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 MARCH 31, 1999 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 April 30, 1999 there were 11,669,783 shares of Common Stock, par
value $0.10 per share, outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................ $ 12,084 $ 23,077
Accounts receivable, net ................. 80,545 57,179
Income taxes receivable .................. -- 1,120
Inventories .............................. 91,230 53,718
Prepaid expenses and other assets ........ 8,819 1,897
Deferred tax asset ....................... 2,501 2,488
--------- ---------
Total current assets ................. 195,179 139,479
--------- ---------
Property, plant and equipment, at cost ..... 91,444 80,826
Accumulated depreciation ................... (39,165) (35,264)
--------- ---------
Net property, plant and equipment .... 52,279 45,562
--------- ---------
Other assets, net .......................... 8,806 7,948
Goodwill, net .............................. 47,997 48,907
--------- ---------
$ 304,261 $ 241,896
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt ........ $ 33,164 $ 8,200
Accounts payable ......................... 67,654 37,046
Income taxes payable ..................... 1,448 --
Accrued liabilities ...................... 9,567 7,968
--------- ---------
Total current liabilities ............ 111,833 53,214
Long term debt, less current portion ....... 44,111 46,111
Deferred income taxes ...................... 4,630 4,570
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 - 11,715,567 and
11,676,967, respectively;
outstanding - 11,666,083 and
11,627,483, respectively ............... 1,167 1,162
Additional paid-in capital ............... 70,803 70,159
Retained earnings ........................ 71,837 66,800
Less treasury shares, at cost;
49,484 shares .......................... (120) (120)
--------- ---------
Total shareholders' equity ........... 143,687 138,001
Commitments and contingencies
--------- ---------
$ 304,261 $ 241,896
========= =========
See accompanying notes to condensed consolidated financial statements.
2
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BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ---------
Sales .......................................... $ 146,546 $ 108,046
Cost of sales .................................. 131,856 97,141
--------- ---------
Gross profit ............................. 14,690 10,905
Selling, general and administrative expense .... 4,950 3,526
Amortization of goodwill ....................... 910 585
--------- ---------
Income from operations ................... 8,830 6,794
Interest expense ............................... (1,125) (902)
Interest income ................................ 138 168
Other income ................................... 78 47
--------- ---------
Income before income taxes ............... 7,921 6,107
Income tax expense ............................. 2,884 2,365
--------- ---------
Net income ............................... $ 5,037 $ 3,742
========= =========
Earnings per share:
Basic .................................... $ 0.43 $ 0.32
Diluted .................................. $ 0.40 $ 0.31
========= =========
Weighted average number of shares outstanding:
Basic .................................... 11,655 11,575
Diluted .................................. 12,703 12,243
========= =========
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)
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income ....................................... $ 5,037 $ 3,742
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense ........ 4,818 3,435
Deferred income taxes ........................ 47 320
Gain on sale of property, plant and
equipment .................................. (34) (7)
Tax benefit of employee stock options
exercised .................................. 211 20
Amortization of premiums on marketable
securities ................................. -- 46
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable .......................... (23,366) (7,890)
Inventories .................................. (2,718) (3,536)
Prepaid expenses and other assets ............ (323) 7
Accounts payable ............................. 30,608 8,919
Accrued liabilities .......................... 1,599 (304)
Income taxes ................................. 2,568 2,017
-------- --------
Net cash provided by operations .......... 18,447 6,769
-------- --------
Cash flows from investing activities:
Capital expenditures, net ........................ (3,956) (2,433)
Additions to capitalized software ................ (734) --
Proceeds from sale of marketable securities ...... -- 11,385
Acquisitions, net of cash acquired ............... (48,000) (70,646)
-------- --------
Net cash used in investing activities .... (52,690) (61,694)
-------- --------
Cash flows from financing activities:
Debt issuance costs .............................. (152) (390)
Proceeds from issuance of debt ................... 25,000 40,000
Proceeds from exercise of employee stock options . 438 33
Principal payments on long-term debt ............. (2,036) (52)
-------- --------
Net cash provided by financing activities 23,250 39,591
-------- --------
Net decrease in cash and cash equivalents .......... (10,993) (15,334)
Cash and cash equivalents at beginning of year ... 23,077 21,029
-------- --------
Cash and cash equivalents at March 31 ............ $ 12,084 $ 5,695
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid ................................ $ 57 $ 9
======== ========
Interest paid .................................... $ 1,610 $ 1,217
======== ========
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 electronics manufacturing and design services to original equipment
manufacturers (OEMs) in select industries, including enterprise computer,
telecommunications, medical device, industrial control and testing
instrumentation.
