SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _____________.
COMMISSION FILE NUMBER: 1-10560
BENCHMARK ELECTRONICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
TEXAS 74-2211011
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
3000 TECHNOLOGY DRIVE 77515
ANGLETON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
(979) 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, 2000 there were 19,546,441 shares of Benchmark
Electronics, Inc. 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, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................. $ 23,740 $ 9,437
Accounts receivable, net ................... 257,378 197,239
Income taxes receivable .................... -- 3,351
Inventories ................................ 317,298 214,554
Prepaid expenses and other assets .......... 20,938 15,499
Deferred tax asset ......................... 2,248 2,334
--------- ---------
Total current assets ..................... 621,602 442,414
--------- ---------
Property, plant and equipment ................ 186,538 175,774
Accumulated depreciation ..................... (57,958) (53,766)
--------- ---------
Net property, plant and equipment ........ 128,580 122,008
--------- ---------
Other assets, net ............................ 25,451 23,625
Goodwill, net ................................ 164,431 172,791
--------- ---------
$ 940,064 $ 760,838
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of other
long-term debt ........................... $ 17,519 $ 19,184
Accounts payable ........................... 267,819 215,971
Income taxes payable ....................... 445 --
Accrued liabilities ........................ 34,548 29,333
--------- ---------
Total current liabilities ................ 320,331 264,488
Revolving line of credit ..................... 56,500 41,500
Convertible subordinated notes ............... 80,200 80,200
Other long-term debt, excluding
current installments ....................... 67,600 81,111
Other long-term liability .................... 6,124 5,939
Deferred income taxes ........................ 6,048 5,665
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 -
19,592,075 and 16,290,010, respectively;
outstanding - 19,542,591 and 16,240,526,
respectively ............................. 1,954 1,624
Additional paid-in capital ................. 316,926 200,980
Retained earnings .......................... 90,593 78,774
Accumulated other comprehensive income(loss) (6,092) 677
Less treasury shares, at cost; 49,484 shares (120) (120)
--------- ---------
Total shareholders' equity ............... 403,261 281,935
Commitments and contingencies
--------- ---------
$ 940,064 $ 760,838
========= =========
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ................................ $ 459,540 $ 229,870 $ 1,215,266 $ 539,037
Cost of sales ........................ 425,640 216,106 1,128,016 493,729
----------- ----------- ----------- -----------
Gross profit ................... 33,900 13,764 87,250 45,308
Selling, general and
administrative expenses ............ 15,523 8,642 41,636 19,269
Amortization of goodwill ............. 3,096 1,630 9,416 3,449
----------- ----------- ----------- -----------
Income from operations ......... 15,281 3,492 36,198 22,590
Interest expense ..................... (5,638) (2,625) (18,251) (4,940)
Other income (expense) ............... (540) 1,116 (359) 1,066
----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item ........... 9,103 1,983 17,588 18,716
Income tax expense ................... 2,867 647 5,769 6,738
----------- ----------- ----------- -----------
Income before extraordinary item 6,236 1,336 11,819 11,978
Extraordinary item - loss on
extinguishment of debt ............. -- (1,297) -- (1,297)
----------- ----------- ----------- -----------
Net income ..................... $ 6,236 $ 39 $ 11,819 $ 10,681
=========== =========== =========== ===========
Earnings per share:
Basic:
Income before extraordinary item $ 0.34 $ 0.09 $ 0.70 $ 0.90
Extraordinary item ............. -- (0.09) -- (0.10)
----------- ----------- ----------- -----------
Earnings per share ............. $ 0.34 $ 0.00 $ 0.70 $ 0.80
=========== =========== =========== ===========
Diluted:
Income before extraordinary item $ 0.32 $ 0.08 $ 0.65 $ 0.83
Extraordinary item ............. -- (0.08) -- (0.09)
----------- ----------- ----------- -----------
Earnings per share ............. $ 0.32 $ 0.00 $ 0.65 $ 0.74
=========== =========== =========== ===========
Weighted average number of shares
outstanding:
Basic .......................... 18,189 15,626 16,914 13,360
Diluted ........................ 19,770 16,812 18,148 14,448
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 11,819 $ 10,681
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization .......................... 39,401 19,407
Deferred income taxes .................................. 469 314
(Gain) loss on the sale of property, plant and equipment 54 (329)
Federal tax benefit of stock options exercised ......... 907 320
Extraordinary loss on extinguishment of debt ........... -- 1,297
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable .................................... (63,374) (17,407)
Inventories ............................................ (104,316) 11,272
Prepaid expenses and other assets ...................... (7,281) (3,872)
Accounts payable ....................................... 87,416 29,514
Accrued liabilities .................................... 5,765 1,575
Other long-term liability .............................. 185 --
Income taxes ........................................... 3,796 (2,198)
--------- ---------
Net cash provided by (used in) operations .......... (25,159) 50,574
--------- ---------
Cash flows from investing activities:
Capital expenditures, net .................................. (36,909) (17,020)
Additions to capitalized software .......................... (1,529) (2,048)
Acquisitions ............................................... (35,303) (306,319)
--------- ---------
Net cash used in investing activities .............. (73,741) (325,387)
--------- ---------
Cash flows from financing activities:
Net proceeds from stock offering ........................... 113,287 93,692
Debt issuance costs ........................................ (1,383) (5,950)
Proceeds from issuance of debt, net ........................ 15,000 289,000
Proceeds from stock options exercised ...................... 1,531 762
Proceeds from employee stock purchases ..................... 551 77
Principal payments on other long-term debt ................. (15,176) (102,711)
Repayment premium on extinguishment of debt ................ -- (1,995)
--------- ---------
Net cash provided by financing activities .......... 113,810 272,875
--------- ---------
Effect of exchange rate changes .............................. (607) 466
--------- ---------
Net increase (decrease) in cash and cash equivalents ......... 14,303 (1,472)
Cash and cash equivalents at beginning of year ............. 9,437 23,077
--------- ---------
Cash and cash equivalents at September 30 .................. $ 23,740 $ 21,605
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid (refunded) ............................... $ (3) $ 8,185
========= =========
Interest paid .............................................. $ 17,637 $ 5,020
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, UNLESS OTHERWISE NOTED)
(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) of telecommunication equipment, computers and related
products for business enterprises, video/ audio/entertainment products,
industrial control equipment, testing and instrumentation products, personal
computer and medical devices. The Company has manufacturing operations located
in the Americas, Europe and Asia.
