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 June 30,
2017
__
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
or organization)
|
Identification
No.)
|
4141 N. Scottsdale Road, Ste. 300
|
85251
|
Scottsdale, Arizona
|
(Zip Code)
|
(Address of principal
executive offices)
|
|
|
|
|
(480)
372-4365
(Registrant
’
s
telephone number, including area code)
3000 Technology Drive, Angleton, Texas 77515
|
(Former name, former address and
former fiscal year, if changed since last report)
|
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 [
Ö
] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [
Ö
] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
Large
accelerated filer [
Ö
]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
(Do
not check if a smaller reporting company)
|
Smaller
reporting company [ ]
|
Emerging
growth company [ ]
|
|
If an emerging
growth company, indicate by check mark if the registrant has elected not to use
the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. [
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b–2 of the Act). Yes [ ] No [
Ö
]
As of August 7,
2017
,
there were 49,924,169 shares of Common Stock of Benchmark Electronics, Inc.,
par value $0.10 per share, outstanding.
PART I - FINANCIAL INFORMATION
Item 1.
Financial
Statements.
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(in thousands, except par value)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
749,311
|
|
$
|
681,433
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$4,535
|
|
|
|
|
|
|
|
|
and $2,838, respectively
|
|
391,830
|
|
|
440,692
|
|
|
Inventories
|
|
416,030
|
|
|
381,334
|
|
|
Prepaid expenses and other assets
|
|
39,177
|
|
|
28,057
|
|
|
Income taxes receivable
|
|
1,296
|
|
|
146
|
|
|
|
|
Total current assets
|
|
1,597,644
|
|
|
1,531,662
|
|
Property, plant and equipment, net of accumulated depreciation
of
|
|
|
|
|
|
|
|
|
|
$416,263 and $406,375, respectively
|
|
172,080
|
|
|
166,148
|
|
Goodwill
|
|
191,616
|
|
|
191,616
|
|
Deferred income taxes
|
|
4,366
|
|
|
6,572
|
|
Other, net
|
|
98,734
|
|
|
102,670
|
|
|
|
|
|
$
|
2,064,440
|
|
$
|
1,998,668
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Current installments of long-term debt and capital lease
obligations
|
$
|
15,333
|
|
$
|
12,396
|
|
|
Accounts payable
|
|
343,241
|
|
|
326,249
|
|
|
Income taxes payable
|
|
3,864
|
|
|
3,534
|
|
|
Accrued liabilities
|
|
83,684
|
|
|
70,202
|
|
|
|
|
Total current liabilities
|
|
446,122
|
|
|
412,381
|
|
Long-term debt and capital lease obligations, less current
installments
|
|
202,122
|
|
|
211,252
|
|
Other long-term liabilities
|
|
10,359
|
|
|
9,570
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
Preferred stock, $0.10 par value; 5,000 shares authorized, none
issued
|
|
—
|
|
|
—
|
|
|
Common stock, $0.10 par value; 145,000 shares authorized; issued
|
|
|
|
|
|
|
|
|
and outstanding – 49,845 and 49,330, respectively
|
|
4,985
|
|
|
4,933
|
|
|
Additional paid-in capital
|
|
637,796
|
|
|
626,306
|
|
|
Retained earnings
|
|
773,943
|
|
|
748,402
|
|
|
Accumulated other comprehensive loss
|
|
(10,887)
|
|
|
(14,176)
|
|
|
|
|
Total shareholders’ equity
|
|
1,405,837
|
|
|
1,365,465
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
$
|
2,064,440
|
|
$
|
1,998,668
|
See accompanying notes to condensed consolidated
financial statements.
1
BENCHMARK ELECTRONICS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(unaudited)
|
|
Three Months Ended
|
Six Months Ended
|
|
|
June 30,
|
June 30,
|
(in thousands, except per share data)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
616,904
|
$
|
579,342
|
$
|
1,183,405
|
$
|
1,128,567
|
Cost of sales
|
|
558,317
|
|
526,488
|
|
1,075,758
|
|
1,025,396
|
|
Gross
profit
|
|
58,587
|
|
52,854
|
|
107,647
|
|
103,171
|
Selling, general and administrative expenses
|
|
32,335
|
|
28,540
|
|
64,986
|
|
56,997
|
Amortization of intangible assets
|
|
2,481
|
|
2,972
|
|
4,962
|
|
5,775
|
Restructuring charges and other costs
|
|
1,544
|
|
3,602
|
|
3,055
|
|
6,391
|
|
Income from operations
|
|
22,227
|
|
17,740
|
|
34,644
|
|
34,008
|
Interest expense
|
|
(2,312)
|
|
(2,299)
|
|
(4,537)
|
|
(4,633)
|
Interest income
|
|
1,213
|
|
329
|
|
2,287
|
|
593
|
Other income (expense)
|
|
(830)
|
|
71
|
|
(911)
|
|
(152)
|
|
Income before income taxes
|
|
20,298
|
|
15,841
|
|
31,483
|
|
29,816
|
Income tax expense
|
|
3,122
|
|
3,156
|
|
4,620
|
|
6,079
|
|
Net
income
|
$
|
17,176
|
$
|
12,685
|
$
|
26,863
|
$
|
23,737
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.35
|
$
|
0.26
|
$
|
0.54
|
$
|
0.48
|
|
Diluted
|
$
|
0.34
|
$
|
0.26
|
$
|
0.54
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
49,766
|
|
49,323
|
|
49,640
|
|
49,586
|
|
Diluted
|
|
50,239
|
|
49,667
|
|
50,209
|
|
50,042
|
See accompanying notes to condensed consolidated
financial statements.
2
BENCHMARK
ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive
Income
(unaudited)
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
June 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
17,176
|
|
$
|
12,685
|
|
$
|
26,863
|
|
$
|
23,737
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
2,513
|
|
|
(832)
|
|
|
3,121
|
|
|
516
|
|
Unrealized gain on investments, net of tax
|
|
12
|
|
|
22
|
|
|
16
|
|
|
16
|
|
Unrealized gain (loss) on derivative, net of tax
|
|
(200)
|
|
|
(667)
|
|
|
165
|
|
|
(2,899)
|
|
Other
|
|
-
|
|
|
-
|
|
|
(13)
|
|
|
-
|
Other comprehensive income (loss)
|
|
2,325
|
|
|
(1,477)
|
|
|
3,289
|
|
|
(2,367)
|
|
|
|
Comprehensive income
|
$
|
19,501
|
|
$
|
11,208
|
|
$
|
30,152
|
|
$
|
21,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated
financial statements.
3
BENCHMARK
ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders’ Equity
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Shares
|
|
Par
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
Shareholders’
|
(in thousands)
|
|
Outstanding
|
|
Value
|
|
Capital
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2016
|
|
|
49,330
|
|
|
$ 4,933
|
|
$ 626,306
|
|
$ 748,402
|
|
|
$ (14,176)
|
|
|
$ 1,365,465
|
Stock-based compensation expense
|
|
|
-
|
|
|
-
|
|
4,505
|
|
-
|
|
|
-
|
|
|
4,505
|
Shares repurchased and retired
|
|
|
(61)
|
|
|
(6)
|
|
(672)
|
|
(1,322)
|
|
|
-
|
|
|
(2,000)
|
Stock options exercised
|
|
|
411
|
|
|
41
|
|
8,053
|
|
-
|
|
|
-
|
|
|
8,094
|
Vesting of restricted stock units
|
|
|
177
|
|
|
18
|
|
(18)
|
|
-
|
|
|
-
|
|
|
-
|
Shares withheld for taxes
|
|
|
(12)
|
|
|
(1)
|
|
(378)
|
|
-
|
|
|
-
|
|
|
(379)
|
Net income
|
|
|
-
|
|
|
-
|
|
-
|
|
26,863
|
|
|
-
|
|
|
26,863
|
Other comprehensive income
|
|
|
-
|
|
|
-
|
|
-
|
|
-
|
|
|
3,289
|
|
|
3,289
|
Balances, June 30, 2017
|
|
|
49,845
|
|
|
$ 4,985
|
|
$ 637,796
|
|
$ 773,943
|
|
|
$ (10,887)
|
|
|
$ 1,405,837
|
See accompanying notes to condensed consolidated
financial statements.
