SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 COMMISSION FILE NUMBER: 1-10560
BENCHMARK ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-2211011
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NUMBER)
3000 TECHNOLOGY DRIVE 77515
ANGLETON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(409) 849-6550
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_____
As of August 13, 1998 there were 11,603,318 shares of Common Stock, par
value $0.10 per share, outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1998 1997
--------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 8,985 $ 21,029
Accounts receivable, net ....................... 62,830 39,772
Income taxes receivable ........................ 1,290 314
Inventories .................................... 76,401 61,134
Prepaid expenses and other assets .............. 1,428 1,545
Deferred tax asset ............................. 3,382 1,359
--------- ---------
Total current assets ......................... 154,316 125,153
--------- ---------
Property, plant and equipment, at cost ........... 74,229 54,061
Accumulated depreciation ......................... (29,465) (23,245)
--------- ---------
Net property, plant and equipment ............ 44,764 30,816
--------- ---------
Other assets, net ................................ 571 241
Marketable securities ............................ -- 11,431
Goodwill, net .................................... 50,726 22,681
--------- ---------
$ 250,377 $ 190,322
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt .............. $ 8,154 $ 155
Accounts payable ............................... 42,405 31,694
Accrued liabilities ............................ 9,047 5,425
--------- ---------
Total current liabilities .................... 59,606 37,274
Long term debt, less current portion ............. 58,246 30,330
Deferred income taxes ............................ 4,027 1,846
Shareholders' equity:
Preferred shares, $0.10 par value;
5,000,000 shares authorized,
none issued .................................. -- --
Common shares, $0.10 par value;
30,000,000 shares authorized; issued -
11,632,802 and 11,623,252, respectively;
outstanding - 11,583,318 and 11,573,768,
respectively ................................. 1,158 1,157
Additional paid-in capital ..................... 69,555 69,408
Retained earnings .............................. 57,905 50,427
Less treasury shares, at cost; 49,484
shares ....................................... (120) (120)
--------- ---------
Total shareholders' equity ................... 128,498 120,872
Commitments and contingencies
--------- ---------
$ 250,377 $ 190,322
========= =========
See accompanying notes to condensed consolidated financial statements.
2
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BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales ...................................... $ 132,636 $ 78,156 $ 240,682 $ 153,879
Cost of sales .............................. 119,955 68,690 217,096 135,171
--------- --------- --------- ---------
Gross profit ......................... 12,681 9,466 23,586 18,708
Selling, general and administrative
expense ................................... 4,465 3,042 7,991 6,222
Amortization expense ....................... 906 417 1,492 834
--------- --------- --------- ---------
Income from operations ............... 7,310 6,007 14,103 11,652
Interest income ............................ 55 331 223 567
Interest expense ........................... (1,286) (627) (2,188) (1,241)
Other income (expense) ..................... 12 11 61 52
--------- --------- --------- ---------
Income before income tax expense 6,091 5,722 12,199 11,030
Income tax expense ......................... 2,356 2,165 4,721 4,182
--------- --------- --------- ---------
Net income ........................... $ 3,735 $ 3,557 $ 7,478 $ 6,848
========= ========= ========= =========
Earnings per common share:
Basic ................................ $ 0.32 $ 0.31 $ 0.65 $ 0.60
========= ========= ========= =========
Diluted .............................. $ 0.31 $ 0.30 $ 0.61 $ 0.58
========= ========= ========= =========
Weighted average number of common
shares outstanding:
Basic ................................ 11,581 11,489 11,578 11,485
========= ========= ========= =========
Diluted .............................. 12,120 11,943 12,217 11,852
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income ........................................... $ 7,478 $ 6,848
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense ............ 8,074 6,111
Deferred income taxes ............................ 869 (211)
(Gain) loss on sale of property, plant and
equipment ....................................... 4 (27)
Tax benefit of employee stock options exercised .. 34 31
Amortization of premiums on marketable securities 46 154
Changes in operating assets and liabilities, net of
effects from acquisition of business:
Accounts receivable .............................. 1,752 2,035
Inventories ...................................... 8,248 (9,142)
Prepaid expenses and other assets ................ 142 (671)
Accounts payable ................................. (10,011) 15,944
Accrued liabilities .............................. 526 (423)
Income taxes ..................................... (976) (1,317)
-------- --------
Net cash provided by operations .............. 16,186 19,332
-------- --------
Cash flows from investing activities:
Capital expenditures, net ............................ (4,574) (3,817)
Redemption of marketable securities .................. 11,385 --
Acquisition, net of cash acquired .................... (70,680) --
-------- --------
Net cash used in investing activities ........ (63,869) (3,817)
-------- --------
Cash flows from financing activities:
Debt issuance costs .................................. (390) --
Proceeds from issuance of long term debt ............. 40,000 --
Proceeds from exercise of employee stock options ..... 114 172
Stock offering expenses .............................. -- (52)
Principal payments on long term debt ................. (4,085) (118)
-------- --------
Net cash provided by financing activities .... 35,639 2
-------- --------
Net increase (decrease) in cash ........................ (12,044) 15,517
Cash at beginning of year ............................ 21,029 13,800
-------- --------
Cash at June 30 ...................................... $ 8,985 $ 29,317
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid .................................... $ 4,793 $ 5,222
======== ========
Interest paid ........................................ $ 1,501 $ 1,277
======== ========
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Benchmark Electronics, Inc. (the Company) is a Texas corporation which
provides contract electronics manufacturing and design services to original
equipment manufacturers (OEMs) in select industries, including medical devices,
communications equipment, industrial and business computers, testing
instrumentation, and industrial controls.
