 million (approximately $0.03
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
nine-month periods ended September 30, 2000 is approximately $0.1 million
(approximately $0.01 per share diluted) and $0.2 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 nine-month periods ended September 30, 2001, the Company recognized $266 and
$452 in losses, included in interest expense, on the interest rate swap
attributable to interest costs occurring during the first nine 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 $1.8 million as of September
30, 2001. Approximately $1.4 million (which includes $0.3 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 4.1% and 5.2% of the Company's sales and 12.2% and 20.8% of its
operating income for the three and nine-month periods ended September 30, 2000.
NOTE 8 - BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company has 14 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 nine-month periods
ended September 30, 2001 and 2000 was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales:
Americas $ 231,494 444,267 898,182 1,166,178
Europe 43,295 74,226 173,951 218,451
Asia 4,974 10,566 23,423 29,636
Elimination of intersegment sales (21,794) (69,519) (88,249) (198,999)
----------- ----------- ----------- -----------
$ 257,969 459,540 1,007,307 1,215,266
=========== =========== =========== ===========
Depreciation and amortization:
Americas $ 8,688 8,661 26,126 23,157
Europe 1,332 1,775 3,946 6,282
Asia 203 188 633 546
Corporate - goodwill 3,222 3,096 9,667 9,416
----------- ----------- ----------- -----------
$ 13,445 13,720 40,372 39,401
=========== =========== =========== ===========
Income (loss) from operations:
Americas $ 7,938 17,223 31,131 36,059
Europe 193 3,245 2,056 11,464
Asia 109 346 2,090 2,311
Corporate and intersegment eliminations (67,346) (5,533) (80,051) (13,636)
----------- ----------- ----------- -----------
$ (59,106) 15,281 (44,774) 36,198
=========== =========== =========== ===========
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
Total Assets:
Americas $ 565,131 812,882
Europe 91,315 143,265
Asia 18,873 16,537
Corporate 22,948 18,537
----------- -----------
$ 698,267 991,221
=========== ===========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales derived from:
Printed circuit boards $ 214,055 441,578 837,922 1,162,916
Systems integration and box build 43,914 17,962 169,385 52,350
---------- ---------- ---------- ----------
$ 257,969 459,540 1,007,307 1,215,266
========== ========== ========== ==========
Geographic net sales:
United States $ 193,479 309,453 763,773 821,826
Europe 36,036 78,907 141,138 194,697
Asia and other 28,454 71,180 102,396 198,743
---------- ---------- ---------- ----------
$ 257,969 459,540 1,007,307 1,215,266
========== ========== ========== ==========
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------- ----------
Long-lived assets:
United States $ 90,131 108,415
Europe 13,528 18,539
Asia and other 9,819 28,582
---------- ----------
$ 113,478 155,536
========== ==========
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 nine-month periods ended September 30,
2001 and 2000, was $(59.7) million and $2.7 million and $(64.1) million and $5.1
million, respectively. Total comprehensive loss for the three and nine-month
periods ended September 30, 2001 and 2000 was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) $(57,015) 6,236 (53,996) 11,819
Cumulative translation adjustment (2,177) (3,517) (8,935) (6,769)
Hedge accounting for derivative financial
instruments, net of tax (522) -- (740) --
Cumulative effect attributable to adoption of
SFAS No. 133 (See note 6), net of tax -- -- (402) --
-------- -------- -------- --------
Comprehensive income (loss) $(59,714) 2,719 (64,073) 5,050
======== ======== ======== ========
Included in the hedge accounting for derivative financial instruments of $(522)
and $(740) are reclassification adjustments of approximately $169 and $271,
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 is vigorously
pursuing its claims against Seller and defending 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.
11
NOTE 11- RESTRUCTURING CHARGES AND ASSET WRITE-OFFS
During the nine month period ended September 30, 2001, the Company recorded
restructuring charges of approximately $5.1 million ($3.6 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
severance, consolidation of facilities and abandonment of leased equipment.