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, 1999.
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 1,234 and 1,088 for the nine months ended September 30, 2000 and 1999,
respectively and 1,581 and 1,186 for the three months ended September 30, 2000
and 1999, respectively, were used in the calculation of diluted earnings per
share. The effect of the if-converted method for the 6% Convertible Subordinated
Notes is antidilutive and 1,995 of potential common shares have not been
considered in computing diluted earnings per share for the three-month and
nine-month periods ended September 30, 2000 and 1999.
NOTE 3 - BORROWING FACILITIES
In order to finance the acquisition of AVEX Electronics, Inc. and Kilbride
Holdings, B.V. (AVEX), the Company obtained $100 million through borrowings
under a five-year term loan (the Term Loan) through a syndicate of commercial
banks. Principal on the Term Loan is payable in quarterly installments in annual
amounts of $16 million in 2000, $18 million in 2001, $20 million in 2002, $22
million in 2003 and $21 million in 2004. The Term Loan bears interest, at the
Company's option, at either the bank's Eurodollar rate plus 1.25% to 3.00% or
its prime rate plus 0.00% to 1.75%, based upon the Company's debt ratio as
specified in the agreement and interest is payable quarterly. As of September
30, 2000, the Company had $85 million outstanding under the Term Loan, bearing
interest at rates ranging from 9.28438% to 9.8125%.
5
<PAGE>
The Company has a $175 million revolving line of credit facility (the
Revolving Credit Facility) with a commercial bank. The Company is entitled to
borrow under the Revolving Credit Facility up to the lesser of $175 million or
the sum of 75% of its eligible accounts receivable, 45% of its eligible
inventories and 50% of its eligible fixed assets. Interest on the Revolving
Credit Facility is payable quarterly, at the Company's option, at either the
bank's Eurodollar rate plus 1.25% to 3.00% or its prime rate plus 0.00% to
1.75%, based upon the Company's debt ratio as specified in the agreement. A
commitment fee of 0.375% to 0.500% per annum on the unused portion of the
Revolving Credit Facility is payable quarterly in arrears. The Revolving Credit
Facility matures on September 30, 2004. As of September 30, 2000, the Company
had $56.5 million outstanding under the Revolving Credit Facility, bearing
interest at 11.0%, $5.2 million outstanding letters of credit and $113.3 million
was available for future borrowings.
The Term Loan and the Revolving Credit Facility (collectively the
Facility) are secured by the Company's domestic inventory and accounts
receivable, 100% of the stock of the Company's domestic subsidiaries, and 65% of
the voting capital stock of each direct foreign subsidiary and substantially all
of the other tangible and intangible assets of the Company and its domestic
subsidiaries. The Facility contains customary financial covenants and restricts
the ability of the Company to incur additional debt, pay dividends, sell assets,
and to merge or consolidate with other persons, without the consent of the bank.
In August 1999, the Company issued $80.2 million principal amount of 6%
Convertible Subordinated Notes due August 15, 2006 (the Notes). The indenture
relating to the Notes contains affirmative and negative covenants including
covenants restricting the Company's ability to merge or engage in certain other
extraordinary corporate transactions unless certain conditions are satisfied.
Upon the occurrence of a change of control of the Company (as defined in the
indenture relating to the Notes), each holder of Notes will have the right to
require the Company to repurchase all or part of the Holder's notes at 100% of
the face amount thereof, plus accrued and unpaid interest.
The Notes are convertible, unless previously redeemed or repurchased, at
the option of the holder at any time prior to maturity, into shares of the
Company's common stock at an initial conversion price of $40.20 per share,
subject to adjustment in certain events. The Notes are convertible into a total
of 1,995 shares of the Company's common stock. Interest is payable February 15
and August 15 each year.
NOTE 4 - INVENTORIES
Inventory costs are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
Raw materials ............ $ 262,024 $ 191,952
Work in process .......... 69,239 42,603
Obsolescence reserve ..... (13,965) (20,001)
------------- -------------
$ 317,298 $ 214,554
============= =============
6
<PAGE>
NOTE 5 - INCOME TAXES
Income tax expense, excluding $698 allocated to the extraordinary item in
1999, consists of the following:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
Federal - Current ................ $ 1,343 $ 4,906
Foreign - Current ................ 3,552 435
State - Current .................. 404 384
Deferred ......................... 470 315
-------- --------
Total ....................... $ 5,769 $ 6,040
======== ========
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.
The Company considers earnings from its foreign subsidiaries to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been made for these earnings. Upon distribution of
foreign subsidiary earnings in the form of dividends or otherwise, the Company
would be subject to 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 Ireland at rates substantially less than the statutory tax rates for
that jurisdiction. As a result of these reduced rates, income tax expense for
the quarter and nine months ended September 30, 2000 is approximately $239
(approximately $0.01 per share diluted) and $362 (approximately $0.02 per share
diluted), respectively, lower than the amount computed by applying the statutory
tax rates. Income tax expense for the quarter and nine months ended September
30, 1999 is approximately $46 (approximately $0.003 per share diluted) and $743
(approximately $0.05 per share diluted), respectively, lower than the amount
computed by applying the statutory rates.
