<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
COMMISSION FILE NUMBER: 1-10560
BENCHMARK ELECTRONICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
TEXAS 74-2211011
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
3000 TECHNOLOGY DRIVE 77515
ANGLETON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
(979) 849-6550
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of May 13, 2002 there were 24,121,687 shares of Benchmark Electronics,
Inc. Common Stock, par value $0.10 per share, outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 79,940 $ 59,879
Accounts receivable, net of allowance for doubtful
accounts of $2,951 and $2,211, respectively 185,818 180,021
Income taxes receivable - 1,711
Inventories, net 196,837 197,278
Prepaid expenses and other assets 18,783 12,928
Deferred tax asset 9,109 9,080
---------- ----------
Total current assets 490,487 460,897
---------- ----------
Property, plant and equipment 208,133 210,556
Accumulated depreciation (121,615) (116,751)
---------- ----------
Net property, plant and equipment 86,518 93,805
---------- ----------
Other assets, net 12,238 12,194
Goodwill, net 119,249 119,209
---------- ----------
$ 708,492 $ 686,105
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of other long-term debt $ 22,873 $ 22,367
Accounts payable 162,698 144,150
Income taxes payable 1,163 -
Accrued liabilities 27,591 26,541
---------- ----------
Total current liabilities 214,325 193,058
Convertible subordinated notes 80,200 80,200
Other long-term debt, excluding current installments 38,650 44,695
Other long-term liability 8,094 7,771
Deferred tax liability 9,367 8,699
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 - 19,833 and 19,751, respectively;
outstanding - 19,784 and 19,702, respectively 1,978 1,970
Additional paid-in capital 320,806 319,875
Retained earnings 49,711 44,363
Accumulated other comprehensive loss (14,519) (14,406)
Less treasury shares, at cost; 49 shares (120) (120)
---------- ----------
Total shareholders' equity 357,856 351,682
Commitments and contingencies
---------- ----------
$ 708,492 $ 686,105
========== ==========
</Table>
See accompanying notes to condensed consolidated financial statements.
2
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BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
--------- ----------
Sales $ 329,188 $ 431,905
Cost of sales 304,313 399,742
--------- ----------
Gross profit 24,875 32,163
Selling, general and administrative expenses 14,176 14,159
Restructuring charges - 1,266
Amortization of goodwill - 3,222
--------- ----------
Income from operations 10,699 13,516
Interest expense (2,914) (5,713)
Other income (expense) 572 (500)
--------- ----------
Income before income taxes 8,357 7,303
Income tax expense 3,009 2,191
--------- ----------
Net income $ 5,348 $ 5,112
========= ==========
Earnings per share:
Basic $ 0.27 $ 0.26
Diluted $ 0.26 $ 0.25
========= ==========
Weighted average number of shares outstanding:
Basic 19,763 19,597
Diluted 20,508 20,324
========= ==========
</Table>
See accompanying notes to condensed consolidated financial statements.
3
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BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
-------- ---------
Cash flows from operating activities:
Net income $ 5,348 $ 5,112
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 7,958 13,649
Deferred income taxes 541 334
Loss on the sale of property, plant and equipment 15 14
Federal tax benefit of stock options exercised 154 20
Changes in operating assets and liabilities:
Accounts receivable (5,951) 43,743
Inventories 227 38,607
Prepaid expenses and other assets (5,759) 1,647
Accounts payable 18,834 (65,980)
Accrued liabilities 1,796 (7,226)
Income taxes 2,874 1,796
-------- ---------
Net cash provided by operations 26,037 31,716
-------- ---------
Cash flows from investing activities:
Capital expenditures, net (1,087) (3,435)
Additions to capitalized software (44) -
-------- ---------
Net cash used in investing activities (1,131) (3,435)
-------- ---------
Cash flows from financing activities:
Repayment of revolving line of credit, net - (20,500)
Proceeds from stock options exercised 785 83
Principal payments on other long-term debt (5,539) (4,519)
-------- ---------
Net cash used in financing activities (4,754) (24,936)
-------- ---------
Effect of exchange rate changes (91) (4,240)
-------- ---------
Net increase (decrease) in cash and cash equivalents 20,061 (895)
Cash and cash equivalents at beginning of year 59,879 23,541
-------- ---------
Cash and cash equivalents at March 31 $ 79,940 $ 22,646
======== =========
Supplemental disclosures of cash flow information:
Income taxes paid (refunded) $ (486) $ (618)
======== =========
Interest paid $ 3,560 $ 6,545
======== =========
</Table>
See accompanying notes to condensed consolidated financial statements.
4
<Page>
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 computers and related products for business enterprises,
telecommunication equipment, video/ audio/entertainment products, industrial
control equipment, testing and instrumentation products, 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, 2001.
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
approximately 0.7 million for the three months ended March 31, 2002 and 2001
were used in the calculation of diluted earnings per share. Options to purchase
0.7 million and 0.8 million shares of common stock for the three-months ended
March 31, 2002 and 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. The effect of the if-converted
method for the 6% Convertible Subordinated Notes is antidilutive and
approximately 2.0 million of potential common shares has not been considered in
computing diluted earnings per share for the three-month periods ended March 31,
2002 and 2001.
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 $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 March 31, 2002, the Company had $58.0 million outstanding under
the Term Loan, bearing interest at rates ranging from 3.50% to 8.255%.
The Company has a $175 million revolving line of credit facility (the
Revolving Credit Facility) with a syndicate of commercial banks. 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
5
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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 March 31, 2002, the Company had no borrowings outstanding under
the Revolving Credit Facility, $0.4 million outstanding letters of credit and
$174.6 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 as to working capital, interest
coverage, debt leverage, fixed charges, and consolidated net worth, 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 banks. At March 31, 2002, the Company was in compliance with all such
restrictions.
