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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2021

or

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.)

 

 

 

56 South Rockford Drive

 

85281

Tempe, Arizona

 

(Zip Code)

(Address of principal executive offices)

 

 

 

(623) 300-7000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.10 per share

 

BHE

 

The New York Stock Exchange

 

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☑

As of November 1, 2021, there were 35,224,307 shares of common stock of Benchmark Electronics, Inc., par value $0.10 per share, outstanding.


 

TABLE OF CONTENTS

 

 

 

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 Statements 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 Results of Operations

21

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

(unaudited)

 

 

 

September 30,

 

 

December 31,

 

(in thousands, except par value)

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

288,567

 

 

$

390,808

 

Restricted cash

 

 

2,630

 

 

 

5,182

 

Accounts receivable, net of allowance for doubtful accounts of
   $
828 and $1,371, respectively

 

 

311,384

 

 

 

309,331

 

Contract assets

 

 

160,194

 

 

 

142,779

 

Inventories

 

 

478,325

 

 

 

327,377

 

Prepaid expenses and other assets

 

 

35,810

 

 

 

26,457

 

Income taxes receivable

 

 

2,099

 

 

 

417

 

Total current assets

 

 

1,279,009

 

 

 

1,202,351

 

Property, plant and equipment, net

 

 

188,858

 

 

 

185,272

 

Operating lease right-of-use assets

 

 

102,440

 

 

 

79,966

 

Goodwill

 

 

192,116

 

 

 

192,116

 

Deferred income taxes

 

 

4,248

 

 

 

4,924

 

Other assets, net

 

 

73,695

 

 

 

79,606

 

 

 

$

1,840,366

 

 

$

1,744,235

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current installments of long-term debt

 

$

7,663

 

 

$

9,161

 

Accounts payable

 

 

401,106

 

 

 

282,208

 

Advance payments from customers

 

 

91,464

 

 

 

84,122

 

Income taxes payable

 

 

4,376

 

 

 

5,572

 

Accrued liabilities

 

 

95,560

 

 

 

100,073

 

Total current liabilities

 

 

600,169

 

 

 

481,136

 

Long-term debt, less current installments

 

 

123,510

 

 

 

131,051

 

Operating lease liabilities

 

 

94,219

 

 

 

72,120

 

Other long-term liabilities

 

 

58,130

 

 

 

65,552

 

Deferred income taxes

 

 

2,002

 

 

 

4,788

 

Commitments and contingencies

 

 

 

 

 

 

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 –
35,209 and 36,295, respectively

 

 

3,521

 

 

 

3,629

 

Additional paid-in capital

 

 

503,062

 

 

 

510,405

 

Retained earnings

 

 

473,385

 

 

 

492,205

 

Accumulated other comprehensive loss

 

 

(17,632

)

 

 

(16,651

)

Total shareholders’ equity

 

 

962,336

 

 

 

989,588

 

 

 

$

1,840,366

 

 

$

1,744,235

 

 

See accompanying notes to condensed consolidated financial statements.

1


 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(unaudited)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

(in thousands, except per share data)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Sales

 

$

571,882

 

 

$

525,951

 

 

$

1,622,265

 

 

$

1,531,881

 

Cost of sales

 

 

518,177

 

 

 

479,597

 

 

 

1,478,420

 

 

 

1,407,494

 

Gross profit

 

 

53,705

 

 

 

46,354

 

 

 

143,845

 

 

 

124,387

 

Selling, general and administrative expenses

 

 

34,387

 

 

 

29,724

 

 

 

98,969

 

 

 

89,815

 

Amortization of intangible assets

 

 

1,596

 

 

 

2,368

 

 

 

4,793

 

 

 

7,120

 

Restructuring charges and other costs

 

 

6,428

 

 

 

7,161

 

 

 

9,600

 

 

 

15,480

 

Ransomware related incident costs (recovery), net

 

 

(500

)

 

 

(1,558

)

 

 

(3,944

)

 

 

(1,305

)

Income from operations

 

 

11,794

 

 

 

8,659

 

 

 

34,427

 

 

 

13,277

 

Interest expense

 

 

(1,987

)

 

 

(2,136

)

 

 

(6,215

)

 

 

(6,189

)

Interest income

 

 

122

 

 

 

154

 

 

 

451

 

 

 

1,040

 

Other income (expense)

 

 

500

 

 

 

439

 

 

 

664

 

 

 

(191

)

Income before income taxes

 

 

10,429

 

 

 

7,116

 

 

 

29,327

 

 

 

7,937

 

Income tax expense

 

 

2,364

 

 

 

1,201

 

 

 

5,976

 

 

 

1,577

 

Net income

 

$

8,065

 

 

$

5,915

 

 

$

23,351

 

 

$

6,360

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

 

$

0.16

 

 

$

0.65

 

 

$

0.17

 

Diluted

 

$

0.23

 

 

$

0.16

 

 

$

0.64

 

 

$

0.17

 

Weighted-average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,423

 

 

 

36,467

 

 

 

35,806

 

 

 

36,565

 

Diluted

 

 

35,666

 

 

 

36,544

 

 

 

36,287

 

 

 

36,821

 

 

See accompanying notes to condensed consolidated financial statements.

2


 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income

 

$

8,065

 

 

$

5,915

 

 

$

23,351

 

 

$

6,360

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,438

)

 

 

2,045

 

 

 

(3,146

)

 

 

1,654

 

Unrealized gain (loss) on derivatives, net of tax

 

 

214

 

 

 

447

 

 

 

1,796

 

 

 

(3,911

)

Other

 

 

113

 

 

 

86

 

 

 

369

 

 

 

302

 

Other comprehensive income (loss)

 

 

(1,111

)

 

 

2,578

 

 

 

(981

)

 

 

(1,955

)

Comprehensive income

 

$

6,954

 

 

$

8,493

 

 

$

22,370

 

 

$

4,405

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)

 

(in thousands)

 

Shares

 

 

Common
stock

 

 

Additional
paid-in
capital

 

 

Retained
earnings

 

 

Accumulated
other
comprehensive
loss

 

 

Total
shareholders’
equity

 

Balances, December 31, 2020

 

 

36,295

 

 

$

3,629

 

 

$

510,405

 

 

$

492,205

 

 

$

(16,651

)

 

$

989,588

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

10,856

 

 

 

 

 

 

 

 

 

10,856

 

Shares repurchased and retired

 

 

(1,380

)

 

 

(137

)

 

 

(15,364

)

 

 

(24,715

)

 

 

 

 

 

(40,216

)

Stock options exercised

 

 

29

 

 

 

3

 

 

 

343

 

 

 

 

 

 

 

 

 

346

 

Vesting of restricted stock units

 

 

373

 

 

 

37

 

 

 

(37

)

 

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

 

(108

)

 

 

(11

)

 

 

(3,141

)

 

 

 

 

 

 

 

 

(3,152

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(17,456

)

 

 

 

 

 

(17,456

)

Net income

 

 

 

 

 

 

 

 

 

 

 

23,351

 

 

 

 

 

 

23,351

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(981

)

 

 

(981

)

Balances, September 30, 2021

 

 

35,209

 

 

$

3,521

 

 

$

503,062

 

 

$

473,385

 

 

$

(17,632

)

 

$

962,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, June 30, 2021

 

 

35,566

 

 

$

3,558

 

 

$

503,386

 

 

$

476,855

 

 

$

(16,521

)

 

$

967,278

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,993

 

 

 

 

 

 

 

 

 

3,993

 

Shares repurchased and retired

 

 

(372

)

 

 

(38

)

 

 

(4,137

)

 

 

(5,722

)

 

 

 

 

 

(9,897

)

Vesting of restricted stock units

 

 

22

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

 

(7

)

 

 

(1

)

 

 

(178

)

 

 

 

 

 

 

 

 

(179

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(5,813

)

 

 

 

 

 

(5,813

)

Net income

 

 

 

 

 

 

 

 

 

 

 

8,065

 

 

 

 

 

 

8,065

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,111

)

 

 

(1,111

)

Balances, September 30, 2021

 

 

35,209

 

 

$

3,521

 

 

$

503,062

 

 

$

473,385

 

 

$

(17,632

)

 

$

962,336

 

 

(in thousands)

 

Shares

 

 

Common
stock

 

 

Additional
paid-in
capital

 

 

Retained
earnings

 

 

Accumulated
other
comprehensive
loss

 

 

Total
shareholders’
equity

 

Balances, December 31, 2019

 

 

36,957

 

 

$

3,696

 

 

$

512,019

 

 

$

515,876

 

 

$

(16,759

)

 

$

1,014,832

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

9,464

 

 

 

 

 

 

 

 

 

9,464

 

Shares repurchased and retired

 

 

(724

)

 

 

(72

)

 

 

(8,048

)

 

 

(11,209

)

 

 

 

 

 

(19,329

)

Stock options exercised

 

 

17

 

 

 

2

 

 

 

369

 

 

 

 

 

 

 

 

 

371

 

Vesting of restricted stock units

 

 

301

 

 

 

30

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

 

(77

)

 

 

(8

)

 

 

(1,905

)

 

 

 

 

 

 

 

 

(1,913

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(17,503

)

 

 

 

 

 

(17,503

)

Net income

 

 

 

 

 

 

 

 

 

 

 

6,360

 

 

 

 

 

 

6,360

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,955

)

 

 

(1,955

)

Balances, September 30, 2020

 

 

36,474

 

 

$

3,648

 

 

$

511,869

 

 

$

493,524

 

 

$

(18,714

)

 

$

990,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, June 30, 2020

 

 

36,461

 

 

$

3,647

 

 

$

508,555

 

 

$

493,450

 

 

$

(21,292

)

 

$

984,360

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,420

 

 

 

 

 

 

 

 

 

3,420

 

Stock options exercised

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Vesting of restricted stock units

 

 

18

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Shares withheld for taxes

 

 

(5

)

 

 

(1

)

 

 

(111

)

 

 

 

 

 

 

 

 

(112

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(5,841

)

 

 

 

 

 

(5,841

)

Net income

 

 

 

 

 

 

 

 

 

 

 

5,915

 

 

 

 

 

 

5,915

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,578

 

 

 

2,578

 

Balances, September 30, 2020

 

 

36,474

 

 

$

3,648

 

 

$

511,869

 

 

$

493,524

 

 

$

(18,714

)

 

$

990,327

 

 

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)

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

23,351

 

 

$

6,360

 

Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation

 

 

26,335

 

 

 

28,400

 

Amortization

 

 

6,628

 

 

 

8,539

 

Provision for doubtful accounts

 

 

40

 

 

 

2,160

 

Deferred income taxes

 

 

(2,110

)

 

 

(4,079

)

Asset impairments

 

 

4,358

 

 

 

6,950

 

(Gain) loss on the sale of property, plant and equipment

 

 

164

 

 

 

(114

)

Stock-based compensation expense

 

 

10,856

 

 

 

9,464

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(2,342

)

 

 

16,410

 

Contract assets

 

 

(17,415

)

 

 

(335

)

Inventories

 

 

(151,518

)

 

 

(37,131

)

Prepaid expenses and other assets

 

 

(9,470

)

 

 

1,675

 

Accounts payable

 

 

114,477

 

 

 

(18,260

)

Advance payments from customers

 

 

7,341

 

 

 

21,074

 

Accrued liabilities

 

 

(9,087

)

 

 

(13,498

)

Operating leases

 

 

(196

)

 

 

942

 

Income taxes

 

 

(2,720

)

 

 

(2,942

)

Net cash provided by (used in) operations

 

 

(1,308

)

 

 

25,615

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(29,497

)

 

 

(26,108

)

Proceeds from the sale of property, plant and equipment

 