4
BENCHMARK
ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
$
|
26,863
|
|
$
|
23,737
|
|
Adjustments to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
18,414
|
|
|
21,160
|
|
|
|
Amortization
|
|
5,903
|
|
|
6,740
|
|
|
|
Deferred income taxes
|
|
2,103
|
|
|
2,649
|
|
|
|
Gain on the sale of property, plant and equipment
|
|
(167)
|
|
|
(136)
|
|
|
|
Asset impairments
|
|
-
|
|
|
121
|
|
|
|
Stock-based compensation expense
|
|
4,505
|
|
|
3,981
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
-
|
|
|
(122)
|
|
Changes in operating assets and liabilities, net of effects from
|
|
|
|
|
|
|
|
business acquisition:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
49,394
|
|
|
57,044
|
|
|
|
Inventories
|
|
(34,218)
|
|
|
37,034
|
|
|
|
Prepaid expenses and other assets
|
|
(9,658)
|
|
|
(5,864)
|
|
|
|
Accounts payable
|
|
16,675
|
|
|
23,084
|
|
|
|
Accrued liabilities
|
|
13,388
|
|
|
(10,036)
|
|
|
|
Income taxes
|
|
(673)
|
|
|
(1,258)
|
|
|
|
|
Net
cash provided by operations
|
|
92,529
|
|
|
158,134
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Proceeds from sales of investments at par
|
|
250
|
|
|
200
|
|
Additions to property, plant and equipment
|
|
(24,039)
|
|
|
(15,149)
|
|
Proceeds from the sale of property, plant and equipment
|
|
235
|
|
|
188
|
|
Additions to purchased software
|
|
(2,340)
|
|
|
(1,054)
|
|
Other
|
|
(105)
|
|
|
(83)
|
|
|
|
|
Net
cash used in investing activities
|
|
(25,999)
|
|
|
(15,898)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Proceeds from stock options exercised
|
|
8,094
|
|
|
823
|
|
Employee taxes paid for shares withheld
|
|
(379)
|
|
|
(536)
|
|
Excess tax benefits from stock-based compensation
|
|
-
|
|
|
122
|
|
Principal payments on long-term debt and capital lease
obligations
|
|
(6,185)
|
|
|
(6,149)
|
|
Share repurchases
|
|
(2,000)
|
|
|
(29,315)
|
|
Debt issuance costs
|
|
(433)
|
|
|
-
|
|
|
|
|
Net cash used in financing activities
|
|
(903)
|
|
|
(35,055)
|
Effect of exchange rate changes
|
|
2,251
|
|
|
72
|
Net increase in cash and cash equivalents
|
|
67,878
|
|
|
107,253
|
|
Cash and cash equivalents at beginning of year
|
|
681,433
|
|
|
465,995
|
|
Cash and cash equivalents at end of period
|
$
|
749,311
|
|
$
|
573,248
|
See accompanying notes to condensed consolidated
financial statements.
5
BENCHMARK ELECTRONICS, INC.
AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(amounts in
thousands,
except per share data, unless otherwise noted)
(unaudited)
Note
1 – Basis of Presentation
Benchmark Electronics, Inc. (the Company) is a Texas corporation
that provides worldwide integrated electronic manufacturing services (EMS),
engineering and design services, and precision machining services. The Company
provides services to original equipment manufacturers (OEMs) in the following industries:
industrial controls, aerospace and defense (A&D), telecommunications,
computers and related products for business enterprises, medical devices, and
test and instrumentation. The Company has manufacturing operations located in
the United States and Mexico (the Americas), Asia and Europe.
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (the SEC). The financial statements
reflect all normal and recurring adjustments necessary in the opinion of
management 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 year ended December 31, 2016 (the 2016 10-K).
Management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
assets and liabilities to prepare these financial statements in accordance with
generally accepted accounting principles in the United States (U.S. GAAP).
Actual results could differ from those estimates and assumptions.
Effective January 1, 2017, the Company adopted a new accounting
standard update that simplifies several aspects of the accounting for employee
share-based payment transactions, including accounting for income taxes,
forfeitures, and statutory withholding requirements, as well as classification
in the Condensed Consolidated Statements of Cash Flows. As required by this
standard, excess tax benefits recognized on stock-based compensation expense
are reflected in the accompanying Condensed Consolidated Income Statement as a
component of the provision for income taxes on a prospective basis (See Note 8).
As a result of including the income tax effects from excess tax benefits in
income tax expense, the effects of the excess tax benefits are no longer
included in the calculation of diluted shares outstanding, resulting in an
increase in the number of diluted shares outstanding. The Company adopted this
change in the method of calculating diluted shares outstanding on a prospective
basis. Additionally, excess tax benefits or deficiencies recognized on
stock-based compensation expense are classified as an operating activity in the
accompanying Condensed Consolidated Statements of Cash Flows. The Company has
applied this provision prospectively. Additionally, the Company is now required
to present the cost of shares withheld from the employee to satisfy the
employees’ income tax liability as a financing activity on the statement of
cash flows rather than as an operating cash flow. The Company adopted this
change retrospectively. As a result, for the six months ended June 30, 2016,
net cash provided by operations increased by $0.5 million with a corresponding
offset to net cash used in financing activities. The standard also allows for
the option to account for forfeitures as they occur when determining the amount
of compensation cost to be recognized, rather than estimating expected
forfeitures over the course of a vesting period. The Company elected to account
for forfeitures as they occur. The net cumulative effect to the Company from
the adoption of this accounting standard update was an increase to paid-in
capital of $0.2 million and a reduction to retained earnings of $0.2 million as
of January 1, 2017.
Certain reclassifications of prior period amounts have been made
to conform to the current period presentation. During the quarter ended
September 30, 2016, the Company concluded that it was appropriate
to classify amounts relating to the amortization of
intangible assets separately. Previously, the Company had reported these
amounts under the captions “cost of sales” and “selling, general and
administrative expenses”. These reclassifications had no effect on previously
reported net income.
Note 2 – Stock-Based
Compensation
The Company’s 2010 Omnibus Incentive Compensation Plan (the 2010
Plan) authorizes the Company, upon approval of the Compensation Committee of
the Board of Directors, to grant a variety of awards, including stock options,
restricted shares and restricted stock units (both time-based and
performance-based) and other forms of equity awards, or any combination
thereof, to any director, officer, employee or consultant (including any
prospective director, officer, employee or consultant) of the Company. Stock
options are granted to employees with an exercise price equal to the market
price of the Company’s common shares on the date of grant, generally vest over
a four-year period from the date of grant and have a term of ten years. Time-based
restricted stock units granted to employees generally vest over a four-year
period from the date of grant, subject to the continued employment of the
employee by the Company. Performance-based restricted stock unit awards
generally vest over a three-year performance cycle, which includes the year of
the grant, and are based upon the Company’s achievement of specified
performance metrics. Awards under the 2010 Plan to non-employee directors have
been in the form of restricted stock units, which vest in equal quarterly
installments over a one-year period, starting on the grant date
.
As of June 30, 2017
, 3.2
million
additional common shares were available for issuance under the Company’s 2010
Plan.
All share-based payments to employees, including grants of
employee stock options, are recognized in the financial statements based on
their grant date fair values. The total compensation cost recognized for
stock-based awards was
$2.3 million and $4.5 million for the three and six months ended
June 30, 2017, respectively, and $1.9 million and $4.0 million for the three
and six months ended June 30, 2016, respectively. The total income tax benefit
recognized in the condensed income statements for stock-based awards was $0.9
million and $1.6 million for the three and six months ended June 30, 2017, respectively,
and $0.7 million and $1.5 million for the three and six months ended June 30,
2016, respectively. Awards of restricted shares, restricted stock units, and
performance-based restricted stock units are valued at the closing market price
of the Company’s common shares on the date of grant. For performance-based
restricted stock units, compensation expense is based on the probability that
the performance goals will be achieved, which is monitored by management
throughout the requisite service period. When it becomes probable, based on the
Company’s expectation of performance during the measurement period, that more
or less than the previous estimate of the awarded shares will vest, an
adjustment to stock-based compensation expense is recognized as a change in
accounting estimate.
As of June 30, 2017, the
unrecognized compensation cost and remaining weighted-average amortization
related to stock-based awards were as follows:
|
|
|
|
|
|
Performance-
|
|
|
|
|
|
|
based
|
|
|
|
|
Restricted
|
|
Restricted
|
|
|
Stock
|
|
Stock
|
|
Stock
|
(in thousands)
|
|
Options
|
|
Units
|
|
Units
(1)
|
Unrecognized compensation cost
|
|
$ 1,223
|
|
|
$ 13,673
|
|
|
$ 5,195
|
Remaining weighted-average
|
|
|
|
|
|
|
|
|
amortization period
|
1.1 years
|
|
|
2.6 years
|
|
|
1.8 years
|
|
|
|
|
|
|
|
|
|
(1)
Based on the probable achievement of the performance goals
identified in each award.
|
The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model.
No
options were granted during the six months ended June 30, 2017 and 2016.
The total cash received by the Company as a result of stock option
exercises for the six months ended June 30, 2017 and 2016 was approximately
$8.1 million and $0.8 million, respectively. The actual tax benefit realized as
a result of stock option exercises and the vesting of other share-based awards
during the six months ended June 30, 2017 and 2016 was $3.8 million and $1.6
million, respectively. For the six months ended June 30, 2017 and 2016, the
total intrinsic value of stock options exercised was $5.2 million and $0.3
million, respectively.
The Company awarded performance-based restricted stock units to
employees during the six months ended June 30, 2017 and 2016. The number of
performance-based restricted stock units that may ultimately be earned will not
be determined until the end of the corresponding performance periods, and may
vary from as low as zero to as high as 2.5 times the target number depending on
the level of achievement of certain performance goals. The level of achievement
of these goals is based upon the audited financial results of the Company for
the last full calendar year within the performance period. The performance
goals consist of certain levels of achievement using the following financial
metrics: revenue growth, operating margin expansion, and return on invested
capital. If the performance goals are not met based on the Company’s financial
results, the applicable performance-based restricted stock units will not vest
and will be forfeited. Shares subject to forfeited performance-based restricted
stock units will be available for issuance under the 2010 Plan.
The following table summarizes activities relating to the
Company’s stock options:
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Number of
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
(in thousands, except per share data)
|
|
Options
|
|
|
Price
|
|
Term (Years)
|
|
Value
|
Outstanding as of December 31, 2016
|
|
1,197
|
|
|
$19.51
|
|
|
|
|
Exercised
|
|
(411)
|
|
|
19.71
|
|
|
|
|
Forfeited or expired
|
|
(11)
|
|
|
19.99
|
|
|
|
|
Outstanding as of June 30, 2017
|
|
775
|
|
|
$19.40
|
|
5.35
|
|
$ 10,004
|
Exercisable as of June 30, 2017
|
|
619
|
|
|
$18.46
|
|
3.64
|
|
$ 8,559
|
The
aggregate intrinsic value in the table above is before income taxes and is
calculated as the difference between the exercise price of the underlying
options and the Company’s closing stock price as of the last business day of
the period ended June 30, 2017 for options that had exercise prices that were
below the closing price.