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 $29.0 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:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
Raw materials $ 158,032 $ 166,129
Work in process 35,896 28,147
Finished goods 13,013 12,026
Obsolescence reserve (10,104) (9,024)
----------- -----------
$ 196,837 $ 197,278
=========== ===========
</Table>
6
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NOTE 5 - INCOME TAXES
Income tax expense consists of the following:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2002 2001
--------- --------
Federal - Current $ 1,885 $ 1,284
Foreign - Current 176 246
State - Current 407 327
Deferred 541 334
--------- --------
Total $ 3,009 $ 2,191
========= ========
</Table>
Income tax expense differs from the amount computed by applying the U.S.
federal statutory income tax rate to income before income tax due to the impact
of 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 certain 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 statutory tax rate will
be 12.5%. As a result of these reduced rates, income tax expense for the
three-month periods ended March 31, 2002 and 2001 is approximately $201
(approximately $0.01 per share diluted) and $314 (approximately $0.02 per share
diluted), respectively, lower than the amount computed by applying the statutory
tax rates (16% in 2002 and 20% in 2001).
NOTE 6 - DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain
Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of SFAS 133." These
statements establish accounting and reporting standards requiring that
derivative instruments, including certain derivative instruments embedded in
other contracts, be recorded on the balance sheet at fair value as either assets
or liabilities. The accounting for changes in the fair value of a derivative
instrument depends on the intended use and designation of the derivative at its
inception. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results of the hedged item in the statements of
operations, and requires the Company to formally document, designate and assess
the effectiveness of the hedge transaction to receive hedge accounting. For
derivatives designated as cash-flow hedges, changes in fair value, to the extent
the hedge is effective, are recognized in other comprehensive income until the
hedged item is recognized in earnings. Overall hedge effectiveness is measured
at least quarterly. Any changes in the fair value of the derivative instrument
resulting from hedge ineffectiveness, as defined by SFAS No. 133 and measured
based on the cumulative changes in the fair value of the derivative instrument
and the cumulative changes in the estimated future cash flows of the hedged
item, are recognized immediately in earnings.
The Company has designated its swap agreement as a cash flow hedge. During
the three-month periods ended March 31, 2002 and 2001, the Company recognized
$361 and $20 in losses,
7
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included in interest expense, on the interest rate swap attributable to interest
costs occurring during the first three months of 2002 and 2001. No gain or loss
on ineffectiveness was required to be recognized. As of March 31, 2002, the fair
value of the interest rate swap agreement was a loss of $1.1 million that 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 - 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 allocated to these operating
segments and are included for performance evaluation. Amortization expense
associated with capitalized software costs is allocated to these operating
segments, but the related assets are not allocated. Amortization expense
associated with goodwill is not allocated to the results of operations in
analyzing segments, but the related balances are allocated to the segments. The
accounting policies for the reportable operating segments are the same as for
the Company taken as a whole.
8
<Page>
Information about operating segments for the three-month periods ended
March 31, 2002 and 2001 was as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------
2002 2001
---------- -------
Net sales:
Americas $ 332,093 386,755
Europe 82,444 80,010
Asia 3,644 8,483
Elimination of intersegment sales (88,993) (43,343)
---------- -------
$ 329,188 431,905
========== =======
Depreciation and amortization:
Americas $ 6,960 8,867
Europe 826 1,344
Asia 172 216
Corporate - goodwill - 3,222
---------- -------
$ 7,958 13,649
========== =======
Income (loss) from operations:
Americas $ 14,658 15,468
Europe 1,898 3,375
Asia (94) 537
Corporate and intersegment eliminations (5,763) (5,864)
---------- -------
$ 10,699 13,516
========== =======
Capital expenditures:
Americas $ 959 1,724
Europe 118 980
Asia 10 731
---------- -------
$ 1,087 3,435
========== =======
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
---------- ------------
Total assets:
Americas $ 566,329 532,047
Europe 112,222 113,824
Asia 12,992 17,346
Corporate 16,949 22,888
----------- -------
$ 708,492 686,105
=========== =======
</Table>
9
<Page>
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.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
---------- -------
Net sales derived from:
Printed circuit boards $ 251,297 363,689
Systems integration and box build 77,891 68,216
---------- -------
$ 329,188 431,905
========== =======
Geographic net sales:
United States $ 256,292 330,113
Europe 53,395 62,049
Asia and other 19,501 39,743
---------- -------
$ 329,188 431,905
========== =======
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
Long-lived assets:
United States $ 79,391 84,877
Europe 11,433 12,215
Asia and other 7,932 8,907
----------- -------
$ 98,756 105,999
=========== =======
</Table>
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which includes net income, the change in the
cumulative translation adjustment and the effect of accounting for cash flow
hedging derivatives, for the three-month periods ended March 31, 2002 and 2001,
was $5.2 million and $(1.5) million, respectively. Total comprehensive income
(loss) for the three-month periods ended March 31, 2002 and 2001 was as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
-------- ------
Net income (loss) $ 5,348 5,112
Cumulative translation adjustment (431) (5,841)
Hedge accounting for derivative financial
instruments, net of tax 318 (359)
Cumulative effect attributable to adoption of
SFAS No. 133 (See note 6), net of tax - (402)
-------- ------
Comprehensive income (loss) $ 5,235 (1,490)
======== ======
</Table>
Included in the hedge accounting for derivative financial instruments of $318
and $(359) are reclassification adjustments of approximately $216 and $12,
respectively.