The condensed consolidated financial statements included herein have been
prepared by the Company without audit pursuant to the rules and regulations of
the Securities and Exchange Commission. The financial statements reflect all
normal and recurring adjustments which in the opinion of management are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of
shares outstanding. Diluted earnings per share is computed using the weighted
average number of shares outstanding adjusted for the incremental shares
attributed to outstanding stock options to purchase common stock. Incremental
shares of 639,499 and 366,810 for the six months ended June 30, 1998 and 1997,
respectively, and 538,637 and 454,504 for the three months ended June 30, 1998
and 1997, respectively, were used in the calculation of diluted earnings per
share. Options to purchase 372,000 and 147,000 shares of common stock for three
and six-month periods ended June 30, 1998, respectively, were not included in
the computation of diluted earnings per share because the option exercise price
was greater than the average market price of the common stock.
NOTE 3 - INDEBTEDNESS
In order to finance a portion of the cash consideration for the
acquisition of EMD Technologies, Inc. (EMD) on July 30, 1996, the Company issued
a $30 million, 8.02% Senior Note due 2006 (the Senior Note) to Northwestern
Mutual Life Insurance Company. The Senior Note is unsecured and guaranteed by
each of the Company's United States subsidiaries. Principal on the Senior Note
is payable in annual installments of $5.0 million beginning July 31, 2001 with a
final installment on the unpaid principal amount due July 31, 2006. Interest on
the Senior Note is payable semi-annually on January 31 and July 31. The purchase
agreement relating to the Senior Note (the Purchase Agreement) includes
customary affirmative and negative covenants and restricts the ability of the
Company to incur additional debt and to pay dividends. Upon any prepayment of
all or a portion of the Senior Note, the Company is obligated to pay the holder
a premium on the amount prepaid. The Purchase Agreement contains a provision
that in the event of a change of control (defined generally to mean the
acquisition by a person or group (as defined in the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder) of beneficial
ownership of more than 50% of the total voting power of the outstanding voting
stock of the Company), the Company must offer to repurchase
5
<PAGE>
the Senior Note at par plus any prepayment penalty. As of June 30, 1998, the
Company had $30 million outstanding under the Senior Note.
6
<PAGE>
In connection with the acquisition of Lockheed Commercial Electronics
Company (LCEC) on February 23, 1998, the Company obtained $40 million through
borrowings under a five-year term loan (the Term Loan) with a commercial bank.
Principal on the Term Loan is payable in quarterly installments of $2.0 million
beginning June 30, 1998 with a final installment of the unpaid principal amount
due March 31, 2003. The Term Loan bears interest, at the Company's option, at
either the bank's Eurodollar rate plus .625% to 1.375% or its prime rate, and
interest is payable quarterly. The margin on the Eurodollar rate fluctuates with
the Company's ratio of debt to earnings before interest, taxes, depreciation and
amortization (EBITDA). The Term Loan includes customary affirmative and negative
covenants and restricts the Company's ability to incur additional indebtedness
and to pay dividends. As of June 30, 1998, the Company had $36 million
outstanding under the Term Loan.