The following table
summarizes the activities related to the Company’s time-based restricted stock
units:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
|
Grant Date
|
(in thousands, except per share data)
|
|
Units
|
|
|
Fair Value
|
Non-vested awards outstanding as of December 31, 2016
|
|
525
|
|
|
$22.57
|
Granted
|
|
264
|
|
|
31.50
|
Vested
|
|
(177)
|
|
|
21.01
|
Forfeited
|
|
(29)
|
|
|
23.39
|
Non-vested awards outstanding as of June 30, 2017
|
|
583
|
|
|
$27.05
|
The
following table summarizes the activities related to the Company’s
performance-based restricted stock units:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
(in thousands, except per share data)
|
|
|
Units
|
|
|
Fair Value
|
Non-vested units outstanding as of December 31, 2016
|
|
|
227
|
|
|
$21.43
|
Granted
(1)
|
|
|
144
|
|
|
31.40
|
Forfeited or expired
|
|
|
(50)
|
|
|
18.69
|
Non-vested units outstanding as of June 30, 2017
|
|
|
321
|
|
|
$26.35
|
(1)
Represents
target number of units that can vest based on the achievement of the performance
goals.
Note
3 – 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 equivalents. Stock equivalents include
common shares issuable upon the exercise of stock options and other equity
instruments, and are computed using the treasury stock method. Under the
treasury stock method, the exercise price of a share, and the amount of
compensation cost, if any, for future service that the Company has not yet
recognized are assumed to be used to repurchase shares in the current period.
The
following table sets forth the calculation of basic and diluted earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
(in thousands, except per share data)
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
Net income
|
|
$
|
17,176
|
|
$
|
12,685
|
|
$
|
26,863
|
|
$
|
23,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted-average number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding during the period
|
|
|
49,766
|
|
|
49,323
|
|
|
49,640
|
|
|
49,586
|
Incremental common shares attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise of dilutive options
|
|
|
318
|
|
|
287
|
|
|
341
|
|
|
289
|
Incremental common shares attributable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to outstanding restricted stock units
|
|
|
155
|
|
|
57
|
|
|
228
|
|
|
167
|
Denominator for diluted earnings per share
|
|
|
50,239
|
|
|
49,667
|
|
|
50,209
|
|
|
50,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.35
|
|
$
|
0.26
|
|
$
|
0.54
|
|
$
|
0.48
|
Diluted earnings per share
|
|
$
|
0.34
|
|
$
|
0.26
|
|
$
|
0.54
|
|
$
|
0.47
|
Options to purchase 1.0 million common
shares for both the three- and six-month periods ended June 30, 2016 were not
included in the computation of diluted earnings per share because their effect
would have been anti-dilutive.
Note 4 – Goodwill and Other Intangible Assets
Goodwill
allocated to the Company’s reportable segments was as follows:
(in thousands)
|
|
Americas
|
|
Asia
|
|
Total
|
Goodwill as of December 31, 2016 and June 30, 2017
|
$
|
153,514
|
$
|
38,102
|
$
|
191,616
|
|
|
|
|
|
|
|
Other assets consist primarily of acquired
identifiable intangible assets and capitalized purchased software costs.
Intangible assets as of June 30, 2017 and
December 31, 2016 were as follows:
|
|
As of June 30, 2017
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
(in thousands)
|
|
Amount
|
|
Amortization
|
|
Amount
|
Customer relationships
|
$
|
100,144
|
|
$
|
(31,145)
|
|
$
|
68,999
|
Purchased software costs
|
|
33,936
|
|
|
(29,038)
|
|
|
4,898
|
Technology licenses
|
|
26,800
|
|
|
(15,968)
|
|
|
10,832
|
Trade names and trademarks
|
|
7,800
|
|
|
-
|
|
|
7,800
|
Other
|
|
868
|
|
|
(249)
|
|
|
619
|
Total
|
$
|
169,548
|
|
$
|
(76,400)
|
|
$
|
93,148
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
(in thousands)
|
|
Amount
|
|
Amortization
|
|
Amount
|
Customer relationships
|
$
|
100,053
|
|
$
|
(27,883)
|
|
$
|
72,170
|
Purchased software costs
|
|
31,582
|
|
|
(28,508)
|
|
|
3,074
|
Technology licenses
|
|
26,800
|
|
|
(14,189)
|
|
|
12,611
|
Trade names and trademarks
|
|
7,800
|
|
|
-
|
|
|
7,800
|
Other
|
|
868
|
|
|
(237)
|
|
|
631
|
Total
|
$
|
167,103
|
|
$
|
(70,817)
|
|
$
|
96,286
|
Customer relationships are being amortized
on a straight-line basis over a period of 10 to 14 years. Capitalized purchased
software costs are being amortized on a straight-line basis over the estimated
useful life of the related software, which ranges from 2 to 10 years. Technology
licenses are being amortized over their estimated useful lives in proportion to
the economic benefits consumed. The Company’s acquired trade names and trademarks
have been determined to have an indefinite life.
Amortization for the six months ended June 30, 2017 and 2016 was as
follows:
|
Six Months Ended
|
|
June 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
Amortization of intangible assets
|
$
|
4,962
|
|
$
|
5,775
|
Amortization of capitalized purchased software costs
|
|
516
|
|
|
587
|
Amortization of debt costs
|
|
425
|
|
|
378
|
|
$
|
5,903
|
|
$
|
6,740
|
The estimated future amortization expense
of acquired intangible assets for each of the next five years is as follows (in
thousands):
Year ending December 31,
|
|
Amount
|
2017 (remaining six months)
|
$
|
5,640
|
2018
|
|
10,245
|
2019
|
|
10,084
|
2020
|
|
9,316
|
2021
|
|
6,389
|
Note
5 – Borrowing Facilities
The Company has a
$430 million Credit Agreement (the Credit Agreement) by and among Benchmark,
JPMorgan Chase Bank, N.A. as
administrative agent and collateral agent (the Administrative Agent), and the
financial institutions acting as lenders thereunder from time to time
.
This Credit Agreement
provides for a five-year $200 million revolving credit facility and
a five-year $230 million term loan
facility (the Term Loan), both with a maturity date of November 12, 2020.
The revolving credit
facility is available for general corporate purposes, may be drawn in foreign
currencies up to an amount equivalent to $20 million, and may be used for letters
of credit up to $20 million. The Credit Agreement includes an accordion
feature, pursuant to which total commitments under the facility may be
increased by an additional $150 million, subject to the satisfaction of certain
conditions.
The Term Loan is payable in minimum quarterly principal installments
of $2.9 million in 2017, $4.3 million in 2018, $5.8 million in 2019, and $8.6
million in 2020, with the balance payable on the maturity date.
Interest on outstanding
borrowings under the Credit Agreement accrues, at our option, at (a) the
adjusted London interbank offered rate (LIBOR) plus 1.25% to 2.25%, or (b) the
alternative base rate plus 0.25% to 1.25%, and is payable quarterly in arrears.
The alternative base rate is equal to the highest of (i) the Administrative
Agent’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the
adjusted LIBOR rate plus 1.00%. The margin on the interest rates fluctuates
based upon the ratio of the Company’s debt to its consolidated EBITDA.
As of June 30, 2017,
$159.6 million of the outstanding debt under the Credit Agreement was
effectively at a fixed interest rate as a result of a $159.6 million notional
interest rate swap contract discussed in Note 14. A commitment fee of 0.30% to
0.40% per annum (based on the debt to EBITDA ratio) on the unused portion of
the revolving credit line is payable quarterly in arrears.
The Credit Agreement is generally secured by a pledge of (a) all
the capital stock of the Company’s domestic subsidiaries and 65% of the capital
stock of its directly owned foreign subsidiaries, (b) any indebtedness owed to Benchmark
and its subsidiaries and (c) all or substantially all other personal property
of Benchmark and its domestic subsidiaries (including, accounts receivable,
inventory and fixed assets of Benchmark and its domestic subsidiaries), in each
case, subject to customary exceptions and limitations.
The Credit Agreement contains
financial covenants as to debt leverage and interest coverage, and certain
customary affirmative and negative covenants, including restrictions on our
ability to incur additional debt and liens, pay dividends, repurchase shares,
sell assets and merge or consolidate with other persons. Amounts due under the
Credit Agreement may be accelerated upon specified events of default, including
a failure to pay amounts due, breach of a covenant, material inaccuracy of a
representation, or occurrence of bankruptcy or insolvency, subject, in some
cases, to cure periods.
As of June 30, 2017 and December 31,
2016, the Company was in compliance with all of these covenants and
restrictions.
As of June 30, 2017, the Company had $212.8 million in borrowings
outstanding under the Term Loan facility and $2.6 million in letters of credit
outstanding under the revolving credit facility. The Company
has $197.4 million available for future borrowings under
the revolving credit facility.
The Company’s Thailand subsidiary has a multi-purpose credit
facility with Kasikornbank Public Company Limited (the Thai Credit Facility)
that provides for 350 million Thai baht working capital availability. The Thai
Credit Facility is secured by land and buildings in Thailand owned by the
Company’s Thailand subsidiary. Availability of funds under the Thai Credit
Facility is reviewed annually and is currently accessible through October 2017.
As of both June 30, 2017 and 2016, there were no working capital borrowings
outstanding under the facility.