NOTE 6 - RECENTLY ENACTED 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". As amended by SFAS No. 137 and 138, SFAS
No. 133 establishes methods of accounting for derivative financial instruments
and hedging activities. It requires that companies recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company anticipates that the adoption of
SFAS No. 133 will not have a material impact on its financial position, results
of operations or cash flows. The Company will adopt SFAS No. 133, as amended, on
January 1, 2001.
7
<PAGE>
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC and requires companies to
report any changes in revenue recognition as a cumulative change in accounting
principle at the time of implementation in accordance with Accounting Principles
Board Opinion 20, "Accounting Changes." Subsequently, SAB No. 101A and 101B were
issued to delay the implementation of SAB No. 101 to no later than the fourth
quarter of fiscal years beginning after December 15, 1999 with the cumulative
adjustment recorded as of January 1, 2000. The Company does not expect the
adoption of SAB No. 101 to have a material impact on its financial position or
results of operations.
NOTE 7 - ACQUISITIONS
On August 24, 1999, the Company completed the acquisition of all of the
1outstanding capital stock of AVEX from J.M. Huber Corporation (the Seller).
AVEX had manufacturing plants or design centers in the United States in
Huntsville, Alabama and Pulaski, Tennessee, and elsewhere in Campinas, Brazil,
Csongrad, Hungary, Guadalajara, Mexico, Cork, Ireland, Singapore, East Kilbride,
Scotland, and Katrineholm, Sweden. In consideration of the capital stock of
AVEX, the Company paid $265.3 million in cash at closing, subject to certain
adjustments, including a working capital adjustment, and issued one million
shares of the Company's common stock to the Seller. The working capital
adjustment was settled in the second quarter of 2000 and $35.3 million was paid
to the Seller. In addition, the Company paid $5.2 million in acquisition costs.
In order to finance the AVEX acquisition, the Company (i) obtained a term loan
from a syndicate of commercial banks in the amount of $100 million, (ii)
obtained a new revolving credit facility permitting draws of up to $125 million,
subject to a borrowing base calculation, and borrowed $46 million under such
facility and (iii) issued $80.2 million in Notes. In connection with the AVEX
acquisition, the Company borrowed $30 million under the new revolving credit
facility to refinance existing debt pursuant to the Company's prior Senior Note.
The AVEX acquisition was accounted for using the purchase method of accounting.
The acquisition resulted in goodwill of approximately $133.1 million that is
being amortized on a straight-line basis over 15 years.
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 $42.3 million in cash as
adjusted. The acquisition price was allocated $6.1 million to equipment and
other assets, and $36.2 million to inventories. 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 Holdings Limited and the Company hired approximately 260
employees.
NOTE 8 - BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company has 14 manufacturing facilities in the Americas, Europe and
Asia to serve its customers. The Company is operated and managed geographically.
The Company's management evaluates performance and allocates the Company's
resources on a geographic basis. Intersegment sales, primarily constituting
sales from the Americas to Europe, are generally recorded at prices that
approximate arm's length transactions. Operating segments' measure of
profitability is based on income from operations prior to goodwill amortization.
Certain corporate expenses, including items such as insurance and software
licensing costs, are allocated to these operating segments and are included for
performance evaluation. Amortization expense associated with capitalized
software costs is allocated to these operating segments, but the related assets
are not allocated. The
8
<PAGE>
unamortized balance of goodwill is allocated to the operating segments, but
goodwill amortization is not considered in the operating segments' measure of
profitability. The accounting policies for the reportable operating segments are
the same as for the Company taken as a whole.
Information about operating segments for the three and nine-month periods
ended September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales:
Americas .............................. $ 444,267 185,970 1,166,178 458,999
Europe ................................ 74,226 63,126 218,451 123,644
Asia .................................. 10,566 4,205 29,636 4,205
Elimination of intersegment sales ..... (69,519) (23,431) (198,999) (47,811)
---------- ---------- ---------- ----------
$ 459,540 229,870 1,215,266 539,037
========== ========== ========== ==========
Depreciation and amortization:
Americas .............................. $ 8,661 6,059 23,157 13,246
Europe ................................ 1,775 1,485 6,282 2,652
Asia .................................. 188 60 546 60
Corporate - goodwill .................. 3,096 1,630 9,416 3,449
---------- ---------- ---------- ----------
$ 13,720 9,234 39,401 19,407
========== ========== ========== ==========
Income from operations:
Americas .............................. $ 17,223 5,040 36,059 23,146
Europe ................................ 3,245 685 11,464 4,599
Asia .................................. 346 176 2,311 176
Corporate and intersegment eliminations (5,533) (2,409) (13,636) (5,331)
---------- ---------- ---------- ----------
$ 15,281 3,492 36,198 22,590
========== ========== ========== ==========
</TABLE>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
Total assets:
Americas .................. $ 774,509 572,905
Europe .................... 128,832 146,004
Asia ...................... 17,585 20,026
Corporate ................. 19,138 21,903
------------- -------------
$ 940,064 760,838
============= =============
The following enterprise-wide information is provided in accordance with
SFAS No. 131. Geographic net sales information reflects the destination of the
product shipped. Long-lived assets information is based on the physical location
of the asset.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales derived from:
Printed circuit boards ............... $ 430,011 187,842 1,131,488 442,650
Systems integration and box build .... 29,529 42,028 83,778 96,387
---------- ---------- ---------- ----------
$ 459,540 229,870 1,215,266 539,037
========== ========== ========== ==========
Geographic net sales:
United States ........................ $ 349,916 130,030 908,772 373,643
Europe ............................... 81,173 74,218 226,226 139,200
Asia and other ....................... 28,451 25,622 80,268 26,194
---------- ---------- ---------- ----------
$ 459,540 229,870 1,215,266 539,037
========== ========== ========== ==========
</TABLE>
9
<PAGE>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
Long-lived assets:
United States ........ $ 106,743 99,221
Europe ............... 17,368 24,538
Asia and other ....... 29,920 21,874
------------- -------------
$ 154,031 145,633
============= =============
NOTE 9 - COMPREHENSIVE INCOME
Comprehensive income, which includes net income and the change in the
cumulative translation adjustment, for the three-month and nine-month periods
ended September 30, 2000, was $2.8 million and $5.1 million, respectively. For
the 1999 periods, comprehensive income and net income was $0.8 million and $11.4
million, respectively.
