UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
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(Exact name of registrant as specified in its charter)
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(I.R.S. Employer |
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(Address, including zip code, and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
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.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Act). Yes ☐ No
As of June 30, 2021, the number of outstanding common shares was 35,565,789. As of such date, the aggregate market value of the common shares held by non-affiliates, based on the closing price of the common shares on the New York Stock Exchange on such date, was approximately $
As of February 23, 2022, there were
Documents Incorporated by Reference:
Portions of the registrant's Proxy Statement for the 2022 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2021, are incorporated herein by reference (Part III, Items 10-14 of this Annual Report on Form 10-K).
TABLE OF CONTENTS
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PART I |
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Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II |
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Item 5. |
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Item 6. |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
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Item 8. |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
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Item 9B. |
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Item 9C. |
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
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PART III |
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Item 10. |
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Item 11. |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
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PART IV |
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Item 15. |
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Item 16. |
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PART I
Item 1. Business.
This Annual Report on Form 10-K (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,” “could,” “predict,” and similar expressions or the negative or other variations thereof. In particular, statements, express or implied, concerning the estimated financial impact of the COVID-19 (COVID) pandemic, the company’s anticipated plans and responses to the COVID pandemic, the company’s expectations relating to current supply chain and labor constraints, future operating results or margins, the ability to generate sales and income or cash flow, expected revenue mix, the company’s business strategy and strategic initiatives, the company’s repurchases of shares of its common stock and the company’s intentions concerning the payment of dividends, among others, are forward-looking statements. Although the company believes these statements are based on and derived from reasonable assumptions, they involve risks, uncertainties and assumptions that are beyond the company’s ability to control or predict, relating to operations, markets and the business environment generally, including those discussed under Part I, Item 1A of this Report and in any of the company’s subsequent reports filed with the Securities and Exchange Commission (SEC). In particular, these statements also depend on the duration, severity and evolution of the COVID 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 the crisis and the consequences for the global economy, the company’s business and the businesses of its suppliers and customers. Events relating to or resulting from the COVID pandemic, including the possibility of customer demand fluctuations, supply chain constraints, or the ability to utilize the company’s manufacturing facilities at sufficient levels to cover its fixed operating costs, may have resulting impacts on the company’s business, financial condition, results of operations, and the company’s ability (or inability) to execute on its plans to respond to the COVID 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. All forward-looking statements included in this document are based upon information available to the company as of the date of this document, and the company assumes no obligation to update.
Our fiscal year ends on December 31. Consequently, references to 2021 relate to the calendar year ended December 31, 2021; references to 2020 relate to the calendar year ended December 31, 2020, etc.
General
Benchmark Electronics, Inc. (Benchmark) is a Texas corporation that began operations in 1979 and is today 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:
1
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 Industry
Outsourcing engineering and manufacturing services enable OEMs to concentrate on their core strengths, such as research and development, branding, and marketing and sales. In an outsourcing model, OEMs also benefit from improved efficiencies and reduced production costs, volume purchasing leverage, reduced fixed capital investments, improved inventory management, and access to global engineering and manufacturing resources. OEMs continue to turn to outsourcing partners to reduce time-to-market and time-to-volume production through utilization of their service providers’ product design and engineering services, technology solutions and manufacturing services.
Outsourcing rates fluctuate periodically, and not all industries we serve are outsourcing at the same growth rates. The traditional markets of computing and telecommunications have used the outsourcing model for a number of years and have a lower outsourcing growth potential than the less-outsourced medical, complex industrials, A&D, and semi-cap markets, which we identify as our higher-value markets. The higher-value markets typically provide the opportunity for increased value-add which leads to higher profitability than the traditional markets and in some cases provide the potential for stable growth. The higher-value markets also align well with our expertise in more complex and highly regulated products, and we believe we are well-positioned to capitalize on increased outsourcing in these markets.
Our Strategy
Our goal is to be the solutions provider of choice to leading OEMs that we believe offer the greatest potential for profitable growth. To meet this goal, we have implemented the following strategies:
2
3
Services We Provide
Through the Benchmark network, we offer a wide range of design, engineering, automation, test, manufacturing and fulfillment solutions that support our customers’ products from initial concept and design through prototyping, design validation, testing, ramp-to-volume production, worldwide distribution and aftermarket support. With our balanced footprint, we have the ability to serve global and regional customers. We support all of our service offerings with supply chain management systems, superior quality program management and integrated information technology systems. Our comprehensive service offerings enable us to provide a complete solution for our customers’ outsourcing requirements. All of our services are supported through a strong quality management system designed to globally provide the process discipline to reliably deliver high quality services, solutions and products to our customers.
Design & Engineering Services and Technology Solutions:
Our approach is to coordinate and integrate our concept, design, prototype and other engineering capabilities in support of our customers’ go-to-market and product life cycle requirements. These services strengthen our relationships with our manufacturing customers and help attract new customers that require specialized design and engineering services. Early engagement with engineering-led solutions is key to our strategy of focusing on products with greater complexity in our targeted verticals.
Manufacturing Services (Electronics Manufacturing and Testing Services):
As OEMs seek to provide greater functionality in smaller products, they increasingly require sophisticated manufacturing technologies and processes. Our investment in advanced manufacturing equipment and process development, as well as our experience in innovative packaging and interconnect technologies, enable us to offer a variety of advanced manufacturing solutions. These packaging and interconnect technologies include but are not limited to:
4
We provide our customers with a comprehensive set of PCBA manufacturing technologies and solutions, which include:
We also provide specialized solutions in support of our customers’ components, products and systems, which include:
5
Precision Technology Services (Precision Machining and Complex Vertically Integrated Assemblies):
In addition to traditional EMS, we offer complex precision technology services including full electromechanical assembly and testing services. Benchmark Precision Technologies delivers critical tolerance to metal fabrication and assembly, building components, sub-assemblies, and full module assemblies for highly regulated industries, including semi-conductor capital equipment, aerospace & defense, medical, and complex industrials. Benchmark Precision Technologies’ capabilities go well beyond the typical machine shop in that they can design and engineer a prototype, transition it to an accelerated manufacturing protocol (AMP) center to prepare for full volume production, and then shift it to any of Benchmark’s global manufacturing facilities.
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Our global network of operations includes manufacturing facilities in eight countries, which are strategically located to support full product life cycle services for our customers. We have domestic facilities in Alabama, Arizona, California, Minnesota, New Hampshire and Texas and international facilities in China, Malaysia, Mexico, Netherlands, Romania, Singapore and Thailand. Our network also includes engineering centers that lead customer engagements and provide solutions to customers in the Americas, Asia and Europe. Additionally, we are compliant with and/or hold the following accreditations, certifications and registrations by geography:
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Europe |
Asia |
ISO 13485 – Medical |
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FDA/QSR Compliant – Medical |
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ISO 14971 – Medical Risk Management |
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MedAccred |
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AS9100 – Aerospace |
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ITAR (International Traffic and Arms) |
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Nadcap (National Aerospace & Defense Assoc. Program) |
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FAA Approved Parts Manufacturer – Aviation |
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IATF 16949 – Automotive |
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TL9000 – Telecommunications |
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ANSI ESD S20:20 |
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ISO 9001 – Quality |
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ISO 14001 – Environmental Health and Safety |
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OHSAS 18001/ISO 45001 – Occupational Health and Safety |
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Supply Chain, Order Fulfillment, and Aftermarket Support Services:
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 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.
In support of our engineering services, technology solutions and manufacturing services, we offer our customers a wide array of capabilities from early supply chain design, to order fulfillment, to aftermarket services.
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Marketing and Customers
We market our services and solutions primarily through a direct sales force organized by market sector. In addition, our engineering, operational, and executive management teams are an integral part of our sales and marketing approach. We generally enter into master supply agreements with our customers. These arrangements generally govern the conduct of our business with customers relating to, among other things, the design and manufacturing of products that in some cases were previously produced by the customer. The arrangements also generally identify the specific products to be designed and manufactured, quality and production requirements, product pricing and materials management. There can be no assurance that these arrangements will remain in effect or be renewed, but we focus intently on customer care in an effort to anticipate and meet the current and future needs of our customers.
Our key customer accounts are supported by dedicated teams directly responsible for account management. These teams coordinate activities across the Benchmark global network to effectively satisfy customer requirements and have direct access to leadership and executive management to quickly address customer concerns. Local program managers and customer account teams further support the global teams and are linked by a comprehensive communications and information management infrastructure. In addition, our executive management is heavily involved in customer relations and devotes significant attention to broadening existing and developing new customer relationships.
The following table sets forth the percentages of our sales by sector for 2021, 2020 and 2019.
Higher-Value Markets |
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2021 |
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2020 |
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2019 |
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Industrials |
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20 |
% |
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18 |
% |
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20 |
% |
A&D |
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15 |
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21 |
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19 |
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Medical |
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20 |
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24 |
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20 |
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Semi-Cap |
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26 |
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18 |
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12 |
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81 |
% |
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81 |
% |
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71 |
% |
Traditional Markets |
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2021 |
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2020 |
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2019 |
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Computing |
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9 |
% |
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8 |
% |
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16 |
% |
Telecommunications |
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10 |
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11 |
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13 |
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19 |
% |
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19 |
% |
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29 |
% |
Total |
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100 |
% |
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100 |
% |
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100 |
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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%, 41% and 38% of our sales in 2021, 2020 and 2019, respectively. Sales to Applied Materials represented 16% and 12% of our total sales in 2021 and 2020, respectively. In 2019, no single customer represented 10% or more of our total sales.
8
Seasonality
Seasonality in our business has historically been driven by customer complexity and product mix, particularly the industries that our customers serve. Although we have historically experienced higher sales during the fourth quarter, this pattern does not repeat itself every year. In addition, we typically experience our lowest sales volume in the first quarter of each year.
Suppliers
We maintain a network of suppliers of components and other materials used in our operations. We procure components when a purchase order or forecast is received from a customer and occasionally utilize components or other materials for which a supplier is the single source of supply. If any of these single-source suppliers were unable to provide these materials, a shortage of components could temporarily interrupt our operations and lower our profits until an alternate component could be identified and qualified for use. For additional information, see “Risk Factors—Shortages or price increases of components specified by our customers have delayed and are expected to continue delaying shipments and may adversely affect our profitability” in Part I, Item 1A of this Report. Although we have experienced component shortages and longer lead times for various components, particularly with regard to supply disruptions due to COVID, we continually strive to reduce the impact of component shortages by working with customers to reschedule deliveries and with suppliers to provide the needed components using just-in-time inventory programs, or by purchasing components at slightly higher prices from distributors rather than directly from manufacturers. In addition, by developing long-term relationships with suppliers, we endeavor to minimize the effects of component shortages compared to manufacturers without such relationships. The goal of these procedures is to reduce our inventory risk. However, due to the COVID 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.
Competition
The services we provide are available from many independent sources as well as from the in-house manufacturing capabilities of current and potential customers. Our competitors include Celestica Inc., Flex Ltd., Jabil Inc., Plexus Corp and Sanmina Corporation. We believe that the principal competitive factors in our targeted markets are engineering solutions capabilities, product quality, flexibility, cost and timeliness in responding to design and schedule changes, reliability in meeting product delivery schedules, pricing, technological sophistication and geographic location.
In addition, original design manufacturers (ODMs) that provide design and manufacturing services to OEMs have significantly increased their share of outsourced manufacturing services provided to OEMs in traditional markets, such as computing and telecommunication. Competition from ODMs may increase if our business in these markets grows or if ODMs expand further into or beyond these markets.
Environmental, Social & Governance (ESG) & Sustainability
Benchmark continues to evolve and improve upon its ESG strategy and is implementing and managing long-term, strategic sustainability initiatives. The Nominating, Sustainability and Governance Committee of our Board of Directors is sponsoring this effort and in 2020, Benchmark established an ESG/Sustainability Council. The ESG/Sustainability Council is currently chaired by Stephen J. Beaver, SVP, General Counsel & Chief Legal Officer, who is a member of our senior executive leadership team and provides regular updates to the Nominating, Sustainability and Governance Committee on ESG initiatives and progress. The Council also includes a cross-functional team of leaders representing operations, human resources, supply chain, regulatory compliance, finance, marketing communications, investor relations, facilities and the legal department. The team performed an assessment in 2020 of ESG topics aligned with the Sustainability Accounting Standards Board (SASB) with the goal of developing future reporting that will include other frameworks such as the Global Reporting Initiative (GRI), United Nations Sustainable Development Goals (SDG) and the Task Force on Climate-Related Financial Disclosures (TCFD). We expect to publish and release our inaugural 2021 Sustainability Report at or around the time of the filing of our proxy statement for our 2022 Annual Meeting of Shareholders. Our most current sustainability information is posted on our website at https://www.bench.com/sustainability.
Benchmark’s long-term commitment to sustainability is comprehensive, placing increased focus and emphasis on environmental consciousness, social responsibility, ethics and corporate governance, and supply chain ecosystem
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responsibility. Our goal is to do our part in contributing to a more sustainable world, while providing value to our shareholders consistent with our business objectives. Our sustainability priorities include:
Environmental Responsibility:
Care for Our People:
Ethics & Corporate Responsibility:
10
Supply Chain Responsibility:
Human Capital Management
Our employees are an indispensable contributor to our success. Only an inspired community of talented employees enable us to realize our Company Vision to “positively impact lives by solving complex challenges with our customers, creating innovative products that no one imagined were possible.”
We believe we have a responsibility to foster the best possible work environment for everyone in our organization through sound ethical and organizational governance, by promoting business ethics and integrity, and by embracing equality, diversity and inclusion throughout our organization. For additional information, see “—Environmental, Social & Governance (ESG) & Sustainability—Ethics & Corporate Responsibility,” above.
Purpose and Culture
Benchmark focuses on delivering an engaging employee experience for our team members, creating a workplace where they can build the career of their dreams. Through encouragement, our desire is to have our team members unleash their full potential to drive industry leading business results, while making a lasting difference in the lives of others. We embrace diverse viewpoints and perspectives, recognizing that greater inclusion fosters innovation and improves decision-making and financial results. In 2021, the Company published a refreshed set of values that drive our culture. These values include:
11
As mentioned above, we established an ESG/Sustainability Council in 2020 with Board oversight to drive the five tenets of our long-term ESG strategy: Environmental Responsibility, Our People, Our Community, Governance and Our COVID Response. Our commitment to ESG and these tenets is a strategic and operational imperative as we build a sustainable infrastructure across the Company. In partnership with our employees, we are committed to protecting the natural environment and our community through pollution prevention, conservation, responsible use and sustainable practices. Through our sustainability initiatives, we further engage our employees to ensure that our business practices support diversity, equity and inclusion to build an innovative workforce and to strive toward having our organization reflect the diversity of our customers and suppliers.
Our Human Capital and Compensation Committee is responsible for overseeing the Company’s human capital practices and management compensation philosophy, including the incentive compensation and equity-based plans for executives. Our Chief Human Resources Officer reports on important human capital management topics to this committee every quarter, including the Company’s all-important diversity, equity and inclusion initiatives.
Diversity, Equity and Inclusion
Benchmark’s Diversity, Equity and Inclusion (DEI) strategy is focused on creating a culture of belonging where team members can be their authentic selves and cultivate a workplace where everyone can succeed.