The Company has a $25 million revolving line of credit with a commercial
bank. The Company is entitled to borrow under the line of credit up to the
lesser of $25 million or the sum of 75% of its eligible accounts receivable and
25% of its eligible inventories. Interest on the line of credit is payable
quarterly, at the Company's option, at either the bank's Eurodollar rate plus
.625% to 1.375% or its prime rate. A commitment fee of 0.25% per annum on the
unused portion of the line of credit is payable quarterly in arrears. The line
of credit agreement contains certain financial covenants and restricts the
ability of the Company to incur additional debt without the consent of the bank
and to pay dividends. The line of credit matures on March 31, 2003. As of June
30, 1998, the Company had no borrowings outstanding under this line of credit.
NOTE 4 - INVENTORIES
Inventory costs are summarized as follows:
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
Raw materials $51,838,348 $41,837,205
Work in process 24,563,002 19,296,758
----------- -----------
$76,401,350 $61,133,963
NOTE 5 - INCOME TAXES
Income tax expense (benefit) consists of the following:
SIX MONTHS ENDED
JUNE 30,
1998 1997
---------- ----------
Federal - Current $3,406,014 $3,848,853
State - Current 445,605 543,384
Federal/State - Deferred 869,000 (210,666)
---------- ----------
Total $4,720,619 $4,181,571
========== ==========
Income tax expense differs from the amount computed by applying the U.S.
federal statutory income tax rate to pretax income due to the impact of
nondeductible amortization of goodwill, state income taxes, net of federal
benefit and the benefit from the use of a foreign sales corporation and
non-taxable interest earned on municipal investments.
7
<PAGE>
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company currently does not have any items that would
require additional presentation of Comprehensive Income and operates in a single
business segment. Accordingly, adoption of these standards as of January 1, 1998
did not affect the Company's consolidated financial statements.
NOTE 7 - STOCK SPLIT
In July 1997, the Board of Directors approved a two-for-one stock split
effected in the form of a stock dividend payable to shareholders of record as of
August 7, 1997. Shareholders' equity has been restated to give retroactive
recognition to the stock split in prior periods by reclassifying from additional
paid-in capital to common stock the par value of the additional shares arising
from the split. All share and per share data appearing in the consolidated
financial statements and notes thereto have been retroactively adjusted for the
stock split.
NOTE 8 - ACQUISITION
On February 23, 1998, the Company completed its acquisition of LCEC for
$70.7 million in cash. LCEC, situated in Hudson, New Hampshire, is one of New
England's largest electronics manufacturing services companies, providing a
broad range of services including printed circuit board assembly and test,
system assembly and test, prototyping, depot repair, materials procurement, and
engineering support services. The transaction was accounted for under the
purchase method of accounting, and, accordingly, the results of operations of
LCEC since February 23, 1998 have been included in the accompanying condensed
consolidated statement of operations. The acquisition resulted in goodwill of
approximately $29.5 million that will be amortized on a straight-line basis over
15 years.
The net purchase price was allocated as follows:
Working capital, other than cash $30,575,000
Property, plant and equipment 15,905,000
Goodwill 29,537,000
Other liabilities (3,096,000)
Deferred income taxes (2,241,000)
-----------
Purchase price, net of cash received $70,680,000
The following summary pro forma condensed consolidated financial information
reflects the acquisition as if it had occurred on January 1, 1997 for purposes
of the statements of operations. The summary pro forma information is not
necessarily representative of what the Company's results of operations would
have been had the acquisition in fact had occurred on January 1, 1997 and is not
intended to project the Company's results of operations for any future period or
date.
