UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

 

FORM 10‑Q

_______________

 

X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

 

__  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to________________

 

Commission File Number: 1‑10560

 

BENCHMARK ELECTRONICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Texas

74‑2211011

 

(State or other jurisdiction

(I.R.S. Employer

 

of incorporation or organization)

 

 

Identification No.)

3000 Technology Drive

77515

Angleton, Texas

(Zip Code)

(Address of principal executive offices)

 

 

     

(979) 849‑6550

(Registrants telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [Ö] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [Ö] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b–2 of the Act.

 

Large accelerated filer [Ö

Accelerated filer [   ]

Non-accelerated filer [   ] (Do not check if a smaller reporting company)

Smaller reporting company [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Act). Yes [ ] No [Ö

 

As of November 7, 2016 there were 48,878,788 shares of Common Stock of Benchmark Electronics, Inc., par value $0.10 per share, outstanding.

 

  

 


 

TABLE OF CONTENTS

 

PART I

 

 

 

 

Page

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Income

2

 

Condensed Consolidated Statements of Comprehensive Income

3

 

Condensed Consolidated Statement of Shareholders’ Equity

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and

21

 

Results of Operations

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

29

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 6.

Exhibits

31

 

 

SIGNATURES

32

  

 


 

PART I - FINANCIAL INFORMATION

 

Item 1.            Financial Statements.   

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

  

 

 

 

 

 

 

September 30,

December 31,

(in thousands, except par value)

 

2016

 

 

2015

 

 

 

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

635,683

 

$

465,995

 

 

Accounts receivable, net of allowance for doubtful accounts of $3,314

 

 

 

 

 

 

 

 

and $3,417, respectively

 

417,325

 

 

479,140

 

 

Inventories

 

395,948

 

 

411,986

 

 

Prepaid expenses and other assets

 

31,375

 

 

31,351

 

 

Income taxes receivable

 

380

 

 

156

 

 

 

 

Total current assets

 

1,480,711

 

 

1,388,628

 

Property, plant and equipment, net of accumulated depreciation of

 

 

 

 

 

 

 

 

 

$402,359 and $379,088, respectively

 

168,806

 

 

178,170

 

Goodwill

 

191,616

 

 

199,290

 

Deferred income taxes

 

12,590

 

 

14,088

 

Other, net

 

105,345

 

 

113,702

 

 

 

 

 

$

1,959,068

 

$

1,893,878

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current installments of long-term debt and capital lease obligations

$

12,365

 

$

12,284

 

 

Accounts payable

 

308,859

 

 

251,163

 

 

Income taxes payable

 

5,112

 

 

5,069

 

 

Accrued liabilities

 

74,796

 

 

64,578

 

 

 

 

Total current liabilities

 

401,132

 

 

333,094

 

Long-term debt and capital lease obligations, less current installments

 

214,171

 

 

222,909

 

Other long-term liabilities

 

9,448

 

 

15,971

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.10 par value; 5,000 shares authorized, none issued

 

 

 

 

 

Common stock, $0.10 par value; 145,000 shares authorized; issued

 

 

 

 

 

 

 

 

and outstanding – 48,754 and 50,178, respectively

 

4,875

 

 

5,018

 

 

Additional paid-in capital

 

613,036

 

 

624,997

 

 

Retained earnings

 

730,725

 

 

704,905

 

 

Accumulated other comprehensive loss

 

(14,319)

 

 

(13,016)

 

 

 

 

Total shareholders’ equity

 

1,334,317

 

 

1,321,904

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

$

1,959,068

 

$

1,893,878

See accompanying notes to condensed consolidated financial statements.

1


 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(unaudited)

  

 

 

 

Three Months Ended

Nine Months Ended

 

 

September 30,

September 30,

(in thousands, except per share data)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

Sales

$

574,341

$

630,191

$

1,702,908

$

1,915,154

Cost of sales

 

521,519

 

575,627

 

1,546,915

 

1,752,809

 

Gross profit

 

52,822

 

54,564

 

155,993

 

162,345

Selling, general and administrative expenses

 

28,085

 

26,216

 

85,082

 

80,689

Amortization of intangible assets

 

3,170

 

1,104

 

8,945

 

3,039

Restructuring charges and other costs

 

3,485

 

1,096

 

9,876

 

7,553

 

Income from operations

 

18,082

 

26,148

 

52,090

 

71,064

Interest expense

 

(2,302)

 

(495)

 

(6,935)

 

(1,427)

Interest income

 

577

 

246

 

1,170

 

971

Other expense

 

(383)

 

(1,121)

 

(535)

 

(1,582)

 

Income before income taxes

 

15,974

 

24,778

 

45,790

 

69,026

Income tax expense (benefit)

 

(5,768)

 

4,213

 

311

 

13,046

 

Net income

$

21,742

$

20,565

$

45,479

$

55,980

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

$

0.44

$

0.40

$

0.92

$

1.08

 

Diluted

$

0.44

$

0.40

$

0.91

$

1.07

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares outstanding:

 

 

 

 

 

 

 

Basic

 

48,965

 

51,192

 

49,377

 

51,940

 

Diluted

 

49,414

 

51,588

 

49,878

 

52,448

See accompanying notes to condensed consolidated financial statements.