Our commitment to DEI starts at the top with the Company’s Board of Directors. In early 2021, the Board’s Nominating, Sustainability and Governance Committee committed to adding more diversity to our Board with the goal of adding continued female representation, as well as a racially and/or ethnically diverse member as we continue to evolve our Board structure. In June 2021, the Company welcomed Lynn Wentworth as our latest female director. In October 2021, Benchmark appointed a new independent director, Ramesh Gopalakrishnan, to fill a vacant board position. Mr. Gopalakrishnan is a native of India and brings diverse perspectives and thought leadership to the Board based on his significant global operational and strategy experience at several multinational companies. We will continue to keep diversity in mind as we refresh our Board in the future.
In January 2022, the senior executive team selected 16 Benchmark team members to serve on the Company’s inaugural Inclusion Council. The Inclusion Council, which includes our Chief Executive Officer and our Chief Human Resources Officer, meet regularly to discuss the Company’s role in DEI and provide advice to integrate, inform and shape the DEI strategy at Benchmark. Our aim is to ensure that the Company is a place where diverse thinking, experiences and ideas are encouraged, presented and celebrated in order to see the best ideas come to life. To advance these objectives, the Company increased the availability of training on topics such as anti-harassment, anti-discrimination and unconscious bias. The Company is also training our talent acquisition team and hiring managers on how to work to eliminate bias in the interview process. The Company also conducted a global engagement and inclusion survey in the fall of 2021 to elicit feedback from employees, and is developing action plans for continuous improvement in the areas of leadership, communication, culture, inclusion, growth and development. The Human Capital and Compensation Committee of our Board of Directors reviews these initiatives and results with our Chief Human Resources Officer quarterly to track progress on our DEI strategy.
Career Development
Benchmark is committed to developing a qualified and motivated workforce to power our continued innovation and growth. We provide opportunities for employees to gain the skills and knowledge they need to advance in the Company and fulfill their personal career goals.
We are on a journey to transform and modernize our talent management practices at Benchmark. In 2020, the Company began implementing a new Human Capital Management (HCM) system to establish a foundation and common database upon which the Company can centralize people-related data and standardize people management processes across the globe. The HCM system provides an operating framework to enable leaders to better hire talent and manage teams, including setting goals, performance evaluations, succession planning, and learning and
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development. The HCM system will also provide visibility for the Company to monitor employee retention rates, employee promotions and other data to help ensure that we focus on giving employees opportunities to advance within the Company. The Company also offers competency-based training on leadership and development through our online learning platform.
We offer competitive compensation and benefits packages that reflect the needs of our workforce. In the U.S., we offer medical, dental, and vision benefits, disability coverage, survivor benefits, and a wellness program. We also offer competitive retirement benefits including a 401(k) match program at 100% of eligible employee contributions up to 4%, as well as similar retirement financial tools in other countries in which we operate. In addition to base salary, Benchmark employees participate in a Quarterly Incentive Plan or Annual Incentive Plan that supports our organizational philosophy of allowing employees to share in the Company’s performance and success. These plans align employee efforts to achieve the Company’s strategic objectives through cash bonus payouts based primarily on performance results achieved against plan performance measures. Our executive compensation program is designed to attract, retain, and reward performance and align incentives with achievement of the Company’s strategic plan and both short- and long-term operating objectives. In accordance with our compensation philosophy established by the Human Capital and Compensation Committee and the Board, we believe our executive pay is well-aligned with performance, creating a positive relationship between our operational performance and shareholder returns. Benchmark utilizes equity grants as part of at-risk incentive compensation for Named Executive Officers using a combination of performance-based restricted stock units and time-based restricted stock units to align their compensation with the creation of shareholder value.
Our Chief Human Resources Officer, and other key leaders in our organization, update the Human Capital and Compensation Committee on our strategy for talent development and retention, including succession planning for key positions in the Company.
Health and Safety
The safety of our employees is also of paramount concern to us. We are committed to ensuring that proper working conditions exist for the safety of our employees, such as the implementation of 6S and visual management practices, developing, implementing and continuously improving our Occupational Health and Safety Management System, and providing appropriate education, reporting and controls. We engage our employees to participate in decision-making as part of our Occupational Health and Safety Management System to ensure that we are developing, implementing and continuously improving our health and safety ecosystem and performance to prevent injury and illness. From the onset of the COVID pandemic, we established a COVID Task Force, a cross-functional advisory team of Company leaders committed to promoting the health and safety of our employees in accordance with Centers for Disease Control and Prevention (CDC) guidelines and ensuring that our employees’ safety remains a constant focal point. The COVID Task Force has promulgated policies, procedures, protocols and guidelines relating to symptom awareness and contact tracing, remote work requirements, effective hygiene practices, travel restrictions, temperature screening, visitor protocols, social distancing, facial mask requirements, enhanced cleaning protocols and decontamination procedures.
As of December 31, 2021, we employed approximately 10,900 people, approximately 340 of whom were engaged in design and development engineering. None of our domestic employees are represented by a labor union. In certain international locations, our employees are represented by labor unions and by works councils. Some European countries also often have mandatory legal provisions regarding terms of employment, severance compensation and other conditions of employment that are more restrictive than U.S. laws. We have never experienced a strike or similar work stoppage, and we believe that our employee and labor relations are strong.
13
Segments and International Operations
We have manufacturing facilities in the Americas (United States and Mexico), Asia (China, Malaysia, Singapore and Thailand) and Europe (Netherlands and Romania) to serve our customers. Benchmark is operated and managed geographically, and management evaluates performance and allocates resources on a geographic basis. During 2021, 2020 and 2019, 55%, 52% and 47%, respectively, of our sales were from our international operations. See Note 8 and Note 13 to consolidated financial statements in Part II, Item 8 of this Report for segment and geographical information.
Governmental Regulation
Our operations, and the operations of businesses that we acquire, are subject to foreign, federal, state and local regulatory requirements relating to security clearance, trade compliance, anticorruption, environmental, waste management, and health and safety matters. We are committed to operating in compliance with all applicable requirements. Significant costs and liabilities may arise from these requirements or from new, modified or more stringent requirements, which could affect our earnings and competitive position. In addition, our past, current and future operations, and those of businesses we 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.
We periodically generate and temporarily handle limited amounts of materials that are considered hazardous waste under applicable law. We contract for the off-site disposal of these materials and have implemented a waste management program to address related regulatory issues. For additional information, see “Risk Factors—Compliance or the failure to comply with environmental regulations could cause us significant expense” in Part I, Item 1A of this Report.
Available Information
Our website may be viewed at http://www.bench.com. Reference to our website is for informational purposes only and the information contained therein is not incorporated by reference into this Report. We make available free of charge through our internet website our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at http://www.sec.gov.
Item 1A. Risk Factors.
The following risk factors should be read carefully when reviewing the Company’s business, the forward-looking statements contained in this Report, and the other statements the Company or its representatives make from time to time. Any of the following factors could materially and adversely affect the Company’s business, operating results, financial condition and the actual results of the matters addressed by the forward-looking statements.
Operational Risks
Our business, financial condition and results of operations have been and are expected to continue to be adversely affected by the COVID pandemic, the extent of which is uncertain and difficult to predict. The widespread outbreak of any other health epidemics could also adversely affect our business, financial condition and results of operations.
Any outbreaks of contagious diseases and other adverse public health developments, particularly in countries where we operate, could have a material and adverse effect on our business, financial condition and results of operations. In late 2019, there was an outbreak of a new strain of coronavirus (COVID) first identified in Wuhan, Hubei Province, China, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID a pandemic. Further, the COVID outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home,” total lock-down orders, business limitations or shutdowns and similar orders. As a result, the COVID pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and created significant volatility and disruption of financial markets.
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More recently, more contagious variants of COVID, such as the Delta and Omicron variants, have emerged and spread globally, which has caused some governments to reimplement various measures, or impose new restrictions, in an effort to lessen the spread of COVID and its variants.
Benchmark provides critical infrastructure products and essential services in each of our locations. However, as a result of the COVID pandemic, including the related responses from government authorities, the Company’s operations were impacted worldwide starting in the first quarter of 2020. For example, the Company’s facilities worldwide, to varying degrees, were affected in 2021 and 2020 by government enacted plant shut-downs, stay-at-home or shelter-in-place or similar restrictions, which resulted in reduced productivity levels throughout our facilities that negatively impacted our operations. Additionally, the Company has experienced a challenging supply chain environment and labor constraints in 2020, and 2021, which are expected to continue throughout 2022, as well as increased direct costs and under absorption of fixed costs, due to the COVID pandemic. For additional information see “—COVID Pandemic Update” in Part II, Item 7 of this Report.
Additionally, our business, financial condition and results of operations have been and may be further impacted in several ways, including, but not limited to, the following:
The spread of COVID has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, and suppliers. There is no certainty that such measures will be enough to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed.
The emergence of the significantly more contagious Delta and Omicron variants of COVID and the prevalence of breakthrough cases of infection among fully vaccinated people adds additional uncertainty and could result in further impacts to our business and operations, including those discussed above.
Any of the foregoing could adversely affect our business, financial condition and results of operations. The potential effects of COVID may also impact many of our other risk factors discussed in this Report. The exact extent of the impact of the COVID pandemic on our business, financial condition and results of operations will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted, including, but not limited to, the duration and spread of the COVID pandemic and its severity; the emergence and severity of its variants, including the Delta and Omicron variants; 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;
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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.
Shortages or price increases of components specified by our customers have delayed and are expected to continue delaying shipments and may adversely affect our profitability.
Substantially all of our sales are derived from manufacturing services in which we purchase components specified by our customers. Currently, supply shortages for components and commodity categories used in manufacturing have resulted in industry-wide shortages of electronic components and have curtailed production of assemblies, primarily as a result of the ongoing COVID pandemic, including due to related labor and supply disruptions. In some instances, such component shortages have resulted in delayed shipments. Because of the continued increase in demand for surface mount components, we anticipate component shortages and longer lead times for certain components to occur. Also, we have and may continue to bear the risk of component price increases that occur between periodic re-pricings of products during the term of a customer contract. If shortages or delays in component products persist, the price of certain components may increase further, we may be exposed to quality issues, or the components may not be available at all. Further, we may not be able to secure enough components at reasonable prices or of acceptable quality to build products or provide services in a timely manner in the quantities needed or according to customer specifications. Accordingly, our business, cash flows, results of operations and financial condition could suffer if we lose time-sensitive sales, incur additional freight costs or are unable to pass on price increases to our customers due to such component shortages or delays.
We are dependent on the success of our customers and the markets in which they operate. When our customers or the markets in which they operate experience declines or grow at a significantly slower pace than anticipated, we may be adversely affected.
We are dependent on the continued growth, viability and financial stability of our customers. Our customers are OEMs of:
These markets are subject to rapid technological change, vigorous competition, short product life cycles and consequent product obsolescence. When our customers are adversely affected by these factors, we may be similarly affected. For example, the declines in demand in the aerospace market in 2020 and 2021 had a significant impact on us for those fiscal years.
The loss of a major customer would adversely affect 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. Further, developments adverse to our major customers or their products, or the failure of a major customer to pay for components or services, could have an adverse effect on us. Sales to our ten largest customers represented 47%, 41% and 38% of our sales in 2021, 2020 and 2019, respectively.
We expect to continue to depend on sales to our largest customers, and any material delay, cancellation or reduction of orders from these customers or other significant customers would have a material adverse effect on our results of operations. In addition, we generate significant accounts receivable in connection with providing services to our customers. If one or more of our customers were to become insolvent or otherwise unable to pay for the services provided by us, our operating results and financial condition would be adversely affected.
Most of our customers do not commit to long-term production schedules, which makes it difficult for us to schedule production and achieve maximum efficiency of our manufacturing capacity.
The volume and timing of sales to our customers vary due to:
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Due in part to these factors, most of our customers do not commit to firm production schedules for more than one quarter in advance. Our inability to forecast the level of customer orders with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity. In the past, we have been required to increase staffing and other expenses in order to meet the anticipated demand of our customers. Anticipated orders from many of our customers have, in the past, failed to materialize or delivery schedules have been deferred as a result of changes in our customers’ business needs, thereby adversely affecting our results of operations. On other occasions, our customers have required rapid increases in production, which have placed an excessive burden on our resources. Such customer order fluctuations and deferrals have had a material adverse effect on us in the past, and may again in the future. A business downturn resulting from any of these external factors could have a material adverse effect on our operating income.
Winning business is subject to lengthy, competitive bid selection processes that often require us to incur significant expense, from which we may ultimately generate no revenue.
Our business is dependent on us winning competitive bid selection processes. These selection processes are typically lengthy and can require us to dedicate significant development expenditures and scarce engineering resources in pursuit of a single customer opportunity. Failure to obtain a particular design win may prevent us from obtaining design wins in subsequent generations of a particular product. This can result in lost revenue and could weaken our position in future competitive bid selection processes.
Our customers may cancel their orders, change production quantities, delay production or change their sourcing strategies.
EMS providers must provide increasingly rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers, and we continue to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities, delay production or change their sourcing strategy for a number of reasons. Cancellations, reductions, delays or changes in the sourcing strategy by a significant customer or by a group of customers could negatively impact our operating income.
In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, personnel needs, capital expenditures and other resource requirements, based on our estimate of customer requirements. The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for their products impede our ability to accurately estimate the future requirements of those customers.
The degree of success or failure of our customers’ products in the market also affects our business. On occasion, customers require rapid increases in production, which can stress our resources and reduce operating margins. In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross profits and operating results.
We may encounter significant delays or defaults in payments owed to us by customers for products we have manufactured or components that are unique to particular customers.
We structure our agreements with customers to mitigate our risks related to obsolete or unsold inventory. However, enforcement of these contracts may result in material expense and delay in payment for inventory. If any of our significant customers become unable or unwilling to purchase such inventory, our business may be materially harmed.
Our financial results depend, in part, on our ability to perform on our U.S. government contracts, which are subject to uncertain levels of funding, timing and termination.
We provide services both as a prime contractor and subcontractor for the U.S. government. Consequently, a portion of our financial results depends on our performance under these contracts. Delays, cost overruns or product failures in connection with one or more contracts, could lead to their termination and negatively impact our results of operations, financial condition or liquidity. We can give no assurance that we would be awarded new contracts to offset the revenues lost as a result of such a termination.
U.S. government programs require congressional appropriations, which are typically made for a single fiscal year even though a program may extend over several years. Programs often are only partially funded, and additional funding requires further congressional appropriations. The programs in which we participate compete with other
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programs for consideration and funding during the budget and appropriations process, which can be impacted by shifting and often competing political priorities.
Our government contracts often involve the development, application and manufacture of advanced defense and technology systems and products aimed at achieving challenging goals. New technologies used for these contracts may be untested or unproven and product requirements and specifications may be modified. Consequently, technological and other performance difficulties may cause delays, cost overruns or product failures. Moreover, there can be no assurance that the amounts we spend to develop new products or solutions to compete for a government contract will be recovered since we may not be awarded the contract.
Our international operations are subject to certain risks.