10
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NOTE 9 - 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 "Court"). On March 18,
2002, the Court entered an interlocutory judgement denying the Company's claims
against Seller, but preserving Seller's counterclaims against the Company. On
April 15, 2002, the Company and Seller jointly filed with the Court a
stipulation to dismiss Seller's claims and counterclaims against the Company
without prejudice allowing the Court to render a final judgement in the case so
that the Company may file an appeal to the Fifth Circuit Court of Appeals (the
"Fifth Circuit"). Under the stipulation, Seller also agreed to refrain from
refiling its claims while the Company pursued any appeals with the Fifth
Circuit. On May 1, 2002, the Court entered a final judgement dismissing without
prejudice the claims and counterclaims of Seller. Management is currently
assessing the advisability of pursuing an appeal in the Fifth Circuit.
On April 14, 2000, the Company, along with numerous other companies, was
named as a defendant in a lawsuit filed in the United States District Court for
the District of Arizona 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 2, 2000, the Company
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 judgement 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.
11
<Page>
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 10 - RESTRUCTURING CHARGES
During the three month period ended March 31, 2001, the Company recorded
restructuring charges of approximately $1.3 million ($0.9 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. All such amounts were paid by March 31, 2001.
NOTE 11 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted the Financial Accounting Standards Board (FASB) SFAS No.
141, "Business Combinations" effective July 1, 2001, and SFAS No. 142, "Goodwill
and Other Intangible Assets" effective January 1, 2002. 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 no longer amortizes goodwill and
intangible assets with indefinite useful lives, but instead tests those assets
for impairment at least annually. SFAS No. 142 also requires that intangible
assets with definite useful lives be amortized over such lives to their
estimated residual values.
SFAS No. 142 required the Company to perform a transitional goodwill
impairment evaluation as of the date of adoption. To accomplish this the Company
identified its reporting units and determined 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 January 1, 2002.
The Company has until June 1, 2002 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 December 31,
2002. 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 January 1, 2002, the Company had unamortized goodwill in the amount
of $119.2 million subject to the transition provisions of Statements 141 and
142. The change in the amount of unamortized goodwill during the three months
ended March 31, 2002 is due to the impact of foreign currency translation
adjustments. The adoption of the Statement 142 resulted in the elimination of
approximately $12.2 million of goodwill amortization, annually, subsequent to
December 31, 2001. Amortization expense related to goodwill was $3.2 million for
the three months ended March 31, 2001. Because of the extensive effort needed to
comply with adopting Statement 142, it is not practical to reasonably estimate
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle and the impact on the
Company's financial statements at the date of this report.
12
<Page>
The pro forma effects of the adoption of SFAS 142 on net income and
earnings per share for the Company for the three months ended March 31, 2001 is
as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31, 2001
------------------
Net income as reported $ 5,112
Add back: Amortization of goodwill, net of tax 2,676
--------
Adjusted net income $ 7,788
========
Basic earnings per share, as reported $ 0.26
Add back: Amortization of goodwill, net of tax 0.14
--------
Pro forma $ 0.40
========
Diluted earnings per share, as reported $ 0.25
Add back: Amortization of goodwill, net of tax 0.13
--------
Pro forma $ 0.38
========
</Table>
As of January 1, 2002, the Company adopted 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 adoption of SFAS No. 144 did not have a
material effect on the Company's consolidated financial statements.
NOTE 12 - SUBSEQUENT EVENTS
On April 15, 2002, the Company completed the public offering of 4,312,500 shares
of its common stock for net proceeds of approximately $110 million. The Company
invested the net proceeds in interest bearing short-term investments and cash
equivalents.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
References in this report to "the Company", "Benchmark", "we", or "us" mean
Benchmark Electronics, Inc. together with its subsidiaries. The following
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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. Forward-looking statements are any
statements that do not relate solely to historical or current facts. They are
identified by 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
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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, including those discussed under the
heading Risk Factors below. The future results of our operations may differ
materially from those expressed in the forward-looking statements included in
this report. Many of the factors that will determine these results are beyond
our ability to control or predict. 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 computers and related products for business
enterprises, telecommunication equipment, video/audio/entertainment products,
industrial control equipment, testing and instrumentation products, 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.
We do not typically obtain long-term purchase orders or commitments from
our customers. Instead we work closely with our customers to develop forecasts
for future orders, which are not binding. Customers may cancel 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. As many of our costs and operating expenses are relatively fixed, a
reduction in customer demand can disproportionately adversely affect our gross
margins and operating income.
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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.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------
2002 2001
----- -----
Sales 100.0% 100.0%
Cost of sales 92.4 92.6
----- -----
Gross profit 7.6 7.4
Selling, general and administrative expense 4.3 3.3
Restructuring charges 0.0 0.3
Amortization of goodwill 0.0 0.7
----- -----
Income from operations 3.3 3.1
Interest expense (0.9) (1.3)
Other income (expense) 0.1 (0.1)
----- -----
Income before income taxes 2.5 1.7
Income tax expense 0.9 0.5
----- -----
Net income 1.6% 1.2%
===== =====
</Table>
SALES
- --------------------------------------------------------------------------------
Sales for the first quarter of 2002 were approximately $329.1 million, a
23.8% decrease from sales of approximately $431.9 million for the same quarter
in 2001. 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 first quarter of 2002 compared to the comparable
quarter of 2001. Of this net decrease, there is a 33.8% increase attributable to
the operation of the systems integration facilities, a 28.8% decrease resulting
from the consolidation and downsizing of certain manufacturing facilities during
2001 and an approximately 105.0% net decrease in sales volume resulting from the
continued slowdown in the technology marketplace.
