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 September
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
|
85251
|
Scottsdale, Arizona
|
(Zip Code)
|
(Address of
principal executive offices)
|
|
|
|
|
(623)
300-7000
(Registrant
’
s
telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [
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 November 7,
2017
,
there were 49,723,053 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
|
|
|
|
|
September 30,
|
December 31,
|
(in thousands,
except par value)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
730,146
|
|
$
|
681,433
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $1,802
|
|
|
|
|
|
|
|
|
and $2,838,
respectively
|
|
411,550
|
|
|
440,692
|
|
|
Inventories
|
|
421,858
|
|
|
381,334
|
|
|
Prepaid expenses
and other assets
|
|
42,150
|
|
|
28,057
|
|
|
Income taxes
receivable
|
|
199
|
|
|
146
|
|
|
|
|
Total current
assets
|
|
1,605,903
|
|
|
1,531,662
|
|
Property, plant
and equipment, net of accumulated depreciation of
|
|
|
|
|
|
|
|
|
|
$423,520 and
$406,375, respectively
|
|
178,122
|
|
|
166,148
|
|
Goodwill
|
|
191,616
|
|
|
191,616
|
|
Deferred income
taxes
|
|
4,908
|
|
|
6,572
|
|
Other, net
|
|
96,157
|
|
|
102,670
|
|
|
|
|
|
$
|
2,076,706
|
|
$
|
1,998,668
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
installments of long-term debt and capital lease obligations
|
$
|
16,804
|
|
$
|
12,396
|
|
|
Accounts payable
|
|
335,315
|
|
|
326,249
|
|
|
Income taxes
payable
|
|
3,629
|
|
|
3,534
|
|
|
Accrued
liabilities
|
|
90,045
|
|
|
70,202
|
|
|
|
|
Total current
liabilities
|
|
445,793
|
|
|
412,381
|
|
Long-term debt
and capital lease obligations, less current installments
|
|
197,766
|
|
|
211,252
|
|
Other long-term
liabilities
|
|
8,236
|
|
|
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 –
49,822 and 49,330, respectively
|
|
4,982
|
|
|
4,933
|
|
|
Additional
paid-in capital
|
|
640,472
|
|
|
626,306
|
|
|
Retained earnings
|
|
788,939
|
|
|
748,402
|
|
|
Accumulated other
comprehensive loss
|
|
(9,482)
|
|
|
(14,176)
|
|
|
|
|
Total
shareholders’ equity
|
|
1,424,911
|
|
|
1,365,465
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
$
|
2,076,706
|
|
$
|
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
|
Nine Months Ended
|
|
|
September 30,
|
September 30,
|
(in thousands,
except per share data)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
603,550
|
$
|
574,341
|
$
|
1,786,955
|
$
|
1,702,908
|
Cost of sales
|
|
545,395
|
|
521,519
|
|
1,621,153
|
|
1,546,915
|
|
Gross profit
|
|
58,155
|
|
52,822
|
|
165,802
|
|
155,993
|
Selling, general
and administrative expenses
|
|
32,093
|
|
28,085
|
|
97,079
|
|
85,082
|
Amortization of
intangible assets
|
|
2,736
|
|
3,170
|
|
7,698
|
|
8,945
|
Restructuring
charges and other costs
|
|
2,511
|
|
3,485
|
|
5,566
|
|
9,876
|
|
Income from
operations
|
|
20,815
|
|
18,082
|
|
55,459
|
|
52,090
|
Interest expense
|
|
(2,324)
|
|
(2,302)
|
|
(6,861)
|
|
(6,935)
|
Interest income
|
|
1,334
|
|
577
|
|
3,621
|
|
1,170
|
Other expense
|
|
(394)
|
|
(383)
|
|
(1,305)
|
|
(535)
|
|
Income before
income taxes
|
|
19,431
|
|
15,974
|
|
50,914
|
|
45,790
|
Income tax
expense (benefit)
|
|
1,919
|
|
(5,768)
|
|
6,539
|
|
311
|
|
Net income
|
$
|
17,512
|
$
|
21,742
|
$
|
44,375
|
$
|
45,479
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.35
|
$
|
0.44
|
$
|
0.89
|
$
|
0.92
|
|
Diluted
|
$
|
0.35
|
$
|
0.44
|
$
|
0.88
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
49,865
|
|
48,965
|
|
49,716
|
|
49,377
|
|
Diluted
|
|
50,330
|
|
49,414
|
|
50,292
|
|
49,878
|
See accompanying notes to condensed consolidated
financial statements.