During 2021, 2020 and 2019, 55%, 52% and 47%, respectively, of our sales were from our international operations. These international operations are subject to a number of risks, including:
Changes made that impact the way we operate internally could have a negative impact on us and reduce the demand for our foreign manufacturing facilities. Moreover, any regulatory actions by other countries where we operate could also negatively impact our financial performance. In addition, changes in policies by the U.S. or other governments could negatively affect our operating results due to trade wars, changes in duties, tariffs or taxes, currency exchange rate fluctuations, or limitations on currency or fund transfers, as well as government-imposed restrictions on producing certain products in, or shipping them to, specific countries. Also, our current facilities in Mexico operate under the Mexican Maquiladora (IMMEX) program. This program provides for reduced tariffs and eased import regulations. We could be adversely affected by changes in the IMMEX program or our failure to comply with its requirements. Additionally, increasing tariffs and other trade protection measures between the U.S. and China may affect the cost of our products originating in China as well as the demand for our products manufactured in China in the event our customers reduce operations in China as a result of such tariffs or trade protection measures. These actions could also affect the cost and/or availability of components that we procure from suppliers in China.
In addition, several of the countries where we operate have emerging or developing economies, which may be subject to greater currency volatility, negative growth, high inflation, limited availability of foreign exchange and other risks. 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. These factors may harm our results of operations, and any measures that we may implement to reduce the effect of volatile currencies and other risks of our international operations may not be effective. In our experience, entry into new international markets requires considerable management time as well as start-up expenses for market development,
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hiring and establishing office facilities before any significant revenues are generated. As a result, initial operations in a new market may operate at low margins or may be unprofitable.
Certain foreign jurisdictions, as well as the U.S. government, restrict the amount of cash that can be transferred to the U.S. or impose taxes and penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed by, our operations in the United States, we may incur penalties and/or taxes to repatriate these funds.
Another significant legal risk resulting from our international operations is compliance with the U.S. Foreign Corrupt Practices Act (FCPA). In many foreign countries, particularly in those with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA, other U.S. laws and regulations, or similar laws of host countries and related anti-bribery conventions. Although we have implemented policies and procedures designed to comply with the FCPA and similar laws, there can be no assurance that all of our employees, agents, or those companies to which we outsource certain of our business operations, will not take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.
Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and such costs may not be recoverable if the new programs or transferred programs are cancelled.
Start-up costs, the management of labor and equipment resources in connection with the establishment of new programs and new customer relationships, and the need to estimate required resources in advance can adversely affect our gross margins and operating results. These factors are particularly evident in the early stages of the life cycle of new products and new programs or program transfers and in the opening of new facilities. These factors also affect our ability to efficiently use labor and equipment. We are currently managing a number of new programs. If any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short-term. We may not be able to recoup these start-up costs or replace anticipated new program revenues.
Our business may be adversely impacted by natural disasters.
Some of our facilities are located in areas that may be impacted by hurricanes, earthquakes, water shortages, tsunamis, floods, typhoons, fires, extreme weather conditions and other natural or manmade disasters. For example, our facilities in Thailand experienced extensive flooding in 2011. Our insurance coverage for natural disasters is limited and is subject to deductibles and coverage limits. This coverage may not be adequate or may not continue to be available at commercially reasonable rates and terms. See “—Operational Risks—We bear the risk of uninsured losses.”
In addition, some of our facilities possess certifications necessary to work on specialized products that our other locations lack. If work is disrupted at one of these facilities, it may be impractical, or we may be unable, to transfer such specialized work to another facility without significant costs and delays. Thus, any disruption in operations at a facility with specialized certifications could adversely affect our ability to provide products and services to our customers, and thus negatively affect our relationships and financial results.
We bear the risk of uninsured losses.
As a result of extensive 2011 flooding in Thailand, we have been unable to obtain cost-effective flood insurance to adequately cover assets at our facilities in Thailand. We continue to monitor the insurance market in Thailand; however, we have made physical alterations to help mitigate a similar natural disaster. We maintain insurance on all our properties and operations for risks and in amounts customary in the industry. While such insurance includes general liability, property & casualty, cybersecurity and directors & officers liability coverage, not all losses are insured, and we retain certain risks of loss through deductibles, limits and self-retentions. In the event we experience a significant uninsured loss, it could have a material adverse effect on our business, financial condition and results of operations.
Energy price increases may negatively impact our results of operations.
Some of the components that we use in our manufacturing activities are petroleum-based. In addition, we, along with our suppliers and customers, rely on various energy sources (including oil) in our transportation activities. While significant uncertainty exists about the future levels of energy prices, a significant increase is possible.
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Increased energy prices could cause an increase in our raw material and transportation costs. In addition, increased costs of our suppliers or customers could be passed along to us, and we may not be able to increase our product prices enough to offset them. Moreover, any increase in our product prices may reduce our future customer orders and profitability.
Introducing programs requiring implementation of new competencies, including new process technology within our mechanical operations, could affect our operations and financial results.
The introduction of programs requiring implementation of new competencies, including new process technology within our mechanical operations, presents challenges in addition to opportunities. Deployment of such programs may require us to invest significant resources and capital in facilities, equipment and/or personnel. We may not meet our customers’ expectations or otherwise execute properly or in a cost-efficient manner, which could damage our customer relationships and result in remedial costs or the loss of our invested capital and anticipated revenues and profits. In addition, there are risks of market acceptance and product performance that could result in less demand than anticipated and our having excess capacity. The failure or inability to reflect the anticipated costs, risks and rewards of such an opportunity in our customer contracts could adversely affect our profitability. If we do not meet one or more of these challenges, our operations and financial results could be adversely affected.
Customer relationships with start-up or emerging companies may present more risks than with established companies.
Customer relationships with start-up or emerging companies present special risks because these companies do not have an extensive product history. As a result, there is less demonstration of market acceptance of their products, making it harder for us to anticipate needs and requirements than with established customers. In addition, funding for such companies may be more difficult to obtain and these customer relationships may not continue or materialize to the extent we plan or previously experienced. This tightening of financing for start-up customers, together with many start-up customers’ lack of prior operations and unproven product markets increase our credit risk, especially in trade accounts receivable and inventories. Although we perform ongoing credit evaluations of our customers and adjust our allowance for doubtful accounts receivable for all customers, including start-up customers and emerging companies, based on the information available, these allowances may not be adequate. This risk may exist for any new start-up or emerging company customers in the future.
We face risks arising from the restructuring of our operations.
Over the past several years, we have undertaken initiatives to restructure our business operations with the intention of improving utilization and realizing cost savings. These initiatives have included changing the number and location of our production facilities, largely to align our capacity and infrastructure with current and anticipated customer demand. The process of restructuring entails, among other activities, moving production between facilities, transferring programs from higher cost geographies to lower cost geographies, closing facilities, reducing the level of staff, realigning our business processes and reorganizing our management.
Restructurings could adversely affect us, including a decrease in employee morale, delays encountered in finalizing the scope of, and implementing, the restructurings, failure to achieve targeted cost savings, and failure to meet operational targets and customer requirements due to the restructuring process. These risks are further complicated by our extensive international operations, which subject us to different legal and regulatory requirements that govern the extent and speed of our ability to reduce our manufacturing capacity and workforce.
Industry Risks
We operate in a highly competitive industry; if we are not able to compete effectively in the EMS industry, our business could be adversely affected.
We compete against many providers of electronics manufacturing services. Some of our competitors have substantially greater financial, manufacturing or marketing resources than we do and have more geographically diversified international operations than we do. Our competitors include Celestica Inc., Flex Ltd., Jabil Inc., Plexus Corp and Sanmina Corporation. In addition, we may in the future encounter competition from other large electronic manufacturers that are selling, or may begin to sell, electronics manufacturing services.
We also face competition from the manufacturing operations of our current and future customers, who are continually evaluating the merits of manufacturing products internally against the advantages of outsourcing to EMS
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providers. In addition, in recent years, ODMs that provide design and manufacturing services to OEMs, have significantly increased their share of outsourced manufacturing services provided to OEMs in several markets, such as notebook and desktop computers, personal computer motherboards, and consumer electronic products. Competition from ODMs may increase if our business in these markets grows or if ODMs expand further into or beyond these markets.
During periods of recession in the electronics industry, our competitive advantages in the areas of quick turnaround manufacturing and responsive customer service may be of reduced importance to electronics OEMs, who may become more price sensitive. We may also be at a competitive disadvantage with respect to price when compared to manufacturers with lower cost structures, particularly those with more offshore facilities located where labor and other costs are lower.
The availability of excess manufacturing capacity at many of our competitors creates intense pricing and competitive pressure on the EMS industry as a whole. To compete effectively, we must continue to provide technologically advanced manufacturing services, maintain strict quality standards, respond flexibly and rapidly to customers’ design and schedule changes, deliver products globally on a reliable basis at competitive prices and seek to create enhanced relationships with our customers with our advanced technology and engineering solutions. Our inability to do so could have an adverse effect on us.
We may be affected by consolidation in the electronics industry, which could create increased pricing and competitive pressures on our business.
Consolidation in the electronics industry could result in a decrease in manufacturing capacity as companies seek to close plants or take other steps to increase efficiencies and realize synergies of mergers, creating increased pricing and competitive pressures for the EMS industry as a whole and our business in particular. In addition, consolidation could also result in an increasing number of very large electronics companies offering products in multiple sectors of the electronics industry. The growth of these large companies, with significant purchasing and marketing power, could also result in increased pricing and competitive pressures for us. Accordingly, industry consolidation could harm our business. We may need to increase our efficiencies to compete and may incur additional restructuring charges.
Regulatory, Compliance and Litigation Risks
Government contracts are subject to significant regulation, including rules related to bidding, billing, kickbacks and false claims, and any non-compliance could subject us to fines and penalties or debarment.
Like all government contractors, we are subject to risks associated with this contracting. These risks include substantial civil and criminal fines and penalties if we were to fail to follow procurement integrity and bidding rules or cost accounting standards, employ improper billing practices, receive or pay kickbacks or file false claims. We have been, and expect to continue to be, subjected to audits and investigations by U.S. and foreign government agencies and authorities. The failure to comply with the terms of our government contracts could result in progress payments being withheld, our suspension or debarment from future government contracts or harm to our business reputation.
Regulatory, legislative or self-regulatory/standard developments regarding privacy and data security matters could adversely affect our ability to conduct our business.
U.S. privacy and data security laws apply to our various businesses. We also do business globally in countries that have more stringent data protection laws than those in the United States that may be inconsistent across jurisdictions and are subject to evolving and differing interpretations. Governments, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data. In Europe, the General Data Protection Regulation (GDPR) requires us to protect the privacy of certain personal data of European Union (EU) citizens. The California Consumer Privacy Act (CCPA), which went into effect January 1, 2020, has similar protections. While we have implemented processes and controls to comply with GDPR and CCPA requirements, we could incur significant fines, individual damages and reputational risks if our controls and processes are ineffective and we fail to comply.
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Unanticipated changes in our tax position, the adoption of new tax legislation or exposure to additional tax liabilities could adversely affect our financial results.
We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. Our tax position, however, is subject to review and possible challenge by taxing authorities and to possible changes in law. We cannot determine in advance the extent to which some jurisdictions may assess additional tax or interest and penalties on such additional taxes.
Several countries where we operate allow for tax holidays or provide other tax incentives to attract and retain business. We have obtained holidays or other incentives where available. Our taxes could increase if certain tax holidays or incentives were retracted, or if they were not renewed upon expiration, such as the nonrenewal of our tax holiday in Malaysia in 2021, or tax rates applicable to us in such jurisdictions were otherwise increased. In addition, further acquisitions may cause our effective tax rate to increase. Given the scope of our international operations and our international tax arrangements, changes to the manner in which U.S. based multinational companies are taxed in the U.S. could have a material impact on our financial results and competitiveness.
Based on current and future tax policy in Washington D.C., our effective tax rates and overall cash taxes may change in the future and could have an impact on our financial results.
Any litigation, even where a claim is without merit, could result in substantial costs and diversion of resources.
In the past, we have been notified of claims relating to various matters including intellectual property rights, contractual matters, labor issues or other matters arising in the ordinary course of business. In the event of any such claim, we may be required to spend a significant amount of money and resources, even where the claim is without merit. Accordingly, the resolution of such disputes, even those encountered in the ordinary course of business, could have a material adverse effect on our business, consolidated financial conditions and results of operations. See Part I, Item 3. Legal Proceedings.
Compliance or the failure to comply with environmental regulations could cause us significant expense.
We are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to environmental, waste management, and health and safety concerns, including the handling, storage, discharge and disposal of hazardous materials used in or derived from our manufacturing processes. If we or companies we acquire have failed or fail in the future to comply with such laws and regulations, then we could incur liabilities and fines and our operations could be suspended. Such laws and regulations could also restrict our ability to modify or expand our facilities, could require us to acquire costly equipment, or could impose other significant expenditures. In addition, our operations may give rise to claims of property contamination or human exposure to hazardous chemicals or conditions.
Our worldwide operations are subject to local laws and regulations. Some of our operations are subject to various environmental laws and related regulations, including: the “RoHS” (EU Directive 2011/65/EC on Restriction of certain Hazardous Substances); “WEEE” (EU Directive 2002/96/EC on Waste Electrical and Electronic Equipment); “REACH” (EC Regulation No 1907/2006 on Registration, Evaluation and Authorization of Chemicals); EU Member States’ Implementation of the foregoing; “Conflict Minerals” as defined in the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act § 1502(b), implementing legislation and rules; and the People’s Republic of China (PRC) Management Methods for the Restriction of the Use of Hazardous Substances in Electrical and Electronic Products; and other environmental laws and regulations. These laws and regulations impose administrative burdens on and restrict the sourcing and distribution of products containing certain substances, including lead, within applicable geographies and require a manufacturer or importer to recycle products containing those substances.
These directives affect the worldwide electronics and electronics components industries as a whole. If we or our customers fail to comply with such laws and regulations, we could incur liabilities and fines and our operations could be suspended.
In addition, as climate change concerns become more prevalent, the U.S. and foreign governments have sought to limit the effects of any such changes. This increasing governmental focus on climate change may result in new environmental regulations that may negatively affect us, our suppliers and our customers. This could cause us to
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incur additional direct costs or obligations in complying with any new environmental regulations and reporting requirements, as well as increased indirect costs resulting from our customers, suppliers or both incurring additional compliance costs that get passed on to us. These costs may adversely impact our operations and financial condition.
If our manufacturing processes and services do not comply with applicable regulatory requirements, or if we manufacture products containing design or manufacturing defects, demand for our services may decline and we may be subject to liability claims.
We predominantly manufacture and design products to our customers’ specifications; in some cases, our processes and facilities must comply with applicable regulatory requirements. For example, medical devices that we manufacture or design, as well as the facilities and manufacturing processes that we use to produce them, are regulated by the U.S. Food and Drug Administration or non-U.S. counterparts of this agency. Similarly, items we manufacture for customers in the A&D industries, as well as the processes we use to produce them, are regulated by the Department of Defense and the Federal Aviation Authority, which have increased their focus and penalties related to counterfeit materials. In addition, our customers’ products and the manufacturing processes or documentation that we use to produce them often are highly complex. As a result, products that we manufacture may at times contain manufacturing or design defects, and our manufacturing processes may be subject to errors or noncompliant with applicable statutory and regulatory requirements. Defects in the products we manufacture or design, whether caused by a design, manufacturing or component failure or error, or deficiencies in our manufacturing processes, may result in delayed shipments to customers or reduced or cancelled customer orders. If these defects or deficiencies are significant, our business reputation could also be damaged. The failure of our products, manufacturing processes or facilities to comply with applicable statutory and regulatory requirements could subject us to fines or penalties and, in some cases, require us to shut down or incur considerable expense to correct a product, process or facility. In addition, these defects may result in liability claims against us or expose us to liability to pay for the recall of a product. The magnitude of any such claim may increase as we expand our medical and aerospace and defense manufacturing services, as defects in medical, aerospace or defense devices or systems could seriously harm or kill users of these products and others. Even if our customers are responsible for the defects, they may not, or may not have resources to, assume responsibility for any costs or liabilities arising from these defects, which could expose us to additional liability claims.
