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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

 

FORM 10‑Q

_______________

 

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

For the quarterly period ended September 30, 2014

 

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

For the transition period from _________________ to________________.

 

Commission File Number: 1‑10560

 

BENCHMARK ELECTRONICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Texas

74‑2211011

 

(State or other jurisdiction

(I.R.S. Employer

 

of incorporation or organization)

 

 

Identification No.)

3000 Technology Drive

77515

Angleton, Texas

(Zip Code)

(Address of principal executive offices)

 

 

     

(979) 849‑6550

(Registrants telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer [Ö

Accelerated filer [   ]

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

Smaller reporting company [   ]

 

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

 

As of November 5, 2014 there were 53,122,841 Common Shares of Benchmark Electronics, Inc., par value $0.10 per share, outstanding.

 

 


 

TABLE OF CONTENTS

 

PART I

 

 

 

 

Page

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Income

2

 

Condensed Consolidated Statements of Comprehensive Income

3

 

Condensed Consolidated Statement of Shareholders’ Equity

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and

22

 

Results of Operations

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 4.

Controls and Procedures

32

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 5.

Other

33

Item 6.

Exhibits

34

 

 

SIGNATURES

35


 

PART I - FINANCIAL INFORMATION

 

Item 1.           Financial Statements. 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

  

  

  

  

  

  

September 30,

  

  

December 31,

(in thousands, except par value)

  

2014 

  

  

2013 

  

  

  

  

  

  

(unaudited)

  

  

  

Assets

  

  

  

  

  

  

Current assets:

  

  

  

  

  

  

  

Cash and cash equivalents

$

 420,236 

  

$

 345,555 

  

  

Accounts receivable, net of allowance for doubtful

  

  

  

  

  

  

  

  

accounts of $2,943 and $338, respectively

  

 534,002 

  

  

 559,763 

  

  

Inventories, net

  

 434,166 

  

  

 396,699 

  

  

Prepaid expenses and other assets

  

 30,901 

  

  

 26,283 

  

  

Income taxes receivable

  

 234 

  

  

 3,231 

  

  

Deferred income taxes

  

 5,247 

  

  

 11,302 

  

  

  

  

Total current assets

  

 1,424,786 

  

  

 1,342,833 

  

Long-term investments

  

 1,207 

  

  

 9,921 

  

Property, plant and equipment, net of accumulated

  

  

  

  

  

  

  

  

  

depreciation of $360,513 and $346,500 respectively

  

 190,158 

  

  

 185,319 

  

Goodwill, net

  

 45,970 

  

  

 44,691 

  

Deferred income taxes

  

 29,623 

  

  

 33,856 

  

Other, net

  

 36,247 

  

  

 40,751 

  

  

  

  

  

$

 1,727,991 

  

$

 1,657,371 

  

  

  

  

  

  

  

  

  

  

Liabilities and Shareholders’ Equity

  

  

  

  

  

  

Current liabilities:

  

  

  

  

  

  

  

Current installments of capital lease obligations

$

 651 

  

$

 582 

  

  

Accounts payable

  

 341,508 

  

  

 320,953 

  

  

Income taxes payable

  

 3,708 

  

  

 9,570 

  

  

Accrued liabilities

  

 73,452 

  

  

 67,272 

  

  

  

  

Total current liabilities

  

 419,319 

  

  

 398,377 

  

Capital lease obligations, less current installments

  

 9,021 

  

  

 9,521 

  

Other long-term liabilities

  

 21,126 

  

  

 20,369 

  

Deferred income taxes

  

 2,071 

  

  

 2,071 

  

Shareholders’ equity:

  

  

  

  

  

  

  

Preferred shares, $0.10 par value; 5,000 shares

  

  

  

  

  

  

  

  

authorized, none issued

  

  

  

  

  

Common shares, $0.10 par value; 145,000 shares

  

  

  

  

  

  

  

  

authorized; issued  – 53,465 and 53,936, respectively

  

  

  

  

  

  

  

  

outstanding  – 53,465 and 53,825, respectively

  

 5,347 

  

  

 5,383 

  

  

Additional paid-in capital

  

 650,474 

  

  

 644,594 

  

  

Retained earnings

  

 631,353 

  

  

 586,422 

  

  

Accumulated other comprehensive loss

  

 (10,720) 

  

  

 (9,094) 

  

  

Less treasury shares, at cost; 0 and 111 shares, respectively

  

 - 

  

  

 (272) 

  

  

  

  

Total shareholders’ equity

  

 1,276,454 

  

  

 1,227,033 

  

  

Commitments and contingencies

  

  

  

  

  

  

  

  

  

  

$

 1,727,991 

  

$

 1,657,371 

 

 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(unaudited)

 

  

  

Three Months Ended

Nine Months Ended

  

  

September 30,

September 30,

(in thousands, except per share data)

  

2014 

  

2013 

  

2014 

  

2013 

  

  

  

  

  

  

  

  

  

  

Sales

$

 731,302 

$

 599,658 

$

 2,087,514 

$

 1,749,624 

Cost of sales

  

 676,008 

  