2
BENCHMARK
ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive
Income
(unaudited)
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
September 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
17,512
|
|
$
|
21,742
|
|
$
|
44,375
|
|
$
|
45,479
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
|
1,313
|
|
|
299
|
|
|
4,434
|
|
|
815
|
|
Unrealized gain
on investments, net of tax
|
|
3
|
|
|
1
|
|
|
19
|
|
|
17
|
|
Unrealized gain
(loss) on derivative, net of tax
|
|
89
|
|
|
765
|
|
|
254
|
|
|
(2,134)
|
|
Other
|
|
-
|
|
|
(1)
|
|
|
(13)
|
|
|
(1)
|
Other
comprehensive income (loss)
|
|
1,405
|
|
|
1,064
|
|
|
4,694
|
|
|
(1,303)
|
|
|
|
Comprehensive
income
|
$
|
18,917
|
|
$
|
22,806
|
|
$
|
49,069
|
|
$
|
44,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
-
|
|
6,819
|
|
-
|
|
|
-
|
|
|
6,819
|
Shares
repurchased and retired
|
|
|
(183)
|
|
|
(18)
|
|
(2,031)
|
|
(3,838)
|
|
|
-
|
|
|
(5,887)
|
Stock options
exercised
|
|
|
502
|
|
|
50
|
|
9,778
|
|
-
|
|
|
-
|
|
|
9,828
|
Vesting of
restricted stock units
|
|
|
185
|
|
|
18
|
|
(18)
|
|
-
|
|
|
-
|
|
|
-
|
Shares withheld
for taxes
|
|
|
(12)
|
|
|
(1)
|
|
(382)
|
|
-
|
|
|
-
|
|
|
(383)
|
Net income
|
|
|
-
|
|
|
-
|
|
-
|
|
44,375
|
|
|
-
|
|
|
44,375
|
Other
comprehensive income
|
|
|
-
|
|
|
-
|
|
-
|
|
-
|
|
|
4,694
|
|
|
4,694
|
Balances,
September 30, 2017
|
|
|
49,822
|
|
|
$ 4,982
|
|
$ 640,472
|
|
$ 788,939
|
|
|
$ (9,482)
|
|
|
$ 1,424,911
|
See accompanying notes to condensed consolidated
financial statements.
4
BENCHMARK ELECTRONICS,
INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
Net income
|
$
|
44,375
|
|
$
|
45,479
|
|
Adjustments to
reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
27,452
|
|
|
31,623
|
|
|
|
Amortization
|
|
9,139
|
|
|
10,379
|
|
|
|
Deferred income
taxes
|
|
1,505
|
|
|
2,577
|
|
|
|
Gain on the sale
of property, plant and equipment
|
|
(194)
|
|
|
(119)
|
|
|
|
Asset impairments
|
|
42
|
|
|
121
|
|
|
|
Stock-based
compensation expense
|
|
6,819
|
|
|
4,302
|
|
|
|
Excess tax
benefits from stock-based compensation
|
|
-
|
|
|
(299)
|
|
Changes in
operating assets and liabilities, net of effects from
|
|
|
|
|
|
|
|
business
acquisition:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
30,926
|
|
|
61,776
|
|
|
|
Inventories
|
|
(38,778)
|
|
|
13,991
|
|
|
|
Prepaid expenses
and other assets
|
|
(12,066)
|
|
|
(302)
|
|
|
|
Accounts payable
|
|
3,922
|
|
|
59,183
|
|
|
|
Accrued
liabilities
|
|
15,637
|
|
|
19
|
|
|
|
Income taxes
|
|
1,111
|
|
|
(146)
|
|
|
|
|
Net cash provided by operations
|
|
89,890
|
|
|
228,584
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
Proceeds from
sales of investments at par
|
|
250
|
|
|
200
|
|
Additions to property,
plant and equipment
|
|
(35,033)
|
|
|
(24,126)
|
|
Proceeds from the
sale of property, plant and equipment
|
|
270
|
|
|
237
|
|
Additions to
purchased software
|
|
(2,703)
|
|
|
(1,272)
|
|
Business
acquisition, net of cash acquired
|
|
-
|
|
|
10,750
|
|
Other
|
|
(156)
|
|
|
(224)
|
|
|
|
|
Net cash used in investing activities
|
|
(37,372)
|
|
|
(14,435)
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
Proceeds from
stock options exercised
|
|
9,828
|
|
|
5,544
|
|
Employee taxes
paid for shares withheld
|
|
(383)
|
|
|
(554)
|
|
Excess tax
benefits from stock-based compensation
|
|
-
|
|
|
299
|
|
Principal
payments on long-term debt and capital lease obligations
|
|
(9,288)
|
|
|
(9,224)
|
|
Share repurchases
|
|
(5,887)
|
|
|
(40,862)
|
|
Debt issuance
costs
|
|
(433)
|
|
|
-
|
|
|
|
|
Net cash used in
financing activities
|
|
(6,163)
|
|
|
(44,797)
|
Effect of
exchange rate changes
|
|
2,358
|
|
|
336
|
Net increase in
cash and cash equivalents
|
|
48,713
|
|
|
169,688
|
|
Cash and cash
equivalents at beginning of year
|
|
681,433
|
|
|
465,995
|
|
Cash and cash
equivalents at end of period
|
$
|
730,146
|
|
$
|
635,683
|
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 nine months ended September 30, 2016, net
cash provided by operations increased by $0.6 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.