2


 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

  

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

(in thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

21,742

 

$

20,565

 

$

45,479

 

$

55,980

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

299

 

 

378

 

 

815

 

 

(2,386)

 

Unrealized gain (loss) on investments, net of tax

 

1

 

 

10

 

 

17

 

 

(23)

 

Unrealized gain (loss) on derivative, net of tax

 

765

 

 

-

 

 

(2,134)

 

 

-

 

Other

 

(1)

 

 

(3)

 

 

(1)

 

 

(10)

Other comprehensive income (loss)

 

1,064

 

 

385

 

 

(1,303)

 

 

(2,419)

 

 

 

Comprehensive income

$

22,806

 

$

20,950

 

$

44,176

 

$

53,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

 

Other

 

 

Total

 

 

 

Shares

 

Par

 

Paid-in

 

Retained

 

Comprehensive

Shareholders’

(in thousands)

 

Outstanding

 

Value

 

Capital

 

Earnings

 

 

Loss

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2015

 

 

50,178

 

 

$  5,018

 

$  624,997

 

$  704,905

 

 

$  (13,016)

 

 

$  1,321,904

Stock-based compensation expense

 

 

-

 

 

-

 

4,302

 

-

 

 

-

 

 

4,302

Shares repurchased and retired

 

 

(1,923)

 

 

(193)

 

(21,010)

 

(19,659)

 

 

-

 

 

(40,862)

Stock options exercised

 

 

328

 

 

33

 

5,511

 

-

 

 

-

 

 

5,544

Vesting of restricted stock units

 

 

197

 

 

20

 

(20)

 

-

 

 

-

 

 

-

Shares withheld for taxes

 

 

(26)

 

 

(3)

 

(551)

 

-

 

 

-

 

 

(554)

Excess tax shortfall of stock-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation

 

 

-

 

 

-

 

(193)

 

-

 

 

-

 

 

(193)

Net income

 

 

-

 

 

-

 

-

 

45,479

 

 

-

 

 

45,479

Other comprehensive loss

 

 

-

 

 

-

 

-

 

-

 

 

(1,303)

 

 

(1,303)

Balances, September 30, 2016

 

 

48,754

 

 

$  4,875

 

$  613,036

 

$  730,725

 

 

$  (14,319)

 

 

$  1,334,317

See accompanying notes to condensed consolidated financial statements.

4


 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

  

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

(in thousands)

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

$

45,479

 

$

55,980

 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

31,623

 

 

32,298

 

 

 

Amortization

 

10,379

 

 

4,192

 

 

 

Deferred income taxes

 

2,577

 

 

7,481

 

 

 

Gain on the sale of property, plant and equipment

 

(119)

 

 

(56)

 

 

 

Asset impairments

 

121

 

 

84

 

 

 

Stock-based compensation expense

 

4,302

 

 

6,021

 

 

 

Excess tax benefits from stock-based compensation

 

(299)

 

 

(345)

 

Changes in operating assets and liabilities, net of effects from

 

 

 

 

 

 

 

business acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

61,776

 

 

52,217

 

 

 

Inventories

 

13,991

 

 

(21,059)

 

 

 

Prepaid expenses and other assets

 

(302)

 

 

(9,015)

 

 

 

Accounts payable

 

59,183

 

 

(9,222)

 

 

 

Accrued liabilities

 

(535)

 

 

529

 

 

 

Income taxes

 

(146)

 

 

(383)

 

 

 

 

Net cash provided by operations

 

228,030

 

 

118,722

Cash flows from investing activities:

 

 

 

 

 

 

Proceeds from sales of investments at par

 

200

 

 

50

 

Additions to property, plant and equipment

 

(24,126)

 

 

(31,980)

 

Proceeds from the sale of property, plant and equipment

 

237

 

 

477

 

Additions to purchased software

 

(1,272)

 

 

(902)

 

Business acquisition, net of cash acquired

 

10,750

 

 

-

 

Other

 

(224)

 

 

187

 

 

 

 

Net cash used in investing activities

 

(14,435)

 

 

(32,168)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from stock options exercised

 

5,544

 

 

1,683

 

Excess tax benefits from stock-based compensation

 

299

 

 

345

 

Principal payments on long-term debt and capital lease obligations

 

(9,224)

 

 

(500)

 

Share repurchases

 

(40,862)

 

 

(52,323)

 

 

 

 

Net cash used in financing activities

 

(44,243)

 

 

(50,795)

Effect of exchange rate changes

 

336

 

 

(1,041)

Net increase in cash and cash equivalents

 

169,688

 

 

34,718

 

Cash and cash equivalents at beginning of year

 

465,995

 

 

427,376

 

Cash and cash equivalents at end of period

$

635,683

 

$

462,094

See accompanying notes to condensed consolidated financial statements.