<PAGE>
Pro forma condensed consolidated financial information for the periods
ended June 30, 1998 and 1997 (unaudited):
SIX MONTHS ENDED
JUNE 30,
1998 1997
------------ ------------
Net sales ........................................ $264,952,000 $305,010,000
Gross profit ..................................... $ 21,966,000 $ 25,135,000
Income from operations ........................... $ 10,387,000 $ 12,419,000
Net income ....................................... $ 4,900,000 $ 6,125,000
Earnings per common share:
Basic .......................................... $ 0.42 $ 0.53
Diluted ........................................ $ 0.40 $ 0.52
Weighted average number of shares outstanding:
Basic .......................................... 11,578,000 11,485,000
Diluted ........................................ 12,217,000 11,852,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements regarding
future financial condition and results of operations and the Company's business
operations. The words "expect," "estimate," "anticipate," "predict," and similar
expressions are intended to identify forward-looking statements. Such statements
involve risks, uncertainties and assumptions. Important factors that could cause
actual results to differ materially from those indicated include factors noted
in conjunction with the forward looking statements and the following additional
factors: the ability of the Company successfully to integrate the operations of
LCEC; the Company's reliance on a relatively few customers; the effect on the
Company's results of operations of reduced purchases by certain customers during
1998; the absence of long term sales contracts; the Company's dependence on the
growth of the medical device, communications equipment, industrial and business
computer, testing instrumentation and industrial controls industries, all of
which are characterized by rapid technological change; changes in the
availability of customer specified components; the Company's dependence on
certain key executives; and competition from other providers of contract
manufacturing services. Should one or more of these or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated.
GENERAL
The Company provides contract electronics manufacturing and design
services to OEMs in select industries, including medical devices, communications
equipment, industrial and business computers, testing instrumentation and
industrial controls. The Company specializes in manufacturing high quality,
technologically complex printed circuit board assemblies with computer-automated
equipment using surface mount and pin-through-hole interconnection technologies
for customers requiring low to medium volume production runs. The Company
frequently works with customers from product design and prototype stages through
ongoing production and, in some cases, final assembly of the customers' products
and provides manufacturing services for successive product generations. As a
result, the Company believes that it is often an integral part of its customers'
operations.
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Substantially all of the Company's manufacturing services are provided on
a turnkey basis, whereby the Company purchases customer-specified components
from its extensive network of suppliers, assembles the components on finished
printed circuit boards, performs post-production testing and provides the
customer with production process and testing documentation. The Company offers
its customers flexible, "just-in-time" delivery programs allowing product
shipments to be closely coordinated with the customers' inventory requirements.
In certain instances, the Company completes the assembly of its customers'
products at the Company's facilities by integrating printed circuit board
assemblies into other elements of the customers' products. The Company also
provides manufacturing services on a consignment basis, whereby the Company,
utilizing components provided by the customer, provides only assembly and
post-production testing services. The Company operates a total of 45 surface
mount production lines at its facilities in Angleton, Texas, Beaverton, Oregon,
Hudson, New Hampshire and Winona, Minnesota.
Revenues are recognized at the time products are shipped to customers and
may vary depending on the timing of customers' orders, product mix and
availability of component parts. Substantially all of the Company's business is
performed on a turnkey basis, which involves the procurement of component parts.
The gross profit margin for such materials is generally lower than the gross
profit associated with the manufacturing process and other value-added services.
The level and timing of purchase orders placed by the Company's customers
are affected by a number of factors not within the control of the Company,
including variation in demand for customers' products, customer attempts to
manage inventory and changes in customers' manufacturing strategies. The Company
typically does not obtain long-term purchase orders or commitments but instead
works with its customers to develop nonbinding forecasts of the future volume of
orders. Based on such nonbinding forecasts, the Company makes commitments
regarding the level of business that it will seek and accept, the timing of
production schedules and the levels and utilization of personnel and other
resources. A variety of conditions, both specific to each individual customer
and generally affecting each customer's industry, may cause customers to cancel,
reduce or delay purchase orders and commitments without penalty, except for
payment for services rendered, materials purchased and, in certain
circumstances, charges associated with such cancellation, reduction or delay.
Significant or numerous cancellations, reductions or delays in orders by
customers, or any inability of customers to pay for services provided by the
Company or to pay for components and materials purchased by the Company on such
customers' behalf, could have an adverse effect on the Company's business,
financial condition and results of operations.
A substantial percentage of the Company's sales historically have been
made to a relatively small number of customers. However, the Company continues
to seek to reduce its dependence on any one customer or industry by diversifying
and expanding its customer base, with the view to reducing the impact of a
substantial reduction in business from any one customer or industry. This
strategy was advanced by the acquisition of LCEC, as there was no customer
overlap between the Company and LCEC. Nevertheless, during the six months ended
June 30, 1998, the Company's three largest customers accounted for 53% of the
Company's sales. On a pro forma basis for the six months ended June 30, 1998,
the three largest customers of the Company and LCEC accounted for 54% of sales.