Note 6 – Inventories
|
Inventory costs are summarized as follows:
|
|
|
June 30,
|
|
December 31,
|
(in thousands)
|
|
2017
|
|
|
2016
|
Raw
materials
|
$
|
270,826
|
|
$
|
233,111
|
Work
in process
|
|
112,054
|
|
|
113,496
|
Finished
goods
|
|
33,150
|
|
|
34,727
|
|
$
|
416,030
|
|
$
|
381,334
|
Note
7 – Accounts Receivable Sale Program
In connection with a trade accounts receivable sale program with
an unaffiliated financial institution, the Company may elect to sell, at a
discount, on an ongoing basis, up to a maximum of $40.0 million, of specific
accounts receivable at any one time. The program was executed on March 29,
2017, is an uncommitted facility and is scheduled to expire in one year with
options to automatically extend the agreement, although any party may elect to
terminate the agreement upon 60 days prior notice.
During the three months ended June 30, 2017, the Company sold $40.0
million of accounts receivable under this program, and in exchange, the Company
received cash proceeds of $39.9 million, net of the discount. During the six
months ended June 30, 2017, the Company sold $65.0 million of accounts
receivable under this program, and in exchange, the Company received cash
proceeds of $64.9 million, net of the discount. The loss on the sale resulting
from the discount during the three and six months ended June 30, 2017 was not
material, and was recorded to other expense within the Condensed Consolidated
Statements of Income.
Note
8 – Income Taxes
|
Income tax expense consists of the following:
|
|
Six Months Ended
|
|
June 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
Federal – current
|
$
|
(1,024)
|
|
$
|
9
|
Foreign – current
|
|
3,379
|
|
|
3,186
|
State – current
|
|
162
|
|
|
235
|
Deferred
|
|
2,103
|
|
|
2,649
|
|
$
|
4,620
|
|
$
|
6,079
|
Income tax expense differs from the amount
computed by applying the U.S. federal statutory income tax rate to income
before income tax primarily due to the mix of taxable income by taxing
jurisdiction, the impact of tax incentives and tax holidays in foreign
locations, and state income taxes (net of federal benefit). The decrease in
income tax expense during 2017 is primarily the result of a tax incentive in
China and the recognition of excess tax benefits in the U.S. attributable to
the adoption of an accounting standard effective January 1, 2017. See Note 1.
Under this standard, the excess tax benefits or deficiencies resulting from the
exercise or vesting of awards are included in income tax expense in the
reporting period in which they occur. Therefore, the tax effect of stock option
exercises and RSU vesting is not spread over the entire year through the use of
the annual effective tax rate, but instead is recorded entirely in the period
in which the tax deduction arose. Accordingly, the Company recorded the income
tax benefit as a discrete item for the six months ended June 30, 2017. The
Company’s effective tax rate could fluctuate significantly on a quarterly basis
due to the tax effects of stock-based compensation.
The
Company considers earnings from 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 subject to U.S. income taxes and foreign withholding taxes, reduced by any
applicable foreign tax credits. Determination of the amount of any unrecognized
deferred tax liability on these undistributed earnings is not practicable.
The Company has been granted certain tax
incentives, including tax holidays, for its subsidiaries in China, Malaysia and
Thailand that will expire at various dates, unless extended or otherwise renegotiated,
through 2018 in China, 2021 in Malaysia and 2028 in Thailand, and are subject
to certain conditions with which the Company expects to comply.
The net impact of these tax incentives was to lower income tax
expense for the six months ended June 30, 2017 and 2016 by approximately $4.2
million (approximately 0.08 per diluted share) and $2.0 million (approximately
$0.04 per diluted share), respectively, as follows:
|
Six Months Ended
|
|
June 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
China
|
$
|
471
|
|
$
|
-
|
Malaysia
|
|
1,773
|
|
|
707
|
Thailand
|
|
1,926
|
|
|
1,337
|
|
$
|
4,170
|
|
$
|
2,044
|
As of June 30, 2017, the total amount of
the reserve for uncertain tax benefits including interest was $9.0 million. The
reserve is classified as a current or long-term liability in the condensed consolidated
balance sheets based on the Company’s expectation of when the items will be
settled. The amount of accrued
potential interest on unrecognized tax
benefits included in the reserve as of June 30, 2017, was $17.0 thousand. There
was no reserve for potential penalties. During the three months ended June 30,
2017, we recorded an additional $0.9 million of additional accruals related to
the open examination for a subsidiary in Thailand for the years 2004 to 2005. We
received a denial of our appeal to the local tax authorities for this open
examination and have recorded an accrual for the remaining unrecognized tax
benefit related to this examination.
The Company and its subsidiaries in Brazil, China, Ireland,
Luxembourg, Malaysia, Mexico, the Netherlands, Romania, Singapore, Thailand and
the United States remain open to examination by the various local taxing
authorities, in total or in part, for fiscal years 2011 to 2016.
The Company is currently under examination by the U.S. Internal
Revenue Service for 2014. In addition, Secure Communication Systems, Inc. and its
subsidiaries (the Secure Group), companies that the Company acquired on
November 11, 2015, are under a U.S. income tax audit for calendar years 2013,
2014 and through November 11, 2015. This audit is for the period of time prior
to the acquisition of the Secure Group by the Company, and any resulting tax
liabilities are the responsibility of the seller. The Company does not expect
to incur any income tax costs with respect to this audit. During the course of
such examinations, disputes may occur as to matters of fact or law. Also, in
most tax jurisdictions, the passage of time without examination will result in
the expiration of applicable statutes of limitations thereby precluding
examination of the tax period(s) for which such statute of limitation has
expired. The Company believes that it has adequately provided for its tax
liabilities.
Note 9 – Segment and Geographic Information
The Company currently has manufacturing facilities in the Americas,
Asia and Europe to serve its customers. The Company is operated and managed
geographically, and management evaluates performance and allocates the
Company’s resources on a geographic basis. Intersegment sales are generally
recorded at prices that approximate arm’s length transactions. Operating
segments’ measure of profitability is based on income from operations. The
accounting policies for the reportable operating segments are the same as for
the Company taken as a whole. The Company has three reportable operating
segments: Americas, Asia and Europe.
Information
about operating segments is as follows:
|
|
Three Months Ended
|
Six Months Ended
|
|
|
June 30,
|
June 30,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
405,602
|
$
|
395,354
|
$
|
780,161
|
$
|
748,168
|
|
Asia
|
|
191,207
|
|
162,825
|
|
366,098
|
|
336,195
|
|
Europe
|
|
43,408
|
|
40,505
|
|
83,824
|
|
82,520
|
|
Elimination of intersegment sales
|
|
(23,313)
|
|
(19,342)
|
|
(46,678)
|
|
(38,316)
|
|
|
$
|
616,904
|
$
|
579,342
|
$
|
1,183,405
|
$
|
1,128,567
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
5,415
|
$
|
5,842
|
$
|
10,920
|
$
|
11,608
|
|
Asia
|
|
2,973
|
|
4,129
|
|
6,139
|
|
8,249
|
|
Europe
|
|
679
|
|
692
|
|
1,336
|
|
1,396
|
|
Corporate
|
|
2,977
|
|
3,330
|
|
5,922
|
|
6,647
|
|
|
$
|
12,044
|
$
|
13,993
|
$
|
24,317
|
$
|
27,900
|
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
18,611
|
$
|
21,434
|
$
|
33,807
|
$
|
39,479
|
|
Asia
|
|
20,044
|
|
11,665
|
|
32,365
|
|
22,557
|
|
Europe
|
|
2,571
|
|
2,536
|
|
4,952
|
|
5,488
|
|
Corporate and intersegment eliminations
|
|
(18,999)
|
|
(17,895)
|
|
(36,480)
|
|
(33,516)
|
|
|
$
|
22,227
|
$
|
17,740
|
$
|
34,644
|
$
|
34,008
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
5,770
|
$
|
5,387
|
$
|
9,036
|
$
|
9,596
|
|
Asia
|
|
8,714
|
|
1,464
|
|
11,124
|
|
4,573
|
|
Europe
|
|
2,466
|
|
491
|
|
3,380
|
|
672
|
|
Corporate
|
|
1,851
|
|
1,024
|
|
2,839
|
|
1,362
|
|
|
$
|
18,801
|
$
|
8,366
|
$
|
26,379
|
$
|
16,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
December 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Total assets:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
|
|
$
|
910,825
|
$
|
864,388
|
|
Asia
|
|
|
|
|
|
678,513
|
|
634,838
|
|
Europe
|
|
|
|
|
|
407,716
|
|
393,443
|
|
Corporate and other
|
|
|
|
|
|
67,386
|
|
105,999
|
|
|
|
|
|
|
$
|
2,064,440
|
$
|
1,998,668
|
Geographic
net sales information reflects the destination of the product shipped.
Long-lived assets information is based upon the physical location of the asset.
|
|
Three Months Ended
|
Six Months Ended
|
|
|
June 30,
|
June 30,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Geographic net sales:
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
413,568
|
$
|
412,203
|
$
|
787,967
|
$
|
797,191
|
|
Asia
|
|
115,782
|
|
82,257
|
|
210,857
|
|
153,719
|
|
Europe
|
|
71,385
|
|
57,583
|
|
147,462
|
|
122,527
|
|
Other Foreign
|
|
16,169
|
|
27,299
|
|
37,119
|
|
55,130
|
|
|
$
|
616,904
|
$
|
579,342
|
$
|
1,183,405
|
$
|
1,128,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
$
|
164,691
|
$
|
167,367
|
|
Asia
|
|
|
|
|
|
72,641
|
|
67,998
|
|
Europe
|
|
|
|
|
|
10,750
|
|
8,415
|
|
Other
|
|
|
|
|
|
22,218
|
|
24,290
|
|
|
|
|
|
|
$
|
270,300
|
$
|
268,070
|
|
|
|
|
|
|
|
|
|
|
Note 10 – Supplemental Cash Flow and Non-Cash Information
|
The following information concerns supplemental disclosures of
cash payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
Income taxes paid, net
|
$
|
1,709
|
|
$
|
2,703
|
|
$
|
2,525
|
|
$
|
4,820
|
Interest paid
|
|
2,082
|
|
|
2,113
|
|
|
4,296
|
|
|
4,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
in accounts payable
|
|
|
|
|
|
|
$
|
2,074
|
|
$
|
1,291
|
Note
11 – Contingencies
The Company is involved in various 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.