5


 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(amounts in thousands, except per share data, unless otherwise noted)

(unaudited)

 

Note 1 – Basis of Presentation

Benchmark Electronics, Inc. (the Company) is a Texas corporation that provides worldwide integrated electronic manufacturing services (EMS), engineering and design services, and precision machine services. The Company provides services to original equipment manufacturers (OEMs) of industrial control equipment (including equipment for the aerospace and defense industries), telecommunication equipment, computers and related products for business enterprises, medical devices, and testing and instrumentation products. The Company has manufacturing operations located in the United States and Mexico (the Americas), Asia and Europe.

 

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The financial statements reflect all normal and recurring adjustments necessary in the opinion of management for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s annual report on Form 10‑K for the year ended December 31, 2015 (the 2015 10-K).

 

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP). Actual results could differ from those estimates and assumptions.

 

Certain reclassifications of prior period amounts have been made to conform to the current period presentation. In the quarter ending September 30, 2016, the Company concluded that it was appropriate to classify amounts relating to the amortization of intangible assets separately. Previously, the Company had reported these amounts under the captions “cost of sales” and “selling, general and administrative expenses”. These reclassifications had no effect on previously reported net income.

 

Note 2—Acquisition

On November 12, 2015, the Company acquired all of the outstanding common stock of Secure Communication Systems, Inc. and its subsidiaries (collectively referred to as Secure Technology or Secure) (the Secure Acquisition) for a purchase price of $219.8 million, as adjusted in accordance with the acquisition agreement. Secure Technology is a leading provider of customized high-performance electronics, sub-systems, and component solutions for mission critical applications. The transaction was financed with borrowings under the Company’s term loan facility.

 

The allocation of the Secure Acquisition’s net purchase price resulted in $145.6 million of goodwill. The final allocation of the purchase price, which the Company completed in September 2016, reflects a $10.8 million purchase price adjustment received during the quarter ended September 30, 2016. The Secure Acquisition deepened Benchmark’s engineering capabilities and enhanced its ability to serve customers in highly regulated industrial markets, including aerospace and defense. The goodwill recognized in connection with the acquisition represents the future economic benefit arising from assets acquired that could not be individually identified and separately recognized and is attributable to the general reputation, acquisition synergies and expected future cash flows of the acquisition, as well as the nature of Secure’s products and services and its competitive position in the marketplace.

 

 

6 


 

The purchase price paid for Secure has been allocated as follows (in thousands):

 

Purchase price paid

$

219,754

Cash acquired

 

(922)

 

Purchase price, net of cash received

$

218,832

 

 

 

 

Acquisition-related costs for 2016

$

132

 

 

 

 

The following table summarizes the assets acquired and liabilities assumed:

 

 

 

Cash

$

922

 

Accounts receivable

 

12,521

 

Inventories

 

13,484

 

Other current assets

 

1,569

 

Property, plant and equipment

 

2,048

 

Other assets

 

97

 

Trade names and trademarks intangible

 

7,800

 

Technology licenses intangible

 

15,500

 

Customer relationships intangible

 

67,100

 

Current liabilities

 

(16,936)

 

Long-term debt

 

(24)

 

Other long-term liabilities

 

(800)

 

Deferred income taxes

 

(29,173)

 

Total identifiable net assets

 

74,108

 

Goodwill

 

145,646

 

Net assets acquired

$

219,754

 

The following summary pro forma condensed consolidated financial information reflects the Secure Acquisition as if it had occurred on January 1, 2015 for purposes of the statements of income. This summary pro forma information is not necessarily representative of what the Company’s results of operations would have been had this acquisition in fact occurred on January 1, and is not intended to project the Company’s results of operations for any future period.