Although the loss of a major customer could have an adverse effect on the
Company, the Company does not believe that any such effect would be material
unless the Company were unable to replace such customer's business. The
Company's future sales are dependent on the success of its customers, some of
which operate in businesses associated with rapid technological change, vigorous
competition, short product life cycles and pricing and margin pressures.
Additionally, certain of the industries
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served by the Company are subject to economic cycles and have in the past
experienced, and are likely in the future to experience, recessionary periods.
Developments adverse to the Company's major customers or their products could
have an adverse effect on the Company.
The acquisition of LCEC represents a significant expansion in the scope of
the Company's operations, and the integration and consolidation of LCEC into the
Company has and will require substantial management, financial and other
resources. During the integration process, the financial performance of the
Company will be subject to the risks commonly associated with the acquisition of
businesses, including the impact of expenses incurred in connection with an
acquisition and the potential disruptions associated with the integration of
businesses. The integration process may place a significant strain on the
Company's management, production, technical, financial and other resources, and
may pose a risk with respect to production, customer service and market share.
The Company's future success is dependent upon its ability to effectively
integrate LCEC into the Company, including its ability to implement potentially
available marketing and cost saving opportunities, some of which may involve
operational changes. There can be no assurance as to the timing or amount of any
marketing opportunities or cost savings that may be realized as the result of
operational changes implemented during the integration process. Further, there
can be no assurance that the Company will not experience difficulties with
customers, personnel and business prospects or that the combination of the
Company and LCEC will be successful.
The following discussion should be read in conjunction with the unaudited
financial statements of the Company included elsewhere in this report.
ACQUISITION
On February 23, 1998, the Company completed its acquisition of LCEC for
$70.7 million in cash. LCEC, situated in Hudson, New Hampshire, is one of New
England's largest electronics manufacturing services companies, providing a
broad range of services including printed circuit board assembly and test,
system assembly and test, prototyping, depot repair, materials procurement, and
engineering support services. The transaction was accounted for under the
purchase method of accounting, and, accordingly, the results of operations of
LCEC since February 23, 1998 have been included in the accompanying condensed
consolidated statement of operations. The acquisition resulted in goodwill of
approximately $29.5 million that will be amortized on a straight-line basis over
15 years. See Note 8 of Notes to Condensed Consolidated Financial Statements.
In connection with the acquisition of LCEC, the Company obtained $40
million through borrowings under a five-year Term Loan with a commercial bank.
See Note 3 of Notes to Condensed Consolidated Financial Statements and
"Liquidity and Capital Resources".
Completion of the acquisition of LCEC on February 23, 1998 and the
inclusion of LCEC's operations in the Company's accounts subsequent to that date
is responsible for a substantial portion of the variation in the results of the
Company's operations (including components thereof) for the six months ended
June 30, 1998, as compared to the same period during the prior year. The effects
of the acquisition of LCEC on the Company's financial condition as of June 30,
1998, and its reported results of operations for the six months then ended,
should be considered when reviewing the financial information contained herein.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items in
the Company's Condensed Consolidated Statements of Operations as a percentage of
sales:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
----- ----- ----- -----
Sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 90.4 87.9 90.2 87.8
----- ----- ----- -----
Gross profit ..................... 9.6 12.1 9.8 12.2
Selling, general and administrative
expense .............................. 3.4 3.9 3.3 4.0
Amortization of goodwill ............... 0.7 0.5 0.6 0.6
----- ----- ----- -----
Income from operations ........... 5.5 7.7 5.9 7.6
Interest income ........................ 0.0 0.4 0.1 0.4
Interest expense ....................... (0.9) (0.8) (0.9) (0.8)
----- ----- ----- -----
Income before income tax
expense ......................... 4.6 7.3 5.1 7.2
Income tax expense ..................... 1.8 2.8 2.0 2.7
----- ----- ----- -----
Net income ....................... 2.8% 4.5% 3.1% 4.5%
===== ===== ===== =====
Sales for the second quarter of 1998 were approximately $132.6 million, a
69.6% increase from sales of approximately $78.2 million for the same quarter of
1997. Sales for the first six months of 1998 were approximately $240.7 million,
a 56.4% increase from sales of $153.9 million for the same period of 1997.