Technology Risks
If we are unable to maintain our technological and manufacturing process expertise, our business could be adversely affected.
The market for our manufacturing and engineering services is characterized by rapidly changing technology and continuing process development. We are continually evaluating the advantages and feasibility of new manufacturing processes. We believe that our future success will depend upon our ability to develop and provide manufacturing services that meet our customers’ changing needs. This requires that we maintain technological leadership and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. Our failure to maintain our technological and manufacturing process expertise could have a material adverse effect on our business.
Our operations are subject to cyberattacks that could have a material adverse effect on our business.
We are increasingly dependent on digital technologies and services to conduct our business. We use these technologies for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Examples of these digital technologies include ERP, shop floor control, test equipment, and other similar business applications, our global infrastructure and networks as well as external systems, analytics, automation, and cloud services. Digital technologies and services are subject to the risk of cyberattacks and, given the nature of such attacks, some incidents can remain undetected for a period of time despite our efforts to detect and respond to them in a timely manner. In particular, as discussed further below, our operations have been, and may in the future be, subject to ransomware or cyber-extortion attacks, which could significantly disrupt our operations. Generally, such attacks involve restricting access to computer systems or vital data.
We routinely monitor our systems for cyber threats and have processes in place to detect and remediate vulnerabilities. Nevertheless, we have experienced cyberattacks and attempted breaches, including phishing emails and other targeted attacks. In the fourth quarter of fiscal 2019, a ransomware incident encrypted information on our systems and disrupted customer and employee access to our systems and services, which resulted in the Company incurring costs relating to this event, including to retain third party consultants and forensic experts to assist with the restoration and remediation of systems and, with the assistance of law enforcement, to investigate the attack, as well as increased expenditures for our information technology (IT) infrastructure, systems and network. This ransomware
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incident also adversely affected our operations and the Company’s fourth quarter 2019 revenue. See Note 18 to the consolidated financial statements in Part II, Item 8 of this Report for additional information.
Future cybersecurity incidents could result in the misappropriation of confidential information of the Company or that of its customers, employees, business partners or others; litigation and potential liability; enforcement actions and investigations by regulatory authorities; loss of customers and contracts; damage to the Company’s reputation and/or otherwise harm its business. We also expect to incur substantial costs in the future to satisfy customer requirements (including costs arising from the U.S. government’s Cybersecurity Maturity Model Certification (CMMC) program) and to mitigate against cybersecurity attacks as threats are expected to continue to become more persistent and sophisticated. If our systems for protecting against cybersecurity risks prove not to be sufficient, we could be adversely affected by, among other things: loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data; interruption of our business operations; and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition.
Any delay in the upgrade of our information systems could disrupt our operations and cause unanticipated increases in our costs.
We are currently upgrading our IT infrastructure and enterprise resource planning system, which we anticipate taking several years. Failure to complete the upgrade timely or at all could leave us with sites without the systems capability to flexibly support future customer requirements for manufacturing capabilities and data driven analytics, as well as result in unanticipated increases in costs.
Financial Risks
Our level of indebtedness may limit our flexibility in operating our business and reacting to changes in our business or industry, or prevent us from making payments on our debt or obtaining additional financing.
As of December 31, 2021, our total outstanding debt (excluding unamortized debt issuance costs and finance leases) was $131.3 million, all of which represented borrowings under our term loan facility (the Term Loan). Our level of indebtedness could have important consequences. For example, it could:
Any of these risks could materially impact our ability to fund our operations or limit our ability to expand our business, which could have a material adverse effect on our business, financial condition and results of operations.
We are exposed to intangible asset risk; our goodwill may become impaired.
We have recorded intangible assets, including goodwill, in connection with business acquisitions. We are required to assess goodwill and intangible assets for impairment at least on an annual basis and whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. A significant and sustained decline in our market capitalization could result in material charges in future periods that could be adverse to our operating results and financial position. As of December 31, 2021, we had $192.1 million in goodwill and $64.2 million of identifiable intangible assets. See Note 1(i) to the consolidated financial statements in Part II, Item 8 of this Report.
We may be exposed to interest rate fluctuations.
We have exposure to interest rate risk on our outstanding borrowings under our variable rate credit agreement. These borrowings’ interest rates are based on the spread, at our option, over the London interbank offered rate
24
(LIBOR), the bank’s prime rate or the federal funds rate. We are also exposed to interest rate risk on our invested cash balances.
The elimination of LIBOR could adversely affect our business, results of operations or financial condition. Borrowings under our credit facilities use LIBOR as a benchmark for establishing the applicable interest rate. The UK’s Financial Conduct Authority announced that sometime after 2021 it would no longer persuade or compel panel banks to submit the rates required to calculate LIBOR. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our variable rate indebtedness causing a negative impact on our financial position, liquidity and results of operations. Specifically, the use of an alternative reference rate could result in increased costs, including increased interest expense on our borrowings, and increased borrowing costs in the future. Management continues to evaluate the LIBOR exposure risks.
Risks Related to the Ownership of Our Common Shares
We may experience fluctuations in quarterly results.
Our quarterly results may vary significantly depending on various factors, many of which are beyond our control. These factors include:
Additionally, as is the case with many high technology companies, a significant portion of our shipments typically occur in the last few weeks of a given quarter. Accordingly, sales shifts from quarter to quarter may not be readily apparent until the end of a given quarter and may have a significant effect on projected and reported results. Further, the price of our common shares may experience volatility in response to fluctuating quarterly results.
Provisions in our governing documents and state law may make it harder for others to obtain control of the Company.
Certain provisions of our governing documents and the Texas Business Organizations Code may delay, inhibit or prevent someone from gaining control of the Company through a tender offer, business combination, proxy contest or some other method, even if shareholders might consider such a development beneficial. These provisions include:
25
General Risk Factors
We are exposed to general economic and market conditions that could have a material adverse impact on our business, operating results and financial condition.
Uncertainty over the erosion of global consumer confidence, geopolitical events, global pandemics, such as COVID, the availability and cost of credit, concerns about volatile energy costs, declining asset values, inflation, rising unemployment, and the stability and solvency of financial institutions, financial markets, businesses, and sovereign nations can slow global economic growth and result in recessionary conditions. Any of these potential negative economic conditions may reduce demand for our customers’ products and adversely affect our sales. Consequently, our past operating results, earnings and cash flows may not be indicative of our future operating results, earnings and cash flows.
In addition to our customers or potential customers reducing or delaying orders, a number of other negative effects on our business could materialize, including the insolvency of key suppliers, which could result in production delays, shorter payment terms from suppliers due to reduced availability of credit default insurance in the market, the inability of customers to obtain credit, continued supply chain constraints and the insolvency of one or more customers. Any of these effects could impact our ability to effectively manage inventory levels and collect receivables, increase our need for cash, and decrease our net revenue and profitability.
In cases where the evidence suggests a customer may not be able to satisfy its obligation to us, we establish reserves in an amount we determine appropriate for the perceived risk. There can be no assurance that our reserves will be adequate. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional receivable and inventory reserves may be required and restructuring charges may be incurred.
The acquisition, integration and operation of acquired businesses may disrupt our business and create additional expenses, and we may not achieve the anticipated benefits of the acquisitions.
Our capabilities have historically grown through acquisitions, and we may pursue additional acquisitions in the future. Our projections of results and successful integration of acquired operations into our network involve risks, including:
Our profitability will suffer if we are unable to successfully integrate an acquisition, if the acquisition does not further our business strategy as we expected or if we do not achieve sufficient revenue to offset the increased expenses associated with these acquisitions. We may overpay for, or otherwise not realize the expected return on, our investments, which could adversely affect our operating results and potentially cause impairments to assets that we record as a part of an acquisition including intangible assets and goodwill.
Our success will continue to depend to a significant extent on our key personnel.
We depend significantly on our executive officers and other key personnel. The unexpected loss of the services of any one of these executive officers or other key personnel, or the failure to attract and retain new personnel, could have an adverse effect on us.
26
Our business or stock price could be negatively affected by the actions of activist shareholders or others.
Responding to actions by activist shareholders or others can be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. Our ability to execute our strategic plan could also be impaired. In addition, a proxy contest for the election of directors would require us to incur significant fees and expenses, as well as requiring significant time and attention by management and our Board of Directors. Perceived uncertainties as to our future direction also could affect the market price and volatility of our common shares, our ability to attract and retain qualified personnel and business partners and may affect our relationships with vendors, customers or others.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our customers market numerous products throughout the world and therefore need to access manufacturing services on a global basis. To enhance our service offerings, we seek to locate our facilities either near our customers and our customers’ end markets in major centers for the electronics industry or, where appropriate, in lower cost locations.
The following chart summarizes the approximate square footage of our principal manufacturing facilities by country:
Location |
|
Sq. Ft. |
|
|
Americas |
|
|
|
|
United States: |
|
|
|
|
Alabama |
|
|
195,000 |
|
Arizona |
|
|
170,000 |
|
California |
|
|
388,000 |
|
Minnesota |
|
|
459,000 |
|
New Hampshire |
|
|
161,000 |
|
Texas |
|
|
155,000 |
|
Mexico |
|
|
492,000 |
|
Asia |
|
|
|
|
China |
|
|
326,000 |
|
Malaysia |
|
|
347,000 |
|
Thailand |
|
|
756,000 |
|
Europe |
|
|
|
|
Netherlands |
|
|
159,000 |
|
Romania |
|
|
143,000 |
|
Total |
|
|
3,751,000 |
|
Our principal manufacturing facilities consist of 1.9 million square feet in facilities that we own, with the remaining 1.9 million square feet in leased facilities whose terms expire between 2022 and 2036. We currently lease our corporate headquarters in Tempe, Arizona. This lease consists of approximately 64,000 square feet. We lease other facilities with a total of 22,000 square feet dedicated to engineering, sales and procurement services.
Item 3. Legal Proceedings.
We are involved in various legal actions arising in the ordinary course of business. Information about our legal proceedings is included in Note 16 to the consolidated financial statements in Part II, Item 8 of this Report and is incorporated by reference herein. 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 4. Mine Safety Disclosures.
Not applicable.
27
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares are listed on the New York Stock Exchange under the symbol “BHE.”
The last reported sale price of our common shares on February 23, 2022, as reported by the New York Stock Exchange, was $25.60. There were approximately 500 record holders of our common shares as of February 23, 2022. Because many of our common shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.
Dividends
We began declaring and paying quarterly dividends of $0.15 per share during the first quarter of 2018. In the first quarter of 2020, we increased the quarterly dividend from $0.15 to $0.16 per share and in the second quarter of 2021, we increased the quarterly dividend from $0.16 to $0.165 per share. During 2021, cash dividends paid totaled $23.3 million. The Board of Directors currently intends to continue paying quarterly dividends. However, the Company’s future dividend policy is subject to its compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in the our debt agreements, and other factors that the Board of Directors may deem relevant, including the impact of the COVID pandemic. Dividend payments are not mandatory or guaranteed; there can be no assurance that we will continue to pay a dividend in the future.
Issuer Purchases of Equity Securities
The following table provides information about the Company’s repurchase of its equity securities that are registered pursuant to Section 12 of the Exchange Act during the quarter ending December 31, 2021.
|
|
|
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|
|
|
|
|
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|||
|
|
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|
|
|
|
|
|
|
|
(d) |
|||
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|||
|
|
|
|
|
|
|
|
|
|
|
Number (or |
|||
|
|
|
|
|
|
|
|
(c) |
|
|
Approximate |
|||
|
|
|
|
|
|
|
|
Total Number of |
|
|
Dollar Value) |
|||
|
|
|
|
|
|
|
|
Shares (or Units) |
|
|
of Shares (or |
|||
|
|
(a) |
|
|
|
|
|
Purchased as |
|
|
Units) that |
|||
|
|
Total Number |
|
|
(b) |
|
|
Part of |
|
|
May Yet Be |
|||
|
|
Shares (or |
|
|
Average Price |
|
|
Announced |
|
|
Under the |
|||
|
|
Units) |
|
|
Paid per Share |
|
|
Plans or |
|
|
Plans or |
|||
Period |
|
Purchased |
|
|
(or Unit) |
|
|
Programs |
|
|
Programs(1) |
|||
October 1 to 31, 2021 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$164.0 million |
November 1 to 30, 2021 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$164.0 million |
December 1 to 31, 2021 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$164.0 million |
Total |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
(1)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 as of December 31, 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.
During 2021, the Company repurchased a total of 1.4 million common shares for an aggregate of $40.2 million at an average price of $29.11 per share. Since 2017, the Company has repurchased a total of 16.3 million common shares for an aggregate of $428.5 million at an average price of $26.35 per share.
28
Performance Graph
The following graph compares the cumulative total shareholder return on our common shares for the five‑year period commencing December 31, 2016 and ending December 31, 2021, with the cumulative total return of the Standard & Poor’s 500 Stock Index (which does not include Benchmark), and the Peer Group Index, which is composed of Celestica Inc., Flex Ltd., Jabil Inc., Plexus Corp and Sanmina Corporation. The graph assumes that $100 was invested on December 31, 2016 in our common shares and in each of the two indices, and that dividends, if any, were reinvested.
|
|
|
Dec-16 |
|
|
Dec-17 |
|
|
Dec-18 |
|
|
Dec-19 |
|
|
Dec-20 |
|
|
Dec-21 |
|
||||||
Benchmark Electronics, Inc. |
|
$ |
100.00 |
|
|
$ |
95.40 |
|
|
$ |
69.00 |
|
|
$ |
112.70 |
|
|
$ |
88.60 |
|
|
$ |
88.90 |
|
Peer Group |
|
$ |
100.00 |
|
|
$ |
112.60 |
|
|
$ |
71.60 |
|
|
$ |
111.80 |
|
|
$ |
128.90 |
|
|
$ |
165.40 |
|
S&P 500 |
|
$ |
100.00 |
|
|
$ |
119.40 |
|
|
$ |
111.00 |
|
|
$ |
144.30 |
|
|
$ |
167.80 |
|
|
$ |
212.90 |
|
Item 6. [Reserved]
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated financial statements and Notes thereto in Part II, Item 8 of this Report. You should also bear in mind the Risk Factors set forth in Part I, Item 1A, any of which could materially and adversely affect the Company’s business, operating results, financial condition and the actual results of the matters addressed by the forward-looking statements contained in the following discussion.
For further discussion and analysis regarding our financial condition and results of operations for the year ended December 31, 2020 as compared to the year ended December 31, 2019, refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 1, 2021.