 

Pro forma condensed consolidated financial information for the nine months ended September 30, 2015 (unaudited) (in thousands):

 

Net sales

$

1,989,134

 

Net income

$

57,089

 

Note 3 – Stock-Based Compensation

The Company’s 2010 Omnibus Incentive Compensation Plan (the 2010 Plan) authorizes, the Company, upon approval of the compensation committee of the Board of Directors, to grant a variety of awards, including stock options, restricted shares and restricted stock units (both time-based and performance-based) and other forms of equity awards, or any combination thereof, to any director, officer, employee or consultant (including any prospective director, officer, employee or consultant) of the Company. Stock options are granted to employees with an exercise price equal to the market price of the Company’s common shares on the date of grant, generally vest over a four-year period from the date of grant and have a term of 10 years. Time-based restricted shares and restricted stock units granted to employees generally vest over a four-year period from the date of grant, subject to the continued employment of the employee by the Company. Performance-based restricted stock unit awards generally vest over a three-year

7 


 

performance cycle, which includes the year of the grant, and are based upon the Company’s achievement of specified performance metrics. Awards under the 2010 Plan to non-employee directors have been in the form of restricted stock units, which vest in equal quarterly installments over a one-year period, starting on the grant date.

 

As of September 30, 2016, 3.9 million additional common shares were available for issuance under the Company’s 2010 Plan.

 

All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their grant date fair values. The total compensation cost recognized for stock-based awards was $0.3 million and $4.3 million for the three and nine months ended September 30, 2016, respectively, and $2.0 million and $6.0 million for the three and nine months ended September 30, 2015, respectively. The total income tax benefit recognized in the condensed income statements for stock-based awards was $0.1 million and $1.5 million for the three and nine months ended September 30, 2016, respectively, and $0.8 million and $2.4 million for the three and nine months ended September 30, 2015, respectively. The compensation expense for stock-based awards includes an estimate for forfeitures and is recognized over the vesting period of the awards using the straight-line method. Cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) are classified as cash flows from financing activities. Awards of restricted shares, restricted stock units, and performance-based restricted stock units are valued at the closing market price of the Company’s common shares on the date of grant. For performance-based restricted stock units, compensation expense is based on the probability that the performance goals will be achieved, which is monitored by management throughout the requisite service period. When it becomes probable, based on the Company’s expectation of performance during the measurement period, that more or less than the previous estimate of the awarded shares will vest, an adjustment to stock-based compensation expense is recognized as a change in accounting estimate.

 

As of September 30, 2016, the unrecognized compensation cost and remaining weighted-average amortization related to stock-based awards were as follows:

 

 

 

 

 

 

Performance-

 

 

 

 

 

 

based

 

 

 

 

Restricted

 

Restricted

 

 

Stock

 

Stock

 

Stock

(in thousands)

 

Options

 

 Units 

 

Units(1)

Unrecognized compensation cost

 

 $  2,183

 

 

 $  8,344

 

 

 $  2,821

Remaining weighted-average

 

 

 

 

 

 

 

 

  amortization period

1.3 years

 

 

2.4 years

 

 

2.0 years

 

 

 

 

 

 

 

 

 

(1) Based on the probable achievement of the performance goals identified in each award.

8 


 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value per option granted during the nine months ended September 30, 2015 was $8.76, respectively. No options were granted during the nine months ended September 30, 2016. The weighted-average assumptions used to value the options granted during the nine months ended September 30, 2015 were as follows (in thousands):

Options granted

 

 

289

Expected term of options

 

 

6.4 years

Expected volatility

 

 

35%

Risk-free interest rate

 

 

1.886%

Dividend yield

 

 

zero

 

The expected term of the options represents the estimated period of time until exercise and is based on historical experience, giving consideration to the contractual terms, vesting schedules and expectations of future plan participant behavior. Separate groups of plan participants that have similar historical exercise behavior are considered separately for valuation purposes. Expected stock price volatility is based on the historical volatility of the Company’s common shares. The risk-free interest rate is based on the U.S. Treasury zero-coupon rates in effect at the time of grant with an equivalent remaining term. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.

 

The total cash received by the Company as a result of stock option exercises for the nine months ended September 30, 2016 and 2015 was approximately $5.5 million and $1.7 million, respectively. The actual tax benefit realized as a result of stock option exercises and the vesting of other share-based awards during the nine months ended September 30, 2016 and 2015 was $2.6 million and $2.0 million, respectively. For the nine months ended September 30, 2016 and 2015, the total intrinsic value of stock options exercised was $2.2 million and $0.5 million, respectively.

 

The Company awarded performance-based restricted stock units to employees during the nine months ended September 30, 2016 and 2015. The number of performance-based restricted stock units that will ultimately be earned will not be determined until the end of the corresponding performance periods, and may vary from as low as zero to as high as three times the target number depending on the level of achievement of certain performance goals. The level of achievement of these goals is based upon the audited financial results of the Company for the last full calendar year within the performance period. The performance goals consist of certain levels of achievement using the following financial metrics: revenue growth, operating margin expansion, and return on invested capital. If the performance goals are not met based on the Company’s financial results, the applicable performance-based restricted stock units will not vest and will be forfeited. Shares subject to forfeited performance-based restricted stock units will be available for issuance under the 2010 Plan.