 554,218 

  

 1,923,346 

  

 1,622,983 

  

Gross profit

  

 55,294 

  

 45,440 

  

 164,168 

  

 126,641 

Selling, general and administrative expenses

  

 31,219 

  

 24,501 

  

 88,072 

  

 70,211 

Restructuring charges and integration

  

  

  

  

  

  

  

  

 and acquisition-related costs

  

 2,160 

  

 1,214 

  

 6,176 

  

 7,323 

Asset impairment charge and other

  

 - 

  

 - 

  

 - 

  

 2,606 

Thailand flood related items, net of insurance

 - 

  

 (9,748) 

  

 (1,571) 

  

 (9,748) 

  

Income from operations

  

 21,915 

  

 29,473 

  

 71,491 

  

 56,249 

Interest expense

  

 (494) 

  

 (481) 

  

 (1,443) 

  

 (1,403) 

Interest income

  

 535 

  

 292 

  

 1,718 

  

 997 

Other income (expense)

  

 (1,105) 

  

 745 

  

 (980) 

  

 560 

  

Income before income taxes

  

 20,851 

  

 30,029 

  

 70,786 

  

 56,403 

Income tax expense

  

 3,695 

  

 6,303 

  

 12,355 

  

 12,733 

  

Net income

$

 17,156 

$

 23,726 

$

 58,431 

$

 43,670 

  

  

  

  

  

  

  

  

  

  

Earnings per share:

  

  

  

  

  

  

  

  

  

Basic

$

 0.32 

$

 0.44 

$

 1.09 

$

 0.80 

  

Diluted

$

 0.32 

$

 0.43 

$

 1.07 

$

 0.80 

  

  

  

  

  

  

  

  

  

  

Weighted-average number of shares outstanding:

  

  

  

  

  

  

  

Basic

  

 53,660 

  

 54,087 

  

 53,712 

  

 54,361 

  

Diluted

  

 54,265 

  

 54,611 

  

 54,387 

  

 54,868 

 

 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

  

  

  

  

  

Three Months Ended

  

Nine Months Ended

  

  

  

  

  

September 30,

  

September 30,

(in thousands)

  

2014 

  

  

2013 

  

  

2014 

  

  

2013 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Net income

$

 17,156 

  

$

 23,726 

  

$

 58,431 

  

$

 43,670 

Other comprehensive income (loss):

  

  

  

  

  

  

  

  

  

  

  

  

Foreign currency translation adjustments

  

 (2,712) 

  

  

 1,254 

  

  

 (2,945) 

  

  

 245 

  

Unrealized gain on investments,

  

  

  

  

  

  

  

  

  

  

  

  

  

net of tax

  

 1,496 

  

  

 42 

  

  

 1,342 

  

  

 318 

  

Other

  

 (8) 

  

  

 (1) 

  

  

 (23) 

  

  

 - 

Other comprehensive income (loss):

  

 (1,224) 

  

  

 1,295 

  

  

 (1,626) 

  

  

 563 

  

  

  

Comprehensive income

$

 15,932 

  

$

 25,021 

  

$

 56,805 

  

$

 44,233 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 

 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Shareholders’ Equity

(unaudited)

 

  

  

  

  

  

  

  

  

  

  

  

  

  

Accumulated

  

  

  

  

  

  

  

  

Common Shares

  

Additional

  

  

  

Other

  

  

  

Total

  

  

  

Shares

  

Par

  

Paid-in

  

Retained

  

Comprehensive

  

Treasury

  

Shareholders’

(in thousands)

  

Outstanding

  

Value

  

Capital

  

Earnings

  

Loss

  

Shares

  

Equity

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Balances, December 31, 2013

  

  

 53,825 

  

$

 5,383 

$

 644,594 

$

 586,422 

$

 (9,094) 

$

 (272) 

$

 1,227,033 

Stock-based compensation expense

  

  

 - 

  

  

 - 

  

 6,163 

  

 - 

  

 - 

  

 - 

  

 6,163 

Shares repurchased and retired

  

  

 (1,054) 

  

  

 (105) 

  

 (11,440) 

  

 (13,500) 

  

 - 

  

 - 

  

 (25,045) 

Stock options exercised

  

  

 612 

  

  

 60 

  

 11,688 

  

 - 

  

 - 

  

 - 

  

 11,748 

Issuance of restricted shares, net of

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

forfeitures

  

  

 95 

  

  

 10 

  

 (10) 

  

 - 

  

 - 

  

 - 

  

 - 

Restricted shares withheld for taxes

  

  

 (13) 

  

  

 (1) 

  

 (308) 

  

 - 

  

 - 

  

 - 

  

 (309) 

Excess tax benefit of stock-based

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

compensation

  

  

 - 

  

  

 - 

  

 59 

  

 - 

  

 - 

  

 - 

  

 59 

Cancellation of treasury shares

  

  

 - 

  

  

 - 

  

 (272) 

  

 - 

  

 - 

  

 272 

  

 - 

Comprehensive income

  

  

 - 

  

  

 - 

  

 - 

  

 58,431 

  

 (1,626) 