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, 1998.
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 1,047,686 and 668,494 for the three months ended March 31, 1999 and
1998, respectively, were used in the calculation of diluted earnings per share.
Options to purchase 147,000 shares of common stock for the three-month period
ended March 31, 1998, 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 - BORROWING FACILITIES
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 March 31, 1999, the Company had $30
million outstanding under the Senior Note.
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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
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 March 31, 1999, the Company had $22 million outstanding under
the Term Loan bearing interest at rates ranging from 6.3125% to 7.75%.
The Company has a $65 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 $65 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
.88% to 1.63% or its prime rate. A commitment fee of 0.20% to 0.30% 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, 2004. As of March
31, 1999, the Company had $25 million outstanding under this line of credit and
$40 million available for future borrowings.
NOTE 4 - INVENTORIES
Inventory costs are summarized as follows:
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
Raw materials .................... $57,952,000 $39,230,000
Work in process .................. 33,278,000 14,488,000
----------- -----------
$91,230,000 $53,718,000
=========== ===========
NOTE 5 - INCOME TAXES
Income tax expense consists of the following:
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
---------- ----------
Federal - Current ...................... $2,305,000 $1,860,000
Foreign - Current ...................... 105,000 --
State - Current ........................ 427,000 185,000
Federal/State - Deferred ............... 47,000 320,000
---------- ----------
Total ............................. $2,884,000 $2,365,000
========== ==========
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, foreign income taxes, 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.
The Company considers earnings from its foreign subsidiary to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been made for these
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earnings. Upon distribution of foreign subsidiary earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to adjustment for foreign tax credits).
In addition for a period of up to ten years the Company will be subject to
taxes in a certain foreign location at rates substantially less than the normal
tax rates for that jurisdiction. The effects of these reduced rates in income
tax expense for the three months ended March 31, 1999 was not significant.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company currently
does not hold or issue derivative financial instruments in the normal course of
business. Accordingly, adoption of SFAS No. 133 as of January 1, 2000 is not
expected to affect the Company's consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5 requires all start-up costs related to new
operations be expensed as incurred. In addition, all start-up costs that were
capitalized in the past must be expensed when SOP 98-5 is adopted. The adoption
of SOP 98-5 as of January 1, 1999 did not have a material impact on the
Company's financial position, results of operations or liquidity.
NOTE 7 - ACQUISITIONS
On March 1, 1999, the Company acquired certain plant and equipment and
inventories from Stratus Computer Ireland (Stratus), a wholly-owned subsidiary
of Ascend Communications, Inc. (Ascend) for approximately $48 million, subject
to adjustment. The acquisition price was allocated $6.6 million to equipment,
$34.8 million to inventories and $6.6 million to other current assets (the
Company expects this amount to be remitted back to the Company as a final
adjustment to the transaction). Stratus provided systems integration services
for large and sophisticated fault-tolerant mainframe computers. In connection
with the transaction, the Company entered into a three-year supply agreement to
provide these system integration services to Ascend and Stratus Holding Limited
and the Company hired approximately 260 employees. In conjunction with the
purchase of the Stratus assets, the Company increased its revolving line of
credit to $65 million and borrowed $25 million.
On February 23, 1998, the Company completed its acquisition of LCEC for
$70 million in cash. LCEC, situated in Hudson, New Hampshire, provides 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 statements of income. The acquisition resulted in goodwill of
approximately $29.5 million that is being amortized on a straight-line basis
over 15 years. In connection with the acquisition of LCEC, the Company obtained
$40 million through borrowings under a five-year Term Loan with a commercial
bank.
7
<PAGE>
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 the forward-looking statements include,
without limitation, the integration of the operations of LCEC and the assets in
Ireland purchased from Stratus; changes in customer concentration; the absence
of long term sales contracts; dependence on the growth of the enterprise
computer, telecommunications, medical device, industrial control, and testing
and instrumentation industries; availability of customer specified components;
dependence on certain key executives; Year 2000 problems and competition from
other providers of electronics manufacturing services. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
GENERAL
The Company provides electronics manufacturing services to OEMs in select
industries, including enterprise computer, telecommunications, medical device,
industrial control, and testing and instrumentation industries. We offer a
complete range of integrated electronics manufacturing services from initial
product design to volume production and order fulfillment. We believe that we
have developed particular strengths in the manufacturing process for large,
complex, high-density assemblies. In addition, we offer advanced engineering
services including product design, PCB layout, quickturn prototyping and test
development. Throughout the production process, we offer logistics services,
such as materials procurement, inventory management, packaging and distribution.