 

 

 

9 


 

The following table summarizes activities relating to the Company’s stock options:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

Number of

 

 

Exercise

 

Contractual

 

Intrinsic

(in thousands, except per share data)

 

Options

 

 

Price

 

Term (Years)

 

Value

Outstanding as of December 31, 2015

 

2,580

 

 

$20.49

 

 

 

 

Exercised

 

(328)

 

 

16.89

 

 

 

 

Forfeited or expired

 

(415)

 

 

23.26

 

 

 

 

Outstanding as of September 30, 2016

 

1,837

 

 

$20.51

 

4.48

 

$  8,789

Exercisable as of September 30, 2016

 

1,497

 

 

$20.16

 

3.15

 

$  7,810

 

The aggregate intrinsic value in the table above is before income taxes and is calculated as the difference between the exercise price of the underlying options and the Company’s closing stock price as of the last business day of the period ended September 30, 2016 for options that had exercise prices that were below the closing price.

 

During the nine months ended September 30, 2016, the Company’s remaining outstanding restricted shares at December 31, 2015 vested and the Company has no restricted shares outstanding. Restricted stock units, time-based and performance-based, remain outstanding as detailed below.

 

The following table summarizes the activities related to the Company’s time-based restricted stock units:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

Number of

 

 

Grant Date

(in thousands, except per share data)

 

Units

 

 

Fair Value

Non-vested awards outstanding as of December 31, 2015

 

467

 

 

$21.59

Granted

 

319

 

 

21.50

Vested

 

(198)

 

 

21.09

Forfeited

 

(115)

 

 

21.86

Non-vested awards outstanding as of September 30, 2016

 

473

 

 

$21.67

 

The following table summarizes the activities related to the Company’s performance-based restricted stock units:

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Average

 

 

 

Number of

 

 

Grant Date

(in thousands, except per share data)

 

 

Units

 

 

Fair Value

Non-vested units outstanding as of December 31, 2015

 

 

306

 

 

$19.77

Granted (1)

 

 

184

 

 

21.63

Forfeited or expired

 

 

(260)

 

 

19.62

Non-vested units outstanding as of September 30, 2016

 

 

230

 

 

$21.44

(1)  Represents target number of units that can vest based on the achievement of the performance goals.

10 


 

Note 4 – Earnings Per Share

Basic earnings per share is computed using the weighted-average number of shares outstanding. Diluted earnings per share is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding stock equivalents. Stock equivalents include common shares issuable upon the exercise of stock options and other equity instruments, and are computed using the treasury stock method. Under the treasury stock method, the exercise price of a share, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated excess tax benefits that would be recorded in paid-in-capital, if any, when the option is exercised or the instrument vests are assumed to be used to repurchase shares in the current period.

 

The following table sets forth the calculation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

(in thousands, except per share data)

 

 

2016

 

 

2015

 

 

2016

 

 

2015

Net income

 

$

21,742

 

$

20,565

 

$

45,479

 

$

55,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share -

 

 

 

 

 

 

 

 

 

 

 

 

 

weighted-average number of common

 

 

 

 

 

 

 

 

 

 

 

 

 

shares outstanding during the period

 

 

48,965

 

 

51,192

 

 

49,377

 

 

51,940

Incremental common shares attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

exercise of dilutive options

 

 

323

 

 

292

 

 

304

 

 

326

Incremental common shares attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

to outstanding restricted stock units

 

 

126

 

 

104

 

 

197

 

 

182

Denominator for diluted earnings per share

 

 

49,414

 

 

51,588

 

 

49,878

 

 

52,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.44

 

$

0.40

 

$

0.92

 

$

1.08

Diluted earnings per share

 

$

0.44

 

$

0.40

 

$

0.91

 

$

1.07

 

Options to purchase 0.6 million and 0.9 million common shares for the three- and nine-month periods ended September 30, 2016, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. Options to purchase 1.3 million common shares for both the three- and nine-month periods ended September 30, 2015 were not included in the computation of diluted earnings per share because their effect would also have been anti-dilutive.

 

Note 5 – Goodwill and Other Intangible Assets

Goodwill allocated to the Company’s reportable segments was as follows:

 

(in thousands)

 

Americas

 

Asia

 

Total

Goodwill as of December 31, 2015

$

161,188

$

38,102

$

199,290

Purchase accounting adjustments

 

(7,674)

 

-

 

(7,674)

Goodwill as of September 30, 2016

$

153,514

$

38,102

$

191,616

 

The purchase accounting adjustments in 2016 related to the Secure Acquisition were based on management’s estimates resulting from review of information obtained after the acquisition that related to facts and circumstances that existed at the acquisition date. See Note 2.