  

 - 

  

 56,805 

Balances, September 30, 2014

  

  

 53,465 

  

$

 5,347 

$

 650,474 

$

 631,353 

$

 (10,720) 

$

 - 

$

 1,276,454 

 

 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

  

  

  

  

  

  

Nine Months Ended

  

  

  

  

  

  

September 30,

(in thousands)

  

  

2014 

  

  

2013 

  

  

  

  

  

  

  

  

  

  

  

Cash flows from operating activities:

  

  

  

  

  

  

  

Net income

  

$

 58,431 

  

$

 43,670 

  

Adjustments to reconcile net income to net cash provided by

  

  

  

  

  

  

  

  

operating activities:

  

  

  

  

  

  

  

  

  

Depreciation

  

  

 30,384 

  

  

 26,296 

  

  

  

Amortization

  

  

 3,601 

  

  

 3,339 

  

  

  

Deferred income taxes

  

  

 10,649 

  

  

 9,001 

  

  

  

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

  

  

 588 

  

  

 (1,260) 

  

  

  

Asset impairments

  

  

 184 

  

  

 4,825 

  

  

  

Thailand flood insurance recovery

  

  

 (550) 

  

  

 - 

  

  

  

Stock-based compensation expense

  

  

 5,626 

  

  

 5,310 

  

  

  

Excess tax benefit from stock-based compensation

  

  

 (558) 

  

  

 (285) 

  

Changes in operating assets and liabilities, net of effects from

  

  

  

  

  

  

  

  

business acquisition:

  

  

  

  

  

  

  

  

  

Accounts receivable

  

  

 24,691 

  

  

 47,137 

  

  

  

Inventories

  

  

 (38,603) 

  

  

 (56,453) 

  

  

  

Prepaid expenses and other assets

  

  

 (3,088) 

  

  

 4,778 

  

  

  

Accounts payable

  

  

 17,545 

  

  

 24,507 

  

  

  

Accrued liabilities

  

  

 7,643 

  

  

 (8,701) 

  

  

  

Income taxes

  

  

 (2,638) 

  

  

 (2,233) 

  

  

  

  

Net cash provided by operations

  

  

 113,905 

  

  

 99,931 

Cash flows from investing activities:

  

  

  

  

  

  

  

Proceeds from sales and redemptions of investments

  

  

 10,056 

  

  

 25 

  

Additions to property, plant and equipment

  

  

 (35,743) 

  

  

 (18,268) 

  

Proceeds from the sale of property, plant and equipment

  

  

 289 

  

  

 1,796 

  

Additions to purchased software

  

  

 (871) 

  

  

 (1,879) 

  

Business acquisition, net of cash acquired

  

  

 750 

  

  

 (19,270) 

  

Thailand flood property insurance proceeds

  

  

 550 

  

  

 - 

  

Other

  

  

 363 

  

  

 - 

  

  

  

  

Net cash used in investing activities

  

  

 (24,606) 

  

  

 (37,596) 

Cash flows from financing activities:

  

  

  

  

  

  

  

Proceeds from stock options exercised

  

  

 11,748 

  

  

 10,405 

  

Excess tax benefit from stock-based compensation

  

  

 558 

  

  

 285 

  

Principal payments on capital lease obligations

  

  

 (431) 

  

  

 (368) 

  

Share repurchases

  

  

 (25,045) 

  

  

 (30,673) 

  

  

  

  

Net cash used in financing activities

  

  

 (13,170) 

  

  

 (20,351) 

Effect of exchange rate changes

  

  

 (1,448) 

  

  

 (3) 

Net increase in cash and cash equivalents

  

  

 74,681 

  

  

 41,981 

  

Cash and cash equivalents at beginning of year

  

  

 345,555 

  

  

 384,579 

  

Cash and cash equivalents at end of period

  

$

 420,236 

  

$

 426,560 


 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

 

Note 1 – Basis of Presentation

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

 

The condensed consolidated financial statements included herein have been prepared by the Company without an audit pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The financial statements reflect all normal and recurring adjustments necessary in the opinion of management for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s annual report on Form 10‑K for the year ended December 31, 2013 (the 2013 10-K).

 

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

 

Note 2 – Stock-Based Compensation

The Benchmark Electronics, Inc. 2000 Stock Awards Plan (the 2000 Plan) authorized, and the Benchmark Electronics, Inc. 2010 Omnibus Incentive Compensation Plan (as amended, the 2010 Plan) authorizes, the Company, upon approval of the compensation committee of the Board of Directors, to grant a variety of awards, including stock options, restricted shares, restricted stock units, stock appreciation rights, performance compensation awards, phantom stock awards and deferred share units, or any combination thereof, to any director, officer, employee or consultant (including any prospective director, officer, employee or consultant) of the Company. Stock options are granted to employees with an exercise price equal to the market price of the Company’s common shares on the date of grant, generally vest over a four-year period from the date of grant and have a term of ten years. Restricted shares and restricted stock units granted to employees generally vest over a four-year period from the date of grant, subject to the continued employment of the employee by the Company. The 2000 Plan expired in February 2010, and no additional grants can be made under that plan. The 2010 Plan was approved by the Company’s shareholders in May 2010. Members of the Board of Directors who are not employees of the Company hold awards under the Benchmark Electronics, Inc. 2002 Stock Option Plan for Non-Employee Directors (the 2002 Plan) and the 2010 Plan. Stock options were granted pursuant to the 2002 Plan upon the occurrence of a non-employee director’s election or re-election to the Board of Directors. All awards under the 2002 Plan were fully vested upon the date of grant and have a term of ten years. The 2002 Plan was approved by the Company’s shareholders in May 2002 and expired in February 2012. No additional grants may be made under the 2002 Plan. Non-employee directors currently receive equity awards under the 2010 Plan. Since 2011, awards under the 2010 Plan to non-employee directors have been in the form of restricted stock units, which vest in equal quarterly installments over a one-year period, starting on the grant date.