NOTE 10 - SALE OF SWEDISH OPERATIONS
On September 15, 2000, the Company closed the sale of its Swedish
operations for approximately $14.5 million, subject to adjustment depending on
the actual inventory levels on the date of the closing. The Swedish operations
accounted for 4.1% and 5.2% of the Company's sales and 12.2% and 20.8% of its
operating income for the three and nine-month periods ended September 30, 2000,
respectively.
NOTE 10 - STOCK OFFERING
On August 14, 2000, the Company completed the public offering of 3,162,500
shares of its common stock for net proceeds of approximately $113.3 million. The
Company used the net proceeds to temporarily repay indebtedness under its
Revolving Credit Facility.
NOTE 11 - CONTINGENCIES
On October 18, 1999, the Company announced that its third quarter earnings
announcement would be delayed and subsequently, on October 22, the Company
announced its earnings for the third quarter were below the level of the same
periods during 1998 and were below expectations. Several class action lawsuits
were filed in federal district court in Houston, Texas against the Company and
two of its officers and directors alleging violations of the federal securities
laws. These lawsuits were consolidated in February 2000. The lawsuits seek to
recover unspecified damages. The Company denies the allegations in the lawsuits,
however, and further denies that such allegations provide a basis for recovery
of damages as the Company believes that it has made all required disclosures on
a timely basis. Management intends to vigorously defend against these actions.
At the present time, the Company is unable to reasonably estimate the possible
loss, if any, associated with these matters.
The Company filed suit against Seller in the United States District Court
for the Southern District of Texas for breach of contract, fraud and negligent
misrepresentation on December 14, 1999 and is seeking an unspecified amount of
damages in connection with the Amended and Restated Stock Purchase Agreement
dated August 12, 1999 between the parties whereby the Company acquired all of
the stock of AVEX from Seller. On January 5, 2000, Seller filed suit in the
United States District Court for the Southern District of New York alleging that
the Company failed to comply with certain obligations under the contract
requiring the Company to register shares of its common stock issued to Seller as
partial consideration for the acquisition. Seller's
10
<PAGE>
suit has been consolidated with the Company's suit in the United States District
Court for the Southern District of Texas. The Company intends to vigorously
pursue its claims against Seller and defend against Seller's allegations. At the
present time, the Company is unable to reasonably estimate the possible loss, if
any, associated with these matters.
During the second quarter of 2000, the Company, along with numerous other
companies, was named as a defendant in a lawsuit brought by the Lemelson
Medical, Education & Research Foundation (the Foundation). The lawsuit alleges
that the Company has infringed certain of the Foundation's patents relating to
machine vision and bar code technology utilized in machines the Company has
purchased. On November 11, 2000, the Company filed an Answer, Affirmative
Defenses, and a Motion to Stay based upon Declaratory Judgment Actions filed by
Cognex and Symbol, manufacturers of the equipment at issue. The Company
continues to explore any indemnity or similar rights the Company may have
against manufacturers of the machines or other third parties. The Company
intends to vigorously defend against such claim and pursue all rights it has
against third parties. At the present time, the Company is unable to reasonably
estimate the possible loss, if any, associated with these matters.
The Company is also involved in various other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 12 - SUBSEQUENT EVENTS
On October 2, 2000, the Company acquired substantially all of the assets
and properties, net of assumed liabilities, of the MSI Division of Outreach
Technologies, Inc. This operation in Manassas, Virginia was acquired for $4.5
million, subject to a final working capital adjustment.
11
<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, and the discussion of Market Risk in Item 3 below,
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities and
Exchange Act of 1934. These forward-looking statements are identified as any
statement that does not relate strictly to historical or current facts. They use
words such as "anticipate," "believe," "intend," "plan," "projection,"
"forecast," "strategy," "position," "continue," "estimate," "expect," "may,"
"will," or the negative of those terms or other variations of them or by
comparable terminology. In particular, statements, express or implied,
concerning future operating results or the ability to generate sales, income or
cash flow are forward-looking statements. Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties and assumptions.
The future results of our operations may differ materially from those expressed
in these forward-looking statements. Many of the factors that will determine
these results are beyond our ability to control or predict. Specific factors
which could cause actual results to differ from those in the forward-looking
statements, include:
o incurrence of operating losses at AVEX;
o availability and cost of customer specified components;
o loss of one or more of our major customers;
o absence of long-term sales contracts with our customers;
o our substantial indebtedness;
o a decline in the condition of the capital markets or a substantial rise in
interest rates;
o our dependence on the industries we serve;
o competition from other providers of electronics manufacturing services;
o inability to maintain technical and manufacturing process expertise;
o risks associated with international operations;
o our dependence on certain key executives;
o resolution of the pending legal proceedings;
o integration of the operations of acquired companies;
o effects of domestic and foreign environmental laws;
o fluctuations in our quarterly results of operations; and
o volatility of the price of our common stock.
You should not put undue reliance on any forward-looking statements.
The following discussion should be read in conjunction with the unaudited
financial statements of the Company included elsewhere in this report.
GENERAL
We are in the business of manufacturing electronics and provide our
services to original equipment manufacturers of telecommunication equipment,
computers and related products for business enterprises, video / audio /
entertainment products, industrial control equipment, testing and
instrumentation products, personal computer and medical devices. Our
headquarters are in Angleton, Texas and we have 14 facilities in six countries.