We have 14 manufacturing facilities in the Americas, Europe and Asia to
serve our customers. We are operated and managed geographically. Our facilities
in the Americas provided 85.0% and 85.9% of net sales, respectively, during the
first quarters of 2002 and 2001. Our Americas region includes facilities in
Angleton, Texas, Beaverton, Oregon, Campinas, Brazil, Guadalajara, Mexico,
Hudson, New Hampshire, Huntsville, Alabama, Manassas, Virginia and Winona,
Minnesota. There are two facilities in Huntsville, Alabama - a systems
integration facility opened during 2000 and the PCB facility acquired from AVEX
in 1999. During 2001, we consolidated the Pulaski, Tennessee manufacturing
facility into the Huntsville, Alabama facility. The Pulaski facility is
currently being held for sale. Our facilities in Europe provided 14.0% and 12.1%
of net sales, respectively during the first quarters of 2002 and 2001. Our
Europe region includes facilities in Cork, Ireland, Dublin, Ireland and East
Kilbride, Scotland. Our facilities in Asia provided 1.0% and 2.0% of net sales,
respectively during the first quarters of 2002 and 2001. There are two
facilities in Singapore - a systems integration facility opened at the end of
2000 and the PCB facility acquired from AVEX in 1999. We are currently in the
process of combining the two facilities in Singapore into one site.
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A substantial percentage of our sales have been made to a small number
of customers, and the loss of a major customer, if not replaced, would
adversely affect us. During the three months ended March 31, 2002, our three
largest customers each represented in excess of 10% of our sales and together
represented 69.6% of our sales, with one customer exceeding 40% and each of
the other two largest customers exceeding 10% 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. Recently our customers have experienced a
decline in demand for their products, which has had an adverse effect on our
results of operations.
As a result of our international sales and facilities, our operations are
subject to the risks of doing business abroad. These dynamics have not had a
material adverse effect on our results of operations through March 31, 2002.
However, we cannot assure you that there will not be an adverse impact in the
future. See RISK FACTORS for factors pertaining to our international sales and
fluctuations in the exchange rates of foreign currency and for further
discussion of potential adverse effects in operating results associated with the
risks of doing business abroad. During the three months ended March 31, 2002 and
2001, 19.8% and 21.3%, respectively, of our sales were from our international
operations. The decrease in the percentage of international sales for 2002 as
compared to 2001 primarily reflects the downsizing of the Cork, Ireland facility
offset by additional sales resulting from the operation of the systems
integration facilities in Dublin, Ireland and Singapore.
AMERICAS
Sales in the Americas for the three-month period ended March 31, 2002
decreased $91.2 million compared to the same period of 2001. 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 first quarter of 2002 compared to the comparable quarter of
2001. Of this net decrease, there is a 34.0% increase attributable to the
operation of the systems integration facilities, a 28.0% decrease resulting from
the consolidation and downsizing of certain manufacturing facilities during 2001
and an approximately 106.0% net decrease in sales volume. During 2001, we
consolidated the Pulaski, Tennessee manufacturing facility into the Huntsville,
Alabama facility. The Pulaski facility is currently being held for sale.
EUROPE
Sales in Europe decreased $6.2 million for the first quarter of 2002
compared to the same period of 2001. Of this net decrease, there is an
approximately 48.0% net increase in European sales resulting from the increases
in sales volumes from systems integration customers, a 66.2% decrease resulting
from the downsizing of the Cork, Ireland facility during 2001 and an
approximately 81.8% decrease due to the net decrease in sales volume resulting
from the continued slowdown in the technology marketplace.
ASIA
Sales in Asia decreased by $5.3 million for the three-month period ended
March 31, 2002 compared to 2001. Of this net decrease, there is an approximately
14.1% net increase in Asia sales resulting from the increases in sales volumes
from systems integration customers and an approximately 114.1% decrease due to
the net decrease in sales volume resulting from the continued slowdown in the
technology marketplace.
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GROSS PROFIT
- --------------------------------------------------------------------------------
Gross profit decreased 22.7% to $24.9 million for the first quarter of 2002
from $32.2 million in the same quarter of 2001. Gross profit as a percentage of
sales for the three months ended March 31, 2002 and 2001, respectively,
increased from 7.4% to 7.6%. The decrease in gross profit was a result of the
combined effect of fluctuations in capacity utilization, lower sales volumes,
changes in product mix, favorable component market conditions, cost reductions,
and efforts to integrate recent acquisitions. The combined effect of these
factors, which are continually changing and are interrelated, make it
impracticable to determine with precision the separate effect of each factor. We
expect that a number of high volume programs serving customers in price
sensitive markets will remain subject to competitive restraints on the margin
that may be realized from these programs and that these restraints will exert
downward pressure on our margins in the near future. For the foreseeable future,
our gross margin is expected to depend primarily on the length and severity of
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.
The first quarter 2002 and 2001 gross profit reflects charges related to
reserves for excess and obsolete inventory. During the first three months of
2002 and 2001, $1.5 million and $1.5 million of additional inventory reserves
were recorded, respectively. These charges related to inventory written down to
lower of cost (principally first-in, first-out method) or market, raw materials
held specific to customers who were no longer in business, and changes in
customer demand for inventory that resulted in excess quantities on hand.
Inventory is procured by us based on specific customer orders. Correspondingly,
customer modifications to orders for inventory previously procured by us (e.g.
cancellations as well as inventory that is highly customized and therefore not
available for use by other customers) resulted in excess and obsolete inventory
for the related customers that could not be recovered through put back to
vendors or the specific customer concerned.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------------------------------------------
Selling, general and administrative expenses were $14.2 million in the
first quarter of 2002 and 2001. Selling, general and administrative expenses as
a percentage of sales increased from 3.3% for the first quarter of 2001 to 4.3%
for the first quarter of 2002. The increase in selling, general and
administrative expenses as a percentage of sales reflects the impact of
decreased sales volume during 2002 as compared to 2001 and increased
expenditures related to new program introductions and year-end reporting and
audit activities.