Substantially all of the Company's manufacturing services are provided on
a turnkey basis, whereby the Company purchases customer-specified components
from its 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 39 surface mount production lines at its facilities
in Angleton, Texas; Beaverton, Oregon; Hudson, New Hampshire; Winona, Minnesota;
and Dublin, Ireland.
Sales 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.
We do not typically obtain long-term purchase orders or commitments from
our customers. Instead we work with our customers to develop forecasts for
future orders, which are not binding.
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Customers may cancel their orders, change their orders, change production
quantities from forecast volumes or delay production for a number of reasons
beyond our control. Cancellations, reductions or delays by a significant
customer or by a group of customers would have an adverse effect on us. In
addition, as many of our costs and operating expenses are relatively fixed, a
reduction in customer demand can adversely affect our gross margins and
operating income.
A substantial percentage of our sales have been made to a relatively small
number of customers, and the loss of a major customer would adversely affect us.
During the three months ended March 31, 1999, our three largest customers each
represented in excess of 10% our sales and together represented 52% of the
Company's sales. We expect to continue to depend on the sales from our largest
customers and any material delay, cancellation or reduction of orders from these
or other significant customers would have a material adverse effect on our
results of operations. We are dependent on the continued growth, viability and
financial stability of our customers, some of which operate in industries that
are, to a varying extent, subject to technological change, vigorous competition
and short product life cycles. When our customers are adversely affected by
these factors, we may be similarly affected.
We have made two significant acquisitions in the last fifteen months, and
a total of three significant acquisitions since 1996. In addition, we may
acquire the stock or assets of other companies in the future. The integration of
acquired operations requires substantial management, financial and other
resources and involves a number of risks and challenges, including:
o potential loss of key employees or customers of the acquired companies;
o diversion of management's attention;
o increased expenses and working capital requirements; and,
o increased exposure to Year 2000 or other risks.
The difficulties of integrating acquired businesses may be further complicated
by geographic distances. Our most recent acquisition was in Dublin, Ireland, and
we may make an acquisition in the Far East. During the integration process,
other parts of our business could be disrupted and the financial performance of
our business could be adversely affected. Our success is also dependent upon our
ability to integrate any future acquisitions. Additional expansion or
acquisitions would require investment of financial resources and may require
debt or equity financing which could dilute our shareholders' interest in us. No
assurance can be given that we will consummate any acquisitions in the future,
or that any debt or equity financing required for future acquisitions will be
available on terms acceptable to us.
The following discussion should be read in conjunction with the unaudited
financial statements of the Company included elsewhere in this report.
RECENT ACQUISITIONS
On March 1, 1999, the Company acquired certain equipment and inventories
from Stratus Computer Ireland (Stratus), a wholly-owned subsidiary of Ascend
Communications, Inc. (Ascend) for approximately $48 million in cash, subject to
adjustment. Based on March 31, 1999 estimates, the acquisition price was
allocated $6.6 million to equipment, $34.8 million to inventories with an
estimated$6.6 million to other current assets (as the Company expects this
amount to be remitted back to the Company as a final adjustment to the
transaction). Stratus provided systems integration services for large and
sophisticated fault-tolerant mainframe computers. In connection with the
transaction, the Company entered into a three-year supply agreement to provide
these
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system integration services to Ascend and Stratus Holding Limited and the
Company hired approximately 260 employees. In conjunction with the purchase of
the Stratus assets, the Company increased its revolving line of credit to $65
million and borrowed $25 million. See Note 3 and Note 7 of Notes to Condensed
Consolidated Financial Statements.
On February 23, 1998, the Company acquired LCEC for $70 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 Company's financial statements. The
acquisition resulted in goodwill of approximately $29.5 million that is being
amortized on a straight-line basis over 15 years. See Note 7 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 acquisitions of LCEC and the assets in Ireland from
Stratus and the inclusion of LCEC's operations and the operations of the system
integration facility in Ireland in the Company's accounts subsequent to February
23, 1998 and March 1, 1999, respectively, are responsible for a substantial
portion of the variations in the results of the Company's operations (including
components thereof) for the three months ended March 31, 1999, as compared to
the same period during the prior year. The effects of the acquisitions of the
Stratus assets and LCEC on the Company's financial condition and its reported
results of operations should be considered when reviewing the financial
information contained herein.