As original equipment manufacturers expand internationally, they are
increasingly requiring their electronics manufacturing services providers to
have strategic regional locations and global procurement abilities. We believe a
global manufacturing solution increases our ability to be responsive to our
customers' needs by providing accelerated time-to-market and time-to-volume
production of high quality products.
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These enhanced capabilities should enable us to build stronger strategic
relationships with our customers and to become a more integral part of their
operations.
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 our 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. 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 nine months ended September 30, 2000, our three largest customers
each represented in excess of 10% of our sales and together represented 35% of
our 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.
In connection with the AVEX acquisition, we acquired operations in Sweden.
On September 15, 2000, we closed the previously announced sale of our Swedish
operations. The Swedish operations accounted for 4.1% and 5.2% of our sales and
12.2% and 20.8% of our operating income for the three and nine-month periods
ended September 30, 2000, respectively.
On a pro forma basis, after giving effect to the disposition of the
Swedish operations as if it had occurred on January 1, 2000, our income before
income taxes for the three and nine month periods ended September 30, 2000 would
have been $7.5 million and $10.3 million, respectively. We are currently
obtaining additional business from new and existing customers, which we believe
may offset the loss of the sales and operating income we derived from the
Swedish operations.
RECENT ACQUISITIONS
On August 24, 1999, we acquired AVEX from J.M. Huber Corporation. As
consideration for the acquisition, we paid $265.3 million in cash at closing,
subject to certain adjustments, including a working capital adjustment, and
issued one million shares of our common stock. The transaction was accounted for
under the purchase method of accounting, and, accordingly, the results of
operations of AVEX since August 24, 1999 have been included in our financial
statements. The acquisition resulted in goodwill of approximately $133.1
million, which is being amortized on a straight line basis over 15 years. The
amortization of goodwill, which is a noncash charge, negatively impacts our net
income. In order to finance the AVEX acquisition, we (i) obtained a term loan
from a syndicate of commercial banks in the amount of $100 million, (ii)
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obtained a new revolving credit facility permitting draws of up to $125 million,
subject to a borrowing base calculation, and borrowed $46 million under such
facility and (iii) issued $80.2 million in convertible subordinated debt. In
connection with the AVEX acquisition, we borrowed $30 million under the new
revolving credit facility to refinance our prior Senior Note. Disputes have
arisen between us and Huber relating to the AVEX acquisition resulting in legal
proceedings between the parties over the transaction.
On March 1, 1999, we acquired certain assets from Stratus, a wholly-owned
subsidiary of Ascend Communications, Inc. for approximately $42.3 million in
cash, as adjusted. The acquisition price was allocated $6.1 million to equipment
and other assets, and $36.2 million to inventories. Stratus provided systems
integration services for large and sophisticated fault-tolerant mainframe
computers. In connection with the transaction, we entered into a three-year
supply agreement to provide these system integration services to Ascend and
Stratus Holdings Limited and we hired approximately 260 employees.
The inclusion in our accounts of the operations of AVEX and the systems
integration facility in Ireland are responsible for a substantial portion of the
variations in the results of our operations (including components thereof) from
period to period. The effects of these on our reported financial condition,
liquidity and results of operations should be considered when reading the
financial information contained in this document.
The acquisition of AVEX constitutes a significant expansion of our
operations. Accordingly, the potential effect of the AVEX acquisition on our
future financial condition, liquidity and results of operations should be
considered when reading the historical financial information and related
discussions set forth in the following section.
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................. 92.6 94.0 92.8 91.6
-------- -------- -------- --------
Gross profit ................... 7.4 6.0 7.2 8.4
Selling, general and administrative expense 3.4 3.8 3.4 3.6
Amortization of goodwill .................. 0.7 0.7 0.8 0.6
-------- -------- -------- --------
Income from operations ......... 3.3 1.5 3.0 4.2
Interest expense .......................... (1.2) (1.1) (1.5) (0.9)
Other income (expense) .................... (0.1) 0.4 0.0 0.1
-------- -------- -------- --------
Income before income taxes and
extraordinary item .......... 2.0 0.9 1.5 3.5
Income tax expense ........................ 0.6 0.3 0.5 1.3
-------- -------- -------- --------
Income before extrardinary item 1.4 0.6 1.0 2.2
Extraordinary item - loss on extinguishment
of debt, net of taxes ................... 0.0 (0.6) 0.0 (0.2)
-------- -------- -------- --------
Net income ..................... 1.4% 0.0% 1.0% 2.0%
======== ======== ======== ========
</TABLE>
We have experienced consistent sales growth over the past few years. The
net increase in sales reflects the impact of growth from acquisitions combined
with internal growth resulting
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from the trend towards outsourcing among original equipment manufacturers. Sales
for the third quarter of 2000 were approximately $459.5 million, a 99.9%
increase from sales of approximately $229.9 million for the same quarter in
1999. Sales for the first nine months of 2000 were approximately $1,215.3
million, a 125.5% increase from sales of approximately $539.0 million for the
same period in 1999. Of this total increase in sales for the quarter and the
nine months ended September 30, 2000, approximately 59% and 74%, respectively,
was attributable to the acquisition of AVEX and approximately 41% and 26%,
respectively, resulted from the ramping up of new programs and increases in
sales volume from both existing and new customers.