Approximately $78.8 million of the sales increase during the six-month period
was attributable to the acquisition of LCEC. The increase in sales also resulted
from increased sales volume from existing customers, and the addition of new
customers. The Company has received indications from several customers in the
high end computer and test and instruments segments of the business that their
purchases for the remainder of 1998 will be less than originally forecast as a
result of reduced demand for their products. After considering the effect of the
introduction of several new programs for other customers and the expected
results of cost control measures, the Company does not expect any such
reductions to have a material adverse effect on the Company's results of
operations for 1998. As indicated previously, however, the Company's results of
operations are dependent upon the success of its customers and a prolonged
period of reduced demand for its customers' products could have an adverse
effect on the Company's business unless the reduced sales to the affected
customers are replaced by sales to new or existing customers.
Gross profit increased 33.7% to approximately $12.7 million in the second
quarter of 1998 from approximately $9.5 million in the same quarter of 1997.
Gross profit increased 26.2% to $23.6 million from $18.7 million for the first
six months of 1998. The increase in gross profit was due primarily to the higher
sales volumes attributable to the LCEC acquisition, along with changes in
product and customer mix occurring in the ordinary course of business. Gross
profit as a percentage of sales decreased from 12.1% for the second quarter of
1997 to 9.6% for the second quarter of 1998. Gross profit as a percentage of
sales decreased from 12.2% for the first six months of 1997 to 9.8% for the
first six months of 1998. The Company's gross margin reflects a number of
factors, including product mix, the level of start up costs and efficiencies
associated with new programs, capacity utilization of surface mount and other
equipment, and pricing within the electronics industry. All of these factors are
continually changing and are interrelated, making it impracticable to determine
separately the effect of each factor. The decrease in gross profit as a
percentage of sales during the quarter and six months ended June 30, 1998 as
compared to the same periods in 1997 was due to lower margins on LCEC programs,
12
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changes in the product mix and the initiation of new programs, and
underutilization of the Hudson location.
Selling, general and administrative expenses were $4.5 million in the
second quarter, an increase of 50.0% from $3.0 million for the same quarter of
1997. Selling, general and administrative expenses were $8.0 million for the
first six months of 1998, an increase of 29.0% from $6.2 million for the same
period of 1997. Selling, general and administrative expenses as a percentage of
sales decreased from 3.9% for the second quarter of 1997 to 3.4% for the second
quarter of 1998. Selling, general and administrative expenses decreased from
4.0% for the first six months of 1997 to 3.3% for the first six months of 1998.
In order to satisfy the increased level of business activity and to continue the
development and improvement of the systems and processes necessary to
accommodate future growth, the Company has continued to add personnel. The
increase in selling, general and administrative expenses during the three and
six month periods of 1998 reflects these additional personnel and related
departmental expense, as well as the additional administrative expenses
resulting from the inclusion of LCEC in 1998. The Company anticipates selling,
general and administrative expenses will continue to increase in nominal terms
as the Company continues to build the internal management and support systems
necessary to support higher revenue levels.
The amortization of goodwill for the three and six-month periods ended
June 30, 1998 was $906,000 and $1,492,000, respectively, compared to $417,000
and $834,000, respectively, for the same periods of 1997. The increase was due
to the acquisition of LCEC on February 23, 1998.
Interest expense for the three and six-month periods ended June 30, 1998
was $1,286,000 and $2,188,000, respectively. Interest expense for the three and
six-month periods ended June 30, 1997 was $627,000 and $1,241,000, respectively.
The increase was due to the additional debt incurred in connection with the
acquisition of LCEC on February 23, 1998.
Interest income was approximately $55,000 and $223,000, respectively, for
the three and six-month periods ended June 30, 1998. Interest income for the
three and six-month periods ended June 30, 1997 was $331,000 and $567,000,
respectively. The decrease was due to the decrease in available cash and cash
equivalents and marketable securities as a result of the acquisition of LCEC on
February 23, 1998.
Income tax expense for the three and six-month periods ended June 30, 1998
was $2,356,000 and $4,721,000, respectively. Income tax expense for the three
and six-month periods ended June 30, 1997 was $2,165,000 and $4,182,000,
respectively. The increase was due to higher pre-tax income and nondeductible
amortization of goodwill partially offset by the benefit from the use of a
foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth and operations through funds generated
from operations, proceeds from the sale of its common stock and funds borrowed
under its credit facilities.