 

11 


 

Other assets consist primarily of acquired identifiable intangible assets and capitalized purchased software costs. Acquired identifiable intangible assets as of September 30, 2016 and December 31, 2015 were as follows:

 

 

Gross

 

 

 

 

 

Net

 

 

Carrying

 

Accumulated

 

Carrying

(in thousands)

 

Amount

 

Amortization

 

Amount

Customer relationships

$

100,123

 

$

(25,925)

 

$

74,198

Purchased software costs

 

31,019

 

 

(28,248)

 

 

2,771

Technology licenses

 

26,800

 

 

(13,329)

 

 

13,471

Trade names and trademarks

 

7,800

 

 

-

 

 

7,800

Other

 

868

 

 

(231)

 

 

637

Other intangible assets, September 30, 2016

$

166,610

 

$

(67,733)

 

$

98,877

 

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

Net

 

 

Carrying

 

Accumulated

 

Carrying

(in thousands)

 

Amount

 

Amortization

 

Amount

Customer relationships

$

100,092

 

$

(19,822)

 

$

80,270

Purchased software costs

 

29,754

 

 

(27,394)

 

 

2,360

Technology licenses

 

26,800

 

 

(10,477)

 

 

16,323

Trade names and trademarks

 

7,800

 

 

-

 

 

7,800

Other

 

868

 

 

(213)

 

 

655

Other intangible assets, December 31, 2015

$

165,314

 

$

(57,906)

 

$

107,408

 

Customer relationships are amortized on a straight-line basis over a period of 10 to 14 years. Capitalized purchased software costs are amortized on a straight-line basis over the estimated useful life of the related software, which ranges from 2 to 10 years. Technology licenses are amortized over their estimated useful lives in proportion to the economic benefits consumed. Amortization expense for the nine months ended September 30, 2016 and 2015 was as follows:

 

Nine Months Ended

 

September 30,

(in thousands)

 

2016

 

 

2015

Amortization of intangible assets

$

8,945

 

$

3,039

Amortization of capitalized purchased software costs

 

867

 

 

1,013

Amortization of debt costs

 

567

 

 

140

 

$

10,379

 

$

4,192

 

The increased amortization of intangible assets reflects the impact of the Secure Acquisition. See Note 2.

 

The estimated future amortization expense of other intangible assets for each of the next five years is as follows (in thousands):

 

Year ending December 31,

 

Amount

2016 (remaining three months)

$

3,279

2017

 

10,776

2018

 

9,901

2019

 

9,759

2020

 

9,192

 

12 


 

Note 6 – Borrowing Facilities

On November 12, 2015, the Company entered into a $430 million Credit Agreement (the Credit Agreement) by and among Benchmark, JPMorgan Chase Bank, N.A. as administrative agent and collateral agent (the Administrative Agent), and the financial institutions acting as lenders thereunder from time to time. This Credit Agreement provides for a five-year $200 million revolving credit facility and a five-year $230 million term loan facility (the Term Loan), both with a maturity date of November 12, 2020.  The proceeds of the Term Loan were used to finance the purchase price of the acquisition of Secure Technology. The revolving credit facility is available for general corporate purposes, may be drawn in foreign currencies up to an amount equivalent to $20 million, and may be used for letters of credit up to $20 million. The Credit Agreement includes an accordion feature, pursuant to which total commitments under the facility may be increased by an additional $150 million, subject to satisfaction of certain conditions.

 

The Term Loan is payable in minimum quarterly principal installments, which began in March 2016, of $2.9 million in 2016 and 2017, $4.3 million in 2018, $5.8 million in 2019, and $8.6 million in 2020, with the balance payable on the maturity date.

 

Interest on outstanding borrowings under the Credit Agreement accrues, at our option, at (a) the adjusted London interbank offered rate (LIBOR) plus 1.25% to 2.25%, or (b) the alternative base rate plus 0.25% to 1.25%, and is payable quarterly in arrears. The alternative base rate is equal to the highest of (i) the Administrative Agent’s prime rate, (ii) the federal funds rate plus 0.50% and (iii) the adjusted LIBOR rate plus 1.00%. The margin on the interest rates fluctuates based upon the ratio of the Company’s debt to its consolidated EBITDA. As of September 30, 2016, $166.0 million of the outstanding debt under the Credit Agreement was effectively at a fixed interest rate as a result of a $166.0 million notional interest rate swap contract discussed in Note 14. A commitment fee of 0.30% to 0.40% per annum (based on the debt to EBITDA ratio) on the unused portion of the revolving credit line is payable quarterly in arrears.

