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
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FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER: 1-10560
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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 November 13, 1998 there were 11,616,768 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)
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................. $ 10,349 $ 21,029
Accounts receivable, net ................... 63,529 39,772
Income taxes receivable .................... 1,324 314
Inventories ................................ 71,108 61,134
Prepaid expenses and other assets .......... 2,059 1,545
Deferred tax asset ......................... 2,802 1,359
--------- ---------
Total current assets ..................... 151,171 125,153
--------- ---------
Property, plant and equipment, at cost ....... 77,370 54,061
Accumulated depreciation ..................... (32,354) (23,245)
--------- ---------
Net property, plant and equipment ........ 45,016 30,816
--------- ---------
Other assets, net ............................ 5,037 241
Marketable securities ........................ -- 11,431
Goodwill, net ................................ 49,816 22,681
--------- ---------
$ 251,040 $ 190,322
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt .......... $ 8,221 $ 155
Accounts payable ........................... 47,999 31,694
Accrued liabilities ........................ 9,631 5,425
--------- ---------
Total current liabilities ................ 65,851 37,274
Long term debt, less current portion ......... 48,137 30,330
Deferred income taxes ........................ 3,990 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 - 11,664,652
and 11,623,252, respectively;
outstanding - 11,615,168 and 11,573,768,
respectively ............................. 1,161 1,157
Additional paid-in capital ................. 69,934 69,408
Retained earnings .......................... 62,087 50,427
Less treasury shares, at cost; 49,484
shares .................................... (120) (120)
--------- ---------
Total shareholders' equity ............... 133,062 120,872
Commitments and contingencies
--------- ---------
$ 251,040 $ 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)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
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Sales ...................................... $ 139,645 $ 83,183 $ 380,327 $ 237,062
Cost of sales .............................. 126,100 73,026 343,196 208,198
--------- --------- --------- ---------
Gross profit ......................... 13,545 10,157 37,131 28,864
Selling, general and administrative
expense ................................... 4,767 3,172 12,758 9,394
Amortization expense ....................... 909 417 2,401 1,252
--------- --------- --------- ---------
Income from operations ............... 7,869 6,568 21,972 18,218
Interest income ............................ 120 328 343 895
Interest expense ........................... (1,175) (616) (3,363) (1,857)
Other income (expense) ..................... 8 79 69 131
--------- --------- --------- ---------
Income before income tax expense ..... 6,822 6,359 19,021 17,387
Income tax expense ......................... 2,640 2,346 7,361 6,527
--------- --------- --------- ---------
Net income ........................... $ 4,182 $ 4,013 $ 11,660 $ 10,860
========= ========= ========= =========
Earnings per common share:
Basic ................................ $ 0.36 $ 0.35 $ 1.01 $ 0.94
========= ========= ========= =========
Diluted .............................. $ 0.35 $ 0.33 $ 0.96 $ 0.90
========= ========= ========= =========
Weighted average number of common
shares outstanding:
Basic ................................ 11,602 11,512 11,586 11,494
========= ========= ========= =========
Diluted .............................. 12,116 12,322 12,192 12,021
========= ========= ========= =========
</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)
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NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------- --------
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Cash flows from operating activities:
Net income .......................................... $ 11,660 $ 10,860
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense ........... 12,340 8,904
Deferred income taxes ........................... 1,412 (515)
(Gain) loss on sale of property, plant and
equipment ....................................... (8) (98)
Tax benefit of employee stock options exercised . 194 120
Amortization of premiums on marketable securities 46 230
Changes in operating assets and liabilities, net of
effects from acquisition of business:
Accounts receivable ............................. 1,053 (588)
Inventories ..................................... 13,541 (16,385)
Prepaid expenses and other assets ............... (513) (902)
Accounts payable ................................ (4,417) 15,596
Accrued liabilities ............................. 1,110 (493)
Income taxes .................................... (1,010) 427
-------- --------
Net cash provided by operations ............. 35,408 17,156
-------- --------
Cash flows from investing activities:
Capital expenditures, net ........................... (8,148) (8,234)
Capitalized software costs .......................... (4,464) --
Redemption (purchase) of marketable securities ...... 11,385 (2,265)
Acquisition, net of cash acquired ................... (70,680) --
-------- --------
Net cash used in investing activities ....... (71,907) (10,499)
-------- --------
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 .... 336 392
Stock offering expenses ............................. -- (52)
Principal payments on long term debt ................ (14,127) (177)
-------- --------
Net cash provided by financing activities ... 25,819 163
Net increase (decrease) in cash ....................... (10,680) 6,820
Cash at beginning of year ........................... 21,029 13,800
-------- --------
Cash at September 30 ................................ $ 10,349 $ 20,620
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid ................................... $ 6,649 $ 6,038
======== ========
Interest paid ....................................... $ 3,649 $ 2,509
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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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 605,888 and 526,740 for the nine months ended September 30, 1998 and
1997, respectively, and 513,923 and 810,237 for the three months ended September
30, 1998 and 1997, respectively, were used in the calculation of diluted
earnings per share. Options to purchase 213,000 and 290,000 shares of common
stock for three and nine-month periods ended September 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 the Senior Note at
par plus any prepayment penalty. As of September 30, 1998, the Company had $30
million outstanding under the Senior Note.