These restructuring costs included severance costs of approximately $4.2 million
and losses from lease commitments of $0.9 million. Cash paid for severance costs
and leasing expenses during the nine months ended September 30, 2001 totaled
approximately $4.2 million and $0.9 million, respectively.
In the third quarter of 2001, the Company recorded asset write-offs of
approximately $61.7 million ($43.2 million after-tax) for the write-down of
long-lived assets to fair value. Included in the long-lived asset impairment are
charges of approximately $28.0 million which related to property, plant and
equipment associated with the consolidation and downsizing of certain
manufacturing facilities and the write-off of approximately $33.7 million of the
remaining goodwill and other intangibles related to these facilities.
NOTE 12 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) 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
12
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 $120.3 million which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $9.7 million and $12.8 million for the nine months ended September 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 whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", but retains many of its fundamental provisions. SFAS
No. 144 also clarifies certain measurement and classification issues from SFAS
No. 121. In addition, SFAS No. 144 supercedes the accounting and reporting
provisions for the disposal of a business segment as found in Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" (APB 30). However,
SFAS No. 144 retains the requirement in APB 30 to separately report discontinued
operations, and broadens the scope of such requirement to include more types of
disposal transactions. The scope of SFAS No. 144 excludes goodwill and other
intangible assets that are not to be amortized, as the accounting for such items
is prescribed by SFAS No. 142. The provisions of SFAS No. 144 are effective for
fiscal years beginning after December 15, 2001, and are to be applied
prospectively. The Company will adopt the requirements of SFAS No. 144 as of
January 1, 2002.
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 the length and severity of the current decline in the technology
sector;
o ability of management to manage through a downturn;
o availability and cost of customer specified components;
o loss of one or more of our major customers;
13
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
14 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.
14
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 nine months ended September 30, 2001, our two largest
customers each represented in excess of 10% of our sales and together
represented 35.7% of our sales, and our largest customer accounted for
approximately 18.2% 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 nine months ended September 30, 2001 and 2000, 22.4% and 31.0%,
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 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 4.1% and 5.2% of our sales and 12.2% and 20.8% of our operating
income for the three and nine-month periods ended September 30, 2000.
15
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 92.7 92.6 92.7 92.8
----- ----- ----- -----
Gross profit 7.3 7.4 7.3 7.2
Selling, general and administrative expense 4.9 3.4 4.1 3.4
Restructuring charges 0.2 0.0 0.5 0.0
Asset write-offs 23.9 0.0 6.1 0.0
Amortization of goodwill 1.2 0.7 1.0 0.8
----- ----- ----- -----
Income (loss) from operations (22.9) 3.3 (4.4) 3.0
Interest expense (1.5) (1.2) (1.4) (1.5)
Other income (expense) 0.3 (0.1) 0.0 0.0
----- ----- ----- -----
Income (loss) before income taxes (24.1) 2.0 (5.8) 1.5
Income tax expense (benefit) (2.0) 0.6 (0.4) 0.5
----- ----- ----- -----
Net income (loss) (22.1)% 1.4% (5.4)% 1.0%
===== ===== ===== =====
Sales for the third quarter of 2001 were approximately $258.0 million, a
43.9% decrease from sales of approximately $459.5 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 third quarter compared to the second quarter of
2001 and the comparable quarter of 2000. Of this net decrease, there is a 9.4%
decrease resulting from the sale of the Swedish operations, a 9.7% increase
attributable to the operation of the new facilities added during the fourth
quarter of 2000 and the Manassas, Virginia acquisition, and an approximately
100.3% net decrease in sales volume resulting from the continued slowdown in the
technology marketplace. Sales for the first nine months of 2001 were
approximately $1,007.3 million, a 17.1% decrease from sales of approximately
$1,215.3 million for the same period of 2000. Of this net decrease, there is a
30.4% decrease resulting from the sale of the Swedish operations, a 45.0%
increase attributable to the operation of the new facilities added during the
fourth quarter of 2000 and the Manassas, Virginia acquisition, and an
approximately 114.6% net decrease in sales volumes resulting from the continued
slowdown in the technology marketplace. Our facilities in the Americas provided
85.0% and 83.2% of net sales, respectively, during the third quarters of 2001
and 2000, and 85.5% and 82.9% of net sales, respectively, during the first nine
months of 2001 and 2000. Our facilities in Europe provided 13.2% and 14.6% of
net sales, respectively during the third quarters of 2001 and 2000, and 12.2%
and 14.8% of net sales, respectively, during the first nine months of 2001 and
2000. Our facilities in Asia provided 1.8% and 2.3% of net sales, respectively
during the third quarters of 2001 and 2000, and 2.2% and 2.4% of net sales,
respectively, during the first nine months of 2001 and 2000.