RESTRUCTURING CHARGES
- --------------------------------------------------------------------------------
During the three-month period ended March 31, 2001, we recorded
restructuring charges of $1.3 million ($0.9 million after-tax) related to
reductions in force necessitated by the general slowdown in the technology
marketplaces.
GOODWILL
- --------------------------------------------------------------------------------
Effective January 1, 2002, we adopted accounting principles that change the
way we account for amortization of goodwill. In accordance with SFAS No. 142, we
no longer amortized goodwill effective January 1, 2002. The amortization of
goodwill for the three-month period ended March 31, 2001 was $3.2 million. We
are also required to test goodwill for impairment at least annually. As of March
31, 2002, no impairment of goodwill was required.
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INTEREST EXPENSE
- --------------------------------------------------------------------------------
Interest expense for the three-month periods ended March 31, 2002 and 2001
was $2.9 million and $5.7 million, respectively. The decrease is due to
reductions in interest rates and repayments of outstanding debt.
INCOME TAX EXPENSE
- --------------------------------------------------------------------------------
Income tax expense of approximately $3.0 million represented an effective
tax rate of 36.0% for the three-month period ended March 31, 2002, compared with
an effective tax rate of 30.0% for the three-month period ended March 31, 2001.
The increase 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.
NET INCOME
- --------------------------------------------------------------------------------
We reported net income for the three-month period ended March 31, 2002 of
approximately $5.3 million, or diluted earnings of $0.26, compared with net
income of approximately $5.1 million, or diluted earnings of $0.25 per share,
for the same period of 2001. The increase of $0.2 million during the three
months ended March 31, 2002 was 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 $26.0 million and $31.7 million
for the three months ended March 31, 2002 and 2001, respectively. The cash
provided by operations during the first quarter of 2002 was primarily the result
of increases in accounts payable partially offset by increases in accounts
receivable. Our accounts receivable and inventories at March 31, 2002
(increased) decreased $(6.0) million and $0.2 million, respectively, over their
levels at December 31, 2001, reflecting our increased backlog and effective
working capital management during the first three months of 2002. We expect
increases in accounts receivable and inventories in the near term to support the
anticipated growth in sales. We are continuing the practice of purchasing
components only after customer orders are received, which mitigates, but does
not eliminate the risk of loss on inventories. During the three months ended
March 31, 2002 and 2001, our gross profit was adversely effected by additional
reserves of $1.5 million for excess and obsolete inventory that could not be put
back to vendors or customers. Supplies of electronic components and other
materials used in operations are subject to industry-wide shortages. In certain
instances, suppliers may allocate available quantities to us.
Cash used in investing activities was $1.1 million and $3.4 million for the
three months ended March 31, 2002 and 2001, respectively. Capital expenditures
of $1.1 million for the three months ended March 31, 2002 were primarily
concentrated in manufacturing production equipment. We expect capital
expenditures to remain below historical levels for the foreseeable future as a
result of the general slowdown in the technology marketplaces.
Cash used in financing activities was $4.8 million and $24.9 million for
the three months ended March 31, 2002 and 2001, respectively. During the first
three months of 2002, we made principal payments on other long-term debt
totaling $5.5 million and received $0.8 million from the exercise of stock
options. During the first three months of 2001, we decreased borrowings under
our revolving line of credit by $20.5 million (net).
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Principal on the term loan is payable in quarterly installments of $5.0
million and $5.5 million during 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 syndicate
of commercial banks. 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
March 31, 2002, we had no borrowings outstanding under the revolving credit
facility, $0.4 million outstanding letters of credit and $174.6 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 as to working capital, interest coverage,
debt leverage, fixed charges, and consolidated net worth, 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 banks. At March 31,
2002, we were in compliance with all such restrictions.
We have outstanding $80.2 million principal amount of 6% Convertible
Subordinated Notes due August 15, 2006. 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, our past, current and future
operations, and the operations of businesses we have or may acquire, may give
rise to claims of exposure by employees or the public, or to other claims or
liabilities relating to environmental, waste management or health and safety
concerns.
Our acquisitions in 1999 significantly increased our leverage ratio and
decreased our interest coverage ratio. At March 31, 2002 our debt to total
capitalization ratio was 28%, as compared to 30% at December 31, 2001, 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
19
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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.
On April 15, 2002, we completed the public offering of 4,312,500 shares of
our common stock for net proceeds of approximately $110 million. We currently
expect to use the proceeds from the sale of our common stock for working capital
and other general corporate purposes, including to finance our growth, for
capital expenditures made in the ordinary course of business and for
acquisitions of businesses, products and technologies that complement or expand
our business. We invested the net proceeds in interest bearing short-term
investments and cash equivalents pending any specific application of the
proceeds.
Management believes that after giving effect to the stock offering
completed on April 15, 2002, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of
operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. Our significant accounting policies are
summarized in Note 1 to the Consolidated Financial Statements included in our
Annual Report on Form 10-K for the year ended December 31, 2001. The preparation
of these financial statements requires us to make estimates and judgements that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to allowance for doubtful
accounts, inventories, deferred taxes, impairment of long-lived assets, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgements about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates. We believe the
following critical accounting policies affect our more significant judgements
and estimates used in the preparation of our condensed consolidated financial
statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Our accounts receivable balance is recorded net of allowances for amounts not
expected to be collected from our customers. Because our accounts receivable are
typically unsecured, we periodically evaluate the collectibility of our accounts
based on a combination of factors, including a particular customer's ability to
pay as well as the age of the receivables. To evaluate a specific customer's
ability to pay, we analyze financial statements, payment history, third-party
credit analysis reports and various information or disclosures by the customer
or other publicly available information. In cases where the evidence suggests a
customer may not be able to satisfy its obligation to us, we set up a specific
reserve in an amount we determine appropriate for the perceived risk. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. The allowance for doubtful accounts was $3.0 million at March 31, 2002
and $2.2 million at December 31, 2001.