5
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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 September 30, 1998, the Company had $26 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
September 30, 1998, the Company had no borrowings outstanding under this line of
credit.
NOTE 4 - INVENTORIES
Inventory costs are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
Raw materials ...................... $50,495,216 $41,837,205
Work in process .................... 20,612,757 19,296,758
----------- -----------
$71,107,973 $61,133,963
=========== ===========
NOTE 5 - INCOME TAXES
Income tax expense (benefit) consists of the following:
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
Federal - Current ..................... $ 5,266,000 $ 6,081,000
State - Current ....................... 683,000 961,000
Federal/State - Deferred .............. 1,412,000 (515,000)
----------- -----------
Total ............................ $ 7,361,000 $ 6,527,000
=========== ===========
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.
6
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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 occurred on January 1, 1997 and is not
intended to project the Company's results of operations for any future period or
date.
7
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Pro forma condensed consolidated financial information for the periods
ended September 30, 1998 and 1997 (unaudited):
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---- ----
Net sales ........................................ $404,597,000 $451,287,000
Gross profit ..................................... $ 35,511,000 $ 38,596,000
Income from operations ........................... $ 18,256,000 $ 18,936,000
Net income ....................................... $ 9,082,000 $ 9,594,000
Earnings per common share:
Basic .......................................... $ 0.78 $ 0.83
Diluted ........................................ $ 0.74 $ 0.80
Weighted average number of shares outstanding:
Basic .......................................... 11,586,000 11,494,000
Diluted ........................................ 12,192,000 12,021,000
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 ability to deal with the Year
2000 issue, including problems that may arise on the part of third parties; 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.
8
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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, Winona, Minnesota, and Dublin, Ireland.
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 nine months ended
September 30, 1998, the Company's three largest customers accounted for 56.1% of
the Company's sales. On a pro forma basis for the nine months ended September
30, 1998, the three largest customers of the Company and LCEC accounted for
56.2% 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
9
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competition, short product life cycles and pricing and margin pressures.
Additionally, certain of the industries 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 nine months ended
September 30, 1998, as compared to the same period during the prior year. The
effects of the acquisition of LCEC on the Company's financial
10
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condition as of September 30, 1998, and its reported results of operations for
the nine months then ended, should be considered when reviewing the financial
information contained herein.
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Sales ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................. 90.3 87.8 90.2 87.8
----- ----- ----- -----
Gross profit ........................ 9.7 12.2 9.8 12.2
Selling, general and administrative expense 3.4 3.8 3.4 4.0
Amortization of goodwill .................. 0.7 0.5 0.6 0.5
----- ----- ----- -----
Income from operations .............. 5.6 7.9 5.8 7.7
Interest income ........................... 0.1 0.4 0.1 0.4
Interest expense .......................... (0.8) (0.7) (0.9) (0.8)
----- ----- ----- -----
Income before income tax expense .... 4.9 7.6 5.0 7.3
Income tax expense ........................ 1.9 2.8 1.9 2.8
----- ----- ----- -----
Net income .......................... 3.0% 4.8% 3.1% 4.5%
===== ===== ===== =====
</TABLE>
Sales for the third quarter of 1998 were approximately $139.6 million, a
67.8% increase from sales of approximately $83.2 million for the same quarter of
1997. Sales for the first nine months of 1998 were approximately $380.3 million,
a 60.4% increase from sales of $237.1 million for the same period of 1997.