COVID Pandemic Update
In late 2019, there was an outbreak of a new strain of coronavirus (COVID) first identified in Wuhan, Hubei Province, China, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID a pandemic. Further, the COVID outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID, 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 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 continue to take proactive action to adopt social distancing policies at our locations globally, including working from home for certain employees, limiting the number of employees attending meetings, reducing the number of people in our locations at any one time, and significantly limiting employee travel. More recently, more contagious variants of COVID (the Delta and Omicron variants) have emerged and spread globally, which has caused some governments to reimplement various measures, or impose new restrictions, in an effort to lessen the spread of COVID and its variants. It is unclear at this point the full impact the Delta and Omicron variants will have on the global economy and on our Company.
As a result of the COVID pandemic, our revenue during 2020 and 2021 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 pandemic negatively impacted our 2020 and 2021 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 pandemic continues to affect the Company’s operations into 2022. 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 "2021 Overview" below and "Risk Factors-Shortages or price increases of components specified by our customers have delayed and are expected to continue delaying shipments and may 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 pandemic. The CARES Act among other things, permits net operating loss 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, 2021 and 2020. 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 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. During December 2021, the Company paid approximately 50% of the social security taxes previously deferred. 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 December 31, 2021, and the deferral of the employer portion of social security taxes is not available for 2021. We have not received the retention credits from
30
the Internal Revenue Service that we applied for during second quarter of 2020. The Internal Revenue Service has had some delays in processing the filings for the tax refunds.
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 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 pandemic and its severity; the emergence and severity of its variants, including the Delta and Omicron variants; 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 this Report for additional risks we face due to the COVID pandemic.
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. However, fourth quarter 2019 operations were adversely affected by the inefficiencies caused by taking the network offline for a period of time. As a result, the Company’s fourth quarter 2019 revenue was also adversely affected as the Company was unable to fulfill a portion of customer demand during the quarter.
In 2019, ransomware incident related costs incurred totaled $7.7 million, net of estimated insurance recoveries of $5.0 million. These costs were primarily comprised of the 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 include the $5.0 million of estimated insurance recoveries recorded in 2019 and an additional $1.6 million recorded in 2020. During the year ended December 31, 2021, the Company collected an additional $3.9 million of insurance recoveries. As of December 31, 2021, the Company has collected insurance recoveries totaling $10.5 million. No further insurance recoveries are expected.
2021 OVERVIEW
Sales for 2021 were $2.3 billion, a 10% increase from sales of $2.1 billion in 2020. During 2021, sales to customers in our various industry sectors fluctuated from 2020 as follows:
The overall revenue increase was due primarily to higher overall demand from both our Higher-value and Traditional markets (as discussed below). Higher-value market revenues were up 10% year-over-year from strength in the Semi-Cap and Industrials sectors. Traditional market revenues were up 12% year-over-year from strength in both Computing and Telecommunications sectors.
31
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 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 41% of our total sales in 2021 and 2020, respectively. Sales to Applied Materials represented 16% and 12% of our total sales in 2021 and 2020, respectively. Due to the COVID 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. Lead times continue to extend, and more components are being placed on allocation by suppliers. Additionally, there continues to be 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.
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 unabsorbed manufacturing overhead costs and reduced gross profit. Gross profit can also be impacted by other situations, such as COVID and supply chain constraints.
We have undertaken initiatives to restructure our business operations with the intention of improving utilization and reducing costs. During 2021, we recognized $9.3 million of restructuring and other costs due in part to expenses associated with various site closures and restructuring activities. In addition, we incurred $4.4 million in costs related to asset impairments in the Americas.
RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain items in our consolidated statements of income bear to sales for the periods indicated. The financial information and the discussion below should be read in conjunction with the consolidated financial statements and Notes thereto in Part II, Item 8 of this Report.
|
|
Year Ended |
|
||||||||
|
|
2021 |
|
|
2020 |
|
2019 |
|
|||
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
100.0 |
% |
Cost of sales |
|
|
90.9 |
|
|
|
91.5 |
|
|
91.8 |
|
Gross profit |
|
|
9.1 |
|
|
|
8.5 |
|
|
8.2 |
|
Selling, general and administrative expenses |
|
|
6.1 |
|
|
|
6.0 |
|
|
5.6 |
|
Amortization of intangible assets |
|
|
0.3 |
|
|
|
0.4 |
|
|
0.4 |
|
Restructuring charges and other costs |
|
|
0.6 |
|
|
|
1.0 |
|
|
0.6 |
|
Ransomware related incident costs (recovery), net |
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
0.3 |
|
Income from operations |
|
|
2.4 |
|
|
|
1.2 |
|
|
1.3 |
|
Other expense, net |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
|
(0.1 |
) |
Income before income taxes |
|
|
2.0 |
|
|
|
0.8 |
|
|
1.2 |
|
Income tax expense |
|
|
0.4 |
|
|
|
0.2 |
|
|
0.2 |
|
Net income |
|
|
1.6 |
% |
|
|
0.7 |
% |
|
1.0 |
% |
32
2021 Compared With 2020
Sales
As noted above, sales increased 10% in 2021. The percentages of our sales by sector were as follows:
|
|
2021 |
|
|
2020 |
|
||
Higher-Value Markets |
|
|
|
|
|
|
||
Industrials |
|
|
20 |
% |
|
|
18 |
% |
A&D |
|
|
15 |
|
|
|
21 |
|
Medical |
|
|
20 |
|
|
|
24 |
|
Semi-Cap |
|
|
26 |
|
|
|
18 |
|
|
|
|
81 |
|
|
|
81 |
|
Traditional Markets |
|
|
|
|
|
|
||
Computing |
|
|
9 |
|
|
|
8 |
|
Telecommunications |
|
|
10 |
|
|
|
11 |
|
|
|
|
19 |
|
|
|
19 |
|
Total |
|
|
100 |
% |
|
|
100 |
% |
Industrials. 2021 sales increased 15% to $428.4 million from $373.1 million in 2020. The increase was primarily due to continued demand improvements from oil & gas, building infrastructure, and commercial transportation programs.
Aerospace and Defense. 2021 sales decreased 10% to $381.7 million from $423.6 million in 2020 primarily due to program transitions and lower demand in our commercial aerospace programs which have yet to recover to pre-pandemic levels.
Medical. 2021 sales decreased 7% to $461.8 million from $498.5 million in 2020 primarily due to the slower ramp in new medical programs, the impact of supply chain constraints which limited revenue growth and lower demand for elective surgery products in the first half of 2021. While demand improved in the second half, component availability continued to limit our ability to fulfill all demand from our medical customers.
Semiconductor Capital Equipment. 2021 sales increased 49% to $549.3 million from $369.0 million in 2020. The increase was primarily due to higher demand across our customer base in the front-end semiconductor capital equipment space where we provide differentiated engineering design, precision machining services, and complex system assembly.
Computing. 2021 sales increased 16% to $199.4 million from $171.3. million in 2020. The increase was primarily due to the planned ramp of high-performance computing programs.
Telecommunications. 2021 sales increased 8% to $234.6 million from $217.7 million in 2020. The increase was primarily due to demand improvement for satellite programs and new broadband ramps.
Our international operations are subject to the risks of doing business abroad. See Item 1A for factors pertaining to 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 2021 and 2020, 55% and 52%, respectively, of our sales were from international operations.
Gross Profit
Gross profit increased 17.7% to $205.9 million in 2021 from $175.0 million in 2020. Similarly, gross profit margin increased to 9.1% in 2021 from 8.5% in 2020. Both due primarily to higher revenues, mix of revenues and improved utilization.
Selling, General and Administrative (SG&A) Expenses
SG&A increased to $136.7 million in 2021 from $122.2 million in 2020. The increase was primarily due to the increase in variable compensation, medical expenses, and continued IT infrastructure investments along with reinstatement of some benefits in 2021 such as the 401(k) match that was temporarily suspended as a cost saving
33
measure in 2020 due to COVID. During 2021 and 2020, the provisions to accounts receivable for doubtful accounts (net of recoveries) were $0.0 million and $2.2 million, respectively.
Amortization of Intangible Assets
Amortization of intangible assets was $6.4 million in 2021 and $9.1 million in 2020. The decrease was primarily due to an intangible asset becoming fully amortized in 2020.
Restructuring Charges and Other Costs
During 2021, we recognized $9.3 million of restructuring and other costs due primarily to expenses associated with announced site closures, reduction in force and other restructuring activities. In addition, we incurred $4.4 million in costs related to asset impairments in the Americas that were the result of restructuring activities. During 2020, we recognized $13.2 million of restructuring and other costs due primarily to expenses associated with announced site closures, reduction in force and other restructuring activities. In addition, we incurred $5.7 million in charges and $1.0 million in costs related to asset impairments in the Americas and Asia, respectively. See Note 17 to the consolidated financial statements in Part II, Item 8 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 year ended December 31, 2021, we collected an additional $3.9 million of insurance recoveries. As of December 31, 2021, the Company has collected insurance recoveries totaling $10.5 million. No further insurance recoveries are expected.
Interest Expense
Interest expense remained essentially flat at $8.5 million in 2021 from $8.4 million in 2020.
Interest Income
Interest income decreased to $0.5 million in 2021 from $1.2 million in 2020 due to lower invested cash equivalents and lower interest rates.
Income Tax Expense
Income tax expense of $9.6 million in 2021 represented an 21.2% effective tax rate for 2021, compared with $3.2 million for 2020 representing an effective tax rate of 18.3%. The higher effective tax rate in 2021 is the result of the mix of profits in our foreign and U.S. jurisdictions with a higher amount of foreign earnings being taxed in the U.S. from the global intangible low-tax income calculation method under the U.S. Tax Cuts and Jobs Act (U.S. Tax Reform).
The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in China, Malaysia, and Thailand that expire at various dates, unless extended or otherwise renegotiated and are subject to certain conditions with which the Company expects to comply. The expiration dates of these tax incentives are as follows: 2023 in China and 2028 in Thailand. The Malaysia tax incentive expired as of March 31, 2021, but the Company has applied for an extension of the Malaysia tax holiday in 2022 which will extend the tax holiday for another five years until 2026. See Note 8 to the consolidated financial statements in Part II, Item 8 of this Report.
Net Income
We reported a net income of $35.8 million, or $0.99 per diluted share for 2021, compared with a net income of $14.1 million, or $0.38 per diluted share, for 2020. The net increase of $21.7 million in 2021 is primarily the result of items discussed above.
34
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our organic growth and operations through funds generated from operations and occasional borrowings under our Amended and Restated Credit Agreement (as defined below). Cash and cash equivalents and restricted cash totaled $271.7 million at December 31, 2021 and $396 million at December 31, 2020. During 2021 and 2020, we repatriated $35 million and $25 million, respectively, of foreign earnings to the U.S.
Cash used in operating activities was $2.6 million in 2021. The cash used in operations during 2021 consisted primarily of $35.8 million of net income, adjusted for $44.2 million of depreciation and amortization, a $140.0 million increase in accounts payable, and a $34.0 million increase in advance payments from customers, primarily offset by a $47.0 million increase in accounts receivable due to higher sales and a $197.9 million increase in inventories in support of meeting customer demand. Working capital was $0.7 billion at both December 31, 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 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 $41.9 million in 2021 primarily due to purchases of additional property, plant and equipment totaling $38.8 million. The purchases of property, plant and equipment were primarily for machinery and equipment in the Americas and Asia.
Cash used in financing activities was $74.0 million in 2021. Principal payments on our credit agreement and finance lease obligations totaled $155.6 million and $0.9 million, respectively, borrowings under the credit agreement totaled $150.0 million, share repurchases totaled $40.2 million, dividends paid totaled $23.3 million, and we received $0.3 million from the exercise of stock options.
On December 21, 2021, the Company amended and restated the Company's prior $650 million credit agreement by entering into a $381 million amended and restated credit agreement (the Amended and Restated Credit Agreement). Under the terms of the Amended and Restated Credit Agreement, in addition to the $131.3 million Term Loan facility, we have a $250.0 million five-year revolving credit facility to be used for general corporate purposes, both with a maturity date of December 21, 2026. The Amended and Restated Credit Agreement includes an accordion feature pursuant to which the Company is permitted to add one or more incremental term loans and/or increase commitments under the revolving credit facility in an aggregate amount not exceeding $100 million, subject to the satisfaction of certain conditions and exceptions. As of December 31, 2021, we had $131.3 million in borrowings outstanding under the Term Loan facility and $3.9 million in letters of credit outstanding under our revolving credit facility. $246.1 million remains available for future borrowings under the revolving credit facility. See Note 5 to the consolidated financial statements in Part II, Item 8 of this Report for more information regarding the terms of the Amended and Restated Credit Agreement.
The Amended and Restated 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 Amended and Restated 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 December 31, 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
35
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 December 31, 2021, we had cash and cash equivalents, including restricted cash, totaling $271.7 million and we have $246.1 million available for borrowings under the Amended and Restated Credit Agreement. 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 October 26, 2018, the Board of Directors authorized an additional $100 million shares for repurchase above our existing program. On February 19, 2020, the Board of Directors authorized the repurchase of an additional $150 million of the Company’s common stock. As of December 31, 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 2021 and 2020, cash dividends paid totaled $23.3 million and $23.0 million, respectively. On December 13, 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 December 30, 2021. The dividend of $5.8 million was paid on January 13, 2022. 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 depending 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 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, funds generated from operations, and borrowing availability under our revolving credit facility 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 Amended and Restated 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are summarized in Note 1 to the consolidated financial statements in Part II, Item 8 of this Report. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories, revenue recognition, income taxes, long-lived assets, stock-based compensation and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our revenue is recognized when a contract exists and when, or as, we satisfy a performance obligation by transferring control of a product or service to the customer. A contract exists when it has approval and commitment
36
from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. For the Company, the arrangement with the customer is generally documented through a master agreement which outlines the general terms and conditions of the arrangement and a specific purchase commitment from the customer.
Our performance obligations are satisfied over time as work progresses or at a point in time. The determination of how our performance obligations are satisfied requires judgment and is assessed on a contract by contract basis. Under the majority of our contracts, our performance obligations are satisfied over time as work progresses since the customer controls all of the work-in-progress as products are being built. For these contracts, the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use a cost-based input measurement of progress because it best represents the transfer of assets to the customer. For our other contracts, revenue is recognized upon transfer of control of the product or service, which is generally upon shipment or delivery pending on the terms of the underlying contract. Revenue from design, development and engineering services is generally recognized over time as the services are performed.
Generally, there are no subjective customer acceptance requirements or further obligations related to goods of services provided. Our contracts with customer do not allow for a general right of return.
Income Taxes
We estimate our income tax provision in each of the jurisdictions where we operate, including estimating exposures related to uncertain tax positions. We must also make judgments regarding the ability to realize our deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. Our valuation allowance as of December 31, 2021 of $18.7 million relates to deferred tax assets from our foreign locations.
Differences in our future operating results as compared to the estimates utilized in the determination of the valuation allowances could result in adjustments in valuation allowances in future periods. For example, a significant increase in our operations in the United States, future accretive acquisitions in the United States and any movement in the mix of profits from our international operations to the United States would result in a reduction in the valuation allowance and would increase income in the period such determination was made. Alternatively, significant economic downturns in the United States generating additional operating loss carryforwards and potential movements in the mix of profits to international locations would result in an increase in the valuation allowance and would decrease income in the period such determination was made. In addition, any significant prolonged economic downturns in some of our foreign locations would generate operating loss carryforwards and an increase in the valuation allowance, respectively.