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INVENTORY OBSOLESCENCE RESERVE
We record inventory reserves for estimated obsolescence equal to the difference
between the cost of inventory and estimated market value based on assumptions on
future demands and market conditions. We evaluate on a quarterly basis the
status of our inventory to ensure the amount recorded in our financial
statements reflects the lower of our cost or the value we expect to receive when
we sell the inventory. The allowance for excess and obsolete inventory was $10.1
million at March 31, 2002 and $9.0 million at December 31, 2001. If actual
market conditions are less favorable than those we projected, additional
inventory reserves may be required.
DEFERRED TAXES
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event we were to
subsequently determine that we would be able to realize our deferred tax assets
in the future in excess of our net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Similarly, should we determine that we would not be able to realize all or
part of our net deferred tax asset in the future, an adjustment to the deferred
tax asset would reduce income in the period such determination was made.
IMPAIRMENT OF LONG-LIVED ASSETS
We adopted FASB SFAS No. 142, "Goodwill and Other Intangible Assets" effective
January 1, 2002. Under SFAS No. 142, beginning January 1, 2002, we no longer
amortize goodwill and intangible assets with indefinite useful lives, but
instead test those assets for impairment at least annually. To accomplish this
we identified our reporting units and determined 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 January 1, 2002.
We have until June 1, 2002 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 we must perform the
second step of the transitional impairment test. In the second step, we must
compare the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its 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 December 31, 2002. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in our statement of earnings.
Because of the extensive effort needed to comply with adopting Statement
142, it is not practical to reasonably estimate whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle and the impact on the Company's financial
statements at the date of this report.
We assess the impairment of our long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors considered important which could trigger an impairment
review include significant underperformance relative to expected historical or
projected future operating results, significant changes in the manner of our use
of the acquired assets or the strategy for the overall business, significant
negative industry or economic trends, and our market capitalization relative to
net book value. When it is determined that the carrying value of long-lived
assets not be recoverable based upon the existence of one or more of the above
indicators of impairment, the measurement of any impairment is determined and
the carrying value is reduced as appropriate.
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RISK FACTORS
WE ARE EXPOSED TO GENERAL ECONOMIC CONDITIONS, WHICH COULD HAVE A MATERIAL
ADVERSE IMPACT ON OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION.
As a result of recent unfavorable economic conditions and a decline in demand by
the electronics industry, our sales declined 23.8% during the three months ended
March 31, 2002 compared to the comparable period of 2001. We started to see
sales decline in the technology sector worldwide at the end of the first quarter
of 2001 and it continued throughout 2001. If the economic conditions and demand
for our customers' products do not improve, we may experience a material adverse
impact on our business, operating results and financial condition.
THE LOSS OF A MAJOR CUSTOMER WOULD ADVERSELY AFFECT US.
A substantial percentage of our sales have been to a small number of
customers, and the loss of a major customer, if not replaced, would adversely
affect us. During the three months ended March 31, 2002, our three largest
customers each represented in excess of 10% of our sales and together
represented 69.6% of our sales, with one customer exceeding 40% and each of
the other two largest customers exceeding 10% 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.
We expect to continue to depend on the sales from our largest customers and any
material delay, cancellation or reduction of orders from these or other
significant customers would have a material adverse effect on our results of
operations. In addition, we generate significant accounts receivable in
connection with providing manufacturing services to our customers. If one or
more of our customers were to become insolvent or otherwise unable to pay for
the manufacturing services provided by us, our operating results and financial
condition would be adversely affected.
WE MAY ENCOUNTER SIGNIFICANT DELAYS OR DEFAULTS IN PAYMENTS OWED TO US BY
CUSTOMERS FOR PRODUCTS WE HAVE MANUFACTURED OR COMPONENTS THAT ARE UNIQUE TO
PARTICULAR CUSTOMERS.
We structure our agreements with customers to mitigate our risks related to
obsolete or unsold inventory. However, enforcement of these contracts may result
in material expense and delay in payment for inventory. If any of our
significant customers becomes unable or unwilling to purchase such inventory,
our business may be materially harmed. During the first three months of 2002 and
2001, our gross profit was adversely affected by the write down of $1.5 million
in excess and obsolete inventory that could not be put back to vendors or
customers.
WE ARE DEPENDENT ON THE SUCCESS OF OUR CUSTOMERS.
We are dependent on the continued growth, viability and financial stability of
our customers. Our customers are original equipment manufacturers of:
- - computers and related products for business enterprises;
- - telecommunication equipment;
- - industrial control equipment;
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- - medical devices;
- - video/audio/entertainment products; and
- - testing and instrumentation products.
These industries are, to a varying extent, subject to rapid technological
change, vigorous competition and short product life cycles. When our customers
are adversely affected by these factors, we may be similarly affected. Recently,
our customers have experienced a decline in demand for their products, which has
had an adverse effect on our results of operations.
LONG-TERM CONTRACTS ARE UNUSUAL IN OUR BUSINESS AND CANCELLATIONS, REDUCTIONS OR
DELAYS IN CUSTOMER ORDERS WOULD AFFECT OUR PROFITABILITY.
We do not typically obtain firm long-term purchase orders or commitments from
our customers. Instead, we work closely with our customers to develop forecasts
for future orders, which are not binding. Customers may cancel 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. As many of our costs and operating expenses are relatively fixed, a
reduction in customer demand can disproportionately affect our gross margins and
operating income. Our customer's products have life cycles of varying duration.