The
Company previously reported charges incurred in 2014 for the write-down of
inventory and provisions to accounts receivable associated with the October 2014
bankruptcy filing of GT Advanced Technologies (GTAT). The Company noted then
that its actual loss could differ from the amounts originally recorded.
In October 2016, the Company learned
that the trustee in the GTAT bankruptcy proceedings filed adversary actions
against three of the Company’s subsidiaries to recover payments aggregating
approximately $4.4 million, which were received by the subsidiaries during the
90 days preceding GTAT’s bankruptcy filing,
on the
premise that such payments were made during the preference period and therefore
may be avoidable as preferential or constructively fraudulent, among other
theories. The Company has agreed to resolve the matter for an immaterial amount.
Note
12 – Impact of Recently Enacted Accounting Standards
In May 2017, the Financial Accounting Standards Board (FASB) issued
a new accounting standards update that provides guidance about which changes to
the terms or conditions of a share-based payment award require an entity to
apply modification accounting. This update is effective for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017,
with early adoption permitted. The Company is evaluating the impact of the
adoption of this guidance on its consolidated financial statements and related
disclosures but does not expect it to have a material impact. The Company plans
to adopt the new guidance effective January 1, 2018.
In August 2016, the FASB issued a new accounting standards update,
which seeks to reduce the existing diversity in how certain cash receipts and
cash payments are presented and classified in the statement of cash flows. This
update is effective for fiscal years and interim periods beginning after
December 15, 2017, with early adoption permitted. The Company is currently
evaluating the impact that the adoption of this update will have on its
consolidated financial statements.
In June 2016, the FASB issued a new accounting standards update,
which replaces the current incurred loss impairment methodology with a
methodology that reflects expected credit losses and requires consideration of
a broader range of reasonable and supportable information to inform credit loss
estimates. This update is effective for annual reporting periods beginning
after December 15, 2019. The Company does not expect the implementation of this
update to have a material impact on its consolidated financial position,
results of operations or cash flows.
In February 2016, the FASB issued a new accounting standards
update changing the accounting for leases and including a requirement to record
all leases on the consolidated balance sheets as assets and liabilities. This
update is effective for fiscal years beginning after December 15, 2018. The
Company will adopt this update effective January 1, 2019, which will impact its
consolidated balance sheet. The Company is currently evaluating the impact this
standard will have on its consolidated financial statements.
In May 2014, the FASB issued a new standard that will supersede
most of the existing revenue recognition requirements in current U.S. GAAP. The
new standard will require companies to recognize revenue in an amount
reflecting the consideration to which they expect to be entitled in exchange
for transferring goods or services to a customer. It will also require
significantly expanded disclosures, and will be effective for the Company January
1, 2018. The new standard will permit the use of either the retrospective or
cumulative effect transition method. Under the new standard, the Company
anticipates that a majority of its sales from manufacturing activities will
change to an over-time model; currently the Company accounts for these under a
point-in-time recognition model. Based on its analysis to date, the Company
expects to adopt the new guidance under the retrospective approach. The Company
has reviewed its significant customer contracts and is in the process of
quantifying the potential effects the new standard will have on its
consolidated financial statements and is working on the design and
implementation of the related internal controls. The Company believes it is
likely to have a material impact on the timing of revenue recognition and on
the Company’s balance sheet, primarily related to a reduction in finished goods
and work in process inventories and a corresponding increase in contract assets
for unbilled receivables.
The Company has determined that no other recently issued
accounting standards will have a material impact on its consolidated financial
position, results of operations or cash flows, or will not apply to its operations.
Note
13 – Restructuring Charges
The Company has undertaken initiatives to restructure its business
operations to improve utilization and realize cost savings. These initiatives
have included changing the number and location of production facilities,
largely to align capacity and infrastructure with current and anticipated
customer demand. This alignment includes transferring programs from higher cost
geographies to lower cost geographies. The process of restructuring entails
moving production between facilities, reducing staff levels, realigning our
business processes, reorganizing our management and other activities.
The Company recognized restructuring charges during
2017
and 2016
primarily related to the closure of
facilities in the Americas, capacity reduction and reductions in workforce in
certain facilities across various regions.
The following
table summarizes the
2017
activity in the accrued restructuring
balances related to the restructuring activities initiated prior to June 30,
2017:
|
|
|
Balance as of
|
|
|
|
|
|
|
|
Foreign
|
|
Balance as of
|
|
|
|
December 31,
|
|
Restructuring
|
|
Cash
|
|
Exchange
|
|
June 30,
|
(in thousands)
|
|
|
2016
|
|
|
|
Charges
|
|
|
Payment
|
|
Adjustments
|
|
2017
|
2017 Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
-
|
|
|
$
|
655
|
|
$
|
(642)
|
|
$
|
-
|
|
$
|
13
|
|
Leased facilities and equipment
|
|
|
-
|
|
|
|
105
|
|
|
(105)
|
|
|
-
|
|
|
-
|
|
Other exit costs
|
|
|
-
|
|
|
|
241
|
|
|
(23)
|
|
|
-
|
|
|
218
|
|
|
|
-
|
|
|
|
1,001
|
|
|
(770)
|
|
|
-
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
738
|
|
|
|
40
|
|
|
(439)
|
|
|
-
|
|
|
339
|
|
Other exit costs
|
|
|
545
|
|
|
|
854
|
|
|
(1,333)
|
|
|
2
|
|
|
68
|
|
|
|
1,283
|
|
|
|
894
|
|
|
(1,772)
|
|
|
2
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,283
|
|
|
$
|
1,895
|
|
$
|
(2,542)
|
|
$
|
2
|
|
$
|
638
|
Note 14 – Fair Value
Fair value is defined as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. A three-tier fair value hierarchy of inputs is employed to
determine fair value measurements.
·
Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets
and liabilities.
·
Level
2 inputs are observable prices that are not quoted on active exchanges, such as
quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
·
Level
3 inputs are unobservable inputs employed for measuring the fair value of
assets or liabilities.
This hierarchy requires the
Company to use observable market data, when available, and to minimize the use of
unobservable inputs when determining fair value.
The Company’s financial
instruments include cash equivalents, accounts and other receivables, accounts
payable, accrued liabilities and long-term debt and capital lease obligations.
The Company believes that the carrying values of these instruments approximate
fair value. As of June 30, 2017, the Company’s long-term investments and
derivative instruments were recorded at fair value using Level 3 inputs. The
Company uses
derivative instruments to manage the
variability of foreign currency obligations and interest rates. The Company
does not enter into derivatives for speculative purposes.
The forward currency exchange contracts
in place as of June 30, 2017 have not been designated as accounting hedges and,
therefore, changes in fair value are recorded within the Condensed Consolidated
Statements of Income.
The Company has an interest rate
swap agreement, which had a notional amount of $159.6 million and $163.9 million
as of June 30, 2017 and December 31, 2016, respectively, to hedge a portion of
its interest rate exposure on outstanding borrowings under the Credit
Agreement. Under this interest rate swap agreement, the Company receives
variable rate interest payments based on the one-month LIBOR rate and pays
fixed rate interest payments. The fixed interest rate for the contract is
1.4935%. The effect of this swap is to convert a portion of the floating rate
interest expense to fixed interest rate expense. Based on the terms of the
interest rate swap contract and the underlying borrowings outstanding under the
Credit Agreement, the interest rate contract was determined to be effective,
and thus qualifies and has been designated as a cash flow hedge. As such, changes
in the fair value of the interest rate swap are recorded in other comprehensive
income on the accompanying Condensed Consolidated Balance Sheets until earnings
are affected by the variability of cash flows. The fair value of the interest
rate swap was a $0.7 million asset as of June 30, 2017 and a $0.5 million asset
as of December 31, 2016.
During
the six months ended June 30, 2017, the Company recorded unrealized gain of $0.3
million ($0.2 million net of tax) on the swap in other comprehensive income.
See Note 15.
Note 15
–
Accumulated
Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component
were as follows:
|
|
|
|
Foreign
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
currency
|
|
|
Derivative
|
|
gain (loss) on
|
|
|
|
|
|
|
|
|
|
translation
|
|
|
instruments,
|
|
investments,
|
|
|
|
|
|
(in thousands)
|
|
|
adjustments
|
|
|
net of tax
|
|
|
net of tax
|
|
|
Other
|
|
|
Total
|
Balances, December 31, 2016
|
|
$
|
(14,544)
|
|
$
|
286
|
|
$
|
(74)
|
|
$
|
156
|
|
$
|
(14,176)
|
|
Other comprehensive gain before reclassifications
|
|
|
3,121
|
|
|
165
|
|
|
16
|
|
|
(13)
|
|
|
3,289
|
Net current period other comprehensive gain (loss)
|
|
|
3,121
|
|
|
165
|
|
|
16
|
|
|
(13)
|
|
|
3,289
|
Balances, June 30, 2017
|
|
$
|
(11,423)
|
|
$
|
451
|
|
$
|
(58)
|
|
$
|
143
|
|
$
|
(10,887)
|
See
Note 14 for further explanation of the change in derivative instruments that is
recorded to Accumulated Other Comprehensive Loss
.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report (this Report) contains 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
(the Exchange Act). These forward-looking statements are identified as any
statement that does not relate strictly to historical or current facts and may include
words such as “anticipate,” “believe,” “intend,” “plan,” “projection,”
“forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,”
“will,” or the negative or other variations thereof. In particular, statements,
whether express or implied, concerning future operating results or the ability
to generate sales, income or cash flow are forward-looking statements. Undue
reliance should not be placed on any forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions that are beyond our ability to control or
predict, including those discussed in Part I, Item 1A of the 2016 10-K and any
added under
Part
II, Item 1A of this Report. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes,
including the future results of our operations, may vary materially from those
indicated. The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and accompanying notes, and the 2016
10-K.