Sales in the Americas for the three and nine-month periods ended September
30, 2000 increased $258.3 million and $707.2 million, respectively, with
approximately 56% and 69%, respectively, of this increase resulting from the
acquisition of AVEX. The remaining 44% and 31% increases were the result of
demand increases from existing and new customers. Sales in Europe increased
$11.1 million and $94.8 million for the quarter and first nine months of 2000,
respectively, due primarily to the effect of the AVEX acquisition (representing
approximately 106% and 99%, respectively, of this net increase). The net
increase in sales also includes the impact of the decrease of approximately 30%
and 13%, respectively, of the systems integration facility revenues in Dublin,
Ireland. The 1999 Dublin, Ireland revenues were positively impacted by
significant backlog fulfillment, during that period resulting from a period of
customer transition. Dublin's sales during the remainder of 1999 and the first
three quarters of 2000 have returned to normalized run rates. Sales in Asia
increased by $6.4 million and $25.4 million, respectively, as a result of the
acquired AVEX facility in Asia.
After giving effect to the AVEX acquisition, we would have derived 46% of
our pro forma combined sales in fiscal year 1999 from our international
operations. In the first nine months of 2000, 24% of our sales were from our
international operations. The decrease in the percentage of international sales
on an actual basis for the first nine months of 2000 as compared to the pro
forma basis for 1999 reflects lower sales at our systems integration facility in
Dublin, Ireland and the loss of two of AVEX's customers. The loss of one of
these customers, as well as the deterioration in other customer relationships,
including the major customer of the former Swedish operations, are the subject
of litigation between Huber and us.
Our results of operations are dependent upon the success of our customers,
and a prolonged period of reduced demand for our customers' products would have
an adverse effect on our business. During the nine months ended September 30,
2000, our three largest customers each represented in excess of 10% of our sales
and represented 35% of our sales in the aggregate. The loss of a major customer,
if not replaced, would adversely affect us.
Gross profit increased 146.3% to approximately $33.9 million in the third
quarter of 2000 from approximately $13.8 million in the same quarter in 1999.
Gross profit increased 92.6% to approximately $87.3 million during the first
nine months of 2000 from approximately $45.3 million in the same period in 1999.
The increase in gross profit was due primarily to the higher sales volumes
attributable to the AVEX acquisition and also to the operation of the new
systems integration facility in Ireland and to a shift in mix to customer
programs with higher gross margins, for example, those programs which are more
complex and labor intensive, for the third quarter of 2000. Gross profit as a
percentage of sales for the three months ended September 30, 1999 and 2000,
respectively, increased from 6.0% to 7.4%, while gross profit as a percentage of
sales for the nine months ended September 30, 1999 and 2000, respectively,
decreased from 8.4% to 7.2%. The change in the gross margin for the three-month
period of 2000, as compared to the same period of 1999 is primarily attributable
to improved capacity utilization and a shift in mix to
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<PAGE>
customer programs with a higher gross margin at the AVEX locations. The improved
capacity utilization is the result of new program wins and programs ramping to
production levels.
The decrease in gross margin for the nine-month period of 2000, as
compared to the same period of 1999, is primarily attributable to the inclusion
of AVEX in the results of operations during 2000 for the full nine months,
whereas during 1999, the AVEX operations were included beginning on August 24,
1999, the date of acquisition. Historically, the AVEX operations had lower gross
margin levels. Additionally, other factors impacting our gross margin for the
nine month period of 2000 include the level of start up costs and inefficiencies
associated with new programs, product mix, overall improved capacity utilization
of surface mount and other equipment, and pricing within the electronics
industry. The combined effect of these factors, which are continually changing
and are interrelated, make it impracticable to determine with precision the
separate effect of each factor. We expect that a number of high volume programs
serving customers in price sensitive markets will remain subject to competitive
restraints on the margin that may be realized from these programs and that these
restraints will exert downward pressure on our margins in the near future.
In recent months, component shortages have become more prevalent in our
industry and, as a result, suppliers of such components are occasionally
delivering components to customers such as us on a delayed basis. We expect this
trend to continue from time to time in the future. When there are shortages, or
if the components we receive are defective, we may be forced to delay shipments,
which could have an adverse effect on our sales and our profit margins. While
the full effect of this period of constrained supplies of components on us is
not known at this time, we expect prices for such components will increase. If
such events were to occur, they would have an adverse effect on our results of
operations. Also, we typically bear the risk of component price increases our
suppliers may institute, as there may be some lag time before we can implement a
price increase to our customers for the affected board assembly. Accordingly,
component price increases could adversely affect our gross profit margins.
Selling, general and administrative expenses were $15.5 million in the
third quarter of 2000, an increase of 79.6% from $8.6 million for the same
quarter in 1999. Selling, general and administrative expenses were $41.6 million
during the first nine months of 2000, an increase of 116.1% from $19.3 million
for the same period in 1999. Selling, general and administrative expenses as a
percentage of sales decreased from 3.8% for the third quarter of 1999 to 3.4%
for the third quarter of 2000. Selling, general and administrative expenses as a
percentage of sales decreased from 3.6% for the first nine months of 1999 to
3.4% for the same period of 2000. The increase in selling, general and
administrative expenses during the three and nine-month periods ended September
30, 2000 reflects the additional administrative expenses resulting from the
acquisition of AVEX. For the approximate eight months ended August 24, 1999,
prior to our acquisition of AVEX, AVEX recorded $33.3 million of selling,
general and administrative expenses. Additionally, the increase reflects the
investment in personnel and the incurrence of related corporate and
administrative expenses necessary to support the increased size and complexity
of our business. We anticipate selling, general and administrative expenses will
continue to increase in absolute dollars in the future as we continue to develop
the infrastructure necessary to support our current and prospective business.
The amortization of goodwill for the three and nine-month periods ended
September 30, 2000 was $3.1 million and $9.4 million, respectively compared to
$1.6 million and $3.4 million, respectively for the same periods of 1999. The
increase was due to the acquisition of AVEX on August 24, 1999.