 

222

 

 

 

314

 

Additions to purchased software

 

 

(2,940

)

 

 

(2,994

)

Cash received from business divestitures

 

 

 

 

 

2,214

 

Other

 

 

72

 

 

 

58

 

Net cash used in investing activities

 

 

(32,143

)

 

 

(26,516

)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from stock options exercised

 

 

346

 

 

 

371

 

Employee taxes paid for with shares withheld

 

 

(3,152

)

 

 

(1,913

)

Dividends paid

 

 

(17,448

)

 

 

(17,205

)

Borrowings under credit agreement

 

 

30,000

 

 

 

110,000

 

Principal payments on credit agreement

 

 

(35,625

)

 

 

(100,625

)

Principal payments on finance leases

 

 

(833

)

 

 

(980

)

Share repurchases

 

 

(40,216

)

 

 

(19,329

)

Net cash used in financing activities

 

 

(66,928

)

 

 

(29,681

)

Effect of exchange rate changes

 

 

(4,414

)

 

 

1,436

 

Net decrease in cash and cash equivalents and restricted cash

 

 

(104,793

)

 

 

(29,146

)

Cash and cash equivalents and restricted cash at beginning of year

 

 

395,990

 

 

 

363,956

 

Cash and cash equivalents and restricted cash at end of period

 

$

291,197

 

 

$

334,810

 

 

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 innovative product design, engineering services, technology solutions and advanced manufacturing services. From initial product concept to volume production, including direct order fulfillment and aftermarket services, the Company has been providing integrated services and solutions to original equipment manufacturers (OEMs) since 1979. The Company serves the following industries: aerospace and defense (A&D), medical technologies, complex industrials, semiconductor capital equipment (Semi-Cap), next-generation telecommunications and advanced computing. 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 condensed consolidated 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, 2020 (the 2020 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 condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States (U.S. GAAP) with consideration given to the potential impacts of the coronavirus disease 2019 (COVID-19) pandemic. However, actual results could differ materially from these estimates and be significantly affected by the severity and duration of the pandemic, the extent of actions to contain or treat COVID-19, how quickly and to what extent normal economic and operating activity can resume, and the severity and duration of the global economic downturn that results from the pandemic.

 

Note 2 – New Accounting Pronouncements

Not Yet Adopted

 

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The pronouncement provides temporary optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This update is effective as of March 12, 2020 through December 31, 2022. We will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis. The update is currently not expected to have a material impact on our consolidated financial statements.

 

The Company has determined that other recently issued accounting standards will either not have a material impact on its consolidated financial position, results of operations or cash flows, or will not apply to its operations.

 

Note 3 – Inventories

Inventory costs are summarized as follows:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Raw materials

 

$

461,957

 

 

$

312,856

 

Work in process

 

 

13,224

 

 

 

8,687

 

Finished goods

 

 

3,144

 

 

 

5,834

 

 

 

$

478,325

 

 

$

327,377

 

 

6


 

Note 4 – Goodwill and Other Intangible Assets

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

 

(in thousands)

 

Americas

 

 

Asia

 

 

Total

 

Goodwill as of December 31, 2020 and September 30, 2021

 

$

154,014

 

 

$

38,102

 

 

$

192,116

 

 

Other assets, net consist primarily of acquired identifiable intangible assets and capitalized purchased software costs. Acquired identifiable intangible assets and purchased software as of September 30, 2021 and December 31, 2020 were as follows:

 

(in thousands)

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

Customer relationships

 

$

100,161

 

 

$

(58,119

)

 

$

42,042

 

Purchased software costs

 

 

50,203

 

 

 

(34,684

)

 

 

15,519

 

Technology licenses

 

 

26,800

 

 

 

(26,800

)

 

 

 

Trade names and trademarks

 

 

7,800

 

 

 

 

 

 

7,800

 

Other

 

 

868

 

 

 

(350

)

 

 

518

 

Intangible assets, September 30, 2021

 

$

185,831

 

 

$

(119,953

)

 

$

65,878

 

 

(in thousands)

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Net
Carrying
Amount

 

Customer relationships

 

$

100,228

 

 

$

(53,429

)

 

$

46,799

 

Purchased software costs

 

 

46,183

 

 

 

(33,307

)

 

 

12,876

 

Technology licenses

 

 

28,800

 

 

 

(26,833

)

 

 

1,967

 

Trade names and trademarks

 

 

7,800

 

 

 

 

 

 

7,800

 

Other

 

 

868

 

 

 

(333

)

 

 

535

 

Intangible assets, December 31, 2020

 

$

183,879

 

 

$

(113,902

)

 

$

69,977

 

 

Customer relationships are being amortized on a straight-line basis over a period of 10 to 14 years. Capitalized purchased software costs are amortized straight-line over the estimated useful life of the related software, which ranges from 2 to 14 years. Technology licenses are being amortized over their estimated useful lives in proportion to the economic benefits consumed. The Company’s acquired trade names and trademarks have been determined to have an indefinite life. Amortization on the statements of cash flow for the nine months ended September 30, 2021 and 2020 were as follows:

 

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

Amortization of intangible assets

 

$

4,793

 

 

$

7,120

 

Amortization of capitalized purchased software costs

 

 

1,490

 

 

 

1,074

 

Amortization of debt costs

 

 

345

 

 

 

345

 

 

 

$

6,628

 

 

$

8,539

 

 

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

 

Year ending December 31,

 

Amount

 

2021 (remaining three months)

 

$

1,592

 

2022

 

 

6,367

 

2023

 

 

5,979

 

2024

 

 

4,817

 

2025

 

 

4,817

 

 

7


 

Note 5 – Borrowing Facilities

Long-term debt outstanding as of September 30, 2021 and December 31, 2020 consists of the following:

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Revolving credit facility, due 2023

 

$

 

 

$

 

Term loan, due 2023

 

 

131,250

 

 

 

136,874

 

Less unamortized debt issuance costs

 

 

(810

)

 

 

(1,155

)

Long-term debt

 

$

130,440

 

 

$

135,719

 

 

On July 20, 2018, the Company entered into a $650 million credit agreement (the Credit Agreement) by and among the Company, certain of its subsidiaries, the lenders party thereto and Bank of America, N.A., as Administrative Agent, Swingline Lender and an L/C Issuer. The Credit Agreement is comprised of a five-year $500 million revolving credit facility (the Revolving Credit Facility) and a five-year $150 million term loan facility (the Term Loan Facility), both with a maturity date of July 20, 2023.

The Revolving Credit Facility is available for general corporate purposes. The Credit Agreement includes an accordion feature pursuant to which the Company is permitted to add one or more incremental term loan and/or increase commitments under the Revolving Credit Facility in an aggregate amount not exceeding $275 million, subject to the satisfaction of certain conditions.

The Term Loan Facility is payable in quarterly principal installments of $1.9 million commencing June 30, 2019, with the balance payable on July 20, 2023.

Interest on outstanding borrowings under the Credit Agreement (other than swingline loans) accrues, at the Company’s option, at (a) the London Interbank Offered Rate (LIBOR) plus 1.0% to 2.0% or (b) the base rate plus 0.0% to 1.0%.

As of September 30, 2021, $131.3 million of the outstanding debt under the Credit Agreement is effectively at a fixed interest rate of 2.928% (plus the applicable margin) as a result of a $131.3 million notional interest rate swap contract discussed in Note 15. A commitment fee of 0.20% to 0.30% 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) all or substantially all other personal property of Benchmark and its domestic subsidiaries (including, but not limited to, accounts receivable, contract assets, inventory, intellectual property and fixed assets of Benchmark and its domestic subsidiaries), in each case, subject to customary exceptions and limitations, and (c) all proceeds and products of the property and assets described in (a) and (b) above.

The Credit Agreement contains certain financial covenants related to interest coverage and debt leverage, and certain customary affirmative and negative covenants, including restrictions on the Company’s 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 could 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, 2021, the Company had $131.3 million in borrowings outstanding under the Term Loan Facility and $3.9 million in letters of credit outstanding under the Revolving Credit Facility. The Company had $496.1 million available for future borrowings under the Revolving Credit Facility subject to compliance with financial covenants as to interest coverage and debt leverage in addition to other debt covenant restrictions.

 

Note 6 – Leases

The Company determines if a contract is or contains a lease at inception. The Company has entered into leases for certain facilities, vehicles and other equipment. The Company’s leases consist mainly of operating leases which expire at various dates through 2036. Variable lease payments are generally expensed as incurred and include certain index-based changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease.

8


 

The components of lease expense were as follows:

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets (included in depreciation expense)

 

$

24

 

 

$

177

 

 

$

420

 

 

$

532

 

Interest on lease liabilities

 

 

9

 

 

 

102

 

 

 

184

 

 

 

329

 

Operating lease cost

 

 

4,270

 

 

 

3,936

 

 

 

11,866

 

 

 

12,074

 

Short-term lease cost

 

 

90

 

 

 

105

 

 

 

281

 

 

 

483

 

Variable lease cost

 

 

410

 

 

 

406

 

 

 

1,324

 

 

 

1,322

 

Total lease cost

 

$

4,803

 

 

$

4,726

 

 

$

14,075

 

 

$

14,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

(in thousands)

 

September 30,
2021

September 30,
2020

 

Other information:

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows used for finance lease

 

$

203

 

 

$

354

 

Operating cash flows used for operating leases

 

$

12,870

 

 

$

11,798

 

Financing cash flows used for finance lease

 

$

833

 

 

$

980

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

$

32,398

 

 

$

16,470

 

 

The lease assets and liabilities as of September 30, 2021 and December 31, 2020 were as follows (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Finance lease right-of-use assets (included in other assets)

 

$

784

 

 

$

2,448

 

Operating lease right-of-use assets

 

$

102,440

 

 

$

79,966

 

Finance lease liability, current (included in current installments of long-term debt)

 

$

163

 

 

$

1,661

 

Finance lease liability, noncurrent (included in long-term debt)

 

$

570

 

 

$

2,832

 

Operating lease liabilities, current (included in accrued liabilities)

 

$

13,377

 

 

$

11,516

 

Operating lease liabilities, noncurrent

 

$

94,219

 

 

$

72,120

 

Weighted average remaining lease term – finance leases

 

4.2 years

 

 

3.0 years

 

Weighted average remaining lease term – operating leases

 

10.1 years

 

 

10.0 years

 

Weighted average discount rate – finance leases

 

 

4.8

%

 

 

9.0

%

Weighted average discount rate – operating leases

 

 

4.1

%

 

 

4.4

%

Future annual minimum lease payments and finance lease commitments as of September 30, 2021 were as follows (in thousands):

 

Year ending December 31,

 

Operating
Leases

 

 

Finance
Leases

 

2021 (remaining three months)

 

$

3,809

 

 

$

48

 

2022

 

 

16,297

 

 

 

194

 

2023

 

 

15,032

 

 

 

194

 

2024

 

 

13,566

 

 

 

194

 

2025

 

 

12,619

 

 

 

178

 

2026 and thereafter

 

 

70,876

 

 

 

 

Total minimum lease payments

 

$

132,199

 

 

$

807

 

Less: imputed interest

 

 

(24,603

)

 

 

(74

)

Present value of lease liabilities

 

$

107,596

 

 

$

733

 

 

As of September 30, 2021, the Company’s future operating leases that have not yet commenced are immaterial.