OVERVIEW
We
are a worldwide provider of integrated electronics manufacturing services
(EMS), engineering and design services, and precision machining services. We
provide our services to original equipment manufacturers (OEMs) in the
following industries: industrial controls, aerospace and defense (A&D),
telecommunications, computers and related products for business enterprises,
medical devices, and test and instrumentation. Our services include comprehensive
and integrated design and manufacturing services and solutions—from initial
product concept to volume production, including direct order fulfillment and
aftermarket services. In this Report, references to Benchmark or the Company or
use of the words “we”, “our” and “us” include the subsidiaries of Benchmark
unless otherwise noted.
Our
primary goal is to drive revenue growth at the right balance of mix and
profitability as we continue transitioning our portfolio to the higher-value markets
of A&D, Industrials, Medical and Test & Instrumentation. These
higher-value markets offer greater outsourcing opportunities, longer lifecycle
products and extended manufacturing contracts with customers who have greater
outsourcing needs and require higher value-added and engineering-led solutions
than customers in our traditional markets. We remain focused on key initiatives
critical to our success, including the optimization of our global network; the
implementation of our market-sector sales organization; and the expansion of
our engineering solutions capabilities.
Our
operations comprise three principal areas:
·
Manufacturing
and assembly operations
, which includes printed circuit board assemblies
(PCBAs) and subsystem assembly, box build and systems integration. Systems
integration is often building a finished assembly that includes PCBAs, complex
subsystem assemblies, mechatronics, displays, optics, and other components.
These final products may be configured to order and delivered directly to the
end customer across all the industries we serve.
·
Precision
technology manufacturing
, which complements our electronic manufacturing
expertise by providing further vertical integration of critical mechanical
components. These capabilities include precision machining, advanced metal
joining, assembly and functional testing primarily for customers in the test
& instrumentation market (which includes semiconductor capital equipment)
as well as the medical and aerospace markets.
·
Specialized
engineering services and solutions
, which includes new product concept
development, design for systems, sub-systems, and components, printed circuit
board layout, prototyping,
automation and test
development. We provide these services across all the industries we serve, but
lead with engineering to manufacturing solutions primarily in regulated
industries such as medical, complex industrials, aerospace and defense.
Our
core strength lies in our ability to provide concept-to-production solutions in
support of our customers. Our global manufacturing presence increases our
ability to respond to our customers’ needs by providing accelerated
time-to-market and time-to-volume production of high-quality products –
especially for complex products with lower volume and higher mix in regulated markets.
These capabilities enable us to build strong strategic relationships with our
customers and to become an integral part of their operations.
Our
customers often face challenges in designing supply chains, planning demand,
procuring materials and managing their inventories efficiently due to
fluctuations in their customer demand, product design changes, short product
life cycles and component price fluctuations. We seek to employ enterprise
resource planning (ERP) systems and lean manufacturing principles to manage the
procurement and manufacturing processes in an efficient and cost-effective
manner so that, where possible, components arrive on a just-in-time, as-and-when-needed
basis. We are a significant purchaser of electronic components and other raw
materials and can capitalize on the economies of scale associated with our
relationships with suppliers to negotiate price discounts, obtain components
and other raw materials that are in short supply, and return excess components.
Our agility and expertise in supply chain management and our relationships with
suppliers across the supply chain help enable us to reduce our customers’ cost
of goods sold and inventory exposure.
We recognize revenue
from the sale of manufactured products built to customer specifications and
excess inventory when title and risk of ownership have passed, the price to the
buyer is fixed or determinable and recoverability is reasonably
assured, which generally is when the goods are shipped. Revenue from
design, development and engineering services is recognized when the services
are performed and collectibility is reasonably certain. Such services provided
under fixed price contracts are generally accounted for using the
percentage-of-completion method. We generally assume no significant obligations
after shipment as we typically warrant workmanship only;
accordingly, our warranty provisions are generally not significant.
2017 Highlights
Sales for the three months
ended June 30, 2017 increased 6% to $616.9 million compared to $579.3 million
for 2016. During the second quarter of 2017, sales to customers in our various
industry sectors fluctuated from the comparable 2016 period as follows:
·
Industrials decreased by 14%,
·
A&D increased by 16%,
·
Computing increased by 29%,
·
Medical decreased by 6%,
·
Telecommunications decreased by 12%,
and
·
Test & Instrumentation
increased by 47%.
The revenue increase was
driven by strong Test & Instrumentation growth serving the semi-capital
equipment market, A&D growth primarily from defense programs, and Computing
strength from existing storage customers and new security customers.
Our sales depend 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, can adversely affect us. A substantial
percentage of our sales is made to a small number of customers, and the
loss of a major customer, if not replaced, would
adversely affect us. Sales to our 10 largest customers represented 45% and 43%
of our sales in the six months ended June 30, 2017 and
2016
,
respectively.
During the six months ended
June 30, 2017, we incurred a $4.4 million charge for the write-down of
inventory and a provision to accounts receivable associated with the insolvency
of a customer. These charges increased cost of sales by $2.7 million and
SG&A by $1.7 million.
We experience fluctuations in
gross profit from period to period. Different programs contribute different
gross profits depending on factors such as the types of services involved,
location of production, size of the program, complexity of the product and
level of material costs associated with the various products. Moreover, new
programs can contribute relatively less to our gross profit in their early
stages when manufacturing volumes are usually lower, resulting in
inefficiencies and unabsorbed manufacturing overhead costs. In addition, a
number of our new and higher-volume programs remain subject to competitive
constraints that can exert downward pressure on our margins. During periods of
low production volume, we generally have idle capacity and reduced gross
profit.
We have undertaken
initiatives to restructure our business operations with the intention of
improving utilization and reducing costs. During the first six months of 2017,
we recognized $1.9 million of restructuring charges, primarily related to
reductions in workforce in certain facilities across various regions. In
addition, we incurred $1.2 million in costs related to the relocating of our
corporate headquarters to Arizona.
RESULTS OF OPERATIONS
The following table presents the percentage relationship that
certain items in our 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 in Item 1 of this Report.
|
|
Three Months Ended
|
Six Months Ended
|
|
|
|
June 30,
|
June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Sales
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of sales
|
|
90.5
|
|
90.9
|
|
90.9
|
|
90.9
|
|
|
Gross profit
|
|
9.5
|
|
9.1
|
|
9.1
|
|
9.1
|
|
Selling, general and administrative expenses
|
|
5.2
|
|
4.9
|
|
5.5
|
|
5.0
|
|
Amortization of intangible assets
|
|
0.4
|
|
0.5
|
|
0.4
|
|
0.5
|
|
Restructuring charges and other costs
|
|
0.3
|
|
0.6
|
|
0.3
|
|
0.6
|
|
|
Income
from operations
|
|
3.6
|
|
3.1
|
|
2.9
|
|
3.0
|
|
Other income (expense), net
|
|
(0.3)
|
|
0.3
|
|
(0.3)
|
|
(0.4)
|
|
|
Income
before income taxes
|
|
3.3
|
|
2.7
|
|
2.7
|
|
2.6
|
|
Income tax expense
|
|
0.5
|
|
0.5
|
|
0.4
|
|
0.5
|
|
|
Net
income
|
|
2.8
|
%
|
2.2
|
%
|
2.3
|
%
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Sales for the second quarter of
2017
were $616.9 million, a 6% increase from sales of $579.3 million for the same
quarter in
2016
. Sales for the first six
months of
2017
were $1.2 billion, a 5%
increase from sales of $1.1 billion for the same period in
2016
. The following table sets forth, for the
periods indicated, the percentages of our sales by industry sector.
|
|
Three Months Ended
|
Six Months Ended
|
|
|
|
June 30,
|
June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Higher-Value Markets
|
|
|
|
|
|
|
|
|
|
Industrials
|
|
20
|
%
|
25
|
%
|
20
|
%
|
25
|
%
|
A&D
|
|
16
|
|
15
|
|
17
|
|
16
|
|
Medical
|
|
14
|
|
16
|
|
15
|
|
15
|
|
Test
&
Instrumentation
|
|
15
|
|
10
|
|
14
|
|
10
|
|
|
|
|
65
|
|
66
|
|
66
|
|
66
|
|
|
Traditional Markets
|
|
|
|
|
|
|
|
|
|
Computing
|
|
23
|
|
19
|
|
21
|
|
18
|
|
Telecommunications
|
|
12
|
|
15
|
|
13
|
|
16
|
|
|
|
|
35
|
|
34
|
|
34
|
|
34
|
|
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Industrials.
Second
quarter sales decreased 14% to $123.9 million from $144.6 million in
2016, and de
creased 14% to $242.1 million during the
first six months of 2017 from $282.6 million in the same period of
2016 primarily as a result of softness across several of
our top customers.
Aerospace and Defense.