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<PAGE>
Interest expense for the three and nine-month periods ended September 30,
2000 was $5.6 million and $18.3 million, respectively compared to $2.6 million
and $4.9 million, respectively for the same periods of 1999. The increase was
due to the additional debt incurred in connection with the acquisition of AVEX
on August 24, 1999.
Income tax expense of approximately $5.8 million represented an effective
tax rate of 32.8% for the nine-month period ended September 30, 2000, compared
with an effective tax rate of 36.0% for the nine-month period ended September
30, 1999. The decrease was due primarily to lower foreign tax rates applicable
to a portion of pretax income in 2000 and a 2.1% benefit related to prior years'
amended US tax returns filed in September 2000, partially offset by
nondeductible amortization of goodwill.
In connection with the financing of the acquisition of AVEX, we prepaid
the prior Senior Note due 2006. An extraordinary loss of $1.3 million (net of
income tax benefit of $698,000) was incurred during the quarter ended September
30, 1999 as a result of the early extinguishment of the prior Senior Note.
We reported net income for the three and nine-month periods ended
September 30, 2000 of approximately $6.2 million and $11.8 million, or diluted
earnings of $0.32 and $0.65 per share, respectively, compared with net income of
approximately $39,000 and $10.7 million, or diluted earnings of $0.00 and $0.74
per share for the same periods of 1999, respectively. The approximate $6.2
million and $1.1 million increases were a result of the combined effects of the
acquisition of AVEX, the extraordinary loss in 1999, the ramping up of new
projects and the increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our growth and operations through funds generated from
operations, proceeds from the sale of our securities and funds borrowed under
our credit facilities.
Cash provided by (used in) operating activities was $(25.2) million and
$50.6 million for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in cash provided by operations was primarily the
result of increases in accounts receivable and inventories partially offset by
increases in depreciation and amortization and accounts payable. Our accounts
receivables and inventories at September 30, 2000 increased $63.4 million and
$104.3 million, respectively, over their levels at December 31, 1999, reflecting
our increased sales and backlog during the first nine months of 2000, as
compared to the corresponding period in the prior year. We expect increases in
inventories to support the anticipated growth in sales. We continued and are
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 us for less volume than we
ordered.
Cash used in investing activities was $73.7 million and $325.4 million for
the nine months ended September 30, 2000 and 1999, respectively. Capital
expenditures of $36.9 million for the nine months ended September 30, 2000 were
primarily concentrated in test and manufacturing production equipment.
Capitalized software costs of $1.5 million for the nine months ended September
30, 2000, were for the implementation of our new Enterprise Resource Planning
System software which was completed on May 1, 2000. Pursuant to the terms of the
purchase agreement in connection with the acquisition of AVEX on August 24,
1999, the working capital adjustment was settled in the second quarter of 2000
and $35.3 million was paid
17
<PAGE>
to Huber. The final working capital adjustment was $2.0 million greater than the
current liability we had recorded at December 31, 1999 as an estimate of the
working capital adjustment. We recorded the $2.0 million increase in goodwill
during the quarter ended June 30, 2000.
Cash provided by financing activities was $113.8 million and $272.9
million for the nine months ended September 30, 2000 and 1999, respectively. On
August 14, 2000, we completed the public offering of 3,162,500 shares of our
common stock for net proceeds of $113.3 million. We used such proceeds to
temporarily repay indebtedness outstanding under our revolving credit facility.
During the first nine months of 2000, we increased borrowings outstanding under
our revolving line of credit by $15.0 million (net) and made principal payments
on other long-term debt totaling $15.2 million.
We have a $175 million revolving line of credit facility with a commercial
bank. We are entitled to borrow under the revolving credit facility up to the
lesser of $175 million or the sum of 75% of our eligible accounts receivable,
45% of our eligible inventories and 50% of our eligible fixed assets. Interest
on the revolving credit facility and the term loan is payable quarterly, at our
option, at either the bank's Eurodollar rate plus 1.25% to 3.00% or its prime
rate plus 0.00% to 1.75%, based upon our debt ratio as specified in the
agreement. A commitment fee of 0.375% to 0.500% per annum on the unused portion
of the revolving credit facility is payable quarterly in arrears. The revolving
credit facility matures on September 30, 2004. As of September 30, 2000, we had
$56.5 million outstanding under the revolving credit facility, bearing interest
at 11.0%, $5.2 million outstanding letters of credit and $113.3 million was
available for future borrowings.
The term loan and the revolving credit facility are secured by our
domestic inventory and accounts receivable, 100% of the stock of our domestic
subsidiaries, and 65% of the voting capital stock of each direct foreign
subsidiary and substantially all of our and our domestic subsidiaries other
tangible and intangible assets. The term loan and revolving credit facility
contains customary financial covenants and restricts our ability to incur
additional debt, pay dividends, sell assets, and to merge or consolidate with
other persons, without the consent of the bank.
We have outstanding $80.2 million principal amount of 6% Convertible
Subordinated Notes. The indenture relating to the notes contains affirmative and
negative covenants, including covenants restricting our ability to merge or
engage in certain other extraordinary corporate transactions unless certain
conditions are satisfied. Upon the occurrence of a change of control of our
Company (as defined in the indenture relating to the notes), each holder of
notes will have the right to require us to repurchase all or part of the
holder's notes at 100% of the face amount thereof, plus accrued and unpaid
interest. The notes are convertible into shares of our common stock at an
initial conversion price of $40.20 per share at the option of the holder at any
time prior to maturity, unless previously redeemed or repurchased.
We have no significant capital lease obligations. Aggregate annual rental
payments on future lease commitments at September 30, 2000 were as follows:
2001 2002 2003
---- ---- ----
$7,479,000 $6,913,000 $6,698,000
Additionally, we have an approximately $2.1 million remaining commitment
to expand our Dublin facility.