 

 

9


 

Note 7 – Common Stock and Stock-Based Awards Plans

Dividends

The Company began declaring and paying quarterly dividends during the first quarter of 2018. For the three and nine months ended September 30, 2021, cash dividends paid totaled $5.9 million and $17.4 million, respectively. For the three and nine months ended September 30, 2020, cash dividends paid totaled $5.8 million and $17.2 million, respectively. On March 15, 2021, the Company declared a quarterly cash dividend of $0.16 per share of the Company’s common stock to shareholders of record as of March 31, 2021. On both June 15, 2021 and September 15, 2021, the Company declared a quarterly cash dividend of $0.165 per share of the Company’s common stock to shareholders of record as of June 30, 2021 and September 30, 2021, respectively. The dividends for the first, second and third quarters of 2021 were paid on April 15, 2021, July 14, 2021 and October 14, 20201, respectively. On March 16, 2020, June 15, 2020 and September 11, 2020, the Company declared a quarterly cash dividend of $0.16 per share of the Company’s common stock to shareholders of record as of March 31, 2020, June 30, 2020 and September 30, 2020, respectively. The dividends for the first, second and third quarters of 2020 were paid on April 14, 2020, July 14, 2020 and October 14, 2020, respectively. The Company’s future dividend policy is subject to the Company’s compliance with applicable law, and depends on, among other things, the Company’s results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in the Company’s debt agreements, and other factors that the Board of Directors may deem relevant, including the impact of the COVID-19 pandemic. Dividend payments are not mandatory or guaranteed; there can be no assurance that the Company will continue to pay a dividend in the future.

 

Share Repurchase Authorization

On February 19, 2020 and October 26, 2018, the Board of Directors authorized the repurchase of $150 million and $100 million, respectively, of the Company’s common stock in addition to the $250 million previously approved on March 6, 2018. During the three and nine months ended September 30, 2021, the Company repurchased a total of 0.4 million and 1.4 million common shares, respectively, for an aggregate of $9.9 million and $40.2 million, respectively, at an average price of $26.53 per share and $29.11 per share, respectively. As of September 30, 2021, the Company had an aggregate $164.0 million remaining under its stock repurchase program.

 

Stock-Based Compensation

The Company’s 2019 Omnibus Incentive Compensation Plan (the 2019 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 (which have not been awarded since 2015) are granted to employees with an exercise price equal to the market price of the Company’s common stock 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 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 units generally vest over a three-year performance cycle, which includes the year of the grant, and are based upon the Company’s achievement of specified performance metrics. Awards under the 2019 Plan to non-employee directors have been in the form of restricted stock units, which generally vest one year from the grant date.

 

As of September 30, 2021, 2.2 million common shares were available for issuance under the Company’s 2019 Plan.

 

All share-based payments to employees, including grants of employee stock options, are recognized in the condensed consolidated financial statements based on their grant date fair values. The total compensation cost recognized for stock-based awards was $4.0 million and $10.9 million for the three and nine months ended September 30, 2021, respectively, and $3.4 million and $9.5 million for the three and nine months ended September 30, 2020, respectively. The future tax benefit of these stock-based awards as of the grant date was $0.9 million and $2.5 million for the three and nine months ended September 30, 2021, respectively, and $0.8 million and $2.3 million for the three and nine months ended September 30, 2020, respectively. Awards of restricted stock units and performance-based restricted stock units are valued at the closing market price of the Company’s common stock 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.

 

 

10


 

As of September 30, 2021, the unrecognized compensation cost and remaining weighted-average amortization period related to stock-based awards were as follows:

 

(in thousands)

 

Restricted
Stock Units

 

 

Performance-
based
Restricted
Stock Units
(1)

 

Unrecognized compensation cost

 

$

23,436

 

 

$

7,362

 

Remaining weighted-average amortization period

 

2.6 years

 

 

1.9 years

 

 

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

 

The total cash received by the Company as a result of stock option exercises for the nine months ended September 30, 2021 and 2020 was approximately $0.3 million and $0.4 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, 2021 and 2020 was $2.6 million and $1.8 million, respectively. For the nine months ended September 30, 2021 and 2020, the total intrinsic value of stock options exercised was $0.5 million and $0.1 million, respectively.

 

The Company awarded performance-based restricted stock units to employees during the nine months ended September 30, 2021 and 2020. 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 2.5 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 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, operating income margin, 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 re-issuance under the Company’s 2019 Plan.

 

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

 

(in thousands, except per share data)

 

Number of
Options

 

 

Weighted-
Average
Exercise
Price

 

 

Weighted-
Average
Remaining
Contractual
Term
(Years)

 

 

Aggregate
Intrinsic
Value

 

Outstanding as of December 31, 2020

 

 

188

 

 

$

19.98

 

 

 

 

 

 

 

Exercised

 

 

(54

)

 

 

19.77

 

 

 

 

 

 

 

Forfeited or expired

 

 

(2

)

 

 

20.16

 

 

 

 

 

 

 

Outstanding and exercisable as of September 30, 2021

 

 

132

 

 

$

20.06

 

 

 

1.74

 

 

$

877

 

 

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, 2021 for options that had exercise prices that were below the closing price.

 

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

 

(in thousands, except per share data)

 

Number of
Units

 

 

Weighted-
Average
Grant Date
Fair Value

 

Non-vested awards outstanding as of December 31, 2020

 

 

1,026

 

 

$

27.35

 

Granted

 

 

499

 

 

 

28.54

 

Vested

 

 

(373

)

 

 

26.76

 

Forfeited

 

 

(84

)

 

 

28.45

 

Non-vested awards outstanding as of September 30, 2021

 

 

1,068

 

 

$

28.03

 

 

11


 

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, 2020

 

 

368

 

 

$

27.93

 

Granted(1)

 

 

234

 

 

 

28.60

 

Forfeited

 

 

(60

)

 

 

29.38

 

Non-vested units outstanding as of September 30, 2021

 

 

542

 

 

$

28.06

 

 

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

 

Note 8 – Income Taxes

Income tax expense consists of the following:

 

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

Federal - current

 

$

(426

)

 

$

1,288

 

Foreign - current

 

 

8,734

 

 

 

3,865

 

State - current

 

 

528

 

 

 

503

 

Deferred

 

 

(2,860

)

 

 

(4,079

)

 

 

$

5,976

 

 

$

1,577

 

 

Income tax expense differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income taxes primarily due to the mix of taxable income by taxing jurisdiction, the impact of tax incentives and tax holidays in foreign locations, state income taxes (net of federal benefit) and the U.S. tax under the global intangible low-taxed income (GILTI) provisions. GILTI requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiaries tangible fixed assets. The taxable earnings can be offset by a limited deemed paid foreign tax credit with no carrybacks or carryforwards available. The Company accounts for the GILTI as a period cost and does not include it as a factor in the determination of deferred taxes.

As of December 31, 2020, the Company had approximately $333.6 million in cumulative undistributed foreign earnings of its foreign subsidiaries. These earnings would not be subject to U.S. income tax, if distributed to the Company. During 2018, the Company changed its assertion on its foreign subsidiaries earnings that are permanently reinvested. A certain amount of earnings from specific foreign subsidiaries are permanently reinvested, and certain foreign earnings from other specific foreign subsidiaries are considered to be non-permanently reinvested and are available for immediate distribution to the Company. Income taxes have been accrued on the non-permanently reinvested foreign earnings including any applicable local withholding taxes. During the second quarter of 2021, the Company recorded an income tax benefit of $7.3 million for foreign withholding taxes paid in prior years and has offset this benefit with a corresponding reserve for uncertain tax benefits of the same amount.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in the United States in response to the COVID-19 pandemic. The CARES Act among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021, and contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The Company has evaluated the impact of these provisions and has determined these provisions did not have any impact on the year ended December 31, 2020 or the nine months ended September 30, 2021. In addition, the CARES Act allowed for employee retention tax credits to be taken in U.S. payroll tax filings, and allowed for the deferral of the employer portion of social security taxes during the calendar year 2020 with 50% to be paid at the end of calendar years 2021 and 2022, respectively. The Company has deferred the payment of the employer portion of social security taxes for the year ended December 31, 2020 with 50% of payments to be paid at the end of 2021 and 2022, respectively. The Company has also determined it was entitled to employee retention credits and filed for the credits in the second quarter of 2020 pursuant to the guidance provided by the Internal Revenue Service. The Company has determined that it is not eligible for employee retention tax credits for the nine months ended September 30, 2021, and the deferral of the employer portion of social security taxes is not available for 2021.

 

The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in Malaysia and Thailand that will expire or expired at various dates, unless extended or otherwise renegotiated, through March 31, 2021 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

12


 

to lower foreign income tax expense for both the nine months ended September 30, 2021 and 2020 by approximately $3.4 million (approximately $0.09 per diluted share), as follows:

 

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

Malaysia

 

$

1,259

 

 

$

2,164

 

Thailand

 

 

2,121

 

 

 

1,209

 

 

 

$

3,380

 

 

$

3,373

 

 

As of April 1, 2021, the tax holiday for Malaysia has expired. We have applied for a new tax holiday for our operations in Malaysia. There is no guarantee that we will be granted the tax holiday in Malaysia.

 

As of September 30, 2021, the total amount of the reserve for uncertain tax benefits including interest and penalties was $8.0 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 Company records interest expense and penalties accrued in relation to uncertain income tax benefits as a component of current income tax expense.

The Company and its subsidiaries in Brazil, China, Ireland, 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 2012 to 2020. During such income tax examinations, disputes may occur as to matters of fact or law. Also, 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.
 

Note 9 – Revenue

The Company’s revenues are generated primarily from the sale of manufactured products built to customer specifications. The Company also generates revenue from design, development and engineering services, in addition to the sale of other inventory.

Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a manufactured product to a customer. The Company’s contracts with customers are generally short-term in nature. The Company applies the optional exemption related to short-term performance obligations and does not disclose information about remaining performance obligations that have original expected durations of one year or less. Customers are generally billed when the product is shipped or as services are performed. Under the majority of the Company’s manufacturing contracts with customers, the customer controls all of the work-in-progress as products are being built. Revenues under these contracts are recognized progressively based on the cost-to-cost method. For other manufacturing contracts, the customer does not take control of the product until it is completed. Under these contracts, the Company recognizes revenue upon transfer of control of the product to the customer. Revenue from design, development and engineering services is recognized over time as the services are performed. The Company assumes no significant obligations after shipment as it typically warrants workmanship only. Therefore, the warranty provisions are generally not significant.

If the Company records revenue, but does not issue an invoice, a contract asset is recognized. The contract asset is transferred to accounts receivable when the entitlement to payment becomes unconditional.

Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of sales.

 

13


 

Disaggregation of revenue

In the following tables, revenue is disaggregated by market sector. The tables also include a reconciliation of the disaggregated revenue with the reportable operating segments.