Second quarter sales increased 16% to $100.2 million from $86.0
million in 2016
, and increased 15% to $204.1 million during
the first six months of 2017 primarily due to increased demand from our defense
customers
.
Medical.
Second
quarter sales decreased 6% to $86.3 million from $91.9 million in
2016, and
decreased to $172.4 million during the
first six months of 2017 from $174.4 million in the same period of
2016
due to the insolvency of a customer as noted
above and reduced demand from some of our other customers.
Test & Instrumentation.
Second quarter sales increased 47% to $88.3 million from $60.0
million in
2016 and
increased 45% to $164.5
million during the first six months of 2017 from $113.4 million in the same period
of
2016
. The increase reflected strong growth
in the semi-capital equipment market.
Computing.
Second
quarter sales increased 29% to $141.9 million from $109.6 million in 2016
, and
increased 21% to $242.8 million during the
first six months of 2017 from $201.1 million in the same period of
2016.
The increase is primarily due to increased strength
from our storage customers and new security customers.
Telecommunications.
Second quarter sales decreased 12% to $76.3 million from $87.2
million in
2016, and
decreased 13% to $157.5
million during the first six months of 2017 from $180.2 million in the same
period of
2016.
The decrease related primarily
to a maturing and non-recurring program at a former top customer and reduced
demand from some customers.
Our international operations are subject to the risks of doing business
abroad. See Part I, Item 1A of our
2016 10-K 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 first six months of 2017 and 2016, 46% and 48%,
respectively, of our sales were from our international operations.
Gross Profit
Gross profit increased 11% to $58.6 million for the three months
ended June 30, 2017 from $52.9 million in the same quarter of 2016, and
increased 4% to $107.6 million for the six months ended June 30, 2017 from
$103.2 million in the same period of 2016. For the six months ended June 30,
2017, we incurred a $2.7 million charge for the write-down of inventory
associated with the insolvency of a customer. Including the inventory charge
and partial recovery in the second quarter, gross profit as a percentage of
sales was 9.5% and 9.1%, respectively for the three and six months ended June
30, 2017. Excluding this inventory charge, gross profit as a percentage of
sales increased to 9.4% and 9.3%, respectively, for the three and six months
ended June 30, 2017 from 9.1% and 9.1%, respectively, in the same periods of
2016 primarily due to higher sales, benefits from our increased higher-value
market revenue base, capacity alignment and operational excellence initiatives.
Selling,
General and Administrative Expenses
SG&A increased by 13% to $32.3 million in the second quarter
of 2017 compared to $28.5 million in 2016, and increased by 14% to $65.0 million
in the first six months of 2017 compared to $57.0 million in 2016. The increase
was primarily a result of increased variable compensation , investments in our
sales and marketing organization and a $1.7 million charge for a provision to
accounts receivable associated with the insolvency of a customer. Including
this provision to accounts receivable, SG&A, as a percentage of sales,
increased to 5.2% for the second quarter of 2017 from 4.9% in 2016. SG&A,
as a percentage of sales, increased to 5.5% for the first six months of 2017
from 5.0% in 2016. Excluding this provision to accounts receivable, SG&A,
as a percentage of sales, increased to 5.2% for the second quarter of 2017 from
4.9% in 2016. SG&A, as a percentage of sales, increased to 5.3% for the
first six months of 2017 from 5.0% in 2016 primarily due to increased variable
compensation and the investment in our sales and marketing organization offset
by savings from previous restructuring activities.
Amortization of Intangible Assets
Amortization of
intangible assets decreased to $5.0 million in 2017 from $5.8 million in 2016 due
primarily to certain customer relationship intangible assets that became fully
amortized as of December 31, 2016.
Restructuring Charges and Other Costs
During 2017, we recognized
$3.1 million of restructuring charges and other costs, primarily related to reductions
in workforce in certain facilities across various regions and costs associated
with the move of our corporate headquarters. We expect to incur an additional
$1.5 to $2.0 million in the remaining quarters of 2017 on capacity alignment
efforts in the Americas. In 2016, we recognized $6.4 million of restructuring
charges and other costs, primarily related to the closure of certain facilities
in the Americas and costs associated with a proxy contest relating to our 2016
annual meeting of shareholders. See Note 13 to the Condensed Consolidated
Financial Statements in Item 1 of this Report.
Interest Income
Interest income
increased to $2.3 million in 2017 from $0.6 million in 2016 due to investment
of higher levels of available cash in interest bearing cash equivalents at
higher interest rates.
Income Tax Expense
Income tax expense of $4.6 million represented an effective tax
rate of 14.7% for 2017, compared with $6.1 million for 2016, which represented
an effective tax rate of 20.4%. The decrease in the effective rate
for 2017 is primarily a result of a $1.2 million discrete
tax benefit for stock based compensation in 2017. Excluding this tax item, the
effective tax rate would have been 18.5%.
We have been granted certain tax incentives, including tax
holidays, for our subsidiaries in China, Malaysia and Thailand that will expire
at various dates, unless extended or otherwise renegotiated, through 2018 in
China, 2021 in Malaysia, and 2028 in Thailand. See Note 8 to the Condensed
Consolidated Financial Statements in Item 1 of this report.
Net Income
We reported net income of $26.9 million, or diluted earnings per
share of $0.54 for the first six months 2017, compared with net income of $23.7
million, or diluted earnings per share of $0.47 for 2016. The net increase of
$3.1 million from 2016 was due to the factors discussed above.
LIQUIDITY AND
CAPITAL RESOURCES
We have historically financed our organic growth and operations
through funds generated from operations. In connection with the Secure
Acquisition in 2015, we borrowed $230.0 million under the Term Loan facility to
finance the purchase price of the acquisition. Cash and cash equivalents
totaled $749.3 million at June 30, 2017 and $681.4 million at December 31,
2016, of which $92.0 million and $55.2 million, was available in the U.S. at
June 30, 2017 and December 31, 2016, respectively. Substantially all of the
amounts held outside of the U.S. are intended to be permanently reinvested in
foreign operations. Under current tax laws and regulations, if cash and cash
equivalents held outside the U.S. were to be distributed to the U.S. in the
form of dividends or otherwise, we would be subject to additional U.S. income
taxes and foreign withholding taxes, reduced by any applicable foreign tax
credits.
Cash provided by operating activities during the first six months
was $92.5 million for 2017 and consisted primarily of $26.9 million of net
income adjusted for $24.3 million of depreciation and amortization, a $49.4
million decrease in accounts receivable, a $34.2 million increase in
inventories and a $16.7 million increase in accounts payable over 2016. The decrease
in accounts receivable was primarily driven by the sale of $40.0 million of
accounts receivable under an accounts receivable sales program implemented on
March 29, 2017. Working capital was $1.2 billion at June 30, 2017 and $1.1
billion at December 31, 2016.
We purchase components only after customer orders or forecasts are
received, which mitigates, but does not eliminate, the risk of loss on
inventories. Supplies of electronic components and other materials used in
operations are subject to industry-wide shortages. In certain instances,
suppliers may allocate available quantities to us. If shortages of these
components and other material supplies used in operations occur, vendors may not
ship the quantities we need for production, and we may be forced to delay
shipments, which can increase backorders and impact cash flows.
Cash used in investing activities was $26.0 million for 2017,
primarily due to purchases of additional property, plant and equipment totaling
$24.0 million. The purchases of property, plant and equipment were primarily
for machinery and equipment in the Americas and Asia.
Cash used in financing activities was $0.9 million for 2017. Share
repurchases totaled $2.0 million, principal payments on long-term debt totaled
$6.2 million, and we received $8.1 million from the exercise of stock options.
Under the terms of our $430.0 million Credit Agreement, in
addition to the Term Loan facility, we have a $200.0 million five-year
revolving credit facility to be used for general corporate purposes with a
maturity date of November 12, 2020. The Credit Agreement includes an accordion
feature pursuant to which total commitments under the facility may be increased
by an additional $150.0 million, subject to satisfaction of
certain
conditions. As of
June 30, 2017
, we had $212.8 million in
borrowings outstanding under the Term Loan facility and $2.6 million in letters
of credit outstanding under the revolving credit facility. $197.4 million
remains available for future borrowings under the revolving credit facility.
See
Note 5 to the Condensed Consolidated Financial Statements included in Item 1 of
this Report
for more information regarding the terms
of the Credit Agreement.
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.
As of June 30, 2017, we had cash and cash equivalents totaling
$749.3 million and had $197.4 million available for borrowings under the Credit
Agreement. During the next 12 months, we believe our capital expenditures will
approximate $50 to $55 million, principally for machinery and equipment as well
as expansion investments to support our ongoing business around the globe.
In
December 2015, our Board of Directors approved the repurchase of up to $100.0
million of our outstanding common shares. As of June 30, 2017, we had $90.8
million remaining under the repurchase program to purchase additional shares.
We are under no commitment or obligation to repurchase any particular amount of
common shares. Management believes that our existing cash balances and funds
generated from operations will be sufficient to permit us to meet our liquidity
requirements over the next 12 months. Management further believes that our
ongoing cash flows from operations and any borrowings we may incur under our
revolving credit facility will enable us to meet operating cash requirements in
future years. If we consummated significant acquisitions in the future, our
capital needs would increase and could possibly result in our need to increase
available borrowings under our Credit Agreement or access public or private
debt and equity markets. There can be no assurance, however, that we would be
successful in raising additional debt or equity on acceptable terms.
CONTRACTUAL
OBLIGATIONS
We have certain contractual obligations for operating and capital leases
that were summarized in a table of Contractual Obligations in our
2016
10-K
. There have been no material changes to our contractual
obligations, outside of the ordinary course of our business, since
December 31, 2016.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2017, we did not have any significant off-balance
sheet arrangements. See Note 14 to the Condensed Consolidated Financial
Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis is based upon our condensed
consolidated financial statements, which have been prepared in accordance with U.S.