Sales in the Americas for the three-month period ended September 30, 2001
decreased $162.9 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 third quarter compared to the second quarter of 2001. Of this
net decrease, there is a 11.1% increase attributable to the operation of the new
16
facilities added during the fourth quarter of 2000 and the Manassas, Virginia
acquisition, and an approximately 111.1% net decrease in sales volume. Sales in
the Americas for the nine-month period ended September 30, 2001 decreased $145.7
million compared to the same period of 2000. Of this net increase, there is a
61.4% increase attributable to the operation of the new facilities added during
the fourth quarter of 2000 and the Manassas, Virginia acquisition, and an
approximately 161.4% net decrease in sales volume.
Sales in Europe decreased $32.9 million for the third quarter of 2001
compared to the same period of 2000 due primarily to the sale of the Swedish
operations in September 2000 (representing approximately 57.7% of this net
decrease). The remaining 42.3% of the decrease in sales resulted decreases in
sales volume. Sales in Europe for the nine-month period ended September 30, 2001
decreased $56.1 million compared to the same period of 2000. Of this net
decrease, there is an approximately 12.7% net increase in European sales
resulted from the ramping up of new programs and increases in sales volumes from
both existing and new customers, and an approximately 112.7% decrease due to the
sale of the Swedish operations in September 2000.
Sales in Asia decreased by $5.7 million and $6.2 million for the three and
nine-month periods ended September 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 opened at the end of 2000.
During the three and nine-month periods ended September 30, 2001, 24.2%
and 22.4%, respectively, compared to 30.1% and 31.0%, 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 opened at the end of 2000.
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 nine months ended September 30,
2001, our two largest customers each represented in excess of 10% of our sales
and together represented 35.7% of our sales, and our largest customer accounted
for approximately 18.2% of our sales. The loss of a major customer, if not
replaced, would adversely affect us.
Gross profit decreased 44.3% to approximately $18.9 million in the third
quarter of 2001 from approximately $33.9 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 September 30, 2000
and 2001, respectively, decreased from 7.4% to 7.3%. The decrease was primarily
attributable to lower volumes and utilization rates as demand for our customers'
products continued to decline. Gross profit decreased 16.2% to approximately
$73.1 million in the first nine months of 2001 from approximately $87.3 million
in the same period in 2000. Gross profit as a percentage of sales for the nine
months ended September 30, 2000 and 2001, respectively, was 7.2% and 7.3%. The
decrease in gross profit for the nine months ended September 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, lower
sales volumes, changes in product mix, favorable component market conditions,
cost reductions, and efforts to integrate recent acquisitions.
For the foreseeable future, our gross margin is expected to depend
primarily on the length and severity of the general slowdown in the technology
marketplaces, facility utilization, product
17
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 fourth quarter, we anticipate sales for the fourth quarter to
be consistent with or slightly below or above the third quarter.
Selling, general and administrative expenses were $12.6 million in the
third quarter of 2001, a decrease of 19.0% from $15.5 million for the same
quarter in 2000. Selling, general and administrative expenses as a percentage of
sales increased from 3.4% for the third quarter of 2000 to 4.9% for the third
quarter of 2001. Selling, general and administrative expenses were $41.4 million
in the first nine months of 2001, a decrease of 0.6% from $41.6 million for the
same period in 2000. Selling, general and administrative expenses as a
percentage of sales increased from 3.4% for first nine months of 2000 to 4.1%
for the same period of 2001. The decrease in selling, general and administrative
expenses during the three and nine-month periods ended September 30, 2001
reflects the impact of on-going efforts to manage operating expenses in response
to the current business environment, offset by additional administrative
expenses resulting from the acquisition of the Manassas, Virginia facility and
the opening of additional facilities during the fourth quarter of 2000.