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 (which have not been awarded since 2015) 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 September 30, 2017
,
3.1
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 $6.8 million for the three and nine months ended
September 30, 2017, respectively, and $0.3 million and $4.3 million for the
three and nine months ended September 30, 2016, respectively. The total income
tax benefit recognized in the condensed income statements for stock-based
awards was $0.8 million and $2.5 million for the three and nine months ended
September 30, 2017, respectively, and $0.1 million and $1.5 million for the
three and nine months ended September 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 September 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
|
|
$ 938
|
|
|
$ 13,111
|
|
|
$ 5,328
|
Remaining
weighted-average
|
|
|
|
|
|
|
|
|
amortization
period
|
0.9 years
|
|
|
2.4 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 nine months ended September 30, 2017 and 2016.
The total cash received by the Company as a result of stock option
exercises for the nine months ended September 30, 2017 and 2016 was approximately
$9.8 million and $5.5 million, respectively. The actual tax benefit realized as
a result of stock option exercises and the vesting of other share-based awards
during the nine months ended September 30, 2017 and 2016 was $4.4 million and $2.6
million, respectively. For the nine months ended September 30, 2017 and 2016,
the total intrinsic value of stock options exercised was $6.5 million and $2.2
million, respectively.
The Company awarded performance-based restricted stock units to
employees during the nine months ended September 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
|
|
(502)
|
|
|
19.56
|
|
|
|
|
Forfeited or
expired
|
|
(14)
|
|
|
20.51
|
|
|
|
|
Outstanding as of
September 30, 2017
|
|
681
|
|
|
$19.45
|
|
5.31
|
|
$ 10,015
|
Exercisable as of
September 30, 2017
|
|
527
|
|
|
$18.39
|
|
3.54
|
|
$ 8,304
|
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 September 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
|
|
302
|
|
|
31.64
|
Vested
|
|
(185)
|
|
|
21.43
|
Forfeited
|
|
(34)
|
|
|
23.96
|
Non-vested awards
outstanding as of September 30, 2017
|
|
608
|
|
|
$27.34
|
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)
|
|
|
172
|
|
|
31.60
|
Forfeited or
expired
|
|
|
(51)
|
|
|
18.69
|
Non-vested
units outstanding as of September 30, 2017
|
|
|
348
|
|
|
$26.84
|
(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
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
(in thousands,
except per share data)
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
Net income
|
|
$
|
17,512
|
|
$
|
21,742
|
|
$
|
44,375
|
|
$
|
45,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for
basic earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted-average
number of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding during the period
|
|
|
49,865
|
|
|
48,965
|
|
|
49,716
|
|
|
49,377
|
Incremental
common shares attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise of
dilutive options
|
|
|
268
|
|
|
323
|
|
|
319
|
|
|
304
|
Incremental
common shares attributable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to outstanding
restricted stock units
|
|
|
197
|
|
|
126
|
|
|
257
|
|
|
197
|
Denominator for
diluted earnings per share
|
|
|
50,330
|
|
|
49,414
|
|
|
50,292
|
|
|
49,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
per share
|
|
$
|
0.35
|
|
$
|
0.44
|
|
$
|
0.89
|
|
$
|
0.92
|
Diluted earnings
per share
|
|
$
|
0.35
|
|
$
|
0.44
|
|
$
|
0.88
|
|
$
|
0.91
|
Options to purchase 0.6 million and 1.0
million common shares for both the three- and nine-month periods ended September
30, 2016, respectively, 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 September 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 September 30, 2017 and
December 31, 2016 were as follows:
|
|
As of September 30, 2017