In the ordinary course of business, production starts, increases, declines and
stops in accordance with a product's life cycle. Should we fail to replace
products reaching the end of their life cycles with new programs, or if there
should be a substantial time difference between the loss of a product and the
receipt of revenue from replacement production, our revenues could be adversely
affected.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY.
We compete against many providers of electronics manufacturing services. Certain
of our competitors have substantially greater resources and more geographically
diversified international operations than we do. Our competitors include large
independent manufacturers such as Celestica, Inc., Flextronics International
Ltd., Jabil Circuit, Inc, Sanmina-SCI Corporation and Solectron Corporation. We
also face competition from the manufacturing operations of our current and
future customers.
During periods of recession in the electronics industry, our competitive
advantages in the areas of quick turnaround manufacturing and responsive
customer service may be of reduced importance to electronics OEMs, who may
become more price sensitive. We may also be at a competitive disadvantage with
respect to price when compared to manufacturers with lower cost structures,
particularly those with offshore facilities located where labor and other costs
are lower.
We will experience intense competition, which is expected to intensify further
as more companies enter markets in which we operate, as existing competitors
expand capacity and as the industry consolidates. To compete effectively, we
must continue to provide technologically advanced manufacturing services,
maintain strict quality standards, respond flexibly and rapidly to customers'
design and schedule changes and deliver products globally on a reliable basis at
competitive prices. Our inability to do so could have an adverse effect on us.
WE MAY BE AFFECTED BY CONSOLIDATION IN THE ELECTRONICS INDUSTRY.
As a result of the current economic climate, consolidation in the electronics
industry may increase. Consolidation in the electronics industry could result in
an increase in excess
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manufacturing capacity as companies seek to close plants or take other steps to
increase efficiencies and realize synergies of mergers. The availability of
excess manufacturing capacity could create increased pricing and competitive
pressures for the electronics manufacturing services industry as a whole and
Benchmark in particular. In addition, consolidation could also result in an
increasing number of very large electronics companies offering products in
multiple sectors of the electronics industry. The growth of these large
companies, with significant purchasing power and market power, could also result
in increased pricing and competitive pressures for us. Accordingly, industry
consolidation could harm our business.
OUR INTERNATIONAL OPERATIONS MAY BE SUBJECT TO CERTAIN RISKS.
We currently operate outside the United States in Brazil, Ireland, Mexico,
Scotland, and Singapore. During the three months ended March 31, 2002 and 2001,
19.8% and 21.3%, respectively, of our sales were from our international
operations. These international operations may be subject to a number of risks,
including:
- - difficulties in staffing and managing foreign operations;
- - political and economic instability;
- - unexpected changes in regulatory requirements and laws;
- - longer customer payment cycles and difficulty collecting accounts
receivable;
- - export duties, import controls and trade barriers (including quotas);
- - governmental restrictions on the transfer of funds;
- - burdens of complying with a wide variety of foreign laws and labor
practices;
- - fluctuations in currency exchange rates, which could affect component
costs, local payroll, utility and other expenses; and
- - inability to utilize net operating losses incurred by our foreign
operations to reduce our U.S. income taxes.
We cannot assure you that our international operations will contribute
positively to our business, financial conditions or results of operations.
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. Certain significant transactions involving our
international operations may now require us to engage in hedging transactions to
attempt to mitigate our exposure to fluctuations in foreign exchange rates.
Effective Jan. 1, 2001, we adopted the provisions of the Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Certain Hedging Activities" and
SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging
Activities, an Amendment of SFAS 133".
SHORTAGES OR PRICE INCREASES OF COMPONENTS SPECIFIED BY OUR CUSTOMERS WOULD
DELAY SHIPMENTS AND ADVERSELY AFFECT OUR PROFITABILITY.
Substantially all of our sales are derived from electronics manufacturing
services in which we purchase components specified by our customers. In the
past, supply shortages have substantially curtailed production of all assemblies
using a particular component. In addition, industry-wide shortages of electronic
components, particularly of memory and logic devices, have occurred. If
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shortages of these components occur or if components received are defective, we
may be forced to delay shipments, which could have an adverse effect on our
profit margins. Because of the continued increase in demand for surface mount
components, we anticipate component shortages and longer lead times for certain
components to occur from time to time. Also, we typically bear the risk of
component price increases that occur between periodic repricings during the term
of a customer contract. Accordingly, certain component price increases could
adversely affect our gross profit margins.
OUR SUCCESS WILL CONTINUE TO DEPEND TO A SIGNIFICANT EXTENT ON OUR EXECUTIVES.
We depend significantly on certain key executives, including, but not limited
to, Donald E. Nigbor, Cary T. Fu, Steven A. Barton and Gayla J. Delly. The
unexpected loss of the services of any one of these executive officers would
have an adverse effect on us.
WE MUST SUCCESSFULLY INTEGRATE THE OPERATIONS OF ACQUIRED COMPANIES TO MAINTAIN
PROFITABILITY.
We have completed five acquisitions since July 1996. We may pursue additional
acquisitions over time. These acquisitions involve risks, including:
- - integration and management of the operations;
- - retention of key personnel;
- - integration of purchasing operations and information systems;
- - retention of the customer base of acquired businesses;
- - management of an increasingly larger and more geographically disparate
business; and
- - diversion of management's attention from other ongoing business
concerns.
Our profitability will suffer if we are unable to successfully integrate and
manage any future acquisitions that we might pursue, or if we do not achieve
sufficient revenue to offset the increased expenses associated with these
acquisitions.
WE MUST MAINTAIN OUR TECHNOLOGICAL AND MANUFACTURING PROCESS EXPERTISE.