Approximately $142.9 million of the sales increase during the nine-month period
was attributable to the acquisition of LCEC. 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. As indicated previously, 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 32.4% to approximately $13.5 million in the third
quarter of 1998 from approximately $10.2 million in the same quarter of 1997.
Gross profit increased 28.4% to $37.1 million from $28.9 million for the first
nine 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 12.2% for the third quarter of
1997 to 9.7% for the third quarter of 1998. Gross profit as a percentage of
sales decreased from 12.2% for the first nine months of 1997 to 9.8% for the
first nine 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 nine months ended September 30, 1998
as compared to the same periods in 1997 was due to lower margins on LCEC
programs, changes in the product mix and the initiation of new programs, and
underutilization of the Hudson location.
11
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Selling, general and administrative expenses were $4.8 million in the
third quarter, an increase of 50.0% from $3.2 million for the same quarter of
1997. Selling, general and administrative expenses were $12.8 million for the
first nine months of 1998, an increase of 36.2% from $9.4 million for the same
period of 1997. Selling, general and administrative expenses as a percentage of
sales decreased from 3.8% for the third quarter of 1997 to 3.4% for the third
quarter of 1998. Selling, general and administrative expenses decreased from
4.0% for the first nine months of 1997 to 3.4% for the first nine 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
nine 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 nine-month periods ended
September 30, 1998 was $909,000 and $2,401,000, respectively, compared to
$417,000 and $1,252,000, 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 nine-month periods ended September 30,
1998 was $1,175,000 and $3,363,000, respectively. Interest expense for the three
and nine-month periods ended September 30, 1997 was $616,000 and $1,857,000,
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 $120,000 and $343,000, respectively, for
the three and nine-month periods ended September 30, 1998. Interest income for
the three and nine-month periods ended September 30, 1997 was $328,000 and
$895,000, 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 nine-month periods ended September
30, 1998 was $2,640,000 and $7,361,000, respectively. Income tax expense for the
three and nine-month periods ended September 30, 1997 was $2,346,000 and
$6,527,000, 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 $35.4 million for the nine
months ended September 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 inventories have
decreased $4.4 million, $1.1 million, and $13.5 million (net of
12
<PAGE>
effects from acquisition of LCEC), respectively, during the first nine 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 $71.9 million for the nine months
ended September 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 $8.1
million for the nine months ended September 30, 1998 were primarily concentrated
in test equipment. Capitalized software costs of $4.5 million for the nine
months ended September 30, 1998 were for the purchase and implementation of the
Company's Enterprise Resource Planning System. In connection with the
acquisition of LCEC, the Company redeemed $11.4 million in marketable securities
during the nine months ended September 30, 1998.
Cash provided by financing activities was $25.8 million for the nine
months ended September 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 $14 million during
the nine months ended September 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
September 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
13
<PAGE>
working capital will continue to grow at a rate generally consistent with the
growth of the 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 established its first
international manufacturing operations during the third quarter 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.
STATE OF READINESS
Many of the Company's business and operating systems are currently Year
2000 compliant, and the Company initiated a review of those systems during 1997
to address those systems that are not currently Year 2000 compliant. Areas
addressed include major third-party suppliers of components of the Company's
products as well as full reviews of the Company's manufacturing equipment,
telephone and voice mail systems, security systems and other office support
systems. The Company has also initiated formal communications with significant
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. No significant information technology initiatives have been deferred by
the Company as a result of its Year 2000 project. In addition, the Company has
selected Baan U.S.A., Inc. to provide an Enterprise Resource Planning System to
improve processes and to increase efficiencies, which will be Year 2000
compliant. The new Enterprise Resource Planning System implementation is
scheduled for completion at all locations by November 1999. All necessary Year
2000 upgrades of major systems, including those supplied by vendors, have been
identified and conversion strategies developed and are under deployment.