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Carrying
|
|
Accumulated
|
|
Carrying
|
(in thousands)
|
|
Amount
|
|
Amortization
|
|
Amount
|
Customer
relationships
|
$
|
100,183
|
|
$
|
(32,770)
|
|
$
|
67,413
|
Purchased
software costs
|
|
34,307
|
|
|
(29,327)
|
|
|
4,980
|
Technology
licenses
|
|
26,800
|
|
|
(17,112)
|
|
|
9,688
|
Trade names and
trademarks
|
|
7,800
|
|
|
-
|
|
|
7,800
|
Other
|
|
868
|
|
|
(255)
|
|
|
613
|
Total
|
$
|
169,958
|
|
$
|
(79,464)
|
|
$
|
90,494
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 30, 2017 and 2016
was as follows:
|
Nine Months Ended
|
|
September 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
Amortization of
intangible assets
|
$
|
7,698
|
|
$
|
8,945
|
Amortization of
capitalized purchased software costs
|
|
798
|
|
|
867
|
Amortization of
debt costs
|
|
643
|
|
|
567
|
|
$
|
9,139
|
|
$
|
10,379
|
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
three months)
|
$
|
2,624
|
2018
|
|
10,252
|
2019
|
|
10,091
|
2020
|
|
9,319
|
2021
|
|
6,389
|
Note 5 – Borrowing Facilities
The Company has a
$430 million Credit Agreement (the Credit Agreement) with
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 September 30,
2017, $157.4 million of the outstanding debt under the Credit Agreement was
effectively at a fixed interest rate as a result of a $157.4 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 September 30, 2017 and December
31, 2016, the Company was in compliance with all of these covenants and
restrictions.
As of September 30, 2017, the Company had $209.9 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 2018.
As of both September 30, 2017 and 2016, there were no working capital
borrowings outstanding under the facility.
Note 6 – Inventories
|
Inventory costs
are summarized as follows:
|
|
September 30,
|
December 31,
|
(in thousands)
|
|
2017
|
|
|
2016
|
Raw materials
|
$
|
269,847
|
|
$
|
233,111
|
Work in process
|
|
115,054
|
|
|
113,496
|
Finished goods
|
|
36,957
|
|
|
34,727
|
|
$
|
421,858
|
|
$
|
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 September 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 nine months ended September 30, 2017, the Company sold $105.0 million of
accounts receivable under this program, and in exchange, the Company received
cash proceeds of $104.8 million, net of the discount. The loss on the sale resulting
from the discount during the three and nine months ended September 30, 2017 was
$0.1 million and $0.2 million, respectively, and was recorded to other expense
within the Condensed Consolidated Statements of Income.
Note 8 – Income Taxes
|
Income tax
expense consists of the following:
|
|
Nine Months Ended
|
|
September 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
Federal – current
|
$
|
(1,280)
|
|
$
|
(164)
|
Foreign – current
|
|
6,039
|
|
|
(2,340)
|
State – current
|
|
275
|
|
|
238
|
Deferred
|
|
1,505
|
|
|
2,577
|
|
$
|
6,539
|
|
$
|
311
|
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 increase in
income tax expense during 2017 is primarily the result of an $8.3 million
decrease in the reserve for uncertain tax benefits in 2016. Excluding this item
from 2016, 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 arises. Accordingly,
the Company recorded the income tax benefit as a discrete item for the nine
months ended September 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 nine months ended September 30, 2017 and 2016 by approximately
$7.3 million (approximately 0.15 per diluted share) and $3.5 million
(approximately $0.07 per diluted share), respectively, as follows:
|
Nine Months Ended
|
|
September 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
China
|
$
|
888
|
|
$
|
-
|
Malaysia
|
|
3,151
|
|
|
1,594
|
Thailand
|
|
3,294
|
|
|
1,953
|
|
$
|
7,333
|
|
$
|
3,547
|
As of September 30, 2017, the total amount
of the reserve for uncertain tax benefits including interest was $0.5 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 September 30, 2017, was $17.0 thousand. There was
no reserve for potential penalties.