 

 

 

Reportable Operating Segments

 

 

 

Three Months Ended September 30, 2021

 

(in thousands)

 

Americas

 

 

Asia

 

 

Europe

 

 

Total

 

Market Sector:

 

 

 

 

 

 

 

 

 

 

 

 

Industrials

 

$

19,907

 

 

$

69,436

 

 

$

18,849

 

 

$

108,192

 

A&D

 

 

95,940

 

 

 

827

 

 

 

4,071

 

 

 

100,838

 

Medical

 

 

64,357

 

 

 

43,480

 

 

 

9,956

 

 

 

117,793

 

Semi-Cap

 

 

53,732

 

 

 

63,733

 

 

 

16,111

 

 

 

133,576

 

Computing

 

 

46,804

 

 

 

9,742

 

 

 

11

 

 

 

56,557

 

Telecommunications

 

 

28,456

 

 

 

26,019

 

 

 

451

 

 

 

54,926

 

External revenue

 

 

309,196

 

 

 

213,237

 

 

 

49,449

 

 

 

571,882

 

Elimination of intersegment sales

 

 

9,920

 

 

 

11,194

 

 

 

535

 

 

 

21,649

 

Segment revenue

 

$

319,116

 

 

$

224,431

 

 

$

49,984

 

 

$

593,531

 

 

 

 

Nine Months Ended September 30, 2021

 

(in thousands)

 

Americas

 

 

Asia

 

 

Europe

 

 

Total

 

Market Sector:

 

 

 

 

 

 

 

 

 

 

 

 

Industrials

 

$

61,261

 

 

$

185,961

 

 

$

56,328

 

 

$

303,550

 

A&D

 

 

270,854

 

 

 

900

 

 

 

15,145

 

 

 

286,899

 

Medical

 

 

159,701

 

 

 

134,650

 

 

 

40,537

 

 

 

334,888

 

Semi-Cap

 

 

158,090

 

 

 

179,275

 

 

 

48,525

 

 

 

385,890

 

Computing

 

 

114,908

 

 

 

24,922

 

 

 

11

 

 

 

139,841

 

Telecommunications

 

 

90,421

 

 

 

79,960

 

 

 

816

 

 

 

171,197

 

External revenue

 

 

855,235

 

 

 

605,668

 

 

 

161,362

 

 

 

1,622,265

 

Elimination of intersegment sales

 

 

32,989

 

 

 

29,606

 

 

 

1,122

 

 

 

63,717

 

Segment revenue

 

$

888,224

 

 

$

635,274

 

 

$

162,484

 

 

$

1,685,982

 

 

 

 

Reportable Operating Segments

 

 

 

Three Months Ended September 30, 2020

 

(in thousands)

 

Americas

 

 

Asia

 

 

Europe

 

 

Total

 

Market Sector:

 

 

 

 

 

 

 

 

 

 

 

 

Industrials

 

$

24,303

 

 

$

47,281

 

 

$

14,600

 

 

$

86,184

 

A&D

 

 

100,941

 

 

 

 

 

 

3,958

 

 

 

104,899

 

Medical

 

 

65,389

 

 

 

61,322

 

 

 

7,431

 

 

 

134,142

 

Semi-Cap

 

 

47,021

 

 

 

38,546

 

 

 

13,154

 

 

 

98,721

 

Computing

 

 

35,788

 

 

 

8,551

 

 

 

 

 

 

44,339

 

Telecommunications

 

 

22,023

 

 

 

35,507

 

 

 

136

 

 

 

57,666

 

External revenue

 

 

295,465

 

 

 

191,207

 

 

 

39,279

 

 

 

525,951

 

Elimination of intersegment sales

 

 

10,171

 

 

 

6,300

 

 

 

264

 

 

 

16,735

 

Segment revenue

 

$

305,636

 

 

$

197,507

 

 

$

39,543

 

 

$

542,686

 

 

 

 

Nine Months Ended September 30, 2020

 

(in thousands)

 

Americas

 

 

Asia

 

 

Europe

 

 

Total

 

Market Sector:

 

 

 

 

 

 

 

 

 

 

 

 

Industrials

 

$

82,546

 

 

$

144,885

 

 

$

48,709

 

 

$

276,140

 

A&D

 

 

294,892

 

 

 

 

 

 

17,731

 

 

 

312,623

 

Medical

 

 

207,202

 

 

 

161,415

 

 

 

18,252

 

 

 

386,869

 

Semi-Cap

 

 

114,791

 

 

 

112,989

 

 

 

40,512

 

 

 

268,292

 

Computing

 

 

101,349

 

 

 

23,444

 

 

 

 

 

 

124,793

 

Telecommunications

 

 

69,692

 

 

 

92,955

 

 

 

517

 

 

 

163,164

 

External revenue

 

 

870,472

 

 

 

535,688

 

 

 

125,721

 

 

 

1,531,881

 

Elimination of intersegment sales

 

 

38,360

 

 

 

21,807

 

 

 

1,046

 

 

 

61,213

 

Segment revenue

 

$

908,832

 

 

$

557,495

 

 

$

126,767

 

 

$

1,593,094

 

 

14


 

 

During both the nine months ended September 30, 2021 and 2020, 90% of the Company’s revenue was recognized as products and services that were transferred over time.

 

The timing of revenue recognition, billings and cash collections result in billed accounts receivable, contract assets and advance payments from customers.

 

As of September 30, 2021 and December 31, 2020, the Company had $160.2 million and $142.8 million, respectively, in contract assets from contracts with customers. The contract assets primarily relate to the Company’s right to consideration for work completed but not billed at the reporting date. The contract assets are transferred to accounts receivable when the rights become unconditional.

 

Significant changes in the contract asset balance during the period are as follows:

 

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

Beginning balance as of December 31

 

$

142,779

 

 

$

161,061

 

Revenue recognized

 

 

1,463,872

 

 

 

1,382,582

 

Amounts collected or invoiced

 

 

(1,446,457

)

 

 

(1,382,247

)

Ending balance as of September 30

 

$

160,194

 

 

$

161,396

 

 

As of September 30, 2021 and December 31, 2020, the Company had $91.5 million and $84.1 million, respectively, in advance payments from customers. Of those amounts, $63.0 million and $54.9 million, respectively, were customer deposits and prepayments of inventory and $28.5 million and $29.2 million, respectively, were related to the contractual timing of payments. The advance payments are not considered a significant financing component because they are used to meet working capital demands of a contract, offset inventory risks and protect the Company from the failure of other parties to fulfill obligations under a contract.

 

Note 10 – Accounts Receivable Sale Program

As of September 30, 2021, in connection with trade accounts receivable sale programs with unaffiliated financial institutions, the Company may elect to sell, at a discount, on an ongoing basis, up to a maximum of $120.0 million of specific accounts receivable at any one time.

During the three months ended September 30, 2021 and 2020, the Company sold $109.1 million and $71.5 million, respectively, of accounts receivable under this program, and in exchange, the Company received cash proceeds of $108.8 million and $71.4 million, respectively, net of the discount. During the nine months ended September 30, 2021 and 2020, the Company sold $275.4 million and $225.8 million, respectively, of accounts receivable under this program, and in exchange, the Company received cash proceeds of $274.8 million and $225.4 million, respectively, net of the discount. The loss on the sale resulting from the discount was recorded to other expense within the condensed consolidated statements of income.
 

Note 11 – Contingencies

The Company is involved in various 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 – Restructuring Charges

The Company has undertaken initiatives to restructure its business operations to improve utilization and realize cost savings. These initiatives have included changing the number and location of production facilities, largely to align capacity and infrastructure with current and anticipated customer demand. This alignment includes transferring programs from higher cost geographies to lower cost geographies. The process of restructuring entails moving production between facilities, reducing staff levels, realigning our business processes, reorganizing our management and other activities.

The Company recognized restructuring charges during 2021 and 2020 primarily related to the closure of facilities in the Americas, capacity reduction and reductions in workforce in certain facilities across various regions.

 

15


 

The following table summarizes the 2021 activity in accrued restructuring, which is included in accrued liabilities in the condensed consolidated balance sheets, related to various restructuring activities initiated prior to September 30, 2021:

 

 

 

Balance as of

 

 

 

 

 

 

 

 

 

 

 

Balance as of

 

 

 

December 31,

 

 

Restructuring

 

 

Cash

 

 

Non-Cash

 

 

September 30,

 

(in thousands)

 

2020

 

 

Charges

 

 

Payment

 

 

Activity

 

 

2021

 

Restructuring:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance

 

$

3,996

 

 

$

994

 

 

$

(4,350

)

 

$

(184

)

 

$

456

 

Lease facility costs

 

 

50

 

 

 

1,994

 

 

 

(1,868

)

 

 

(160

)

 

 

16

 

Other exit costs

 

 

408

 

 

 

2,254

 

 

 

(2,074

)

 

 

(351

)

 

 

237

 

Total

 

$

4,454

 

 

$

5,242

 

 

$

(8,292

)

 

$

(695

)

 

$

709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In addition, during the nine months ended September 30, 2021, we incurred $4.4 million in costs related to asset impairments in the Americas. During the nine months ended September 30, 2020, we incurred $5.7 million and $1.0 million in costs related to asset impairments in the Americas and Asia, respectively.

 

Note 13 – Ransomware Incident

During the fourth quarter ended December 31, 2019, some of the Company’s systems were affected by a ransomware incident that encrypted information on its systems and disrupted customer and employee access to its applications and services. The Company immediately took steps to isolate the impact and implemented measures to prevent additional systems from being affected, including taking its network offline as a precaution. In connection with this incident, third party consultants and forensic experts were engaged to assist with the restoration and remediation of the Company’s systems and, with the assistance of law enforcement, to investigate the incident. The Company has found no evidence that customer or employee data was exfiltrated from its network.

The Company restored connectivity and resumed operations quickly following the ransomware incident. We do have insurance coverage, including cyber insurance, and worked diligently with our insurance carriers on claims to recover costs incurred.

In 2019, ransomware incident related costs incurred totaled $12.7 million or $7.7 million, net of estimated insurance recoveries of $5.0 million. These costs were primarily comprised of certain employee related expenses and various third party consulting services, including forensic experts, legal counsel and other IT professional expenses. During the year ended December 31, 2020, the Company collected $6.6 million of insurance recoveries, which included $5.0 million of estimated insurance recoveries recorded in 2019 and an additional $1.6 million recorded in 2020. During the nine months ended September 30, 2021, the Company collected an additional $3.9 million of insurance recoveries. As of September 30, 2021, the Company has collected insurance recoveries totaling $10.5 million. No further insurance recoveries are expected.
 

Note 14 – 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 stock 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 and the amount of compensation cost, if any, for future service that the Company has not yet recognized are assumed to be used to repurchase shares in the current period. In periods when losses are reported, the weighted-average number of shares outstanding excludes stock equivalents because their inclusion would have an anti-dilutive effect.

 

16


 

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

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

(in thousands, except per share data)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income

 

$

8,065

 

 

$

5,915

 

 

$

23,351

 

 

$

6,360

 

Denominator for basic earnings per share – weighted-average
   number of common shares outstanding during the period

 

 

35,423

 

 

 

36,467

 

 

 

35,806

 

 

 

36,565

 

Incremental common shares attributable to exercise of dilutive
   options

 

 

32

 

 

 

22

 

 

 

43

 

 

 

36

 

Incremental common shares attributable to outstanding restricted
   stock units

 

 

211

 

 

 

55

 

 

 

438

 

 

 

220

 

Denominator for diluted earnings per share

 

 

35,666

 

 

 

36,544

 

 

 

36,287

 

 

 

36,821

 

Basic earnings per share

 

$

0.23

 

 

$

0.16

 

 

$

0.65

 

 

$

0.17

 

Diluted earnings per share

 

$

0.23

 

 

$

0.16

 

 

$

0.64

 

 

$

0.17

 

 

Restricted stock units totaling 5 thousand and 4 thousand shares for the three and nine months ended September 30, 2021, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. Restricted stock units totaling 1.0 million and 0.5 million shares for the three and nine months ended September 30, 2020, and outstanding stock options totaling 0.1 million shares for the three months ended September 30, 2020, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

 

Note 15 – Financial Instruments

The Company’s financial instruments include cash equivalents, accounts receivable, other receivables, accounts payable, accrued liabilities and long-term debt. The Company believes that the carrying values of these instruments approximate fair value because of their short-term nature. The Company uses derivative instruments to manage the variability of foreign currency obligations and interest rates. The Company does not enter into derivatives for speculative purposes.