During the three and nine-month periods ended September 30, 2001, we
recorded restructuring charges of $0.5 million ($0.4 million after-tax) and $5.1
million ($4.6 million after-tax) related to reductions in our cost structure,
including reductions in force and included costs resulting from payment of
employee severance, consolidation of facilities and abandonment of leased
equipment 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.
In the third quarter of 2001, we recorded asset write-offs of
approximately $61.7 million ($43.2 million after-tax) for the write-down of
long-lived assets to fair value. Included in the long-lived asset impairment are
charges of approximately $28.0 million which related to property, plant and
equipment associated with the consolidation and downsizing of certain
manufacturing facilities and the write-off of approximately $33.7 million of the
remaining goodwill and other intangibles related to these facilities.
Goodwill is amortized on a straight-line basis over an estimated useful
life of 15 years. The amortization of goodwill for the three and nine-month
periods ended September 30, 2001, was $3.2 million and $9.7 million,
respectively compared to $3.1 million and $9.4 million, respectively, for the
same periods of 2000.
Interest expense for the three and nine-month periods ended September 30,
2001 was $3.9 million and $14.2 million, respectively compared to $5.6 million
and $18.3 million, respectively, for the same periods of 2000. The decrease is
due to reductions in interest rates and repayments of outstanding debt.
18
Income tax benefit of approximately $3.9 million represented an effective
tax rate of 6.8% for the nine-month period ended September 30, 2001, compared
with an effective tax rate of 32.8% for the nine-month period ended September
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 and for tax losses for which no benefit was recognized.
We reported net losses for the three and nine-month periods ended
September 30, 2001 of approximately $(57.0) million and $(54.0) million, or
diluted loss of $(2.90) and $(2.75) per share, respectively, compared with net
income of approximately $6.2 million and $11.8 million, or diluted earnings of
$0.32 and $0.65 per share, respectively for the same periods of 2000. The
decreases of $63.3 million and $65.8 million during the three and nine months
ended September 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 (used in) operating activities was $101.3 million and
$(25.2) million for the nine months ended September 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
September 30, 2001 decreased $98.1 million and $105.8 million, respectively,
over their levels at December 31, 2000, reflecting our decreased backlog and
effective working capital management during the first nine 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 $19.5 million and $73.7 million for
the nine months ended September 30, 2001 and 2000, respectively. Capital
expenditures of $16.0 million for the nine months ended September 30, 2001 were
primarily concentrated in test and manufacturing production equipment. We expect
capital expenditures to remain below historical levels for the foreseeable
futures as a result of the general slowdown in the technology marketplaces.
Cash provided by (used in) financing activities was $(79.4) million and
$113.8 million for the nine months ended September 30, 2001 and 2000,
respectively. During the first nine months of 2001, we decreased borrowings
outstanding under our revolving line of credit by $65.5 million (net) and made
principal payments on other long-term debt totaling $14.8 million.
Principal on the term loan is payable in quarterly installments of $4.5
million, $5.0 million and $5.5 million during 2001, 2002 and 2003, respectively.
The final three installments of $7.0 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 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 September 30, 2001,
19
we had $28.0 million outstanding under the revolving credit facility, bearing
interest at 6.13%, $0.4 million outstanding letters of credit and $146.6 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 (as defined
in the indenture relating to the notes) of our Company, 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 significantly increased our leverage ratio and
decreased our interest coverage ratio. At September 30, 2001, our debt to total
capitalization ratio was 34%, 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; 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.
20
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. The interest rates payable under these facilities are
based on a spread, which varies based upon our debt ration, over the bank's
Eurodollar rate or its prime rate, which vary with market rates. 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 $33.8 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; and
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 defending 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
21
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 Benchmark 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
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Form of Employment Agreements between the Company and its
Chief Executive Officer, President and Executive Vice
President dated August 1, 2001.
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 13, 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)
23