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RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain
items in the Company's Condensed Consolidated Statements of Income bear to sales
for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
------ ------
Sales ............................................ 100.0% 100.0%
Cost of sales .................................... 90.0 89.9
------ ------
Gross profit ............................... 10.0 10.1
Selling, general and administrative expense ...... 3.4 3.3
Amortization of goodwill ......................... 0.6 0.5
------ ------
Income from operations ..................... 6.0 6.3
Interest income .................................. 0.1 0.2
Interest expense ................................. (0.8) (0.8)
------ ------
Income before income taxes ................. 5.4 5.7
Income tax expense ............................... 2.0 2.2
------ ------
Net income ................................. 3.4% 3.5%
====== ======
Sales for the first quarter of 1999 were approximately $146.5 million, a
35.6% increase from sales of approximately $108.0 million for the same quarter
in 1998. The net increase in sales resulted primarily from the acquisition of
LCEC, the operation of the system integration facility in Ireland, existing
customers, and the addition of new customers. 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 would have an adverse
effect on the Company's business.
Gross profit increased 34.7% to approximately $14.7 million in the first
quarter of 1999 from approximately $10.9 million in the same quarter in 1998.
The increase in gross profit was due primarily to the higher sales volumes
attributable to the LCEC acquisition and the operation of the new system
integration facility in Ireland, along with changes in product and customer mix
occurring in the ordinary course of business. Gross profit as a percentage of
sales decreased from 10.1% for the first quarter of 1998 to 10.0% for the first
quarter of 1999. 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 ended March 31, 1999 as compared to the
same period in 1998 was due to lower margins on LCEC programs and the system
integration facility in Ireland, changes in the product mix and the initiation
of new programs.
Selling, general and administrative expenses were $5.0 million in the
first quarter of 1999, an increase of 40.4% from $3.5 million for the same
quarter in 1998. Selling, general and administrative expenses as a percentage of
sales increased from 3.3% for the first quarter of 1998 to 3.4% for the first
quarter of 1999. 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-month period of 1999 reflects these additional personnel and related
departmental expense, as well as the additional administrative expenses
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resulting from the inclusion of LCEC for a full three-month period in 1999 and
the inclusion of the system integration facility. 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 sales levels.
The amortization of goodwill for the three-month periods ended March 31,
1999 and 1998 was $910,000 and $585,000, respectively. The increase was due to
the acquisition of LCEC on February 23, 1998.
Interest expense for the three-month periods ended March 31, 1999 and 1998
was $1,125,000 and $902,000, respectively. The increase was due to the
additional debt incurred in connection with the purchase of the assets in
Ireland from Stratus on March 1, 1999 and the acquisition of LCEC on February
23, 1998.
Interest income was approximately $138,000 and $168,000, respectively, for
the three-month periods ended March 31, 1999 and 1998. The decrease was due to
the use of a portion of the Company's cash and cash equivalents to fund the
purchase of the assets in Ireland from Stratus on March 1, 1999.
Income tax expense for the three-month periods ended March 31, 1999 and
1998 was $2,884,000 and $2,365,000, respectively. The increase was due to higher
pre-tax income and nondeductible amortization of goodwill, partially offset by
lower foreign tax rates applicable to a portion of pretax income in 1999.
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 $18.4 million and $6.8 million
for the three months ended March 31, 1999 and 1998, respectively. The increase
in cash provided by operations was primarily the result of increases in net
income, depreciation and amortization, and increases in accounts payable
partially offset by increases in accounts receivable and inventories. The
Company's accounts payable, accounts receivables, and inventories have increased
$30.6 million, $23.4 million, and $2.7 million (net of effects from purchase of
assets from Stratus), respectively, during the first three months of 1999,
reflecting the Company's increased sales and backlog as compared to the
corresponding period in the prior year. 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.
Cash used in investing activities was $52.7 million and $61.7 million for
the three months ended March 31, 1999 and 1998, respectively. On March 1, 1999,
the Company completed the purchase of inventories and plant and equipment from
Stratus for $48 million in cash. See Note 7 of Notes to Condensed Consolidated
Financial Statements. Capital expenditures of $4.0 million for the three months
ended March 31, 1999, were primarily concentrated in test equipment. Capitalized
software costs of $0.7 million for the three months ended March 31, 1999, were
for the purchase and implementation of the Company's Enterprise Resource
Planning System.