 

On July 30, 2021, the Company entered into forward currency exchange contracts designated as cash flow hedges of forecasted foreign currency expenses with a notional amount of $10.5 million as of September 30, 2021. Changes in the fair value of the derivatives are recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets until earnings are affected by the variability of the cash flows. During the nine months ended September 30, 2021, the Company recorded an unrealized loss of $0.4 million on the forward currency exchange contracts in other comprehensive income (See Note 16). The Company also has forward currency exchange contracts in place as of September 30, 2021 that have not been designated as accounting hedges and, therefore, changes in fair value are recorded within the condensed consolidated statements of income. The fair value of the Company's forward currency exchange contracts are determined using standard valuation models with assumptions about forward rates being based on those observed in the underlying market. As of September 30, 2021, the fair value estimates for the Company's forward currency exchange contracts were based on Level 2 inputs of the fair value hierarchy. The Company enters into forward currency exchange contracts for its operations in Mexico and Europe.

 

The Company has an interest rate swap agreement, with a notional amount of $131.3 million and $136.9 million as of September 30, 2021 and December 31, 2020, respectively, to hedge a portion of its interest rate exposure on outstanding borrowings under the Credit Agreement. Under this interest rate swap agreement, the Company receives variable rate interest payments based on the one-month LIBOR rate and pays fixed rate interest payments. The fixed interest rate for the contract is 2.928%. The effect of this swap is to convert a portion of the floating rate interest expense to fixed interest rate expense. Based on the terms of the interest rate swap contract and the underlying borrowings outstanding under the Credit Agreement, the interest rate contract was determined to be highly effective, and thus qualifies and has been designated as a cash flow hedge. As such, changes in the fair value of the interest rate swap are recorded in other comprehensive income on the accompanying condensed consolidated balance sheets until earnings are affected by the variability of cash flows. As of September 30, 2021 and 2020, the fair value estimates for the Company's interest rate swap agreement were based on Level 3 inputs of the fair value hierarchy. During the nine months ended September 30, 2021, the Company recorded an unrealized gain of $3.0 million ($2.2 million net of tax) on the swap in other comprehensive income. See Note 16.

 

17


 

As of December 31, 2017, the Company had an interest rate swap agreement with a notional amount of $155.3 million with a fixed interest rate of 1.4935%, which was terminated in October 2018 for $3.5 million and the gain was amortized to offset interest expense over the remaining term of the interest rate swap agreement which ended November 2020.

 

The following table presents the fair value of the Company's derivative instruments:

 

 

Fair Values of Derivative Instruments

 

 

 

Liability Derivatives

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

2021

 

 

2020

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

Forward currency exchange contracts

 

$

441

 

 

$

 

Interest rate swap

 

$

6,023

 

 

$

9,011

 

 

Note 16 – Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component were as follows:

 

 

 

Three months ended September 30,

 

 

 

2021

 

 

2020

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

currency

 

 

Derivative

 

 

 

 

 

 

 

 

currency

 

 

Derivative

 

 

 

 

 

 

 

 

 

translation

 

 

instruments,

 

 

 

 

 

 

 

 

translation

 

 

instruments,

 

 

 

 

 

 

 

(in thousands)

 

adjustments

 

 

net of tax

 

 

Other

 

 

Total

 

 

adjustments

 

 

net of tax

 

 

Other

 

 

Total

 

Beginning balance

 

$

(10,083

)

 

$

(5,160

)

 

$

(1,278

)

 

$

(16,521

)

 

$

(12,816

)

 

$

(7,958

)

 

$

(518

)

 

$

(21,292

)

Other comprehensive gain
(loss) before reclassifications

 

 

(1,438

)

 

 

154

 

 

 

113

 

 

 

(1,171

)

 

 

2,045

 

 

 

757

 

 

 

86

 

 

 

2,888

 

Amounts reclassified from accumulated other
comprehensive loss

 

 

 

 

 

60

 

 

 

 

 

 

60

 

 

 

 

 

 

(310

)

 

 

 

 

 

(310

)

Net current period other comprehensive gain (loss)

 

 

(1,438

)

 

 

214

 

 

 

113

 

 

 

(1,111

)

 

 

2,045

 

 

 

447

 

 

 

86

 

 

 

2,578

 

Ending balance

 

$

(11,521

)

 

$

(4,946

)

 

$

(1,165

)

 

$

(17,632

)

 

$

(10,771

)

 

$

(7,511

)

 

$

(432

)

 

$

(18,714

)

 

 

 

Nine months ended September 30,

 

 

 

2021

 

 

2020

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

currency

 

 

Derivative

 

 

 

 

 

 

 

 

currency

 

 

Derivative

 

 

 

 

 

 

 

 

 

translation

 

 

instruments,

 

 

 

 

 

 

 

 

translation

 

 

instruments,

 

 

 

 

 

 

 

(in thousands)

 

adjustments

 

 

net of tax

 

 

Other

 

 

Total

 

 

adjustments

 

 

net of tax

 

 

Other

 

 

Total

 

Beginning balance

 

$

(8,375

)

 

$

(6,742

)

 

$

(1,534

)

 

$

(16,651

)

 

$

(12,425

)

 

$

(3,600

)

 

$

(734

)

 

$

(16,759

)

Other comprehensive gain (loss) before reclassifications

 

 

(3,146

)

 

 

1,736

 

 

 

369

 

 

 

(1,041

)

 

 

1,654

 

 

 

(2,929

)

 

 

302

 

 

 

(973

)

Amounts reclassified from accumulated other
comprehensive loss

 

 

 

 

 

60

 

 

 

 

 

 

60

 

 

 

 

 

 

(982

)

 

 

 

 

 

(982

)

Net current period other comprehensive gain (loss)

 

 

(3,146

)

 

 

1,796

 

 

 

369

 

 

 

(981

)

 

 

1,654

 

 

 

(3,911

)

 

 

302

 

 

 

(1,955

)

Ending balance

 

$

(11,521

)

 

$

(4,946

)

 

$

(1,165

)

 

$

(17,632

)

 

$

(10,771

)

 

$

(7,511

)

 

$

(432

)

 

$

(18,714

)

 

Unrealized gains and losses relating to derivative instruments, reclassified from accumulated other comprehensive loss for the three and nine months ended September 30, 2021, were recognized as a component of cost of sales in the condensed consolidated statements of income, which relate to the Company's foreign currency contracts accounted for as cash flow hedges. See Note 15 for further explanation of the change in derivative instruments that is recorded to accumulated other comprehensive loss.

 

Note 17 – Segment and Geographic Information

The Company currently has manufacturing facilities in the Americas, 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

18


 

same as for the Company taken as a whole. The Company has three reportable operating segments: Americas, Asia, and Europe. Information about operating segments is as follows:

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

319,116

 

 

$

305,636

 

 

$

888,224

 

 

$

908,832

 

Asia

 

 

224,431

 

 

 

197,507

 

 

 

635,274

 

 

 

557,495

 

Europe

 

 

49,984

 

 

 

39,543

 

 

 

162,484

 

 

 

126,767

 

Elimination of intersegment sales

 

 

(21,649

)

 

 

(16,735

)

 

 

(63,717

)

 

 

(61,213

)

 

 

$

571,882

 

 

$

525,951

 

 

$

1,622,265

 

 

$

1,531,881

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

4,914

 

 

$

5,844

 

 

$

15,461

 

 

$

17,191

 

Asia

 

 

2,708

 

 

 

2,801

 

 

 

8,051

 

 

 

8,247

 

Europe

 

 

736

 

 

 

706

 

 

 

2,140

 

 

 

2,131

 

Corporate

 

 

2,611

 

 

 

3,057

 

 

 

7,311

 

 

 

9,370

 

 

 

$

10,969

 

 

$

12,408

 

 

$

32,963

 

 

$

36,939

 

Income from operations:

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

11,053

 

 

$

10,062

 

 

$

31,282

 

 

$

21,700

 

Asia

 

 

21,391

 

 

 

17,865

 

 

 

64,210

 

 

 

45,887

 

Europe

 

 

978

 

 

 

1,395

 

 

 

7,918

 

 

 

4,270

 

Corporate and intersegment eliminations

 

 

(21,628

)

 

 

(20,663

)

 

 

(68,983

)

 

 

(58,580

)

 

 

 

11,794

 

 

 

8,659

 

 

 

34,427

 

 

 

13,277

 

Interest expense

 

 

(1,987

)

 

 

(2,136

)

 

 

(6,215

)

 

 

(6,189

)

Interest income

 

 

122

 

 

 

154

 

 

 

451

 

 

 

1,040

 

Other income (expense)

 

 

500

 

 

 

439

 

 

 

664

 

 

 

(191

)

Income before income taxes

 

$

10,429

 

 

$

7,116

 

 

$

29,327

 

 

$

7,937

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

11,787

 

 

$

2,134

 

 

$

23,629

 

 

$

17,992

 

Asia

 

 

274

 

 

 

1,330

 

 

 

2,608

 

 

 

4,646

 

Europe

 

 

691

 

 

 

252

 

 

 

3,410

 

 

 

1,294

 

Corporate

 

 

1,066

 

 

 

2,096

 

 

 

2,790

 

 

 

5,170

 

 

 

$

13,818

 

 

$

5,812

 

 

$

32,437

 

 

$

29,102

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

 

 

 

 

2021

 

 

2020

 

Total assets:

 

 

 

 

 

 

 

 

 

 

Americas

 

 

 

 

 

$

844,484

 

 

$

777,658

 

Asia

 

 

 

 

 

 

616,535

 

 

 

532,793

 

Europe

 

 

 

 

 

 

174,876

 

 

 

146,277

 

Corporate

 

 

 

 

 

 

204,471

 

 

 

287,507

 

 

 

 

 

 

 

$

1,840,366

 

 

$

1,744,235

 

 

19


 

Geographic net sales information provided below reflects the destination of the product shipped. Long-lived assets information is based on the physical location of the asset and includes property, plant and equipment, net, operating lease right-of-use assets, and other long-term assets, net.

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Geographic net sales:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

342,674

 

 

$

346,849

 

 

$

961,322

 

 

$

1,001,725

 

Singapore

 

 

84,902

 

 

 

51,267

 

 

 

226,657

 

 

$

161,805

 

Other Asia

 

 

55,124

 

 

 

48,337

 

 

 

140,227

 

 

 

126,863

 

Europe

 

 

64,775

 

 

 

55,372

 

 

 

207,066

 

 

 

177,651

 

Other

 

 

24,407

 

 

 

24,126

 

 

 

86,993

 

 

 

63,837

 

 

 

$

571,882

 

 

$

525,951

 

 

$

1,622,265

 

 

$

1,531,881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

(in thousands)

 

 

 

 

 

 

 

2021

 

 

2020

 

Long-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

$

247,995

 

 

$

235,193

 

Asia

 

 

 

 

 

 

 

 

64,581

 

 

 

69,669

 

Europe

 

 

 

 

 

 

 

 

30,288

 

 

 

18,002

 

Other

 

 

 

 

 

 

 

 

22,129

 

 

 

21,980

 

 

 

 

 

 

 

 

 

$

364,993

 

 

$

344,844

 

 

 

Note 18 –Supplemental Cash Flow and Non-Cash Information

The following is additional information concerning supplemental disclosures of cash payments.