The market for our manufacturing services is characterized by rapidly changing
technology and continuing process development. We are continually evaluating the
advantages and feasibility of new manufacturing processes. We believe that our
future success will depend upon our ability to develop and provide manufacturing
services which meet our customers' changing needs. This requires that we
maintain technological leadership and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely
basis. We cannot assure you that our process development efforts will be
successful.
ENVIRONMENTAL LAWS MAY EXPOSE US TO FINANCIAL LIABILITY AND RESTRICTIONS ON
OPERATIONS.
We are subject to a variety of federal, state, local and foreign environmental
laws and regulations relating to environmental, waste management, and health and
safety concerns, including the handling, storage, discharge and disposal of
hazardous materials used in or derived from our manufacturing processes. If we
or companies we acquire have failed or fail in the future to comply with such
laws and regulations, then we could incur liabilities and fines and our
operations could be suspended. Such laws and regulations could also restrict our
ability to modify or expand our facilities, could require us to acquire costly
equipment, or could impose other significant expenditures. In addition, our
operations may give rise to claims of property
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contamination or human exposure to hazardous chemicals or conditions.
OUR ACQUISITIONS HAVE SIGNIFICANTLY INCREASED OUR LEVERAGE.
Our acquisitions in 1999 have significantly increased our leverage ratio and
decreased our interest coverage ratio. At March 31, 2002 our debt to total
capitalization ratio was 28%, as compared to 30% at December 31, 2001, 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 our 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 or other purposes;
- - limit our flexibility in planning for, or reacting to changes in, our
business; and
- - make us more vulnerable in the event of a downturn in our business.
There can be no assurance that we will be able to meet our debt service
obligations.
PROVISIONS IN OUR CHARTER DOCUMENTS AND STATE LAW MAY MAKE IT HARDER FOR OTHERS
TO OBTAIN CONTROL OF BENCHMARK EVEN THOUGH SOME SHAREHOLDERS MIGHT CONSIDER SUCH
A DEVELOPMENT TO BE FAVORABLE.
Our shareholder rights plan, provisions of our amended and restated articles of
incorporation and the Texas Business Corporation Act may delay, inhibit or
prevent someone from gaining control of Benchmark through a tender offer,
business combination, proxy contest or some other method. These provisions
include:
- - a "poison pill" shareholder rights plan;
- - a statutory restriction on the ability of shareholders to take action by
less than unanimous written consent; and
- - a statutory restriction on business combinations with some types of
interested shareholders.
WE MAY EXPERIENCE FLUCTUATIONS IN QUARTERLY RESULTS.
Our quarterly results may vary significantly depending on various factors, many
of which are beyond our control. These factors include:
- - the volume of customer orders relative to our capacity;
- - customer introduction and market acceptance of new products;
- - changes in demand for customer products;
- - the timing of our expenditures in anticipation of future orders;
- - our effectiveness in managing manufacturing processes;
- - changes in cost and availability of labor and components;
- - changes in our product mix;
- - changes in economic conditions; and
- - local factors and events that may affect our production volume, such as
local holidays.
Additionally, as is the case with many high technology companies, a significant
portion of our shipments typically occurs in the last few weeks of a quarter. As
a result, our sales may shift from one quarter to the next, having a significant
effect on reported results.
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OUR STOCK PRICE IS VOLATILE.
Our common stock has experienced significant price volatility, and such
volatility may continue in the future. The price of our common stock could
fluctuate widely in response to a range of factors, including variations in our
reported financial results and changing conditions in the economy in general or
in our industry in particular. In addition, stock markets generally experience
significant price and volume volatility from time to time which may affect the
market price of our common stock for reasons unrelated to our performance.
WE ARE EXPOSED TO INTEREST RATE FLUCTUATIONS.
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. We currently have an interest rate
swap transaction agreement for a notional amount of $29.0 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 receive rate under the swap is based on
LIBOR. The interest rate swap expires in the year 2003.
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 ratio, 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 $29.0 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:
- Foreign currency exchange risk;
- Import and export duties, taxes and regulatory changes;
- Inflationary economies or currencies; and
- 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. Certain significant transactions involving our
international operations may now require us to engage in hedging transactions to
attempt to mitigate our exposure to fluctuations in foreign exchange rates. Our
primary foreign currency cash flows are in certain European countries, Brazil,
and Singapore.
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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.
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 (the "Court"). On March 18, 2002, the Court entered an interlocutory
judgement denying our claims against Seller, but preserving Seller's
counterclaims against Benchmark. On April 15, 2002, Benchmark and Seller jointly
filed with the Court a stipulation to dismiss Seller's claims and counterclaims
against Benchmark without prejudice allowing the Court to render a final
judgement in the case so that Benchmark may file an appeal to the Fifth Circuit
Court of Appeals (the "Fifth Circuit"). Under the stipulation, Seller also
agreed to refrain from refiling its claims while Benchmark pursued any appeals
with the Fifth Circuit. On May 1, 2002, the Court entered a final judgement
dismissing without prejudice the claims and counterclaims of Seller. We are
currently assessing the advisability of pursuing an appeal in the Fifth Circuit.
On April 14, 2000, Benchmark, along with numerous other companies, was
named as a defendant in a lawsuit filed in the United States District Court for
the District of Arizona 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 2, 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 judgement 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.
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.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
Benchmark Electronics, Inc.'s Current Report on Form 8-K filed
March 27, 2002 announcing interlocutory order in respect to
Benchmark Electronics, Inc.'s suit against J. M. Huber
Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 15, 2002.
BENCHMARK ELECTRONICS, INC.
(Registrant)
By: /s/ Donald E. Nigbor
--------------------
Donald E. Nigbor
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Gayla J. Delly
----------------------
Gayla J. Delly
Chief Financial Officer
(Principal Financial Officer)
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