 

The Credit Agreement is generally secured by a pledge of (a) all the capital stock of the Company’s domestic subsidiaries and 65% of the capital stock of its directly owned foreign subsidiaries, (b) any indebtedness owed to Benchmark and its subsidiaries and (c) all or substantially all other personal property of Benchmark and its domestic subsidiaries (including, accounts receivable, inventory and fixed assets of Benchmark and its domestic subsidiaries), in each case, subject to customary exceptions and limitations. The Credit Agreement contains financial covenants as to debt leverage and interest coverage, and certain customary affirmative and negative covenants, including restrictions on our ability to incur additional debt and liens, pay dividends, repurchase shares, sell assets and merge or consolidate with other persons. Amounts due under the Credit Agreement may be accelerated upon specified events of default, including a failure to pay amounts due, breach of a covenant, material inaccuracy of a representation, or occurrence of bankruptcy or insolvency, subject, in some cases, to cure periods. As of September 30, 2016 and December 31, 2015, the Company was in compliance with all of these covenants and restrictions.

 

As of September 30, 2016, the Company had $221.4 million in borrowings outstanding under the Term Loan facility and $2.1 million in letters of credit outstanding under the revolving credit facility. The Company has $197.9 million available for future borrowings under the revolving credit facility.

 

The Company’s Thailand subsidiary has a multi-purpose credit facility with Kasikornbank Public Company Limited (the Thai Credit Facility) that provides for 350 million Thai baht working capital availability. The Thai Credit Facility is secured by land and buildings in Thailand owned by the Company’s Thailand subsidiary. Availability of funds under the Thai Credit Facility is reviewed annually and is currently accessible through October 2017. As of both September 30, 2016 and 2015, there were no working capital borrowings outstanding under the facility.

13 


 

Note 7 – Inventories

Inventory costs are summarized as follows:

 

 

September 30,

 

December 31,

(in thousands)

 

2016

 

 

2015

Raw materials

$

258,048

 

$

276,470

Work in process

 

108,513

 

 

86,475

Finished goods

 

29,387

 

 

49,041

 

$

395,948

 

$

411,986

 

Note 8 – Income Taxes

Income tax expense consists of the following:

 

Nine Months Ended

 

September 30,

(in thousands)

 

2016

 

 

2015

Federal – current

$

(164)

 

$

483

Foreign – current

 

(2,340)

 

 

4,786

State – current

 

238

 

 

296

Deferred

 

2,577

 

 

7,481

 

$

311

 

$

13,046

 

Income tax expense differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income tax primarily due to the mix of taxable income by taxing jurisdiction, the impact of tax incentives and tax holidays in foreign locations, and state income taxes (net of federal benefit). The decrease in income tax expense during 2016 is primarily the result of an $8.3 million decrease in the reserve for uncertain tax benefits and lower taxable income.

 

The Company considers earnings from foreign subsidiaries to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been made for these earnings. Upon distribution of foreign subsidiary earnings in the form of dividends or otherwise, such distributed earnings would be subject to U.S. income taxes and foreign withholding taxes, reduced by any applicable foreign tax credits. Determination of the amount of any unrecognized deferred tax liability on these undistributed earnings is not practicable.

14 


 

The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in Malaysia and Thailand that will expire at various dates, unless extended or otherwise renegotiated, through 2025 in Malaysia and 2028 in Thailand, and are subject to certain conditions with which the Company expects to comply. The net impact of these tax incentives was to lower income tax expense for the nine months ended September 30, 2016 and 2015 by approximately $3.5 million (approximately 0.07 per diluted share) and $7.1 million (approximately $0.13 per diluted share), respectively, as follows:

 

 

Nine Months Ended

 

September 30,

(in thousands)

 

2016

 

 

2015

China

$

-

 

$

1,573

Malaysia

 

1,594

 

 

1,565

Thailand

 

1,953

 

 

3,936

 

$

3,547

 

$

7,074

 

The Company’s Chinese subsidiary had a tax incentive that expired in December 2015 and has submitted an application for a new tax incentive.

 

As of September 30, 2016, the total amount of the reserve for uncertain tax benefits including interest was $8.1 million. The reserve is classified as a current or long-term liability in the condensed consolidated balance sheets based on the Company’s expectation of when the items will be settled. The amount of accrued potential interest on unrecognized tax benefits included in the reserve as of September 30, 2016, was $0.1 million. There was no reserve for potential penalties. During the three months ended September 30, 2016, the Company reduced its reserve by approximately $8.3 million relating to the expiration of the statute of limitations for a foreign subsidiary that was liquidated in 2011 and closed its operations in 2005.