During
the nine months ended September 30, 2017, the Company released $0.9 million of
uncertain tax benefits related to the liquidation of a foreign subsidiary
company. Also during 2017, the Company received a denial of its appeal to the
local tax authorities related to an examination for a subsidiary in Thailand
for the years 2004 to 2005. Consequently, the Company recorded $0.9 million of
additional accruals for uncertain tax benefits. The Company has decided not to
challenge this decision, therefore, the $7.3 million
reserve for unrecognized tax benefits was written off.
This
decrease in the unrecognized
tax benefit reserve
a
s of September 30, 2017 did not impact the
Company’s effective tax rate.
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. Since this audit is for the period of time
prior to the acquisition of the Secure Group by the Company, 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
|
Nine Months Ended
|
|
|
September 30,
|
September 30,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
378,129
|
$
|
387,827
|
$
|
1,158,290
|
$
|
1,135,995
|
|
Asia
|
|
202,149
|
|
169,215
|
|
568,247
|
|
505,410
|
|
Europe
|
|
43,793
|
|
37,113
|
|
127,617
|
|
119,633
|
|
Elimination of
intersegment sales
|
|
(20,521)
|
|
(19,814)
|
|
(67,199)
|
|
(58,130)
|
|
|
$
|
603,550
|
$
|
574,341
|
$
|
1,786,955
|
$
|
1,702,908
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization:
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
5,679
|
$
|
6,031
|
$
|
16,599
|
$
|
17,639
|
|
Asia
|
|
2,882
|
|
4,055
|
|
9,021
|
|
12,304
|
|
Europe
|
|
705
|
|
702
|
|
2,041
|
|
2,098
|
|
Corporate
|
|
3,008
|
|
3,314
|
|
8,930
|
|
9,961
|
|
|
$
|
12,274
|
$
|
14,102
|
$
|
36,591
|
$
|
42,002
|
|
|
|
|
|
|
|
|
|
|
Income from
operations:
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
15,463
|
$
|
21,481
|
$
|
49,270
|
$
|
60,960
|
|
Asia
|
|
20,963
|
|
12,337
|
|
53,328
|
|
34,894
|
|
Europe
|
|
2,560
|
|
2,390
|
|
7,512
|
|
7,878
|
|
Corporate and
intersegment eliminations
|
|
(18,171)
|
|
(18,126)
|
|
(54,651)
|
|
(51,642)
|
|
|
$
|
20,815
|
$
|
18,082
|
$
|
55,459
|
$
|
52,090
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
8,548
|
$
|
7,102
|
$
|
17,584
|
$
|
16,698
|
|
Asia
|
|
1,696
|
|
1,372
|
|
12,820
|
|
5,945
|
|
Europe
|
|
638
|
|
532
|
|
4,018
|
|
1,204
|
|
Corporate
|
|
475
|
|
189
|
|
3,314
|
|
1,551
|
|
|
$
|
11,357
|
$
|
9,195
|
$
|
37,736
|
$
|
25,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
December 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Total assets:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
|
|
$
|
832,024
|
$
|
864,388
|
|
Asia
|
|
|
|
|
|
689,571
|
|
634,838
|
|
Europe
|
|
|
|
|
|
452,015
|
|
393,443
|
|
Corporate and
other
|
|
|
|
|
|
103,096
|
|
105,999
|
|
|
|
|
|
|
$
|
2,076,706
|
$
|
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
|
Nine Months Ended
|
|
|
September 30,
|
September 30,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Geographic net
sales:
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
398,363
|
$
|
403,561
|
$
|
1,186,330
|
$
|
1,200,752
|
|
Singapore
|
|
59,594
|
|
48,057
|
|
179,158
|
|
134,635
|
|
Other Asia
|
|
53,327
|
|
37,770
|
|
144,620
|
|
104,911
|
|
Europe
|
|
70,852
|
|
57,835
|
|
218,314
|
|
180,362
|
|
Other Foreign
|
|
21,414
|
|
27,118
|
|
58,533
|
|
82,248
|
|
|
$
|
603,550
|
$
|
574,341
|
$
|
1,786,955
|
$
|
1,702,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
December 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Long-lived
assets:
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
$
|
163,325
|
$
|
167,367
|
|
Asia
|
|
|
|
|
|
73,418
|
|
67,998
|
|
Europe
|
|
|
|
|
|
10,967
|
|
8,415
|
|
Other
|
|
|
|
|
|
26,052
|
|
24,290
|
|
|
|
|
|
|
$
|
273,762
|
$
|
268,070
|
|
|
|
|
|
|
|
|
|
|
Note 10 –
Supplemental Cash Flow and Non-Cash Information
|
The following
information concerns supplemental disclosures of cash payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
Income taxes
paid, net
|
$
|
2,524
|
|
$
|
1,674
|
|
$
|
5,049
|
|
$
|
6,494
|
Interest paid
|
|
2,089
|
|
|
2,114
|
|
|
6,385
|
|
|
6,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
Additions to
property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
in accounts
payable
|
|
|
|
|
|
|
$
|
6,024
|
|
$
|
1,004
|
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.