We are subject to examination by tax authorities for different periods in various U.S. and foreign tax jurisdictions. During the course of such examinations, disputes may occur as to matters of fact and/or law. In most tax jurisdictions the passage of time without examination will result in the expiration of applicable statutes of limitations, thereby precluding the taxing authority from examining the relevant tax period(s). We believe that we have adequately provided for our tax liabilities.
Impairment of Long-Lived Assets and Goodwill
Long-lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount that the carrying amount of the asset exceeds the fair value of the asset.
Goodwill is tested for impairment on an annual basis, at a minimum, and whenever events and circumstances indicate that the carrying amount may be impaired. Circumstances that may lead to impairment include unforeseen decreases in future performance or industry demand or the restructuring of our operations as a result of a change in our business strategy. We perform a qualitative assessment to determine if goodwill is potentially impaired. If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, then we would be required to perform a
37
quantitative impairment test for goodwill. This process involves determining the fair values of the reporting units and comparing those fair values to the carrying values, including goodwill, of the reporting unit. An impairment loss would be recognized to the extent that the carrying amount exceeds the asset’s fair value. For purposes of performing our goodwill impairment assessment, our reporting units are the same as our operating segments as defined in Note 13 to the consolidated financial statements in Part II, Item 8 of this Report. As of December 31, 2021 and 2020, we had goodwill of approximately $192.1 million, respectively, associated with our Americas and Asia business segments.
Based on our qualitative assessments of goodwill as of December 31, 2021, 2020 and 2019, we concluded that it was more likely than not that the fair value of our Americas and Asia business segments were greater than their carrying amounts, and therefore no further testing was required.
Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis, and that impact these assumptions, may result in a future goodwill impairment charge.
Recently Enacted Accounting Principles
See Note 1(r) to the consolidated financial statements in Part II, Item 8 of this Report for a discussion of recently enacted accounting principles.
CONTRACTUAL OBLIGATIONS
We have certain contractual obligations that extend beyond 2022 under lease obligations and debt arrangements. Non-cancelable purchase commitments do not typically extend beyond normal lead-times of 4 to 20 weeks; however, some electronic component manufacturers now have lead-times in excess of 52 weeks. These select long lead-time manufacturers of semiconductors and electronics components seeking to prevent customers from over-ordering quantities beyond their true demand, are now requiring all new purchase orders to have NCNR (non-cancellable, non-returnable) purchase order terms. Most purchase orders beyond this time frame are normally cancelable, however more manufacturers in the current constrained environment are looking to limit their liability and adding NCNR terms. We do not use off-balance sheet financing techniques other than traditional operating leases, and we have not guaranteed the obligations of any entity that is not one of our wholly owned subsidiaries.
A summary of our operating lease obligations as of December 31, 2021 can be found in Note 6 to the consolidated financial statements in Part II, Item 8 of this Report.
A summary of our long-term debt obligations as of December 31, 2021 can be found in Note 5 to the consolidated financial statements in Part II, Item 8 of this Report.
U.S. federal income tax on deemed mandatory repatriation is payable over four years pursuant to the U.S. Tax Reform. See Note 8 to the consolidated financial statements in Part II, Item 8 of this Report.
38
Item 7A. 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:
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.
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 and trade accounts payable 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 December 31, 2021 have not been designated as accounting hedges and, therefore, changes in fair value are recorded within our 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. 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 year ended December 31, 2021, the Company recorded an unrealized loss on the forward currency exchange contracts in other comprehensive income (see Note 19).
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 Amended and Restated Credit Agreement. As of December 31, 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 $129.4 million. Under this swap agreement, we receive variable rate interest rate payments and pay fixed rate interest payments. The effect of this swap is to convert our floating rate interest expense to fixed interest rate expense. The interest rate swap is designated as a cash flow hedge.
For additional information, see Note 10 to the Notes to consolidated financial statements in Part II, Item 8 of this Report.
39
Item 8. Financial Statements and Supplementary Data.
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
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See accompanying notes to consolidated financial statements.
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BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
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Earnings per share: |
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Weighted-average number of shares outstanding: |
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See accompanying notes to consolidated financial statements.
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BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
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Foreign currency translation adjustments |
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Other |
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$ |
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See accompanying notes to consolidated financial statements.
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BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
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Additional |
|
|
Retained |
|
|
Accumulated |
|
|
Total |
|
||||||
Balances, December 31, 2018 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Shares repurchased and retired |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Shares withheld for taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balances, December 31, 2019 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Shares repurchased and retired |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Shares withheld for taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balances, December 31, 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Shares repurchased and retired |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Vesting of restricted stock units |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Shares withheld for taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balances, December 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
See accompanying notes to consolidated financial statements.
43
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
Year Ended December 31, |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Adjustments to reconcile net income to net cash |
|
|
|
|
|
|
|
|
|
|||
Depreciation |
|
|
|
|
|
|
|
|
|
|||
Amortization |
|
|
|
|
|
|
|
|
|
|||
Provision for doubtful accounts |
|
|
|
|
|
|
|
|
|
|||
Deferred income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Asset impairments |
|
|
|
|
|
|
|
|
|
|||
Insurance recoveries |
|
|
|
|
|
|
|
|
( |
) |
||
(Gain) loss on the sale of property, plant and equipment |
|
|
|
|
|
( |
) |
|
|
|
||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|||
Accounts receivable |
|
|
( |
) |
|
|
|
|
|
|
||
Contract assets |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Inventories |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other assets |
|
|
( |
) |
|
|
|
|
|
|
||
Accounts payable |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Advance payments from customers |
|
|
|
|
|
|
|
|
|
|||
Accrued liabilities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Operating leases |
|
|
( |
) |
|
|
|
|
|
|
||
Income taxes |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by (used in) operations |
|
|
( |
) |
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|||
Proceeds from sales of investments at par |
|
|
|
|
|
|
|
|
|
|||
Additions to property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Proceeds from the sale of property, plant and equipment |
|
|
|
|
|
|
|
|
|
|||
Additions to purchased software |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Cash received from business divestitures |
|
|
|
|
|
|
|
|
|
|||
Other |
|
|
|
|
|
|
|
|
( |
) |
||
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|||
Debt issuance costs |
|
|
( |
) |
|
|
|
|
|
|
||
Proceeds from stock options exercised |
|
|
|
|
|
|
|
|
|
|||
Employee taxes paid for with shares withheld |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Dividends paid |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Borrowings under credit agreement |
|
|
|
|
|
|
|
|
|
|||
Borrowings under finance leases |
|
|
|
|
|
|
|
|
|
|||
Principal payments on credit agreement |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Principal payments on finance leases |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Share repurchases |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Effect of exchange rate changes |
|
|
( |
) |
|
|
|
|
|
|
||
Net (decrease) increase in cash and cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Cash and cash equivalents and restricted cash at beginning of year |
|
|
|
|
|
|
|
|
|
|||
Cash and cash equivalents and restricted cash at end of year |
|
$ |
|
|
$ |
|
|
$ |
|
|||
See accompanying notes to consolidated financial statements.
44
Notes to Consolidated Financial Statements
(amounts in thousands, except per share data, unless otherwise noted)
Note 1—Summary of Significant Accounting Policies
(a) Business
Benchmark Electronics, Inc. (the Company) is a Texas corporation that provides innovative product design services, engineering services, technology solutions and advanced manufacturing services (both electronic manufacturing services and precision technology 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.
(b) Principles of Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the financial statements of Benchmark Electronics, Inc. and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid debt instruments with an original maturity at the date of purchase of three months or less to be cash equivalents. Cash equivalents of $
(d) Allowance for Doubtful Accounts
Accounts receivable are recorded net of allowances for amounts not expected to be collected. In estimating the allowance, management considers a specific customer’s financial condition, payment history, current conditions, and various information or disclosures by the customer or other publicly available information. Accounts receivable are charged against the allowance after all reasonable efforts to collect the full amount (including litigation, where appropriate) have been exhausted. During 2021, 2020 and 2019, the Company recorded $
The following table summarizes the activity in the Company’s allowance for doubtful accounts during 2021, 2020 and 2019:
|
|
Balance at |
|
|
|
|
|
|
|
|
Balance at |
|
||||
|
|
Beginning |
|
|
Charges to |
|
|
|
|
|
End of |
|
||||
(in thousands) |
|
of Period |
|
|
Operations |
|
|
Deductions |
|
|
Period |
|
||||
Year ended December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Allowance for doubtful accounts(1) |
|
$ |
|
|
|
|
|
|
( |
) |
|
$ |
|
|||
Year ended December 31, 2020: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Allowance for doubtful accounts(1) |
|
$ |
|
|
|
|
|
|
( |
) |
|
$ |
|
|||
Year ended December 31, 2019: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Allowance for doubtful accounts(1) |
|
$ |
|
|
|
|
|
|
( |
) |
|
$ |
|
|||
(e) Inventories
Inventories include material, labor and overhead and are stated at the lower of cost (principally first-in, first-out method) or net realizable value.
45
(f) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is calculated on the straight-line method over the useful lives of the assets –
(g) Leases
Lease assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using the Company’s incremental borrowing rate, unless the implicit rate is readily determinable. Our incremental borrowing rate represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. Lease assets also include any upfront lease payments made and exclude lease incentives.
(h) Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of net assets acquired. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead assessed for impairment at least annually. Intangible assets, including those acquired in a business combination, with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values.
(i) Impairment of Long-Lived Assets and Goodwill
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell, and are no longer depreciated.
Goodwill is tested for impairment on an annual basis, during the fourth quarter, and whenever events and changes in circumstances suggest that the carrying amount may be impaired. Circumstances that may lead to the impairment of goodwill include unforeseen decreases in future performance or industry demand or the restructuring of our operations as a result of a change in our business strategy. A qualitative assessment is allowed to determine if goodwill is potentially impaired. Based on this qualitative assessment, if the Company determines that it is more likely than not that the reporting unit’s fair value is less than its carrying value, then it performs a quantitative assessment, otherwise no further analysis is required. In connection with its annual qualitative goodwill impairment assessments as of December 31, 2021, 2020 and 2019, the Company concluded that goodwill was not impaired.
(j) Earnings Per Share
Basic earnings per share is computed using the weighted-average number of shares outstanding. Diluted earnings per share is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding stock equivalents. Stock equivalents include common shares issuable upon the exercise of stock options and other equity instruments and are computed using the treasury stock method. Under the treasury stock method, the exercise price of a share 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.
46
The following table sets forth the calculation of basic and diluted earnings per share.
|
|
Year Ended December 31, |
|
|
||||||||
(in thousands, except per share data) |
|
2021 |
|
|
2020 |
|
2019 |
|
|
|||
Net income |
|
$ |
|
|
$ |
|
$ |
|
|
|||
Denominator for basic earnings per share – weighted-average |
|
|
|
|
|
|
|
|
|
|||
Incremental common shares attributable to exercise of dilutive |
|
|
|
|
|
|
|
|
|
|||
Incremental common shares attributable to outstanding restricted stock units |
|
|
|
|
|
|
|
|
|
|||
Denominator for diluted earnings per share |
|
|
|
|
|
|
|
|
|
|||
Basic earnings per share |
|
$ |
|
|
$ |
|
$ |
|
|
|||
Diluted earnings per share |
|
$ |
|
|
$ |
|
$ |
|
|
|||
Potentially dilutive securities totaling less than
(k) Revenue Recognition
The Company recognizes revenue as the customer takes control of the manufactured products built to customer specifications. 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 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.
The Company’s performance obligations generally have an expected duration of one year or less. The Company applies the practical expedient 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 or any significant financing components in the contracts.
The Company recognizes the incremental costs, if any, of obtaining contracts as an expense when incurred since the amortization period of the assets that the Company otherwise would have recognized is one year less.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce its deferred tax assets to the amounts that are more likely than not to be realized. The Company has considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in assessing the need for the valuation allowance.
(m) Stock-Based Compensation
All share-based payments to employees, including grants of employee stock options (which have not been awarded since 2015), are recognized in the consolidated financial statements based on their grant date fair values. The total compensation cost recognized for stock-based awards was $
47
that the performance goals will be achieved, which is monitored by management throughout the requisite service period. When it becomes probable, based on the Company’s expectation of performance during the measurement period, that more or less than the previous estimate of the awarded shares will vest, an adjustment to stock-based compensation expense is recognized as a change in accounting estimate.
As of December 31, 2021, the unrecognized compensation cost and remaining weighted-average amortization period related to stock-based awards were as follows:
(in thousands) |
|
Restricted |
|
|
Performance- |
|
||
Unrecognized compensation cost |
|
$ |
|
|
$ |
|
||
Remaining weighted-average amortization period |
|
|
|
|
||||
The total cash received as a result of stock option exercises in 2021, 2020 and 2019 was approximately $
The Company awarded performance-based restricted stock units to employees during 2021, 2020 and 2019. 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 issuance under the Company’s 2019 Omnibus Incentive Compensation Plan (the 2019 Plan).
(n) Use of Estimates
Management of the Company 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 U.S. GAAP with consideration given to the potential impacts of COVID. However, actual results could differ materially from these estimates and be significantly affected by the duration and spread of the COVID pandemic and its severity; the emergence and severity of its variants, including the Delta and Omicron variants; 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. On an ongoing basis, management evaluates these estimates, including those related to accounts receivable, inventories, income taxes, long-lived assets, leases, goodwill, stock-based compensation and contingencies and litigation. Actual results could differ from those estimates.
(o) Fair Values of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-tier fair value hierarchy of inputs is employed to determine fair value measurements.
48
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company’s financial instruments include cash equivalents, accounts and other receivables, accounts payable, accrued liabilities and long-term debt and financing lease obligations. The Company believes that the carrying values of these instruments approximate their fair value. As of December 31, 2021, the fair value estimates for the Company's forward currency exchange contracts and the Company’s interest rate swap agreement were based on Level 2 inputs of the fair value hierarchy. See Note 10.
(p) Foreign Currency
For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expenses are translated at average exchange rates. The effects of these translation adjustments are reported in other comprehensive income. Exchange losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in other expense and totaled approximately $
(q) Derivative Instruments
All derivative instruments are recorded on the balance sheet at fair value. The Company uses derivative instruments to manage the variability of foreign currency obligations and interest rates. The Company does not enter into derivative arrangements for speculative purposes. Generally, if a derivative instrument is designated as a cash flow hedge, the change in the fair value of the derivative is recorded in other comprehensive income to the extent the derivative is effective and recognized in the consolidated statements of income when the hedged item affects earnings. Changes in fair value of derivatives that are not designated as cash flow hedges are recorded in earnings. Cash receipts and cash payments related to derivative instruments are recorded in the same category as the cash flows from the items being hedged on the consolidated statements of cash flows.
(r) New Accounting Pronouncements
Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (FASB) issued 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 have no material impact on its consolidated financial position, results of operations or cash flows, or will not apply to its operations.