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Our operations, and the operations of businesses we acquire, are subject
to certain foreign, federal, state and local regulatory requirements relating to
environmental, waste management, health and safety matters. We believe we
operate in substantial compliance with all applicable requirements and we seek
to ensure that newly acquired businesses comply or will comply substantially
with applicable requirements. To date the costs of compliance and workplace and
environmental remediation have not been material to us. However, material costs
and liabilities may arise from these requirements or from new, modified or more
stringent requirements in the future. In addition, past, current and future
operations may give rise to claims of exposure by employees or the public, or to
other claims or liabilities relating to environmental, waste management or
health and safety concerns.
We may require additional capital to finance further enhancements to or
acquisitions or expansions of our manufacturing capacity. Management believes
that the level of working capital will continue to grow at a rate generally
consistent with the growth of our operations. Management continually evaluates
potential strategic acquisitions and investments, but at the present time, we
have no understandings, commitments or agreements with respect to any such
acquisition or investment. Although no assurance can be given that future
financing will be available on terms acceptable to us, we 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 our existing debt agreements.
Our acquisitions in 1999 have significantly increased our leverage ratio
and decreased our interest coverage ratio. At September 30, 2000, our debt to
total capitalization ratio was 35%, as compared to 11% at June 30, 1999, the
last fiscal quarter end prior to the AVEX acquisition. The level of
indebtedness, among other things, could make it difficult for us to obtain any
necessary financing in the future for other acquisitions, working capital,
capital expenditures, debt service requirements and other expenses; limit our
flexibility in planning for, or reacting to changes in, our business; and make
us more vulnerable in the event of an economic downturn in our business.
Management believes our existing cash balances, funds generated from
operations and available funds under our revolving credit facility will be
sufficient to permit us to meet our liquidity requirements for the next 9-12
months. In order for us to achieve our planned growth or to obtain large volume
customer orders, we expect that we will need to raise additional financing
during the next 12-24 months.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate risk under our variable rate revolving
credit and term loan facilities. These facilities are based on the spread over
the bank's Eurodollar rate or its prime rate. Inflation and changing prices have
not significantly affected our operating results or the markets in which we
perform services.
We currently have an interest rate swap transaction agreement for a
notional amount of $35 million under which we pay a fixed rate of interest
hedging against the variable interest rates charged by the term loan. The
interest rate swap expires in the year 2003, which coincides with maturity dates
on the term loan.
Our international sales are a growing portion of our net sales; we are
exposed to risks associated with operating internationally, including the
following:
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o Foreign currency exchange risk;
o Import and export duties, taxes and regulatory changes;
o Inflationary economies or currencies; and
o Economic and political instability.
Historically, we have not held or issued derivative financial instruments.
We do not use derivative financial instruments for speculative purposes. Our
policy is to maintain a hedged position for certain significant transaction
exposures. These exposures are primarily, but not limited to, vendor payments
and inter-company balances in currencies other than the functional currency of
the operating entity. Our international operations in some instances operate in
a natural hedge because both operating expenses and a portion of sales are
denominated in local currency. As of September 30, 2000, we had one foreign
currency hedging contract in place to support expansion of the Dublin, Ireland
facility that expires in December 2000.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On October 18, 1999, we announced that our third quarter 1999 earnings
announcement would be delayed and subsequently, on October 22, we announced our
earnings for the third quarter 1999 were below the level of the same periods
during 1998 and were below expectations. Several class action lawsuits were
filed in federal district court in Houston, Texas against Benchmark and two of
its officers and directors alleging violations of the federal securities laws.
These lawsuits were consolidated in February 2000. The lawsuits seek to recover
unspecified damages. We deny the allegations in the lawsuits, however, and
further deny that such allegations provide a basis for recovery of damages as we
believe that we have made all required disclosures on a timely basis. We intend
to vigorously defend against these actions. No material developments occurred in
this proceeding during the period covered by this report.
Benchmark filed suit against J.M. Huber Corporation (Seller) in the United
States District Court for the Southern District of Texas for breach of contract,
fraud and negligent misrepresentation on December 14, 1999 and is seeking an
unspecified amount of damages in connection with the contract between Benchmark
and Seller pursuant to which Benchmark acquired all of the stock of AVEX and
Kilbride Holdings B.V. On January 5, 2000, Seller filed suit in the United
States District Court for the Southern District of New York alleging that
Benchmark failed to comply with certain obligations under the contract requiring
Benchmark to register shares of its common stock issued to Seller as partial
consideration for the acquisition. Seller's suit has been consolidated with
Benchmark's suit in the United States District Court for the Southern District
of Texas. Benchmark intends to vigorously pursue its claims against Seller and
defend against Seller's allegations. No material developments occurred in this
proceeding during the period covered by this report.
During the second quarter of 2000, Benchmark, along with numerous other
companies, was named as a defendant in a lawsuit brought by the Lemelson
Medical, Education & Research Foundation (the Foundation). The lawsuit alleges
that Benchmark has infringed certain of the Foundation's patents relating to
machine vision and bar code technology utilized in machines the Company has
purchased. On November 11, 2000, Benchmark filed an Answer, Affirmative
Defenses, and a Motion to Stay based upon Declaratory Judgement Actions filed by
Cognex and Symbol, manufacturers of the equipment at issue. We continue to
explore any indemnity or similar rights Benchmark may have against manufacturers
of the machines or other third parties. Management intends to vigorously defend
against such claim and pursue all rights it has against third parties.
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Benchmark is also involved in various other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
Benchmark's consolidated financial position or results of operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 First Amendment to the Benchmark Electronics, Inc. Employee
Stock Purchase Plan
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
Benchmark Electronics, Inc.'s Current Report on Form 8-K filed on
October 26, 2000.
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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 14, 2000.
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)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.1 First Amendment to the Benchmark Electronics, Inc. Employee
Stock Purchase Plan
27.1 Financial Data Schedule.
23