 

As of September 30, 2014, 4.3 million additional common shares were available for issuance under the Company’s 2010 Plan.

 


 

All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their fair values. The total compensation cost recognized for stock-based awards was $1.9 million and $5.6 million for the three and nine months ended September 30, 2014, respectively, and $1.9 million and $5.3 million for the three and nine months ended September 30, 2013, respectively. The total income tax benefit recognized in the income statement for stock-based awards was $0.7 million and $2.4 million for the three and nine months ended September 30, 2014, respectively, and $0.6 million and $1.5 million for the three and nine months ended September 30, 2013, respectively. The compensation expense for stock-based awards includes an estimate for forfeitures and is recognized over the vesting period of the awards using the straight-line method. Cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) are classified as cash flows from financing activities. Awards of restricted shares, restricted stock units, performance-based restricted stock units and phantom stock are valued at the closing market price of the Company’s common shares on the date of grant. For performance-based restricted stock units, compensation expense is based on the probability that the performance goals will be achieved, which is monitored by management throughout the requisite service period. If it becomes probable, based on the Company’s expectation of performance during the measurement period, that more or less than the previous estimate of the awarded shares will vest, an adjustment to stock-based compensation expense is recognized as a change in accounting estimate.

 

As of September 30, 2014, the unrecognized compensation cost and remaining weighted-average amortization related to stock-based awards were as follows:

  

  

  

  

  

  

  

  

  

Performance-

  

  

  

  

  

  

  

  

  

based

  

  

  

  

  

  

  

Restricted

  

Restricted

  

  

Stock

  

Restricted

  

Stock

  

Stock

(in thousands)

  

Options

  

Shares

  

 Units 

  

Units(1)

Unrecognized compensation cost

 5,014 

  

 1,143 

  

 6,896 

  

 2,327 

Remaining weighted-average

  

  

  

  

  

  

  

  

  

  

  

  amortization period

1.9 years

  

1.1 years

  

2.7 years

  

1.9 years

  

  

  

  

  

  

  

  

  

  

  

  

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


 

The weighted-average assumptions used to value the options granted during the three and nine months ended September 30, 2014 and 2013, were as follows:

 

  

  

  

Three Months Ended

  

Nine Months Ended

  

  

  

September 30,

  

September 30,

(in thousands)

  

  

2014 

  

2013 

  

2014 

  

2013 

Options granted

  

  

 - 

  

 - 

  

378 

  

348 

Expected term of options

  

  

N/A

  

N/A

  

7.0 years

  

7.4 years

Expected volatility

  

  

N/A

  

N/A

  

39%

  

42%

Risk-free interest rate

  

  

N/A

  

N/A

  

2.081%

  

1.396%

Dividend yield

  

  

N/A

  

N/A

  

zero

  

zero

 

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

 

The weighted-average fair value per option granted during the nine months ended September 30, 2014 was $9.91. The total cash received as a result of stock option exercises for the nine months ended September 30, 2014 and 2013 was approximately $11.7 million and $10.4 million, respectively. The 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, 2014 and 2013 was $2.5 million and $1.8 million, respectively. For both the nine months ended September 30, 2014 and 2013, the total intrinsic value of stock options exercised was $2.9 million.

 

The Company awarded performance-based restricted stock units to employees during the nine months ended September 30, 2014 and 2013. The number of performance-based restricted stock units that will ultimately be earned will not be determined until the end of the corresponding performance periods and may vary from as low as zero to as high as three times the target number depending on the level of achievement of certain performance goals. The level of achievement of these goals is based upon the audited financial results of the Company for the last full calendar year within the performance period. The performance goals consist of certain levels of achievement using the following financial metrics: revenue growth, operating income margin expansion, and return on invested capital. If the performance goals are not met based on the Company’s financial results, the applicable performance-based restricted stock units will not vest and will be forfeited. Shares subject to forfeited performance-based restricted stock units will be available for issuance under the 2010 Plan.