14
<PAGE>
COSTS TO ADDRESS THE YEAR 2000 ISSUE
The estimated total cost to address the Company's Year 2000 issues,
including the cost associated with the new Enterprise Resource Planning System,
is approximately $13 million. Costs incurred and expected to be incurred consist
primarily of the cost of Company personnel involved in updating applications and
operating systems and the costs of software updates and patches (many of which
are provided free of charge from the vendors). The estimated total cost
associated with the purchase and implementation of the new Enterprise Resource
Planning System is approximately $12 million. 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 amount expended on Year 2000
issues through September 30, 1998, is approximately $4.8 million, of which $4.7
million related to the new Enterprise Resource Planning System implementation
and approximately $100,000 related to the cost of identifying and communicating
with third parties. The costs of the Year 2000 process and the timetable on
which the Company believes it will complete any Year 2000 modifications are
based on management's best estimates, which are derived utilizing a number of
assumptions of future events, including the availability of certain resources
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties. In addition, there can be no assurance that the systems of other
companies on which the Company's systems rely will be converted on a timely
basis or that such failure by another company to convert would not have an
adverse effect on the Company's systems.
RISKS PRESENTED BY THE YEAR 2000 ISSUE
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 issue, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The steps taken by the Company to
address the Year 2000 issues are expected to reduce significantly the Company's
level of uncertainty about the Year 2000 problem and, in particular, about the
Year 2000 compliance and readiness of its material third party suppliers and
customers. The Company believes that, with the implementation of the Enterprise
Resource Planning System and completion of identifying and communication with
third parties as scheduled, the possibility of significant interruptions of
normal operations should be reduced.
CONTINGENCY PLANS
Based on available information, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues, or that the cost of remedial actions will have a material
adverse effect on its business, financial condition or results of operations.
Accordingly, and as the program is on schedule to be completed during the fall
of 1999, the Company has not formulated a worse case scenario in the event its
Year 2000 project is not completed in a timely manner. The Company has a
contingency plan in place in the event all scheduled implementations are not
completed by the end of 1999. All necessary Year 2000
15
<PAGE>
upgrades of major systems and software patches, including those supplied by
vendors, have been identified and conversion strategies are under deployment.
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 for any particular quarter may not be
indicative of the results for any future quarter or for the year.
PART II - OTHER INFORMATION
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
September 30, 1998.
16
<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 November 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)
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAONS CUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,349
<SECURITIES> 0
<RECEIVABLES> 63,529
<ALLOWANCES> 0
<INVENTORY> 71,108
<CURRENT-ASSETS> 151,171
<PP&E> 77,370
<DEPRECIATION> 32,354
<TOTAL-ASSETS> 251,040
<CURRENT-LIABILITIES> 65,851
<BONDS> 48,137
0
0
<COMMON> 1,161
<OTHER-SE> 131,901
<TOTAL-LIABILITY-AND-EQUITY> 251,040
<SALES> 380,327
<TOTAL-REVENUES> 380,327
<CGS> 343,196
<TOTAL-COSTS> 343,196
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,363
<INCOME-PRETAX> 19,021
<INCOME-TAX> 7,361
<INCOME-CONTINUING> 11,660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,660
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0.96
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAONS CUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,620
<SECURITIES> 0
<RECEIVABLES> 39,771
<ALLOWANCES> 0
<INVENTORY> 64,485
<CURRENT-ASSETS> 127,682
<PP&E> 52,183
<DEPRECIATION> 20,820
<TOTAL-ASSETS> 193,943
<CURRENT-LIABILITIES> 45,881
<BONDS> 30,365
0
0
<COMMON> 1,152
<OTHER-SE> 115,167
<TOTAL-LIABILITY-AND-EQUITY> 193,943
<SALES> 237,062
<TOTAL-REVENUES> 237,062
<CGS> 208,198
<TOTAL-COSTS> 208,198
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,857
<INCOME-PRETAX> 17,387
<INCOME-TAX> 6,527
<INCOME-CONTINUING> 10,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,860
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.90
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