Note 2—Inventories
Inventory costs are summarized as follows:
|
|
December 31, |
|
|||||
(in thousands) |
|
2021 |
|
|
2020 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
49
Note 3—Property, Plant and Equipment
Property, plant and equipment consists of the following:
|
|
December 31, |
|
|||||
(in thousands) |
|
2021 |
|
|
2020 |
|
||
Land |
|
$ |
|
|
$ |
|
||
Buildings and building improvements |
|
|
|
|
|
|
||
Machinery and equipment |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Vehicles |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Note 4—Goodwill and Other Intangible Assets
The changes each year in goodwill allocated to the Company’s reportable segments were as follows:
(in thousands) |
|
Americas |
|
|
Asia |
|
|
Total |
|
|||
Goodwill as of December 31, 2019, 2020 and 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Other assets, net consist primarily of acquired identifiable intangible assets and capitalized purchased software costs.
(in thousands) |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|||
Customer relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Purchased software costs |
|
|
|
|
|
( |
) |
|
|
|
||
Technology licenses |
|
|
|
|
|
( |
) |
|
|
|
||
Trade names and trademarks |
|
|
|
|
|
|
|
|
|
|||
Other |
|
|
|
|
|
( |
) |
|
|
|
||
Intangible assets, December 31, 2021 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
(in thousands) |
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|||
Customer relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Purchased software costs |
|
|
|
|
|
( |
) |
|
|
|
||
Technology licenses |
|
|
|
|
|
( |
) |
|
|
|
||
Trade names and trademarks |
|
|
|
|
|
|
|
|
|
|||
Other |
|
|
|
|
|
( |
) |
|
|
|
||
Intangible assets, December 31, 2020 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Customer relationships are being amortized on a straight-line basis over a period of
50
respectively, of purchased software costs were capitalized.
|
|
Year Ended December 31, |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Amortization of intangible assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Amortization of capitalized purchased software costs |
|
|
|
|
|
|
|
|
|
|||
Amortization of debt costs |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
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 |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Note 5—Borrowing Facilities
Long-term debt outstanding as of December 31, 2021 and 2020 consists of the following:
|
|
December 31, |
|
|||||
(in thousands) |
|
2021 |
|
|
2020 |
|
||
Revolving credit facility |
|
$ |
— |
|
|
$ |
— |
|
Term loan |
|
|
|
|
|
|
||
Less unamortized debt issuance costs |
|
|
( |
) |
|
|
( |
) |
Long-term debt |
|
$ |
|
|
$ |
|
||
On December 21, 2021, the Company amended and restated the Prior Credit Agreement by entering into a $
The Amended and Restated Revolving Credit Facility is available for general corporate purposes. The Amended and Restated Credit Agreement includes an accordion feature pursuant to which the Company is permitted to add one or more incremental term loans and/or increase commitments under the Revolving Credit Facility in an aggregate amount not exceeding $
The Term Loan Credit Facility is subject to
51
rate plus
As of December 31, 2021, a portion of the $
The Amended and Restated Credit Agreement is generally secured by a pledge of (a) all the capital stock of the Company’s domestic subsidiaries and
As of December 31, 2021, the Company had $
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2021 are as follows: 2022, $
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.
The components of lease expense were as follows:
|
|
|
Year Ended |
|
|||||
(in thousands) |
|
|
2021 |
|
|
2020 |
|
||
Finance lease cost: |
|
|
|
|
|
|
|
||
Amortization of right-of-use assets (included in depreciation expense) |
|
|
$ |
|
|
$ |
|
||
Interest on lease liabilities |
|
|
|
|
|
|
|
||
Operating lease cost |
|
|
|
|
|
|
|
||
Short-term lease cost |
|
|
|
|
|
|
|
||
Variable lease cost |
|
|
|
|
|
|
|
||
Total lease cost |
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
||
Other information: |
|
|
|
|
|
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Operating cash flows used for finance lease |
|
$ |
|
|
$ |
|
||
Operating cash flows used for operating leases |
|
$ |
|
|
$ |
|
||
Financing cash flows used for finance lease |
|
$ |
|
|
$ |
|
||
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
$ |
|
|
$ |
|
||
52
The lease assets and liabilities as of December 31, 2021 were as follows (in thousands):
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
$ |
|
|
$ |
|
|||
Operating lease right-of-use assets |
|
$ |
|
|
$ |
|
||
(included in current installments of long-term debt) |
|
$ |
|
|
$ |
|
||
(included in long-term debt) |
|
$ |
|
|
$ |
|
||
(included in accrued liabilities) |
|
$ |
|
|
$ |
|
||
Operating lease liabilities, noncurrent |
|
$ |
|
|
$ |
|
||
Weighted average remaining lease term – finance leases |
|
|
|
|
||||
Weighted average remaining lease term – operating leases |
|
|
|
|
||||
Weighted average discount rate – finance leases |
|
|
% |
|
|
% |
||
Weighted average discount rate – operating leases |
|
|
% |
|
|
% |
||
Future annual minimum lease payments and finance lease commitments as of December 31, 2021 were as follows (in thousands):
Year ending December 31, |
|
Operating |
|
|
Finance |
|
||
2022 |
|
|
|
|
|
|
||
2023 |
|
|
|
|
|
|
||
2024 |
|
|
|
|
|
|
||
2025 |
|
|
|
|
|
|
||
2026 |
|
|
|
|
|
|
||
2027 and thereafter |
|
|
|
|
|
|
||
Total minimum lease payments |
|
$ |
|
|
$ |
|
||
Less: imputed interest |
|
|
( |
) |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
$ |
|
||
As of December 31, 2021, the Company’s future operating leases that have not yet commenced are immaterial.
Note 7—Common Stock and Stock-Based Awards Plans
Dividends
The Company began declaring and paying quarterly dividends during the first quarter of 2018. During 2021, 2020 and 2019, cash dividends paid totaled $
Share Repurchase Authorization
On March 6, 2018, the Board of Directors approved an expanded stock repurchase authorization granting the Company authority to repurchase up to $
53
Share 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 will be funded from available cash and may be commenced, suspended or discontinued at any time without prior notice. Shares repurchased under the program are retired. During 2021, the Company repurchased a total of
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
As of December 31, 2021,
The following table summarizes activities related to the Company’s stock options:
(in thousands, except per share data) |
|
Number of |
|
|
Weighted- |
|
|
Weighted- |
|
|
Aggregate |
|
||||
Outstanding as of December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Forfeited or expired |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding as of December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Forfeited or expired |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding as of December 31, 2020 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Forfeited or expired |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding and exercisable as of December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
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 2021 for options that had exercise prices that were below the closing price.
As of December 31, 2021, 2020 and 2019, the number of options exercisable was
Restricted stock units, time-based and performance-based, remain outstanding as detailed below.
54
The following table summarizes the activities related to the Company’s time-based restricted stock units:
(in thousands, except per share data) |
|
Number of |
|
|
Weighted- |
|
||
Non-vested awards outstanding as of December 31, 2018 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Non-vested awards outstanding as of December 31, 2019 |
|
|
|
|
|
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Non-vested awards outstanding as of December 31, 2020 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Non-vested awards outstanding as of December 31, 2021 |
|
|
|
|
$ |
|
||
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, 2018 |
|
|
|
|
$ |
|
||
Granted(1) |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
$ |
|
|
Non-vested units outstanding as of December 31, 2019 |
|
|
|
|
|
|
||
Granted(1) |
|
|
|
|
|
|
||
Forfeited |
|
|
( |
) |
|
$ |
|
|
Non-vested units outstanding as of December 31, 2020 |
|
|
|
|
|
|
||
Granted(1) |
|
|
|
|
|
|
||
Forfeited |
|
|
( |
) |
|
$ |
|
|
Non-vested units outstanding as of December 31, 2021 |
|
|
|
|
|
|
||
Note 8—Income Taxes
Income tax expense (benefit) based on income before income taxes consisted of the following:
|
|
Year Ended December 31, |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Current: |
|
|
|
|
|
|
|
|
|
|||
U.S. Federal |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
State and local |
|
|
|
|
|
|
|
|
( |
) |
||
Foreign |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Deferred: |
|
|
|
|
|
|
|
|
|
|||
U.S. Federal |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
State and local |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Foreign |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
55
Worldwide income (loss) before income taxes consisted of the following:
|
|
Year Ended December 31, |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
United States |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Foreign |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income taxes as a result of the following:
|
|
Year Ended December 31, |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Tax at statutory rate |
|
$ |
|
|
$ |
|
|
$ |
|
|||
State taxes, net of federal tax effect |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Effect of foreign operations and tax incentives |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Change in valuation allowance |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Stock-based compensation |
|
|
( |
) |
|
|
|
|
|
|
||
GILTI |
|
|
|
|
|
|
|
|
|
|||
Foreign tax refund benefit |
|
|
( |
) |
|
|
|
|
|
|
||
Losses in foreign jurisdictions for which no benefit has been provided |
|
|
|
|
|
|
|
|
|
|||
Change in uncertain tax benefits reserve |
|
|
|
|
|
( |
) |
|
|
|
||
Other |
|
|
( |
) |
|
|
|
|
|
|
||
Total income tax expense |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The U.S. Tax Cuts and Jobs Act (U.S. Tax Reform), which was signed into law on December 22, 2017, significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system, adding a global intangible taxation regime and imposing a transition (Transition Tax) tax on deemed repatriated cumulative earnings of foreign subsidiaries. The U.S. Tax Reform reduced the U.S. corporate income tax rate from a maximum of
To minimize tax base erosion with a territorial tax system, the U.S. Tax Reform enacted a new global intangible low-taxed income (GILTI) provision that 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 assets. The taxable earnings can be offset by a limited deemed paid foreign tax credit with no carrybacks or carryforwards available. The Company is subject to the GILTI provisions. The Company elected to account for the GILTI as a period cost and include the effect in the period in which it is incurred and not include it as a factor in the determination of deferred taxes.
The Company incurred a total Transition Tax liability of $
56
During 2021 and 2020, the Company repatriated $
During 2021, the Company recorded an additional tax benefit of $
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
|
|
December 31, |
|
|||||
(in thousands) |
|
2021 |
|
|
2020 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Carrying value of inventories |
|
$ |
|
|
$ |
|
||
Accrued liabilities and allowances deductible for tax purposes on a cash basis |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Operating right-of-use lease liabilities |
|
|
|
|
|
|
||
Net operating loss carryforwards |
|
|
|
|
|
|
||
Tax credit carryforwards |
|
|
|
|
|
|
||
Interest rate swap liabilities |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: valuation allowance |
|
|
( |
) |
|
|
( |
) |
Net deferred tax assets |
|
|
|
|
|
|
||
Deferred tax liabilities: |
|
|
|
|
|
|
||
Plant and equipment, due to differences in depreciation |
|
|
( |
) |
|
|
( |
) |
Operating right-of-use lease assets |
|
|
( |
) |
|
|
( |
) |
Intangible assets, due to differences in amortization |
|
|
( |
) |
|
|
( |
) |
Foreign withholding tax |
|
|
( |
) |
|
|
( |
) |
Other |
|
|
( |
) |
|
|
( |
) |
Gross deferred tax liability |
|
|
( |
) |
|
|
( |
) |
Net deferred tax liability |
|
$ |
|
|
$ |
|
||
The net deferred tax liability is classified as follows: |
|
|
|
|
|
|
||
Long-term asset |
|
$ |
|
|
$ |
|
||
Long-term liability |
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
|
|
$ |
|
||
All deferred taxes are classified as non-current on the balance sheet as of December 31, 2021 and 2020. All deferred tax assets and liabilities are offset and presented as a single net noncurrent amount by each tax jurisdiction.
57
The net change in the total valuation allowance for 2021, 2020 and 2019 was a $
As of December 31, 2021, the Company had $
The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in China, Malaysia, and Thailand that expire at various dates, unless extended or otherwise renegotiated and are subject to certain conditions with which the Company expects to comply. The expiration dates of these tax incentives are as follows:
|
|
Year Ended December 31, |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
China |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Malaysia |
|
$ |
|
|
$ |
|
|
|
|
|||
Thailand |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
The Company must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. As of December 31, 2021, the total amount of the reserve for uncertain tax benefits including interest and penalties was $
|
|
December 31, |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Balance as of January 1 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Additions related to current year tax positions |
|
|
|
|
|
|
|
|
|
|||
Additions related to prior year tax positions |
|
|
|
|
|
|
|
|
|
|||
Decreases related to prior year tax positions |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Decreases related to lapse of statutes |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Balance as of December 31 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
During 2021, the Company released $
58
The reserve is classified as a current or long-term liability in the 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 amount of accrued potential interest on unrecognized tax benefits included in the reserve as of December 31, 2021 is $
The Company and its subsidiaries in Brazil, China, Ireland, Malaysia, Mexico, 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 2021. During the course of 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.
The Company’s customers operate in industries that are, to a varying extent, subject to rapid technological change, vigorous competition and short product life cycles. Developments adverse to the electronics industry, the Company’s customers or their products could impact the Company’s overall credit risk.
The Company extends credit based on evaluation of its customers’ financial condition and generally does not require collateral or other security from its customers and would incur a loss equal to the carrying value of the accounts receivable if its customer failed to perform according to the terms of the credit arrangement.
Sales to the
|
|
Year ended December 31, |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Applied Materials, Inc. and subsidiaries |
|
$ |
|
|
$ |
|
|
$ |
|
* |
||
* amount is less than 10% of total sales.
During 2021 and 2020, net sales attributable to our largest customer were reported in the Americas and Asia reportable segments.
Note 10—Financial Instruments and Concentration of Credit Risk
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 $
As of December 31, 2021, the fair value estimates for the Company's forward currency exchange contracts were based on Level 2 inputs of the fair value hierarchy, which includes obtaining directly or indirectly observable values from third parties active in the relevant markets. Inputs in the fair value of the foreign currency forward contracts include prevailing forward and spot prices for currencies. The Company enters into forward currency exchange contracts for its operations in Mexico and Europe.
59
The Company has an interest rate swap agreement with a notional amount of $
The fair value of the interest rate swap agreements was a $
As of December 31, 2021, the fair value estimate for the Company's interest rate swap agreement were based on Level 2 inputs of the fair value hierarchy, as we obtained the valuation from a third party active in relevant markets. The valuation of the swap is primarily measured through various pricing models or discounted cash flow analysis that incorporate observable market parameters, such as interest rate yield curves and volatility.
The following table presents the fair value of the Company's derivative instruments:
|
|
Fair Values of Derivative Instrument |
|
|||||
|
|
Liability Derivatives |
|
|||||
|
|
December 31, |
|
|||||
(in thousands) |
|
2021 |
|
|
2020 |
|
||
Derivatives designated as hedging instruments |
|
|
|
|
|
|
||
Forward currency exchange contracts |
|
$ |
|
|
$ |
|
||
Interest rate swap |
|
$ |
|
|
$ |
|
||
Financial instruments that subject the Company to credit risk consist of cash and cash equivalents and restricted cash and trade accounts receivable. The Company maintains cash and cash equivalents with recognized financial institutions.
Note 11—Concentrations of Business Risk
Substantially all of the Company’s sales are derived from manufacturing services in which the Company purchases components specified by its customers. The Company uses numerous suppliers of electronic components and other materials for its operations. Some components used by the Company have been subject to industry-wide shortages, and suppliers have been forced to allocate available quantities among their customers. The Company’s inability to obtain any needed components during periods of allocation could cause delays in manufacturing and could adversely affect results of operations.