 


 

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

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Weighted-

  

  

  

  

  

  

  

Weighted-

  

Average

  

  

  

  

  

  

  

Average

  

Remaining

  

Aggregate

  

  

Number of

  

  

Exercise

  

Contractual

  

Intrinsic

(in thousands, except per share data)

  

Options

  

  

Price

  

Term (Years)

  

Value

Outstanding as of December 31, 2013

  

 3,084 

  

$

 19.79 

  

  

  

  

Granted

  

 378 

  

$

 22.94 

  

  

  

  

Exercised

  

 (612) 

  

$

 19.20 

  

  

  

  

Forfeited or expired

  

 (63) 

  

$

 22.59 

  

  

  

  

Outstanding as of September 30, 2014

  

 2,787 

  

$

 20.28 

  

 4.82 

$

 8,008 

Exercisable as of September 30, 2014

  

 1,958 

  

$

 20.56 

  

 3.02 

$

 5,584 

 

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, 2014 for options that had exercise prices that were below the closing price.

 

The following table summarizes the activities related to the Company’s restricted shares:

  

  

  

  

  

  

  

  

  

  

  

Weighted-

  

  

  

  

  

Average

  

  

Number of

  

  

Grant Date

(in thousands, except per share data)

  

Shares

  

  

Fair Value

Non-vested shares outstanding as of December 31, 2013

  

 194 

  

$

 16.56 

Vested

  

 (76) 

  

$

 16.87 

Forfeited

  

 (8) 

  

$

 16.91 

Non-vested shares outstanding as of September 30, 2014

  

 110 

  

$

 16.33 

 

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

 

  

  

  

  

  

Weighted-

  

  

  

  

  

Average

  

  

Number of

  

  

Grant Date

(in thousands, except per share data)

  

Units

  

  

Fair Value

Non-vested units outstanding as of December 31, 2013

  

 303 

  

$

 17.48 

Granted

  

 246 

  

$

 22.92 

Vested

  

 (103) 

  

$

 17.96 

Forfeited

  

 (17) 

  

$

 19.61 

Non-vested units outstanding as of September 30, 2014

  

 429 

  

$

 20.39 

 

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, 2013

  

 215 

  

$

 16.78 

  Granted(1)

  

 88 

  

$

 22.92 

  Forfeited

  

 (29) 

  

$

 18.52 

  Non-vested units outstanding as of September 30, 2014

  

 274 

  

$

 18.56 

   

  

  

  

  

  

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

 


 

Note 3 – 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 during the three and nine months ended September 30, 2014 and 2013. Stock equivalents include common shares issuable upon the exercise of stock options and other equity instruments, and are computed using the treasury stock method. Under the treasury stock method, the exercise price of a share, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated tax benefits that would be recorded in paid-in-capital, if any, when the share is exercised are assumed to be used to repurchase shares in the current period.

 

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

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended

  

Nine Months Ended

  

  

  

September 30,

  

September 30,

(in thousands, except per share data)

  

  

2014 

  

  

2013 

  

  

2014 

  

  

2013 

Net income

  

$

17,156 

  

$

23,726 

  

$

58,431 

  

$

43,670 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Denominator for basic earnings per share -

  

  

  

  

  

  

  

  

  

  

  

  

  

weighted-average number of common

  

  

  

  

  

  

  

  

  

  

  

  

  

shares outstanding during the period

  

  

53,660 

  

  

54,087 

  

  

53,712 

  

  

54,361 

Incremental common shares attributable to

  

  

  

  

  

  

  

  

  

  

  

  

  

exercise of outstanding dilutive options

  

  

445 

  

  

360 

  

  

460 

  

  

284 

Incremental common shares attributable

  

  

  

  

  

  

  

  

  

  

  

  

  

to outstanding restricted shares and

  

  

  

  

  

  

  

  

  

  

  

  

  

restricted stock units

  

  

160 

  

  

164 

  

  

215 

  

  

223 

Denominator for diluted earnings per share

  

  

54,265 

  

  

54,611 

  

  

54,387 

  

  

54,868 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Basic earnings per share

  

$

0.32 

  

$

0.44 

  

$

1.09 

  

$

0.80 

Diluted earnings per share

  

$

0.32 

  

$

0.43 

  

$

1.07 

  

$

0.80 

 

Options to purchase 0.8 million and 0.7 million common shares for the three and nine months ended September 30, 2014, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. Options to purchase 2.0 million and 2.3 million common shares for the three and nine month periods September 30, 2013, respectively, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.


 

Note 4 – Goodwill and Other Intangible Assets

The changes in goodwill allocated to the Company’s reportable segments were as follows for the nine months ended September 30, 2014:

 

(in thousands)

  

Americas

  

Asia

  

Total

Goodwill at December 31, 2013

$

 6,641 

$

 38,050 

$

 44,691 

Purchase accounting adjustments

  

 1,227 

  

 52 

  

 1,279 

Goodwill at September 30, 2014

$

 7,868 

$

 38,102 

$

 45,970 

 

The purchase accounting adjustments are based on management’s estimates resulting from review of information obtained after the acquisition date that relates to facts and circumstances that existed at the acquisition date. See note 16 to the condensed consolidated financial statements for additional information.