12
<PAGE>
Cash provided by financing activities was $23.3 million and $39.6 million
for the three months ended March 31, 1999 and 1998, respectively. In connection
with the purchase of the assets from Stratus on March 1, 1999, the Company
increased its revolving line of credit to $65 million and borrowed $25 million.
The Company made principal payments on long-term debt totaling $2.0 million
during the three months ended March 31, 1999.
The Company has a $65 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 $65 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
.88% to 1.63% or its prime rate. A commitment fee of 0.20% to 0.30% 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, 2004. As of March
31, 1999, the Company had $25 million outstanding under this line of credit with
$40 million available for future borrowings.
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 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, proceeds from an expected equity
offering, funds generated from operations, and borrowings under the Company's
credit facility will be sufficient to permit the Company to meet its liquidity
requirements 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.
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.
13
<PAGE>
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 included 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. Based on its inquiries to date, the Company believes satisfactory
progress is being made by its significant suppliers and customers on 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, which will be Year 2000 compliant, to
improve processes and to increase efficiencies. All necessary Year 2000 upgrades
of major systems, including those supplied by vendors, have been identified and
conversion strategies have been developed and are under deployment.
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 $13.5 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 $13 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 has been and 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 and the new Enterprise Resource
Planning System through March 31, 1999, is approximately $10 million, of which
$9.7 million related to the new Enterprise Resource Planning System
implementation and approximately $300,000 related to the cost of identifying and
communicating with third parties and installing software patches. 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.
14
<PAGE>
RISKS PRESENTED BY THE YEAR 2000 ISSUE
There is considerable uncertainty inherent in assessing the Company's
vulnerability to Year 2000 problems, arising in part from the uncertainty of the
Year 2000 readiness of the Company's suppliers and customers. It is possible
that the failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business operations, and that
such failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Based on the information
available to it, and subject to the effect of the general uncertainty on the
Company's ability to make a definitive determination, the Company does not
believe it has any material exposure to significant business interruption as a
result of the Year 2000 problem, or that the cost of remedial actions will have
a material adverse effect on its business, financial condition or result of
operations.
CONTINGENCY PLANS
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 completion of identifying and communicating with third
parties as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
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 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold or issue derivative financial instruments in the
normal course of business. However, the Company, as a result of its
international operating activities, is exposed to market risks, including
changes in foreign currency exchange rates and interest rates, which may
adversely affect its results of operations and financial position. In seeking to
minimize the risks and/or costs associated with such activities, the Company
manages exposure to changes in interest rates by balancing the amount of its
borrowings between fixed rate and variable interest rates. The Company manages
its exposure to foreign currency exchange rates by requiring customers to pay in
U.S. dollars.
15
<PAGE>
Certain financial instruments used to obtain capital are subject to market
risks from fluctuations in interest rates. As of March 31, 1999, the Company has
$30.3 million of fixed rate financial instruments and $47.0 million of variable
rate financial instruments.
The Company has a subsidiary located in the Republic of Ireland. The
Company predominantly conducts its foreign sales and purchase transactions in
U.S. dollars. Other currency exchange risks are primarily limited to current
liabilities payable in Irish pounds. Such amounts relate to foreign plant wages,
taxes and facility operating costs. Accordingly, the Company does not expect
that the effects of changes in currency exchange rates upon such non-U.S. dollar
transactions would be material. The Company does not currently hedge against
foreign currency translation risks and believes that foreign currency exchange
risk is not significant to its operations.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated March 1, 1999
with the Securities and Exchange Commission during the quarter
ended March 31, 1999 which Report reported on the Company's
purchase of certain assets of the Stratus manufacturing facility
in Dublin, Ireland.
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 April 30, 1999.
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)
17
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
27.1 Financial Data Schedule.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FIRST
QUARTER 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,084
<SECURITIES> 0
<RECEIVABLES> 80,545
<ALLOWANCES> 0
<INVENTORY> 91,230
<CURRENT-ASSETS> 195,179
<PP&E> 91,444
<DEPRECIATION> 39,165
<TOTAL-ASSETS> 304,261
<CURRENT-LIABILITIES> 111,833
<BONDS> 44,111
0
0
<COMMON> 1,167
<OTHER-SE> 142,520
<TOTAL-LIABILITY-AND-EQUITY> 304,261
<SALES> 146,546
<TOTAL-REVENUES> 146,546
<CGS> 131,856
<TOTAL-COSTS> 131,856
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,950
<INCOME-PRETAX> 8,830
<INCOME-TAX> 2,884
<INCOME-CONTINUING> 5,037
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,037
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.40
</TABLE>