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Income taxes paid, net

 

$

8,396

 

 

$

11,629

 

 

$

17,769

 

 

$

14,596

 

Interest paid

 

$

2,254

 

 

$

2,364

 

 

$

6,336

 

 

$

6,791

 

Non-cash investing activity:

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment in accounts payable

 

 

 

 

 

 

 

$

7,980

 

 

$

6,531

 

 

20


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This quarterly report (this Report) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts and may include words such as “anticipate,” “believe,” “intend,” “plan,” “project,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” “will,” or the negative or other variations thereof. In particular, statements, express or implied, concerning future operating results, including guidance for fourth quarter 2021 results and beyond, our ability to generate sales, income or cash flow, the anticipated impact of the COVID-19 pandemic, our anticipated plans and responses to the COVID-19 pandemic, our expectations relating to current supply chain constraints, our expected revenue mix, our business strategy and strategic initiatives, our repurchases of shares of our common stock and our intentions concerning the payment of dividends, among others, are forward-looking statements. Although we believe these statements are based upon reasonable assumptions, they involve risks, uncertainties and assumptions that are beyond our ability to control or predict, relating to operations, markets and the business environment generally, including those discussed in Part I, Item 1A of the 2020 10-K, Part II, Item 1A of this Report and in any of our subsequent reports filed with the SEC. In particular, these statements also depend on the duration, severity and evolution of the COVID-19 pandemic and related risks, including the emergence and severity of its variants, the availability of vaccines and potential hesitancy to utilize them, government and other third-party responses to it and the consequences for the global economy, our business and the businesses of our suppliers and customers, as well as our ability (or inability) to execute on our plans to respond to the COVID-19 pandemic. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes, including the future results of our operations, may vary materially from those indicated. Undue reliance should not be placed on any forward-looking statements. Forward-looking statements are not guarantees of performance. The following discussion should be read in conjunction with the condensed consolidated financial statements and accompanying notes, and the 2020 10-K. All forward-looking statements included in this document are based upon information available to us as of the date of this document, and we assume no obligation to update them.

 

OVERVIEW

We are a worldwide provider of innovative product design services, engineering services, technology solutions and advanced manufacturing services (both electronic manufacturing services (EMS) and precision technology services). In this Report, references to Benchmark, the Company or use of the words “we”, “our” and “us” include Benchmark’s subsidiaries unless otherwise noted.

 

From initial product concept to volume production, including direct order fulfillment and aftermarket services, Benchmark has been providing integrated services and solutions to original equipment manufacturers (OEMs) since 1979. Today, Benchmark proudly serves the following industries: aerospace and defense (A&D), medical technologies, complex industrials, semiconductor capital equipment (semi-cap), next-generation telecommunications and advanced computing.

 

Our customer engagement focuses on three principal areas:

 

Design & Engineering Services, which include design for manufacturability, manufacturing process and test development, concurrent and sustaining engineering, turnkey product design and regulatory services. Our engineering services may be for systems, sub-systems, printed circuit boards and assemblies, and components. We provide these services across all the industries we serve, but focus primarily in regulated industries such as medical, complex industrials, A&D, and semi-cap.

 

Technology Solutions, which involve developing a library of building blocks or reference designs primarily in defense solutions, surveillance systems, radio frequency and high-speed design, and front-end managed connectivity data collection systems. We often merge these technology solutions with engineering services to provide turnkey product development from requirements through to volume production that we support with our manufacturing services. Our building blocks can be utilized across a variety of industries but we have significant capabilities in the A&D and the complex industrials markets. We have also developed differentiated capabilities in radio frequency (RF) and high-speed design for both components and substrates. The need to reduce size, weight, and power (SWaP) to accommodate high frequency electronics communications is important to customers in the A&D, medical, and next-generation telecommunications markets.

 

Manufacturing Services, which include printed circuit board assemblies (PCBAs) using both traditional surface mount technologies (SMT) and microelectronics, subsystem assembly, system build and integration. System builds and integration often involve building a finished assembly that includes PCBAs, complex subsystem assemblies, mechatronics, displays, optics, and other components. These final products may be configured to order and delivered

21


 

directly to the end-customer across all the industries we serve. Manufacturing services also includes precision technology services comprised of precision machining, advanced metal joining, assembly and functional testing primarily for the semi-cap market (serving semiconductor capital equipment customers) and A&D market.

 

Our core strength lies in our ability to provide concept-to-production solutions in support of our customers. Our global manufacturing presence increases our ability to respond to our customers’ needs by providing accelerated time-to-market and time-to-volume production of high-quality products – especially for complex products with lower volume and higher mix in regulated markets with higher reliability requirements. These capabilities enable us to build strong strategic relationships with our customers and to become an integral part of their business.

 

We believe our primary competitive advantages are our leading edge technical capabilities in engineering services (including product design in which we can take a product idea from concept to design to volume manufacturing), technology solutions (especially high frequency RF solutions, microelectronics, and miniaturization), and manufacturing services (including electronics and complex precision machining capabilities) provided by highly skilled personnel. We also have diversified end market and regulated market experience in our targeted higher-value markets. To support customers in these markets, we have invested in strategic global supply chain design and execution.

 

In addition, we believe that a strong focus on human capital through the talent we hire and retain is critical to maintaining our competitiveness. We are driving a customer-centric organization with a high degree of accountability and ownership to develop processes necessary to exceed customer expectations and deliver financial performance aligned to our goals. Through our employee feedback process, we solicit and act upon information to improve our Company and better support our customers and business processes in the future. We have taken steps to attract the best leaders and are accelerating our efforts to increase our diversity and inclusion in our employee and management ranks as we seek to develop an innovative and forward thinking workforce for the future.

 

Our customers often face challenges in designing supply chains, demand planning, procuring materials and managing their inventories efficiently due to fluctuations in their customer demand, product design changes, short product life cycles and component price fluctuations.

 

We employ enterprise resource planning (ERP) systems and lean manufacturing principles to manage procurement and manufacturing processes in an efficient and cost-effective manner so that, where possible, components arrive on a just-in-time, as-and-when-needed basis. Because we are a significant purchaser of electronic components and other raw materials, we are generally able to capitalize on the economies of scale associated with our relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. Utilizing our agility and expertise in supply chain management and our relationships with suppliers across the supply chain we strive to help reduce our customers’ cost of goods sold and inventory exposure. However, due to the COVID-19 pandemic, as well as global labor and supply disruptions, we continue to see component supply chain constraints across all commodity categories that are constraining our ability to produce the full demand forecasts we are receiving from customers.

 

We recognize revenue as the customer takes control of the manufactured products built to customer specifications. We also generate revenue from our design, development and engineering services, in addition to the sale of other inventory.

 

Revenue is measured based on the consideration specified in a contract with a customer. Under the majority of our manufacturing contracts with customers, the customer controls all the work-in-progress as products are being built. Revenues under these contracts are recognized progressively based on the cost-to-cost method. For other manufacturing contracts, the customer does not take control of the product until it is completed. Under these contracts, we recognize revenue upon transfer of control of product to the customer, which is generally when the goods are shipped. Revenue from design, development and engineering services is recognized over time as the services are performed. As a general matter, we assume no significant obligations after shipment as we typically warrant workmanship only. Therefore, the warranty provisions are generally not significant.

 

COVID-19 Pandemic Update

In late 2019, there was an outbreak of a new strain of coronavirus (COVID-19) first identified in Wuhan, Hubei Province, China, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Further, the COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home,” and total lock-down orders, business limitations or shutdowns and similar orders. As a result, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and created significant volatility and disruption of financial markets. In an effort to first and foremost protect the health and safety of our employees, we also took proactive action to adopt social distancing policies at our locations globally, including working from home for certain employees, limiting the number of employees

22


 

attending meetings, reducing the number of people in our locations at any one time, and significantly limiting employee travel. More recently, a more contagious variant of COVID-19 (the Delta Variant) has spread globally, which has caused some governments to reimplement various measures to reduce the spread. It is unclear at this point the full impact the Delta Variant will have on the global economy and on our Company.

As a result of the COVID-19 pandemic, our revenue during 2020 was negatively impacted primarily as a result of operational inefficiencies relating to reduced productivity levels throughout our facilities and supply chain constraints, which affected our ability to support customer demand. Additionally, the COVID-19 pandemic negatively impacted our 2020 results due to increased direct costs associated with labor expenses and personal protective equipment for our employees, as well as under absorption of fixed costs.

Benchmark provides critical infrastructure products and essential services in each of our locations, which has allowed us to continue to operate. The COVID-19 pandemic continues to affect the Company’s operations into 2021. End market demand continues to grow as more customers recover from the pandemic. However, we continue to see component supply chain constraints across all commodity categories which are constraining our ability to produce the full demand forecasts we are receiving from customers. See "Third Quarter 2021 Highlights" below and "Risk Factors-Shortages or price increases of components specified by our customers have resulted in delayed shipments and could adversely affect our profitability" in Part II, Item 1A of this Report for additional information.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in the United States in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021, and contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The Company evaluated the impact of these provisions and determined these provisions did not have any impact on the year ended December 31, 2020 or the nine months ended September 30, 2021. In addition, the CARES Act allows for employee retention tax credits to be taken in U.S. payroll tax filings and allows for the deferral of the employer portion of social security taxes with 50% to be paid at the end of calendar years 2021 and 2022, respectively. Accordingly, the Company has deferred the payment of the employer portion of social security taxes for the year ended December 31, 2020 until the end of 2021 and 2022, respectively. The Company has also determined it was entitled to employee retention credits and filed for the credits in the second quarter 2020 payroll tax reports pursuant to the guidance provided by the Internal Revenue Service. The amount of credits has been recorded in operating expenses for the year ended December 31, 2020. The Company has determined that it is not eligible for employee retention tax credits as of September 30, 2021, and the deferral of the employer portion of social security taxes is not available for 2021.

We continue to monitor the evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, the exact extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations, is currently unknown and will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the COVID-19 pandemic and its severity; the emergence and severity of its variants, including the Delta Variant; the actions to contain the virus or treat its impact, including the availability and efficacy of vaccinations (particularly with respect to emerging strains of the virus) and the rate of inoculations; general economic factors, such as increased inflation; global supply chain constraints and shortages; labor supply issues; and how quickly and to what extent normal economic and operating conditions can resume, which may not return fully to pre-pandemic levels.

Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. See “Risk Factors” in Part I, Item 1A of our 2020 10-K and in Part II, Item 1A of this Report for additional risks we face due to the COVID-19 pandemic.

 

Third Quarter 2021 Highlights

Sales for the three months ended September 30, 2021 were $571.9 million, a 9% increase from sales of $526.0 million during the three months ended September 30, 2020. During the third quarter of 2021, sales to customers in our various industry sectors fluctuated from the third quarter of 2020 as follows:

 

Higher-Value Markets

Industrials increased by 26%,

A&D decreased by 4%,

Medical decreased by 12%, and

Semi-cap increased by 35%.

 

23


 

Traditional Markets

Computing increased by 28%, and

Telecommunications decreased by 5%.

 

Higher-value market revenues were up 9% year-over-year from strength in Industrials and Semi-cap, partially offset by decreases in A&D and Medical. Traditional market revenues were up 9% year-over-year from strength in the Computing market.

Our sales depend on the success of our customers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence. Developments adverse to our major customers or their products, the availability of electronic component supply, or the failure of a major customer to pay for components or services, including in each case as a result of the COVID-19 pandemic, have adversely affected us. A substantial percentage of our sales are made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us. Sales to our ten largest customers represented 47% and 42% of our sales during the nine months ended September 30, 2021 and 2020, respectively.

For the three and nine months ended September 30, 2021, lead times continue to extend, and more components are being placed on allocation by suppliers. During the three months ended September 30, 2021, there was an increase in pushouts of previously committed component orders and tighter allocation and timing restrictions across the component suppliers. These last-minute allocations created inefficiencies in our operations and contributed to the sequential increase in inventory days for the quarter.

We experience fluctuations in gross profit from period to period. Different programs contribute different gross profits depending on the type of services involved, location of production, size of the program, complexity of the product and level of material costs associated with the various products. Moreover, new programs can contribute relatively less to our gross profit in their early stages when manufacturing volumes are usually lower, resulting in inefficiencies and unabsorbed manufacturing overhead costs. In addition, a number of our new program ramps remain subject to competitive constraints that can exert downward pressure on our margins. During periods of low production volume, we generally have idle capacity and reduced gross profit.