 

Other assets consist primarily of acquired identifiable intangible assets, capitalized purchased software costs and assets held for sale. Other intangible assets as of September 30, 2014 and December 31, 2013 were as follows:

  

  

Gross

  

  

  

  

  

Net

  

  

Carrying

  

  

Accumulated

  

  

Carrying

(in thousands)

  

Amount

  

  

Amortization

  

  

Amount

Customer relationships

$

 33,241 

  

$

 (15,313) 

  

$

 17,928 

Technology licenses

  

 11,300 

  

  

 (9,023) 

  

  

 2,277 

Other

  

 868 

  

  

 (184) 

  

  

 684 

Other intangible assets, September 30, 2014

$

 45,409 

  

$

 (24,520) 

  

$

 20,889 

  

  

  

  

  

  

  

  

  

  

  

Gross

  

  

  

  

  

Net

  

  

Carrying

  

  

Accumulated

  

  

Carrying

(in thousands)

  

Amount

  

  

Amortization

  

  

Amount

Customer relationships

$

 33,348 

  

$

 (12,900) 

  

$

 20,448 

Technology licenses

  

 11,300 

  

  

 (8,999) 

  

  

 2,301 

Other

  

 868 

  

  

 (166) 

  

  

 702 

Other intangible assets, December 31, 2013

$

 45,516 

  

$

 (22,065) 

  

$

 23,451 

 

Customer relationships are amortized on a straight-line basis over a period of ten years. Technology licenses are amortized over their estimated useful lives in proportion to the economic benefits consumed. Amortization of other intangible assets for the nine months ended September 30, 2014 and 2013 was $2.5 million and $2.2 million, respectively.

 

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

 

Year ending December 31,

  

Amount

2014 (remaining three months)

$

1,175 

2015 

  

4,123 

2016 

  

4,077 

2017 

  

1,994 

2018 

  

1,574 


 

Note 5 – Borrowing Facilities

Under the terms of a credit agreement (the Credit Agreement), the Company has a $200 million five-year revolving credit facility for general corporate purposes with a maturity date of July 30, 2017. The Credit Agreement includes an accordion feature pursuant to which total commitments under the facility may be increased by an additional $100 million, subject to satisfaction of certain conditions and lender approval.

 

Interest on outstanding borrowings under the Credit Agreement is payable quarterly, at the Company’s option, at either LIBOR plus 1.75% to 2.75% or a prime rate plus 0.75% to 1.75%, based upon the Company’s leverage ratio as specified in the Credit Agreement. A commitment fee of 0.30% to 0.40% per annum (based upon the Company’s liquidity ratio as specified in the Credit Agreement) on the unused portion of the revolving credit line is payable quarterly in arrears. As of September 30, 2014 and December 31, 2013, the Company had no borrowings outstanding under the Credit Agreement, $1.2 million and $0.8 million, respectively, in outstanding letters of credit and $198.8 million and $199.2 million, respectively, was available for future borrowings.

 

The Credit Agreement is secured by the Company’s domestic inventory and accounts receivable, 100% of the stock of the Company’s domestic subsidiaries, 65% of the voting capital stock of each direct foreign subsidiary and substantially all other tangible and intangible assets of the Company and its domestic subsidiaries. The Credit Agreement contains customary financial covenants as to debt leverage and fixed charges, and restricts the Company’s ability to incur additional debt, pay dividends, repurchase shares, sell assets and merge or consolidate with other persons. As of both September 30, 2014 and December 31, 2013, the Company was in compliance with all of these covenants and restrictions.

 

The Company’s Thailand subsidiary has a multi-purpose credit facility with Kasikornbank Public Company Limited (the Thai Credit Facility) that provides for 350 million Thai baht working capital availability. The Thai Credit Facility is secured by land and buildings in Thailand owned by the Company’s Thailand subsidiary. Availability of funds under the Thai Credit Facility is reviewed annually and is currently accessible through October 2015. As of both September 30, 2014 and December 31, 2013, there were no working capital borrowings outstanding under the facility.

 

Note 6 – Inventories

Inventory costs are summarized as follows:

  

  

September 30,

  

  

December 31,

(in thousands)

  

2014 

  

  

2013 

Raw materials

$

283,608 

  

$

245,455 

Work in process

  

95,371 

  

  

84,710 

Finished goods

  

55,187 

  

  

66,534 

  

$

434,166 

  

$

396,699 


 

Note 7 – Income Taxes

Income tax expense (benefit) consists of the following:

  

Nine Months Ended

  

September 30,

(in thousands)

  

2014 

  

  

2013 

Federal – Current

$

 617 

  

 (711) 

Foreign – Current

  

 635 

  

  

 4,292 

State – Current

  

 454 

  

  

 151 

Deferred

  

 10,649 

  

  

 9,001 

  

$

 12,355 

  

 12,733 

  

  

  

  

  

  

 

Income tax expense differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income tax primarily due to the mix of taxable income by taxing jurisdiction, the impact of tax incentives and tax holidays in foreign locations, and state income taxes (net of federal benefit).