Cash provided by operating activities was $16.2 million for the six months
ended June 30, 1998. Cash provided by operations was primarily the result of
increases in net income, depreciation and amortization, and decreases in
accounts receivable and inventories offset by decreases in accounts payable. The
Company's accounts payable, accounts receivables, and
13
<PAGE>
inventories have decreased $10.0 million, $1.8 million, and $8.2 million (net of
effects from acquisition of LCEC), respectively, during the first six months of
1998, reflecting the Company's improved working capital management. The Company
is continuing the practice of purchasing components only after customer orders
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 the Company that may not meet
Company requirements. The Company has not experienced significant supply
constraints in the recent past nor does it expect to in the near future.
Cash used in investing activities was $63.9 million for the six months
ended June 30, 1998. On February 23, 1998, the Company completed the acquisition
of LCEC for approximately $70.7 million in cash. See Note 8 of Notes to
Condensed Consolidated Financial Statements. Capital expenditures of $4.6
million for the six months ended June 30, 1998 were primarily concentrated in
test equipment. In connection with the acquisition of LCEC, the Company redeemed
$11.4 million in marketable securities during the six months ended June 30,
1998.
Cash provided by financing activities was $35.6 million for the six months
ended June 30, 1998. In connection with the acquisition of LCEC on February 23,
1998, the Company obtained $40 million through borrowings under the Term Loan.
Principal on the Term Loan is payable in quarterly installments of $2.0 million
beginning June 30, 1998 with a final installment of the unpaid principal amount
due March 31, 2003. The Term Loan bears interest, at the Company's option, at
either the bank's Eurodollar rate plus .625% to 1.375% or its prime rate, and
interest is payable quarterly. The margin on the Eurodollar rate fluctuates with
the Company's ratio of debt to EBITDA. The Term Loan includes customary
affirmative and negative covenants and restricts the Company's ability to incur
additional indebtedness and to pay dividends. The Company made principal
payments under the Term Loan totaling $4 million during the six months ended
June 30, 1998.
The Company has a $25 million revolving line of credit with a commercial
bank. The Company is entitled to borrow under the line of credit up to the
lesser of $25 million or the sum of 75% of its eligible accounts receivable and
25% of its eligible inventories. Interest on the line of credit is payable
quarterly, at the Company's option, at either the bank's Eurodollar rate plus
.625% to 1.375% or its prime rate. A commitment fee of 0.25% per annum on the
unused portion of the line of credit is payable quarterly in arrears. The line
of credit agreement contains certain financial covenants and restricts the
ability of the Company to incur additional debt without the consent of the bank
and to pay dividends. The line of credit matures on March 31, 2003. As of June
30, 1998, the Company had no borrowings outstanding under this line of credit.
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Some risk of costs and liabilities related to these matters is
inherent in the Company's business as with many similar businesses. Management
believes that the Company's business is operated in substantial compliance with
applicable environmental, waste management, health and safety regulations.
The Company may require additional capital to finance further enhancements
to or acquisitions or expansions of its manufacturing capacity. Management
believes that the level of working capital will continue to grow at a rate
generally consistent with the growth of the
14
<PAGE>
Company's operations. Although no assurance can be given that future financing
will be available on terms acceptable to the Company, the Company may seek
additional funds from time to time through public or private debt or equity
offerings or through bank borrowings to the extent permitted by its existing
debt agreements. Management believes that the existing cash balances, funds
generated from operations, and borrowings under the Company's credit facility
will be sufficient to permit the Company to meet its liquidity requirements in
1998 and for the foreseeable future.
The Company does not hold or issue derivative financial instruments in the
normal course of business. Inflation and changing prices have not significantly
affected the Company's operating results or the markets in which the Company
performs services.
The Company has reached an agreement with the Industrial Development
Agency (Ireland) (the "IDA") to establish a manufacturing operation in Dublin.
Under the terms of the agreement with the IDA, the Company will commence its
first international manufacturing operations during the second half of 1998. The
total cost to the Company of establishing and maintaining an international
operation in Dublin is not expected to be material to the Company's operations,
financial condition or liquidity.
YEAR 2000 ISSUES
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by Year 2000 software failures which
can arise in date-sensitive software applications which utilize a field of two
digits rather than four to define a specific year. Absent corrective actions,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions to various activities and operations.