We have undertaken initiatives to restructure our business operations with the intention of improving utilization and reducing costs. During the first nine months of 2021, we recognized $5.2 million of restructuring and other costs due in part to expenses associated with various site closures and restructuring activities.

 

RESULTS OF OPERATIONS

The following table presents the percentage relationship that certain items in our condensed consolidated statements of income bear on sales for the periods indicated. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and Notes thereto in Part I, Item 1 of this Report.

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Sales

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of sales

 

 

90.6

 

 

 

91.2

 

 

 

91.1

 

 

 

91.9

 

Gross profit

 

 

9.4

 

 

 

8.8

 

 

 

8.9

 

 

 

8.1

 

Selling, general and administrative expenses

 

 

6.0

 

 

 

5.7

 

 

 

6.1

 

 

 

5.9

 

Amortization of intangible assets

 

 

0.3

 

 

 

0.5

 

 

 

0.3

 

 

 

0.5

 

Restructuring charges and other costs

 

 

1.1

 

 

 

1.4

 

 

 

0.6

 

 

 

1.0

 

Ransomware related incident costs (recovery), net

 

 

(0.1

)

 

 

(0.3

)

 

 

(0.2

)

 

 

(0.1

)

Income from operations

 

 

2.1

 

 

 

1.6

 

 

 

2.1

 

 

 

0.9

 

Other expense, net

 

 

(0.3

)

 

 

(0.3

)

 

 

(0.3

)

 

 

(0.3

)

Income before income taxes

 

 

1.8

 

 

 

1.4

 

 

 

1.8

 

 

 

0.5

 

Income tax expense

 

 

0.4

 

 

 

0.2

 

 

 

0.4

 

 

 

0.1

 

Net income

 

 

1.4

%

 

 

1.1

%

 

 

1.4

%

 

 

0.4

%

 

 

24


 

Sales

As noted above, sales for the third quarter of 2021 increased 9% from the same quarter in 2020. Sales for the first nine months of 2021 increased 6% from the same period in 2020. Sales by industry sector were as follows:

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Higher-Value Markets

 

 

 

 

 

 

 

 

 

 

 

 

Industrials

 

$

108,192

 

 

$

86,184

 

 

$

303,550

 

 

$

276,140

 

A&D

 

 

100,838

 

 

 

104,899

 

 

 

286,899

 

 

 

312,623

 

Medical

 

 

117,793

 

 

 

134,142

 

 

 

334,888

 

 

 

386,869

 

Semi-Cap

 

 

133,576

 

 

 

98,721

 

 

 

385,890

 

 

 

268,292

 

 

 

 

460,399

 

 

 

423,946

 

 

 

1,311,227

 

 

 

1,243,924

 

Traditional Markets

 

 

 

 

 

 

 

 

 

 

 

 

Computing

 

 

56,557

 

 

 

44,339

 

 

 

139,841

 

 

 

124,793

 

Telecommunications

 

 

54,926

 

 

 

57,666

 

 

 

171,197

 

 

 

163,164

 

 

 

 

111,483

 

 

 

102,005

 

 

 

311,038

 

 

 

287,957

 

Total

 

$

571,882

 

 

$

525,951

 

 

$

1,622,265

 

 

$

1,531,881

 

 

Industrials. Third quarter 2021 sales increased 26% to $108.2 million from $86.2 million in the third quarter of 2020. Sales during the first nine months of 2021 increased 10% to $303.6 million from $276.1 million in the same period of 2020. The increases were primarily due to continued demand improvements from oil & gas, commercial and building infrastructure programs as well as a new program ramp for LiDAR applications.

Aerospace and Defense. Third quarter 2021 sales decreased 4% to $100.8 million from $104.9 million in the third quarter of 2020. Sales during the first nine months of 2021 decreased 8% to $286.9 million from $312.6 million in the same period of 2020. The decreases were primarily due to a decline in customer demand in the commercial aerospace sector year over year.

Medical. Third quarter 2021 sales decreased 12% to $117.8 million from $134.1 million in the third quarter of 2020. Sales during the first nine months of 2021 decreased 13% to $334.9 million from $386.9 million in the same period of 2020. The decreases were due to the reduction of demand in COVID specific programs and supply chain constraints impacting demand recovery for certain customers.

Semiconductor Capital Equipment. Third quarter 2021 sales increased 35% to $133.6 million from $98.7 million in the third quarter of 2020. Sales during the first nine months of 2021 increased 44% to $385.9 million from $268.3 million in the same period of 2020. The increases were primarily due to high demand levels and our future backlog increasing for our precision machining and large electro-mechanical assembly services, which are primarily related to front-end wafer fab equipment.

Computing. Third quarter 2021 sales increased 28% to $56.6 million from $44.3 million in the third quarter of 2020. Sales during the first nine months of 2021 increased 12% to $139.8 million from $124.8 million in the same period of 2020. The increases were primarily due to a planned ramp of a high performance computing program that will continue into 2022.

Telecommunications. Third quarter 2021 sales decreased 5% to $54.9 million from $57.7 million in the third quarter of 2020. The decrease was primarily due to delays in new program ramps tied to component shortages. Sales during the first nine months of 2021 increased 5% to $171.2 million from $163.2 million in the same period of 2020. The increase was primarily due to strong demand from new and existing programs in commercial broadband.

Our international operations are subject to the risks of doing business abroad. See Part I, Item 1A of our 2020 10-K for factors pertaining to our international sales, fluctuations in foreign currency exchange rates and a discussion of potential adverse effects in operating results associated with the risks of doing business abroad. During the third quarter of 2021 and 2020, 54% and 51%, respectively, of our sales were from international operations.

Gross Profit

Gross profit increased 15.7% to $53.7 million in the third quarter of 2021 from $46.4 million in the third quarter of 2020, and increased 15.6% to $143.8 million for the first nine months of 2021 from $124.4 million for the same period in 2020. Gross margin increased primarily due to higher revenues.

 

25


 

Selling, General and Administrative (SG&A) Expenses

SG&A increased to $34.4 million in the third quarter of 2021 from $29.7 million in the third quarter of 2020, and increased to $99.0 for the first nine months of 2021 from $89.8 for the same period of 2020. The increases were primarily due to higher variable compensation costs and U.S. medical expenses.

Amortization of Intangible Assets

Amortization of intangible assets was $1.6 million in the third quarter of 2021 and $2.4 million in the third quarter of 2020, and $4.8 million for the first nine months of 2021 compared to $7.1 million for the same period in 2020. The decreases were primarily due to an intangible asset becoming fully amortized in 2020.

Restructuring Charges and Other Costs

During the first nine months of 2021, we recognized $5.2 million of restructuring and other costs primarily due to expenses associated with announced site closures or exits, reduction in force and other restructuring activities primarily in the Americas. During the first nine months of 2020, we recognized $8.7 million of restructuring charges, primarily related to site closures and restructuring activities in certain facilities in the Americas and Asia. In addition, during the first nine months of 2021, we incurred $4.4 million in costs related to asset impairments in the Americas. During the first nine months of 2020, we incurred $5.7 million and $1.0 million in costs related to asset impairments in the Americas and Asia, respectively. See Note 12 to the condensed consolidated financial statements in Part I, Item 1 of this Report for additional information on our restructuring charges.

Ransomware Incident Related Costs, Net

During the fourth quarter ended December 31, 2019, ransomware incident related costs incurred totaled $12.7 million or $7.7 million, net of estimated insurance recoveries of $5.0 million. These costs were primarily comprised of certain employee related expenses and various third party consulting services, including forensic experts, legal counsel and other IT professional expenses. During the year ended December 31, 2020, we collected $6.6 million of insurance recoveries which include the $5.0 million of estimated insurance recoveries recorded in 2019 and an additional $1.6 million recorded in 2020. During the first nine months of 2021, we collected an additional $3.9 million of insurance recoveries. As of September 30, 2021, the Company has collected insurance recoveries totaling $10.5 million. No further insurance recoveries are expected.

Interest Expense

Interest expense was $6.2 million during both the first nine months of 2021 and 2020.

Interest Income

Interest income decreased to $0.5 million in the first nine months of 2021 from $1.0 million in the same period of 2020 due to lower invested cash equivalents and lower interest rates.

Income Tax Expense

Income tax expense of $6.0 million represented an 20.4% effective tax rate for the first nine months of 2021, compared with $1.6 million for the same period of 2020 representing an effective tax rate of 19.9%. The slightly higher effective tax rate in 2021 is the result of lower profits in 2020 and the effect of the expired Malaysia tax holiday as of April 1, 2021.

We have been granted certain tax incentives, including tax holidays, for our subsidiaries in Malaysia and Thailand that will expire or expired at various dates, unless extended or otherwise renegotiated, through March 31, 2021 in Malaysia and 2028 in Thailand. See Note 8 to the condensed consolidated financial statements in Part I, Item 1 of this Report.

Net Income

We reported a net income of $23.4 million, or $0.64 per diluted share, for the first nine months of 2021, compared with a net income of $6.4 million, or $0.17 per diluted share, for the same period in 2020. The net increase of $17 million in 2021 is primarily the result of items discussed above.

 

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our organic growth and operations through funds generated from operations and occasional borrowings under our Credit Agreement (as defined below). Cash and cash equivalents and restricted cash totaled $291.2 million at September 30,

26


 

2021 and $396.0 million at December 31, 2020, of which $185.2 million and $207.3 million, respectively, were held outside the U.S. in various foreign subsidiaries.

Cash used by operating activities was $1.3 million during the first nine months of 2021. The cash used by operations during 2021 consisted primarily of an $151.5 million increase in inventories, a $17.4 million increase in contract assets, a $9.1 million decrease in accrued liabilities, a $9.5 million increase in prepaids and other assets and a $2.3 million increase in accounts receivable, partially offset by $23.4 million of net income, $33.0 million of depreciation and amortization, a $114.5 million increase in accounts payable, and a $7.3 million increase in advance payments from customers. Working capital was $0.7 billion at both September 30, 2021 and December 31, 2020.

We primarily purchase components only after customer orders or forecasts 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. When shortages of these components and other material supplies used in operations have occurred, vendors have at times been unable to ship the quantities we need for production, forcing us to delay shipments, which can increase backorders and impact cash flows. In certain instances, we request and receive advance payments from customers as prepayments of inventory to meet working capital demands of a contract, offset inventory risks such as inventory purchased in advance of current needs and protect the Company from the failure of other parties to fulfill obligations under a contract. For example, as discussed above under “COVID-19 Pandemic Update,” we have been impacted by supply chain constraints, including shortages, longer lead times and increased transit times.

Cash used in investing activities was $32.1 million during the first nine months of 2021 primarily due to purchases of additional property, plant and equipment totaling $29.5 million. The purchases of property, plant and equipment were primarily for machinery and equipment in the Americas.

Cash used in financing activities was $66.9 million during the first nine months of 2021. Borrowings under the Credit Agreement were $30.0 million. Principal payments under the Credit Agreement and finance lease obligations totaled $35.6 million and $0.8 million, respectively, share repurchases totaled $40.2 million, dividends paid totaled $17.4 million, and we received $0.3 million from the exercise of stock options.