 

The Company and its subsidiaries in Brazil, China, Ireland, Luxembourg, Malaysia, Mexico, the Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 2004 to 2015. During the course of such examinations, disputes may occur as to matters of fact or law. The Company has no ongoing U.S. Internal Revenue Service income tax audits. In most tax jurisdictions, the passage of time without examination will result in the expiration of applicable statutes of limitations thereby precluding examination of the tax period(s) for which such statute of limitation has expired. The Company believes that it has adequately provided for its tax liabilities.

15 


 

Note 9 – Segment and Geographic Information

The Company currently has manufacturing facilities in the United States, Mexico, Asia and Europe to serve its customers. The Company is operated and managed geographically, and management evaluates performance and allocates the Company’s resources on a geographic basis. Intersegment sales are generally recorded at prices that approximate arm’s length transactions. Operating segments’ measure of profitability is based on income from operations. The accounting policies for the reportable operating segments are the same as for the Company taken as a whole. The Company has three reportable operating segments: the Americas, Asia and Europe. Information about operating segments is as follows:

 

 

 

Three Months Ended

Nine Months Ended

 

 

September 30,

September 30,

(in thousands)

 

2016

 

2015

 

2016

 

2015

Net sales:

 

 

 

 

 

 

 

 

 

Americas

$

387,827

$

398,570

$

1,135,995

$

1,193,194

 

Asia

 

169,215

 

219,400

 

505,410

 

692,609

 

Europe

 

37,113

 

35,399

 

119,633

 

106,647

 

Elimination of intersegment sales

 

(19,814)

 

(23,178)

 

(58,130)

 

(77,296)

 

 

$

574,341

$

630,191

$

1,702,908

$

1,915,154

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Americas

$

6,031

$

5,965

$

17,639

$

18,094

 

Asia

 

4,055

 

4,126

 

12,304

 

12,928

 

Europe

 

702

 

683

 

2,098

 

1,929

 

Corporate

 

3,314

 

1,236

 

9,961

 

3,539

 

 

$

14,102

$

12,010

$

42,002

$

36,490

 

 

 

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

 

 

 

 

Americas

$

21,481

$

21,153

$

60,960

$

53,165

 

Asia

 

12,337

 

16,216

 

34,894

 

50,143

 

Europe

 

2,390

 

973

 

7,878

 

4,273

 

Corporate and intersegment eliminations

 

(18,126)

 

(12,194)

 

(51,642)

 

(36,517)

 

 

$

18,082

$

26,148

$

52,090

$

71,064

 

 

 

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

Americas

$

7,102

$

4,391

$

16,698

$

14,731

 

Asia

 

1,372

 

1,526

 

5,945

 

10,922

 

Europe

 

532

 

577

 

1,204

 

3,873

 

Corporate

 

189

 

1,382

 

1,551

 

3,356

 

 

$

9,195

$

7,876

$

25,398

$

32,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

December 31,

 

 

 

 

 

 

 

2016

 

2015

Total assets:

 

 

 

 

 

 

 

 

 

Americas

 

 

 

 

$

867,099

$

867,858

 

Asia

 

 

 

 

 

623,805

 

604,554

 

Europe

 

 

 

 

 

359,279

 

305,833

 

Corporate and other

 

 

 

 

 

108,885

 

115,633

 

 

 

 

 

 

$

1,959,068

$

1,893,878

16 


 

Geographic net sales information reflects the destination of the product shipped. Long-lived assets information is based upon the physical location of the asset.

 

 

 

Three Months Ended

Nine Months Ended

 

 

September 30,

September 30,

(in thousands)

 

2016

 

2015

 

2016

 

2015

Geographic net sales:

 

 

 

 

 

 

 

 

 

United States

$

403,561

$

452,255

$

1,200,752

$

1,391,414

 

Asia

 

85,827

 

75,479

 

239,546

 

237,490

 

Europe

 

57,835

 

58,307

 

180,362

 

159,781

 

Other Foreign

 

27,118

 

44,150

 

82,248

 

126,469

 

 

$

574,341

$

630,191

$

1,702,908

$

1,915,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

December 31,

 

 

 

 

 

 

 

2016

 

2015

Long-lived assets:

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

$

168,880

$

172,958

 

Asia

 

 

 

 

 

69,294

 

77,237

 

Europe

 

 

 

 

 

9,054

 

9,704

 

Other

 

 

 

 

 

26,179

 

31,046

 

 

 

 

 

 

$

273,407

$

290,945

 

 

 

 

 

 

 

 

 

 

 

Note 10 – Supplemental Cash Flow and Non-Cash Information

The following information concerns supplemental disclosures of cash payments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,