 

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

 

The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in China, Malaysia and Thailand that will expire at various dates, unless extended or otherwise renegotiated, through 2015 in China and Malaysia and 2026 in Thailand, and are subject to certain conditions with which the Company expects to comply. The Company’s Chinese subsidiary had a tax incentive that expired at the end of 2012. During the first quarter of 2014, this tax incentive was extended until 2015 and was retroactively applied to the 2013 calendar year. The tax adjustment for the retroactive income tax incentive for 2013 totaling $1.2 million was recorded as of March 31, 2014. The net impact of all of these tax incentives was to lower income tax expense for the nine months ended September 30, 2014 and 2013 by approximately $10.0 million (approximately $0.18 per diluted share) and $4.5 million (approximately $0.08 per diluted share), respectively, as follows:

 

  

Nine Months Ended

  

September 30,

(in thousands)

  

2014 

  

  

2013 

China

$

 2,321 

  

$

 - 

Malaysia

  

 1,731 

  

  

 1,024 

Thailand

  

 5,913 

  

  

 3,476 

  

$

 9,965 

  

$

 4,500 

  

  

  

  

  

  


 

As of September 30, 2014, the total amount of the reserve for uncertain tax benefits including interest and penalties was $21.3 million. The reserve is classified as a current or long-term liability in the consolidated balance sheet based on the Company’s expectation of when the items will be settled. The amount of accrued potential interest and penalties, respectively, on unrecognized tax benefits included in the reserve as of September 30, 2014, was $1.6 million and $1.6 million. No material changes affected the reserve during the nine months ended September 30, 2014. The Company’s Thailand subsidiary has filed for a refund of $8.0 million of previously paid income taxes applicable to the years 2004 and 2005, which is included in other assets. The Thai tax authorities conducted an initial examination of the applicable refund filings, and in 2011, the Company recorded a reserve for uncertain benefits of $7.1 million against this refund claim. In 2012, the Company received official notification that the tax authorities had rejected its refund claim. The Company has appealed the rejected claim and is awaiting the tax authorities’ decision.

 

The Company and its subsidiaries in Brazil, China, Ireland, Luxembourg, Malaysia, Mexico, the Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 2004 to 2013.

 

The Company is subject to examination by tax authorities for varying periods in various U.S. and foreign tax jurisdictions. In the second quarter of 2014, the Internal Revenue Service (IRS) initiated a federal income tax audit of the calendar year 2011 for the Company and its U.S. subsidiaries. During the course of such 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 8 – Segment and Geographic Information

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

 

  

  

Three Months Ended

Nine Months Ended

  

  

September 30,

September 30,

(in thousands)

  

2014 

  

2013 

  

2014 

  

2013 

Net sales:

  

  

  

  

  

  

  

  

  

Americas

$

 426,060 

$

 358,199 

$

 1,278,430 

$

 1,017,025 

  

Asia

  

 288,962 

  

 223,463 

  

 796,356 

  

 685,139 

  

Europe

  

 39,613 

  

 31,360 

  

 110,296 

  

 106,120 

  

Elimination of intersegment sales

  

 (23,333) 

  

 (13,364) 

  

 (97,568) 

  

 (58,660) 

  

  

$

 731,302 

$

 599,658 

$

 2,087,514 

$

 1,749,624 

  

  

  

  

  

  

  

  

  

  

Depreciation and amortization:

  

  

  

  

  

  

  

  

  

Americas

$

 5,593 

$

 4,281 

$

 15,542 

$

 12,260 

  

Asia

  

 4,385 

  

 4,193 

  

 12,796 

  

 12,772 

  

Europe

  

 738 

  

 690 

  

 2,216 

  

 2,011 

  

Corporate

  

 1,070 

  

 896 

  

 3,431 

  

 2,592 

  

  

$

 11,786 

$

 10,060 

$

 33,985 

$

 29,635 

  

  

  

  

  

  

  

  

  

  

Income from operations:

  

  

  

  

  

  

  

  

  

Americas

$

 9,186 

$

 15,104 

$

 44,272 

$

 34,411 

  

Asia

  

 21,449 

  

 23,305 

  

 57,771 

  

 43,421 

  

Europe

  

 2,739 

  

 1,266 

  

 4,985 

  

 6,897 

  

Corporate and intersegment eliminations

  

 (11,459) 

  

 (10,202) 

  

 (35,537) 

  

 (28,480) 

  

  

$

 21,915 

$

 29,473 

$

 71,491 

$

 56,249 

  

  

  

  

  

  

  

  

  

  

Capital expenditures:

  

  

  

  

  

  

  

  

  

Americas

$

 4,771 

$

 5,404 

$

 28,139 

$

 12,500 

  

Asia

  

 607 

  

 1,003 

  

 4,313 

  

 4,085 

  

Europe

  

 807 

  

 122 

  

 3,375 

  

 1,622 

  

Corporate

  

 132 

  

 307 

  

 787 

  

 1,940 

  

  

$

 6,317 

$

 6,836 

$

 36,614 

$

 20,147 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

September 30,

December 31,

  

  

  

  

  

  

  

2014 

  

2013 

Total assets:

  

  

  

  

  

  

  

  

  

Americas

  

  

  

  

$

722,747 

$

702,378 

  

Asia

  

  

  