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 other recently issued accounting
standards will either have no 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 September
30, 2017:
|
|
|
Balance as of
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Balance as of
|
|
|
|
December 31,
|
|
Restructuring
|
|
Cash
|
|
|
Non-Cash
|
|
Exchange
|
|
September 30,
|
(in thousands)
|
|
|
2016
|
|
|
|
Charges
|
|
|
Payment
|
|
|
Activity
|
|
Adjustments
|
|
2017
|
2017
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
-
|
|
|
$
|
1,903
|
|
$
|
(1,561)
|
|
$
|
(125)
|
|
$
|
-
|
|
$
|
217
|
|
Leased facilities
and equipment
|
|
|
-
|
|
|
|
105
|
|
|
(105)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other exit costs
|
|
|
-
|
|
|
|
334
|
|
|
(149)
|
|
|
-
|
|
|
9
|
|
|
194
|
|
|
|
-
|
|
|
|
2,342
|
|
|
(1,815)
|
|
|
(125)
|
|
|
9
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
738
|
|
|
|
(44)
|
|
|
(626)
|
|
|
-
|
|
|
-
|
|
|
68
|
|
Leased facilities
and equipment
|
|
|
-
|
|
|
|
58
|
|
|
(58)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other exit costs
|
|
|
545
|
|
|
|
1,616
|
|
|
(2,061)
|
|
|
(42)
|
|
|
2
|
|
|
60
|
|
|
|
1,283
|
|
|
|
1,630
|
|
|
(2,745)
|
|
|
(42)
|
|
|
2
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,283
|
|
|
$
|
3,972
|
|
$
|
(4,560)
|
|
$
|
(167)
|
|
$
|
11
|
|
$
|
539
|
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 September 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 September 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 $157.4 million
and $163.9 million as of September 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 $0.9 million asset as of September
30, 2017 and a $0.5 million asset as of December 31, 2016.
During the nine
months ended September 30, 2017, the Company recorded unrealized gain of $0.4
million ($0.3 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 (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
reclassifications
|
|
|
4,434
|
|
|
254
|
|
|
19
|
|
|
(13)
|
|
|
4,694
|
Net current
period other comprehensive gain (loss)
|
|
|
4,434
|
|
|
254
|
|
|
19
|
|
|
(13)
|
|
|
4,694
|
Balances,
September 30, 2017
|
|
$
|
(10,110)
|
|
$
|
540
|
|
$
|
(55)
|
|
$
|
143
|
|
$
|
(9,482)
|
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 September 30, 2017 increased 5% to $603.6 million compared to $574.3
million for 2016. During the third quarter of 2017, sales to customers in our
various industry sectors fluctuated from the comparable 2016 period as follows:
·
Industrials decreased by 12%,
·
A&D increased by 16%,
·
Medical increased by 17%,
·
Test & Instrumentation
increased by 34%,
·
Computing increased by 16%, and
·
Telecommunications decreased by 23%.
The overall revenue increase
was driven by strong Test & Instrumentation growth in our precision
machining serving the semi-capital equipment market, Medical growth from higher
demand and program ramps from new and existing customers, 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 44% of our sales in
both the nine months ended September 30, 2017 and
2016
.