Many of the Company's business and operating systems are currently Year
2000 compliant, and the Company initiated research and development efforts
during 1997 to address those systems which are not currently Year 2000
compliant. During the second quarter of 1998, the Company selected Baan U.S.A.,
Inc. to provide an Enterprise Resource Planning System which will be Year 2000
compliant. The Company is planning to complete all necessary Year 2000 upgrades
of its major systems in 1999, and is currently identifying and developing
conversion strategies for its remaining systems that may be impacted by the Year
2000 issue.
The Company currently does not have an overall estimate of the costs
associated with the purchase and implementation of the new Enterprise Resource
Planning System. The costs of this software will be capitalized and amortized
over the estimated useful life of the software, and costs associated with the
preliminary project stage and post-implementation stage will be expensed as
incurred. The year 2000 component of this system can not be readily segregated
from the total cost of the company-wide Enterprise Resource Planning System
implementation. The total cost to the Company of achieving Year 2000 compliant
systems is not expected to be material to the Company's operations, financial
condition or liquidity.
QUARTERLY RESULTS
Although Management does not believe that the Company's business is
affected by seasonal factors, the Company's sales and earnings may vary from
quarter to quarter, depending primarily upon the timing of manufacturing orders.
Therefore, the Company's operating results
15
<PAGE>
for any particular quarter may not be indicative of the results for any future
quarter or for the year.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) - (c) At the Annual Meeting of Shareholders held on May 19, 1998, the
Company's nominees for directors to serve until the 1999 Annual Meeting of
Shareholders were elected, the appointment of KPMG Peat Marwick LLP as the
independent auditors for the Company for the fiscal year ended December 31, 1998
was ratified, and the Company's 1990 Stock Option Plan was amended to increase
the number of shares of common stock of the Company subject thereto by 1 million
shares. With respect to the election of directors, the voting was as follows:
NOMINEE FOR WITHHELD
------- --- --------
John C. Custer 8,417,520 24,168
Donald E. Nigbor 8,417,520 24,168
Steven A. Barton 8,417,520 24,168
Cary T. Fu 8,417,520 24,168
Peter G. Dorflinger 8,417,520 24,168
Gerald W. Bodzy 8,417,520 24,168
David H. Arnold 8,417,520 24,168
With respect to the ratification of the appointment of KPMG Peat Marwick LLP as
the independent auditors of the Company, the voting was as follows:
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
8,273,085 2,800 14,603 151,200
With respect to the amendment of the Company's 1990 Stock Option Plan, the
voting was as follows:
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
5,331,312 1,954,236 42,687 1,113,453
(d) Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended June
30, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 13, 1998.
BENCHMARK ELECTRONICS, INC.
(Registrant)
By: /s/ DONALD E. NIGBOR
Donald E. Nigbor
President
(Principal Executive Officer)
By: /s/ CARY T. FU
Cary T. Fu
Executive Vice President
(Principal Financial Officer)
18
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,985
<SECURITIES> 0
<RECEIVABLES> 62,830
<ALLOWANCES> 0
<INVENTORY> 76,401
<CURRENT-ASSETS> 154,316
<PP&E> 74,229
<DEPRECIATION> 29,465
<TOTAL-ASSETS> 250,377
<CURRENT-LIABILITIES> 59,606
<BONDS> 58,246
0
0
<COMMON> 1,158
<OTHER-SE> 127,340
<TOTAL-LIABILITY-AND-EQUITY> 250,377
<SALES> 240,682
<TOTAL-REVENUES> 240,682
<CGS> 217,096
<TOTAL-COSTS> 217,096
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,188
<INCOME-PRETAX> 12,199
<INCOME-TAX> 4,721
<INCOME-CONTINUING> 7,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,478
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.61
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> 6-MOS
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 29,317
<SECURITIES> 0
<RECEIVABLES> 37,148
<ALLOWANCES> 0
<INVENTORY> 57,242
<CURRENT-ASSETS> 127,994
<PP&E> 47,803
<DEPRECIATION> 18,567
<TOTAL-ASSETS> 190,364
<CURRENT-LIABILITIES> 46,285
<BONDS> 30,400
0
0
<COMMON> 1,150
<OTHER-SE> 110,847
<TOTAL-LIABILITY-AND-EQUITY> 190,364
<SALES> 153,879
<TOTAL-REVENUES> 153,879
<CGS> 135,171
<TOTAL-COSTS> 135,171
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,241
<INCOME-PRETAX> 11,030
<INCOME-TAX> 4,182
<INCOME-CONTINUING> 6,848
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,848
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.58
</TABLE>