  

  

752,896 

  

658,668 

  

Europe

  

  

  

  

  

219,287 

  

255,644 

  

Corporate and other

  

  

  

  

  

33,061 

  

40,681 

  

  

  

  

  

  

$

1,727,991 

$

1,657,371 


 

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

 

  

  

Three Months Ended

Nine Months Ended

  

  

September 30,

September 30,

(in thousands)

  

2014 

  

2013 

  

2014 

  

2013 

Geographic net sales:

  

  

  

  

  

  

  

  

  

United States

$

 535,786 

$

 367,052 

$

 1,520,192 

$

 1,171,848 

  

Asia

  

 98,432 

  

 167,454 

  

 282,873 

  

 373,426 

  

Europe

  

 64,493 

  

 46,516 

  

 201,344 

  

 156,697 

  

Other Foreign

  

 32,591 

  

 18,636 

  

 83,105 

  

 47,653 

  

  

$

 731,302 

$

 599,658 

$

 2,087,514 

$

 1,749,624 

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

September 30,

December 31,

  

  

  

  

  

  

  

2014 

  

2013 

Long-lived assets:

  

  

  

  

  

  

  

  

  

United States

  

  

  

  

$

 95,019 

$

 96,287 

  

Asia

  

  

  

  

  

 92,591 

  

 98,816 

  

Europe

  

  

  

  

  

 9,412 

  

 10,333 

  

Other

  

  

  

  

  

 29,383 

  

 20,634 

  

  

  

  

  

  

$

 226,405 

$

 226,070 

  

  

  

  

  

  

  

  

  

  

 

Note 9 – Supplemental Cash Flow and Non-Cash Information

The following information concerns supplemental disclosures of cash payments.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Three Months Ended

  

Nine Months Ended

  

  

September 30,

  

September 30,

(in thousands)

  

2014 

  

  

2013 

  

  

2014 

  

  

2013 

Income taxes paid (refunded), net

$

 (751) 

  

$

 34 

  

$

 4,342 

  

$

 5,686 

Interest paid

  

 447 

  

  

 432 

  

  

 1,313 

  

  

 1,270 

 

During the nine months ended September 30, 2013, the Company recognized a non-cash asset impairment charge of $3.8 million related to its facility in Tianjin, China that is being held for sale based on market activity. Also during the nine months ended September 30, 2013, the Company disposed of a non-manufacturing facility in Thailand for $1.6 million resulting in a gain of $1.2 million.

 

Note 10 – 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.

 

For the three months ended September 30, 2014, the Company incurred a $5.0 million charge ($0.09 per share) for the write-down of inventory ($2.3 million) and provisions to accounts receivable ($2.7 million) associated with the October 6, 2014 bankruptcy filing of GT Advanced Technologies. The Company’s actual loss may differ from these amounts and management continues to monitor this situation closely.

 

Note 11 – Impact of Recently Enacted Accounting Standards

In May 2014, the Financial Accounting Standards Board issued a new standard that will supersede most of the existing revenue recognition requirements in current U.S. GAAP. The new standard will require companies to recognize revenue in an amount reflecting the consideration to which they expect to be entitled in exchange for transferring goods or services to a customer. The new standard will also require significantly expanded disclosures regarding the qualitative and quantitative information of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new


 

standard will be effective for reporting periods beginning after December 15, 2016, and will permit the use of either the retrospective or cumulative effect transition method, with early application not permitted. The Company will adopt the new standard effective January 1, 2017, and is currently evaluating the impact the pronouncement will have on its consolidated financial statements and related disclosures and has not yet selected a transition method. As the new standard will supersede all existing revenue guidance affecting the Company under U.S. GAAP, it could impact revenue and cost recognition on contracts across all its business segments, in addition to its business processes and information technology systems. As a result, the Company’s evaluation of the effect of the new standard will likely extend over several future periods.

 

The Company has determined that no other recently issued accounting standards will have a material impact on its consolidated financial position, results of operations or cash flows, or apply to its 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, among other activities, moving production between facilities, reducing staff levels, realigning our business processes and reorganizing our management.

 

The Company recognized restructuring charges during 2014, 2013  and 2012  primarily related to the closure of facilities, capacity reduction and reductions in workforce in certain facilities across various regions.

 

The following table summarizes the 2014  activity in the accrued restructuring balances related to the various restructuring activities initiated prior to September 30, 2014:

 

  

  

  

Balance as of

  

  

  

  

  

  

  

Foreign

  

Balance as of

  

  

  

December 31,

  

Restructuring

  

Cash

  

Non-Cash

  

Exchange

  

September 30,

(in thousands)

  

2013 

  

Charges

  

Payment

  

Activity

  

Adjustments

  

2014 

2014 Restructuring:

  

  

  

  

  

  

  

  

  

  

  

  

  

Severance

$

 - 

$

 614 

$

 (614) 

$

 - 

$

 - 

$

 - 

  

Other exit costs

  

 - 

  

 3 

  

 (3) 

  

 - 

  

 - 

  

 - 

  

  

  

 - 

  

 617 

  

 (617) 

  

 -