During the three months ended
March 31, 2017, we incurred a $5.1 million charge for the write-down of
inventory and a provision to accounts receivable associated with the insolvency
of a customer. In subsequent quarters, we recorded partial recoveries of
inventory charges totaling $2.2 million. During the nine months ended September
30, 2017, these net charges increased cost of sales by $1.2 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 type 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 nine months of 2017,
we recognized $4.0 million of restructuring charges, primarily related to
reductions in workforce in certain facilities across various regions. In
addition, we incurred $1.6 million in costs related to the relocation 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
|
Nine Months Ended
|
|
|
|
September 30,
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Sales
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost of sales
|
|
90.4
|
|
90.8
|
|
90.7
|
|
90.8
|
|
|
Gross profit
|
|
9.6
|
|
9.2
|
|
9.3
|
|
9.2
|
|
Selling, general
and administrative expenses
|
|
5.3
|
|
4.9
|
|
5.4
|
|
5.0
|
|
Amortization of
intangible assets
|
|
0.5
|
|
0.6
|
|
0.4
|
|
0.5
|
|
Restructuring
charges and other costs
|
|
0.4
|
|
0.6
|
|
0.3
|
|
0.6
|
|
|
Income from operations
|
|
3.4
|
|
3.1
|
|
3.1
|
|
3.1
|
|
Other expenses,
net
|
|
(0.2)
|
|
(0.4)
|
|
(0.3)
|
|
(0.4)
|
|
|
Income before income taxes
|
|
3.2
|
|
2.8
|
|
2.8
|
|
2.7
|
|
Income tax
expense (benefit)
|
|
0.3
|
|
(1.0)
|
|
0.4
|
|
-
|
|
|
Net income
|
|
2.9
|
%
|
3.8
|
%
|
2.5
|
%
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Sales for the third quarter of
2017
were $603.6 million, a 5% increase from sales of $574.3 million for the same
quarter in
2016
. Sales for the first nine
months of
2017
were $1.8 billion, a 5%
increase from sales of $1.7 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
|
Nine Months Ended
|
|
|
|
September 30,
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Higher-Value
Markets
|
|
|
|
|
|
|
|
|
|
Industrials
|
|
20
|
%
|
25
|
%
|
20
|
%
|
24
|
%
|
A&D
|
|
16
|
|
14
|
|
17
|
|
15
|
|
Medical
|
|
17
|
|
15
|
|
15
|
|
15
|
|
Test
&
Instrumentation
|
|
15
|
|
11
|
|
14
|
|
11
|
|
|
|
|
68
|
|
65
|
|
66
|
|
65
|
|
|
Traditional
Markets
|
|
|
|
|
|
|
|
|
|
Computing
|
|
20
|
|
19
|
|
21
|
|
19
|
|
Telecommunications
|
|
12
|
|
16
|
|
13
|
|
16
|
|
|
|
|
32
|
|
35
|
|
34
|
|
35
|
|
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Industrials.
Third
quarter sales decreased 12% to $124.0 million from $141.1 million in
2016, and de
creased 10% to $366.1 million during the
first nine months of 2017 from $406.1 million in the same period of
2016 primarily as a result of softness across several of
our top customers.
Aerospace and Defense.
Third quarter sales increased 16% to $95.9 million from $82.6
million in 2016
, and increased 16% to $300.0 million during
the first nine months of 2017 primarily due to increased demand from our
defense customers
.
Medical.
Third
quarter sales increased 17% to $100.4 million from $85.9 million in
2016, and
increased 15% to $272.8 million during the
first nine months of 2017 from $260.3 million in the same period of
2016 from higher demand and program ramps from new and
existing
customers.
Test & Instrumentation.
Third quarter sales increased 34% to $87.9 million from $65.6
million in
2016 and
increased 41% to $252.4
million during the first nine months of 2017 from $179.0 million in the same period
of
2016
. The increase reflected strong growth
in our precision machining serving the semi-capital equipment market.
Computing.
Third
quarter sales increased 16% to $124.4 million from $107.4 million in 2016
, and
increased 13% to $367.2 million during the
first nine months of 2017 from $326.1 million in the same period of
2016.
The increase is primarily due to increased strength
from our existing storage customers and new security customers.
Telecommunications.
Third quarter sales decreased 23% to $71.0 million from $91.7
million in
2016, and
decreased 16% to $228.5
million during the first nine months of 2017 from $271.9 million in the same
period of
2016.
The decrease is primarily due
to new programs not offsetting lower demand from our existing customer base.
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 nine months of 2017 and 2016, 47% and 48%,
respectively, of our sales were from our international operations.