Under the terms of our $650.0 million credit agreement (Credit Agreement), in addition to a $150.0 million term loan facility, we have a $500.0 million five-year revolving credit facility to be used for general corporate purposes, both with a maturity date of July 20, 2023. The Credit Agreement includes an accordion feature pursuant to which total commitments under the facility may be increased by an additional $275.0 million, subject to satisfaction of certain conditions. As of September 30, 2021, we had $131.3 million in borrowings outstanding under the term loan facility, $3.9 million in letters of credit outstanding under our revolving credit facility, and $496.1 million remains available for future borrowings under the revolving credit facility, subject to compliance with financial covenants as to interest coverage and debt leverage, in addition to other debt covenant restrictions. See Note 5 to the condensed consolidated financial statements in Part I, Item 1 of this Report for more information regarding the terms of the Credit Agreement.

The Credit Agreement contains certain financial covenants related to interest coverage and debt leverage, 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 could 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, 2021, we were in compliance with all of these covenants and restrictions.

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, our past, current and future operations, and the operations of businesses we have or may acquire, 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.

As of September 30, 2021, we had cash and cash equivalents, including restricted cash, totaling $291.2 million and $496.1 million available for borrowings under the Credit Agreement, subject to compliance with financial covenants as to interest coverage and debt leverage, in addition to other debt covenant restrictions.

27


 

During the next 12 months, we believe our capital expenditures will approximate $50 million to $60 million, principally for machinery and equipment to help increase our production capacity to support anticipated revenue growth and our ongoing business around the globe.

On March 6, 2018, our Board of Directors approved an expanded stock repurchase program granting us the authority to repurchase up to $250 million in common stock in addition to the $100 million approved on December 7, 2015. On February 19, 2020 and October 26, 2018 , the Board of Directors authorized the repurchase of an additional $150 million and $100 million, respectively, of the Company's common stock. During the nine months ended September 30, 2021, we repurchased a total of 1.4 million common shares for an aggregate of $40.2 million at an average price of $26.53 per share. As of September 30, 2021, we had $164.0 million remaining under the share repurchase authorization to purchase additional shares. We are under no commitment or obligation to repurchase any particular amount of common stock.

The Company began declaring and paying quarterly dividends during the first quarter of 2018. In February 2020, the Board of Directors approved a quarterly dividend increase, raising the quarterly dividend from $0.15 to $0.16 per common share. In May 2021, the Board of Directors approved another quarterly dividend increase, raising the quarterly dividend from $0.16 to $0.165 per common share. During the first nine months of 2021 and 2020, cash dividends paid totaled $17.4 million and $17.2 million, respectively. On September 15, 2021, the Company declared a quarterly cash dividend of $0.165 per share of the Company’s common stock to shareholders of record as of September 30, 2021. The dividend of $5.8 million was paid on October 14, 2021. The Board of Directors currently intends to continue paying quarterly dividends. However, the Company’s future dividend policy is subject to the Company’s compliance with applicable law, and depends on, among other things, the Company’s results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in the Company’s debt agreements, and other factors that the Board of Directors may deem relevant, including the impact of the COVID-19 pandemic. Dividend payments are not mandatory or guaranteed; there can be no assurance that the Company will continue to pay a dividend in the future.

Management believes that our existing cash balances and funds generated from operations will be sufficient to permit us to meet our liquidity requirements over the next 12 months. Management further believes that our ongoing cash flows from operations and any borrowings we may incur under our revolving credit facility will enable us to meet operating cash requirements in future years. If we consummated significant acquisitions in the future, our capital needs would increase and could possibly result in our need to increase available borrowings under our Credit Agreement or access public or private debt and equity markets. There can be no assurance, however, that we would be successful in raising additional debt or equity on acceptable terms.

 

CONTRACTUAL OBLIGATIONS

 

We have certain contractual obligations for operating and capital leases that were summarized in a table of Contractual Obligations in our 2020 10-K. There have been no material changes to our contractual obligations, outside of the ordinary course of our business, since December 31, 2020.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND RECENTLY ENACTED ACCOUNTING PRINCIPLES

 

Management’s discussion and analysis is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. See Note 2 to the condensed consolidated financial statements in Part 1, Item 1 of this Report for a discussion of recently enacted accounting principles. Also, our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements included in our 2020 10-K.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Our international sales comprise a significant portion of our net sales. We are exposed to risks associated with operating internationally, including:

Foreign currency exchange risk;
Import and export duties, taxes and regulatory changes;
Inflationary economies or currencies; and
Economic and political instability.

Additionally, some of our operations are in developing countries. Certain events, including natural disasters, can impact the infrastructure of a developing country more severely than they would impact the infrastructure of a developed country. A developing country can also take longer to recover from such events, which could lead to delays in our ability to resume full operations.

28


 

We transact business in various foreign countries and are subject to foreign currency fluctuation risks. We use natural hedging and forward contracts to economically hedge transactional exposure primarily associated with trade accounts receivable, other receivables, trade accounts payable, and lease liabilities that are denominated in a currency other than the functional currency of the respective operating entity. We do not use derivative financial instruments for speculative purposes. Certain forward currency exchange contracts in place as of September 30, 2021 have not been designated as accounting hedges and, therefore, changes in fair value are recorded within our condensed consolidated statements of income.

On July 30, 2021, the Company entered into forward currency exchange contracts designated as cash flow hedges of forecasted foreign currency expenses with a notional amount of $10.5 million as of September 30, 2021. Changes in the fair value of the derivatives are recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets until earnings are affected by the variability of the cash flows. During the nine months ended September 30, 2021, the Company recorded an unrealized loss of $0.4 million on the forward currency exchange contracts in other comprehensive income.

Our sales are substantially denominated in U.S. dollars. Our foreign currency cash flows are generated in certain European and Asian countries and Mexico.

We are also exposed to market risk for changes in interest rates on our financial instruments, a portion of which relates to our invested cash balances. We do not use derivative financial instruments in our investing activities. We place cash and cash equivalents and investments with various major financial institutions. We protect our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by generally investing in investment-grade securities.

We are also exposed to interest rate risk on borrowings under our Credit Agreement. As of September 30, 2021, we had $131.3 million outstanding on the floating rate term loan facility, and we have an interest rate swap agreement with a notional amount of $131.3 million. Under this swap agreement, we receive variable rate interest rate payments and pay fixed rate interest payments. The effect of this swap is to convert a portion our floating rate interest expense to fixed interest rate expense. The interest rate swap is designated as a cash flow hedge.

For additional information regarding our forward currency exchange contracts and interest rate swap agreement, see Note 15 to the condensed consolidated financial statements in Part I, Item 1 of this Report.

Item 4 – Controls and Procedures

As of the end of the period covered by this Report, the Company’s management (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)) conducted an evaluation pursuant to Rule 13a-15 under the Exchange Act, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based on this evaluation, the CEO and CFO concluded that as of the end of the period covered by this Report, such disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting (as defined in Rule13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the last fiscal quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by individuals’ acts, by collusion of two or more people, or by management overriding the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

29


 

PART II—OTHER INFORMATION

 

We are involved in various legal actions arising in the ordinary course of business. There have been no material changes to the legal proceedings previously reported under Part I, Item 3 of our 2020 10-K, and, in the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position or results of operations.

 

Item 1A. Risk Factors

Except as set forth, there have been no material changes to the risk factors previously disclosed in Part I, Item 1A of our 2020 10-K.

 

Shortages or price increases of components specified by our customers have resulted in delayed shipments and could adversely affect our profitability.

Substantially all of our sales are derived from manufacturing services in which we purchase components specified by our customers. In the past, supply shortages have substantially curtailed production of all assemblies using a particular component and industry-wide shortages of electronic components, particularly of memory and logic devices, have occurred. For example, in 2011, we experienced disruptions to our global supply chain due to the earthquake and tsunami in Japan, as well as floods in Thailand. More recently, the COVID-19 pandemic, as well as labor and supply disruptions, are causing global electronic component shortages and supply chain constraints. In some instances, such component shortages have caused delayed shipments, planning disruptions, extended lead times, and parts placed on allocation, limiting our ability to meet customer demand. Because of the continued increase in demand for surface mount components, we anticipate component shortages and longer lead times for certain components may continue. Also, we may bear the risk of component price increases that occur between periodic re-pricings of products during the term of a customer contract. Accordingly, certain component price increases could adversely affect our gross profit margins.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following table provides information for the quarter ended September 30, 2021 about the Company’s repurchases of its equity securities registered pursuant to Section 12 of the Exchange Act:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(d)

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

 

 

 

 

 

 

Number (or

 

 

 

 

 

 

 

 

(c)

 

 

Approximate

 

 

 

 

 

 

 

 

Total Number of

 

 

Dollar Value)

 

 

 

 

 

 

 

 

Shares (or Units)

 

 

of Shares (or

 

 

(a)

 

 

 

 

 

Purchased as

 

 

Units) that

 

 

Total Number
of

 

 

(b)

 

 

Part of
Publicly

 

 

May Yet Be
Purchased

 

 

Shares (or

 

 

Average Price

 

 

Announced

 

 

Under the

 

 

Units)

 

 

Paid per Share

 

 

Plans or

 

 

Plans or

Period

 

Purchased(1)

 

 

(or Unit)(2)

 

 

Programs

 

 

Programs(3)

July 1 to 31, 2021

 

 

 

 

$

 

 

 

 

 

$173.9 million

August 1 to 31, 2021

 

 

240,000

 

 

 

26.04

 

 

 

240,000

 

 

$167.6 million

September 1 to 30, 2021

 

 

132,000

 

 

 

27.42

 

 

 

132,000

 

 

$164.0 million

Total

 

 

372,000

 

 

$

26.53

 

 

 

372,000

 

 

 

 

(1) All stock repurchases were made on the open market.

(2) Average price paid per share is calculated on a settlement basis and excludes commission.

(3) On October 30, 2018, the Company announced that the Board of Directors authorized the repurchase of $100 million of the Company’s common stock in addition to the $250 million previously announced on March 7, 2018. On February 24, 2020, the Company announced that the Board of Directors authorized the repurchase of an additional $150 million of the Company’s common stock. Net of shares repurchased to date, the total remaining authorization outstanding as of September 30, 2021 is $164.0 million. Stock purchases may be made in the open market, in privately negotiated transactions or block transactions, at the discretion of the Company’s management and as market conditions warrant. Purchases are funded from available cash and may be commenced, suspended or discontinued at any time without prior notice. Shares of stock repurchased under the program are retired.

30


 

Item 6. Exhibits

 

Exhibit

Number

 

 

 

Description of Exhibit

 

 

 

    3.1

 

Restated Certificate of Formation dated May 17, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated May 17, 2016) (the 8-K) (Commission file number 1-10560)

 

 

 

    3.2

 

Amended and Restated Bylaws of the Company dated December 2, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated December 7, 2020 (Commission file number 1-10560))

 

 

 

    4.1

 

Specimen form of certificate evidencing the Common Shares (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014) (Commission file number 1-10560)

 

 

 

  31.1 (1)

 

Section 302 Certification of Chief Executive Officer

 

 

 

  31.2 (1)

 

Section 302 Certification of Chief Financial Officer

 

 

 

  32.1 (2)

 

Section 1350 Certification of Chief Executive Officer

 

 

 

  32.2 (2)

 

Section 1350 Certification of Chief Financial Officer

 

 

 

101.INS (1)

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

 

101.SCH (1)

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL (1)

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF (1)

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB (1)

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE (1)

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104 (1)

 

Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101)

 

(1) Filed herewith.

(2) Furnished herewith

31


 

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 4, 2021.

 

 

BENCHMARK ELECTRONICS, INC.

 

 

 

(Registrant)

 

 

 

 

 

By:

 

/s/ Jeffrey W. Benck

 

 

 

Jeffrey W. Benck

 

 

 

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

By:

 

/s/ Roop K. Lakkaraju

 

 

 

Roop K. Lakkaraju

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

32


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