GAAP. Our significant accounting policies are summarized in Note 1 to the
Consolidated Financial Statements included in our
2016
10-K
. See Note
12
to
the Condensed Consolidated Financial Statements for a discussion of recently
enacted accounting principles.
Item 3 – Quantitative and Qualitative Disclosures About
Market Risk
Our international sales comprise a significant portion of our net
sales. We are exposed to risks associated with operating internationally,
including:
•
Foreign currency exchange
risk;
•
Import and export duties,
taxes and regulatory changes;
•
Inflationary economies or
currencies; and
•
Economic and political
instability.
Additionally, some of our operations are in developing countries.
Certain events, including natural disasters, can impact the infrastructure of a
developing country more severely than they would impact the infrastructure of a
developed country. A developing country can also take longer to recover from
such events, which could lead to delays in our ability to resume full
operations.
We transact business in various foreign
countries and are subject to foreign currency fluctuation risks. We use natural
hedging and forward contracts to economically hedge transactional exposure
primarily associated with trade accounts receivable, other receivables and
trade accounts payable that are denominated in a currency other than the
functional currency of the respective operating entity. We do not use
derivative financial instruments for speculative purposes. The forward
contracts in place as of June 30, 2017 have not been designated as accounting
hedges and, therefore, changes in fair value are recorded within our
Consolidated Statements of Income.
Our sales are substantially denominated in U.S. dollars. Our
foreign currency cash flows are generated in certain European and Asian
countries and Mexico.
We are also exposed to market risk for changes in interest rates
on our financial instruments, a portion of which relates to our invested cash
balances. We do not use derivative financial instruments in our investing
activities. We place cash and cash equivalents and investments with various
major financial institutions. We protect our invested principal funds by
limiting default risk, market risk and reinvestment risk. We mitigate default
risk by generally investing in investment-grade securities.
We
are also exposed to interest rate risk on borrowings under our Credit
Agreement. As of
June 30, 2017
, we
had $212.8 million outstanding on the floating rate Term Loan facility, and we
have an interest rate swap agreement with a notional amount of $159.6 million.
Under this swap agreement, we receive variable rate interest payments and pay
fixed rate interest payments. The effect of this swap is to convert a portion
of our floating rate interest expense to fixed interest rate expense. The
interest rate swap is designated as a cash flow hedge
.
Item 4
–
Controls and Procedures
As of the end of the period covered by this Report, the Company’s
management (with the participation of our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO)) conducted an evaluation pursuant to Rule 13a-15 under
the Exchange Act, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures. Based on this evaluation, the CEO
and CFO concluded that as of the end of the period covered by this Report such
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by the Company in reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
SEC, and include controls and procedures designed to ensure that information
required to be disclosed by the Company in such reports is accumulated and
communicated to our management, including the Company’s CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial
reporting that occurred during the last fiscal quarter covered by this Report
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Our management, including our CEO and CFO, does not expect that
our disclosure controls and internal controls will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
errors or mistakes. Additionally, controls can be circumvented by individuals’
acts, by collusion of two or more people, or by management overriding the
control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, a control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
PART II—OTHER INFORMATION
Item 1.
Legal
Proceedings
We are involved in various 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 our
consolidated financial position or results of operations.
In
October 2016, we learned that the trustee in the GTAT bankruptcy proceedings
filed adversary actions against three of subsidiaries in connection with the
GTAT bankruptcy proceedings. Please see the description included above in Note 11
to the Notes to the Condensed Consolidated Financial Statements, which is
incorporated by reference into this Item 1 of Part II.
Item 1A. Risk Factors
There are no material
changes to the risk factors set forth in Part I, Item 1A of our 2016 10-K
.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
(c) The following table provides information for the quarter
ended June 30, 2017 about the Company’s repurchases of its equity securities
registered pursuant to Section 12 of the Exchange Act, at a total cost of $1.0 million:
ISSUER PURCHASES OF EQUITY
SECURITIES
|
|
|
|
|
|
|
|
|
|
(d) Maximum
|
|
|
|
|
|
|
|
(c) Total
|
|
Number (or
|
|
|
|
|
|
|
|
Number of
|
|
Approximate
|
|
|
|
|
|
|
|
Shares
|
|
Dollar Value)
|
|
|
|
|
|
|
|
(or Units)
|
|
of Shares
|
|
|
|
|
|
|
|
Purchased as
|
|
(or Units) that
|
|
|
|
(a) Total
|
|
|
|
Part of
|
|
May Yet Be
|
|
|
|
Number of
|
|
|
|
Publicly
|
|
Purchased
|
|
|
|
Shares (or
|
|
(b) Average
|
|
Announced
|
|
Under the
|
|
|
|
Units)
|
|
Price Paid per Share
|
|
Plans or
|
|
Plans or
|
Period
|
|
Purchased
(1)
|
|
(or Unit)
(2)
|
|
Programs
|
|
Programs
(3)
|
June 1 to 30, 2017
|
|
29,495
|
|
$33.88
|
|
29,495
|
|
$90.8 million
|
Total
|
|
29,495
|
|
$33.88
|
|
29,495
|
|
|
(1)
All
share repurchases were made on the open market.
(2)
Average
price paid per share is calculated on a settlement basis and excludes
commission.
(3)
In December
2015, the Board of Directors approved the repurchase of up to $100 million of
the Company’s outstanding common shares. Share purchases may be made in the
open market, in privately negotiated transactions or block transactions, at the
discretion of the Company’s management and as market conditions warrant. Purchases
are funded from available cash and may be commenced, suspended or discontinued
at any time without prior notice. Shares repurchased under the program are
retired.
Item 6. Exhibits
Exhibit
|
|
Number
|
Description of Exhibit
|
3.1
|
Restated Certificate of Formation of the Company dated May 17,
2016 (incorporated by reference to Exhibit 3.1 to the Company's report on
Form 8-K filed with the SEC on May 17, 2016) (the 8-K) (Commission file
number 1-10560)
|
3.2
|
Amended and Restated Bylaws of the Company dated May 11, 2016
(incorporated by reference to Exhibit 3.2 to the 8-K)
|
4.1
|
Specimen form of certificate evidencing the Common Shares
(incorporated by reference to Exhibit 4.1 to the Company's quarterly report
on Form 10-Q filed with the SEC on November 7, 2014) (Commission file number
1-10560)
|
10.1*
|
Agreement between the Company and Jon King, dated as of May 15,
2017.
|
31.1*
|
Section 302 Certification of Chief Executive Officer
|
31.2*
|
Section 302 Certification of Chief Financial Officer
|
32.1*
|
Section 1350 Certification of Chief Executive Officer
|
32.2*
|
Section 1350 Certification of Chief Financial Officer
|
101.INS
(1)
|
XBRL Instance Document
|
101.SCH
(1)
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
(1)
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.LAB
(1)
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
(1)
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
101.DEF
(1)
|
XBRL Taxonomy Extension Definition Linkbase Document
|
* Filed herewith.
(1)
XBRL
(Extensible Business Reporting Language) information is furnished and not filed
or a part of a registration statement or prospectus for purposes of Sections 11
or 12 of the Securities Act of 1933, is not deemed filed for purposes of Section
18 of the Exchange Act, and otherwise is not subject to liability under these
sections.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized on August 8,
2017
.
|
BENCHMARK ELECTRONICS, INC.
|
|
(Registrant)
|
|
By:
/s/ Paul J. Tufano
|
|
Paul J. Tufano
|
|
President and Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
|
|
|
|
By:
/s/ Donald F. Adam
|
|
Donald F. Adam
|
|
Chief Financial Officer
|
|
(Principal Financial Officer)
|
EXHIBIT INDEX
Exhibit
|
|
Number
|
Description of Exhibit
|
|
|
3.1
|
Restated Certificate of Formation of the Company dated May 17,
2016 (incorporated by reference to Exhibit 3.1 to the Company's report on
Form 8-K filed with the SEC on May 17, 2016) (the 8-K) (Commission file
number 1-10560)
|
3.2
|
Amended and Restated Bylaws of the Company dated May 11, 2016
(incorporated by reference to Exhibit 3.2 to the 8-K)
|
4.1
|
Specimen form of certificate evidencing the Common Shares
(incorporated by reference to Exhibit 4.1 to the Company's quarterly report
on Form 10-Q filed with the SEC on November 7, 2014) (Commission file number
1-10560)
|
10.1*
|
Agreement between the Company and Jon King, dated as of May 15,
2017.
|
31.1*
|
Section 302 Certification of Chief Executive Officer
|
31.2*
|
Section 302 Certification of Chief Financial Officer
|
32.1*
|
Section 1350 Certification of Chief Executive Officer
|
32.2*
|
Section 1350 Certification of Chief Financial Officer
|
101.INS(1)
|
XBRL Instance Document
|
101.SCH(1)
|
XBRL Taxonomy Extension Schema Document
|
101.CAL(1)
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.LAB(1)
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE(1)
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
101.DEF(1)
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
* Filed herewith.
(1)
XBRL
(Extensible Business Reporting Language) information is furnished and not filed
or a part of a registration statement or prospectus for purposes of sections 11
or 12 of the Securities Act of 1933, is not deemed filed for purposes of
section 18 of the Exchange Act, and otherwise is not subject to liability under
these sections.
Benchmark Electronics (NYSE:BHE)
Historical Stock Chart
From Feb 2024 to Mar 2024
Benchmark Electronics (NYSE:BHE)
Historical Stock Chart
From Mar 2023 to Mar 2024