Gross Profit
Gross profit increased 10% to $58.2 million for the three months
ended September 30, 2017 from $52.8 million in the same quarter of 2016, and
increased 6% to $165.8 million for the nine months ended September 30, 2017
from $156.0 million in the same period of 2016. For the nine months ended
September 30, 2017, we incurred a $1.2 million net charge for the write-down of
inventory associated with the insolvency of a customer. Including the inventory
charge in the first quarter and partial recoveries in the second and third
quarters, gross profit as a percentage of sales was 9.6% and 9.3%, respectively
for the three and nine months ended September 30, 2017. Excluding these items,
gross profit as a percentage of sales increased to 9.4% and 9.3%, respectively,
for the three and nine months ended September 30, 2017 from 9.2% and 9.2%,
respectively, in the same periods of 2016 primarily due to higher sales and a
better mix of higher-value sales.
Selling,
General and Administrative Expenses
SG&A increased by 14% to $32.1 million in the third quarter of
2017 compared to $28.1 million in 2016, and increased by 14% to $97.1 million
in the first nine months of 2017 compared to $85.1 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 5.3% for the third quarter of 2017 from 4.9% in 2016.
SG&A, as a percentage of sales, increased to 5.4% for the first nine months
of 2017 from 5.0% in 2016. Excluding this provision to accounts receivable,
SG&A, as a percentage of sales, increased to 5.3% for the third quarter of
2017 from 4.9% in 2016. SG&A, as a percentage of sales, increased to 5.3%
for the first nine months of 2017 from 5.0% in 2016 primarily due to increased
variable compensation and the investment in our sales and marketing
organization.
Amortization of Intangible Assets
Amortization of
intangible assets decreased to $7.7 million in 2017 from $8.9 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
$5.6 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 costs of additional
efforts to align capacity in the Americas to approximate $1.5 million in the
fourth quarter of 2017. In 2016, we recognized $9.9 million of restructuring
charges and other costs, primarily related to reductions in workforce in
certain facilities across various regions, costs associated with a proxy
contest relating to our 2016 annual meeting of shareholders and costs associated
with the separation of our former Chief Executive Officer. See Note 13 to the
Condensed Consolidated Financial Statements in Item 1 of this Report.
Interest Income
Interest income
increased to $3.6 million in 2017 from $1.2 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 $6.5 million represented an effective tax
rate of 12.8% for 2017, compared with $0.3 million for 2016, which represented
an effective tax rate of 0.7%. The 0.7% effective tax rate in 2016 stemmed
primarily from the reversal of uncertain tax benefits of $8.3 million relating
to the expiration of the statute of limitations for a liquidated subsidiary
that reduced the income tax expense. Without the reversal, the effective tax
rate in 2016 would have been 18.7%. The decrease in the effective rate for 2017
is primarily a result of a $1.4 million discrete tax benefit for stock based
compensation in 2017. Excluding this tax item, the effective tax rate would
have been 15.6%. The decrease in the effective tax rate results primarily from
a tax incentive in China and taxable income in geographies with lower tax
rates.
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 $44.4 million, or diluted earnings per
share of $0.88 for the first nine months of 2017, compared with net income of
$45.5 million, or diluted earnings per share of $0.91 for 2016. The net
decrease of $1.1 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 $730.1 million at September 30, 2017 and $681.4 million at December 31,
2016, of which $75.0 million and $55.2 million, were available in the U.S. at
September 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 nine months
was $89.9 million for 2017 and consisted primarily of $44.4 million of net
income adjusted for $36.6 million of depreciation and amortization, a $30.9
million decrease in accounts receivable, a $38.8 million increase in
inventories and a $3.9 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 September 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 $37.4 million for 2017,
primarily due to purchases of additional property, plant and equipment totaling
$35.0 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 $6.2 million for 2017. Share repurchases totaled $5.9 million,
principal payments on long-term debt totaled $9.3 million, and we received $9.8
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
September 30, 2017
, we had $209.9
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 September 30, 2017, we had cash and cash equivalents
totaling $730.1 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 September 30, 2017, we had
$86.9 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 September 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 September 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
September 30, 2017
, we
had $209.9 million outstanding on the floating rate Term Loan facility, and we
have an interest rate swap agreement with a notional amount of $157.4 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 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.
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 September 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 $3.9 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)
|
August 1 to 31,
2017
|
|
100,794
|
|
$31.64
|
|
100,794
|
|
$87.6 million
|
September 1 to
30, 2017
|
|
21,819
|
|
$31.88
|
|
21,819
|
|
$86.9 million
|
Total
|
|
122,613
|
|
$31.68
|
|
122,613
|
|
|
(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)
|
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 November 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)
|
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 Apr 2024 to May 2024
Benchmark Electronics (NYSE:BHE)
Historical Stock Chart
From May 2023 to May 2024