60
Note 12—Accounts Receivable Sale Program
As of December 31, 2021, in connection with a trade accounts receivable sale program with unaffiliated financial institutions, the Company may elect to sell, at a discount, on an ongoing basis, up to a maximum of $
During the years ended December 31, 2021, 2020 and 2019, the Company sold $
Note 13—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 same as for the Company taken as a whole. The Company has three reportable operating segments: Americas, Asia, and Europe.
|
|
Year Ended December 31, |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Net sales: |
|
|
|
|
|
|
|
|
|
|||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Asia |
|
|
|
|
|
|
|
|
|
|||
Europe |
|
|
|
|
|
|
|
|
|
|||
Elimination of intersegment sales |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Asia |
|
|
|
|
|
|
|
|
|
|||
Europe |
|
|
|
|
|
|
|
|
|
|||
Corporate |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Income from operations: |
|
|
|
|
|
|
|
|
|
|||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Asia |
|
|
|
|
|
|
|
|
|
|||
Europe |
|
|
|
|
|
|
|
|
|
|||
Corporate and intersegment eliminations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|||
Other income (expense) |
|
|
|
|
|
( |
) |
|
|
|
||
Income before income taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Asia |
|
|
|
|
|
|
|
|
|
|||
Europe |
|
|
|
|
|
|
|
|
|
|||
Corporate |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Total assets: |
|
|
|
|
|
|
|
|
|
|||
Americas |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Asia |
|
|
|
|
|
|
|
|
|
|||
Europe |
|
|
|
|
|
|
|
|
|
|||
Corporate |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
61
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.
|
|
Year Ended |
|
|||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Geographic net sales: |
|
|
|
|
|
|
|
|
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Singapore |
|
|
|
|
$ |
|
|
$ |
|
|||
Other Asia |
|
|
|
|
|
|
|
|
|
|||
Europe |
|
|
|
|
|
|
|
|
|
|||
Other |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Long-lived assets: |
|
|
|
|
|
|
|
|
|
|||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Asia |
|
|
|
|
|
|
|
|
|
|||
Europe |
|
|
|
|
|
|
|
|
|
|||
Other |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Note 14 – 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. 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, which is generally when goods are shipped. 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.
62
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 |
|
|||||||||||||
|
|
Year Ended December 31, 2021 |
|
|||||||||||||
(in thousands) |
|
Americas |
|
|
Asia |
|
|
Europe |
|
|
Total |
|
||||
Market Sector: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Industrials |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
A&D |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Medical |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Semi-Cap |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Computing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Telecommunications |
|
|
|
|
|
|
|
|
|
|
|
|
||||
External revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Elimination of intersegment sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Segment revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Year Ended December 31, 2020 |
|
|||||||||||||
(in thousands) |
|
Americas |
|
|
Asia |
|
|
Europe |
|
|
Total |
|
||||
Market Sector: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Industrials |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
A&D |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Medical |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Semi-Cap |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Computing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Telecommunications |
|
|
|
|
|
|
|
|
|
|
|
|
||||
External revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Elimination of intersegment sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Segment revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Year Ended December 31, 2019 |
|
|||||||||||||
(in thousands) |
|
Americas |
|
|
Asia |
|
|
Europe |
|
|
Total |
|
||||
Market Sector: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Industrials |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
A&D |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Medical |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Semi-Cap |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Computing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Telecommunications |
|
|
|
|
|
|
|
|
|
|
|
|
||||
External revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Elimination of intersegment sales |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Segment revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
During 2021, 2020 and 2019,
The timing of revenue recognition, billings and cash collections result in billed accounts receivable, contract assets and advance payments from customers.
As of December 31, 2021 and 2020, the Company had $
63
|
|
Year Ended |
|
|||||
(in thousands) |
|
2021 |
|
|
2020 |
|
||
Beginning balance as of December 31 |
|
$ |
|
|
$ |
|
||
Revenue recognized |
|
|
|
|
|
|
||
Amounts collected or invoiced |
|
|
( |
) |
|
|
( |
) |
Ending balance as of December 31 |
|
$ |
|
|
$ |
|
||
Note 15—Employee Benefit Plans
The Company has defined contribution plans qualified under Section 401(k) of the Internal Revenue Code for the benefit of all its U.S. employees. The Company’s contributions to the plans are based on employee contributions and compensation. During 2021, 2020 and 2019, the Company made contributions to the plans of approximately $
Note 16—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 17—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, 2020 and 2019 primarily related to the closure of facilities in the Americas and capacity reductions in the workforce of certain facilities across various regions in Asia and Europe, respectively.
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 December 31, 2021:
|
|
Balance as of |
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance as of |
|
||||||
|
|
December 31, |
|
|
Restructuring |
|
|
Cash |
|
|
Non-Cash |
|
|
Exchange |
|
|
December 31, |
|
||||||
(in thousands) |
|
2020 |
|
|
Charges |
|
|
Payment |
|
|
Activity |
|
|
Adjustments |
|
|
2021 |
|
||||||
Restructuring: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Severance |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
Lease facility costs |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||||
Other exit costs |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
In addition, during 2021, we incurred $
64
The following table summarizes the 2020 activity in accrued restructuring, which is included in accrued liabilities in the condensed consolidated balance sheets, related to various restructuring activities initiated prior to December 31, 2020:
|
|
Balance as of |
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance as of |
|
||||||
|
|
December 31, |
|
|
Restructuring |
|
|
Cash |
|
|
Non-Cash |
|
|
Exchange |
|
|
December 31, |
|
||||||
(in thousands) |
|
2019 |
|
|
Charges |
|
|
Payment |
|
|
Activity |
|
|
Adjustments |
|
|
2020 |
|
||||||
Restructuring: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Severance |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
Lease facility costs |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||||
Other exit costs |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
In addition, during 2020, the Company incurred $
The following table summarizes the 2019 activity in accrued restructuring, which is included in accrued liabilities in the condensed consolidated balance sheets, related to various restructuring activities initiated prior to December 31, 2019:
|
|
Balance as of |
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Balance as of |
|
||||||
|
|
December 31, |
|
|
Restructuring |
|
|
Cash |
|
|
Non-Cash |
|
|
Exchange |
|
|
December 31, |
|
||||||
(in thousands) |
|
2018 |
|
|
Charges |
|
|
Payment |
|
|
Activity |
|
|
Adjustments |
|
|
2019 |
|
||||||
Restructuring: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Severance |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Lease facility costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other exit costs |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||
Note 18—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. However, fourth quarter 2019 operations were adversely affected by the inefficiencies caused by taking the network offline for a period of time. As a result, the Company’s fourth quarter 2019 revenue was also adversely affected as the Company was unable to fulfill a portion of customer demand during the quarter.
We have insurance coverage, including cyber insurance, and worked diligently with our insurance carriers on claims to recover costs incurred, as discussed further below.
In 2019, ransomware incident related costs incurred totaled $
65
Note 19—Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component were as follows:
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
||||
|
|
currency |
|
|
Derivative |
|
|
|
|
|
|
|
||||
|
|
translation |
|
|
instruments, |
|
|
|
|
|
|
|
||||
(in thousands) |
|
adjustments |
|
|
net of tax |
|
|
Other |
|
|
Total |
|
||||
Balances, December 31, 2018 |
|
$ |
( |
) |
|
|
|
|
|
|
|
$ |
( |
) |
||
Other comprehensive gain (loss) before |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Amounts reclassified from accumulated |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Net current period other comprehensive gain (loss) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balances, December 31, 2019 |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other comprehensive gain (loss) before |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Amounts reclassified from accumulated |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Net current period other comprehensive gain (loss) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Balances, December 31, 2020 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive gain (loss) before reclassifications |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Amounts reclassified from accumulated other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net current period other comprehensive gain (loss) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Balances, December 31, 2021 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
See Note 10 for further explanation of the change in derivative instruments that is recorded to accumulated other comprehensive loss.
Note 20—Supplemental Cash Flow and Non-Cash Information
The following is additional information concerning supplemental disclosures of cash payments.
|
|
Year Ended |
|
|
|
||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
2019 |
|
|||
Income taxes paid, net |
|
$ |
|
|
$ |
|
$ |
|
|||
Interest paid |
|
$ |
|
|
$ |
|
$ |
|
|||
Non-cash investing activity: |
|
|
|
|
|
|
|
|
|||
Additions to property, plant and equipment in accounts payable |
|
$ |
|
|
$ |
|
$ |
|
|||
66
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Benchmark Electronics, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Benchmark Electronics, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
67
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of income tax expense
As discussed in Notes 1 and 8 to the consolidated financial statements, the Company has recorded income tax expense of $9.6 million for the year ended December 31, 2021. The Company serves international markets and is subject to income taxes in the United States and foreign jurisdictions, which affect the Company’s income tax expense. Income tax expense is an estimate based on the Company’s understanding of current enacted tax laws and tax rates of each tax jurisdiction.
We identified the evaluation of income tax expense as a critical audit matter. Complex auditor judgment was required in evaluating the Company’s interpretation and application of tax laws and the related impacts to income tax expense. There is complexity in the evaluation of the U.S. income tax expense due to the impact of U.S. tax reform on multinational operations such as the U.S. tax on global intangible low-taxed income (GILTI) and foreign tax credits. There is also complexity in evaluating the impact of changing foreign tax laws on income tax expense.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s income tax expense process. This included controls over the identification of changes to tax laws in the jurisdictions in which the Company operates and the Company’s evaluation of the determination of GILTI and foreign tax credits. We involved tax professionals with specialized skills and knowledge who assisted in evaluating the application of the relevant tax laws and regulations in the determination of the Company’s tax expense. In addition, we evaluated the Company’s methodology used in the determination of GILTI and foreign tax credits.
(Signed) KPMG LLP
We have served as the Company’s auditor since 1986.
Phoenix, Arizona
February 25, 2022
68
Management’s Report
Benchmark’s management has prepared and is responsible for the consolidated financial statements and related financial data contained in this Report. The consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles and necessarily include certain amounts based upon management’s best estimates and judgments. The financial information contained elsewhere in this Report is consistent with that in the consolidated financial statements.
The Company maintains internal accounting control systems that are adequate to prepare financial records and to provide reasonable assurance that the assets are safeguarded from loss or unauthorized use. We believe these systems are effective, and the cost of the systems does not exceed the benefits obtained.
The Audit Committee, composed exclusively of independent, outside directors, has reviewed all financial data included in this Report and recommended to the full Board inclusion of the audited financial statements contained in the Report. The committee meets periodically with the Company’s management and independent registered public accountants on financial reporting matters. The independent registered public accountants have complete access to the Audit Committee and may meet with the committee, without management present, to discuss their audit results and opinions on the quality of financial reporting.
The role of independent registered public accountants is to render a professional, independent opinion on management’s financial statements to the extent required by the standards of the Public Company Accounting Oversight Board (United States). Benchmark’s responsibility is to conduct its affairs according to the highest standards of personal and corporate conduct.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this Report, the Company’s management (with the participation of its chief executive officer and chief financial officer) conducted an evaluation pursuant to Rule 13a-15 promulgated under the Exchange Act, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that as of the end of the period covered by this Report such disclosure controls and procedures were effective to provide reasonable assurance 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 include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) or Rule 15d-15(f) of the Exchange Act). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2021.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report included in Part II, Item 8 of this Report.
69
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Although we have modified our workplace practices globally due to the pandemic, resulting in some of our employees working remotely, this has not materially affected our internal control over financial reporting. We are continually monitoring and assessing the impacts and disruptions caused by the pandemic to ensure there are no material effects on our internal control over financial reporting and to minimize such impacts on their design and operating effectiveness.
We are currently upgrading our enterprise resource planning system (ERP), which is expected to occur in phases over the next several years. We have completed the implementation of the upgrades at certain of the Company’s locations, and have revised and updated the related controls. These changes did not materially affect our internal control over financial reporting. As we implement the upgrades of this ERP system at the remaining locations over the next several years, we will continue to assess the impact on our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. 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 the 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 error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of 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. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B. Other Information.
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
70
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item can be found in the Company’s Proxy Statement for the 2022 Annual Meeting of Shareholders (the 2022 Proxy Statement), to be filed with the SEC not later than 120 days after the end of the Company’s fiscal year ended December 31, 2021 and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this item can be found in the 2022 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
The following table sets forth certain information relating to our equity compensation plans as of December 31, 2021:
Plan Category |
|
Number of |
|
Weighted- |
|
Number of |
|
|
Equity compensation plans approved by security |
|
1,730,509(1) |
|
$20.06(1) |
|
|
2,237,556 |
|
Additional information required by this item can be found in the 2022 Proxy Statement and is incorporated herein by reference.
The information required by this item can be found in the 2022 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
Our independent registered public accounting firm is
The information required by this item can be found in the 2022 Proxy Statement and is incorporated herein by reference.
71
PART IV
Item 15. Exhibits and Financial Statement Schedules.
See Part II, Item 8 - Financial Statements and Supplementary Data of this Report.
See accompanying Report of Independent Registered Public Accounting Firm incorporated herein by reference.
72
2.1 |
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|
|
3.1 |
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3.2 |
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|
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4.1 |
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4.2 |
|
|
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10.1 |
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|
|
10.2 (1) |
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10.3 (1) |
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|
10.4 (1) |
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10.5 (1) |
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10.6 (1) |
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10.7 (1) |
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10.8 (1) |
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10.9 (1) |
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10.10 (1) |
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10.11 (1) |
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10.12 (1) |
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73
10.13 (1) |
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10.14 (1) |
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10.15 (1) |
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10.16 (3) |
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10.17 |
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10.18 (1) |
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10.19 (1) |
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10.20 (1) |
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10.21 (1) |
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10.22 (1) |
|
14.1 |
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21 (2) |
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23 (2) |
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31.1 (2) |
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31.2 (2) |
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32.1 (2) |
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32.2 (2) |
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74
101.INS (2) |
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 (2) |
Inline XBRL Taxonomy Extension Schema Document |
|
|
101.CAL (2)
101.DEF (2) |
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
101.LAB (2) |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
101.PRE (2) |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
104 (2) |
Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101
|
|
|
Item 16. Form 10-K Summary.
None.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
BENCHMARK ELECTRONICS, INC. |
|
By: |
/s/ Jeffrey W. Benck |
|
|
Jeffrey W. Benck |
|
|
President and Chief Executive Officer |
|
Date: |
February 25, 2022 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant, in the capacities and on the dates indicated.
Name |
Position |
Date |
|
|
|
/s/ David W. Scheible |
Chairman of the Board |
February 25, 2022 |
David W. Scheible |
|
|
|
|
|
/s/ Jeffrey W. Benck |
President, Chief Executive Officer and Director |
February 25, 2022 |
Jeffrey W. Benck |
(principal executive officer) |
|
|
|
|
/s/ Roop K. Lakkaraju |
Chief Financial Officer |
February 25, 2022 |
Roop K. Lakkaraju |
(principal financial and accounting officer) |
|
|
|
|
/s/ Anne De Greef-Safft |
Director |
February 25, 2022 |
Anne De Greef-Safft |
|
|
|
|
|
/s/ Douglas G. Duncan |
Director |
February 25, 2022 |
Douglas G. Duncan |
|
|
|
|
|
/s/ Robert K. Gifford |
Director |
February 25, 2022 |
Robert K. Gifford |
|
|
|
|
|
/s/ Ramesh Gopalakrishnan |
Director |
February 25, 2022 |
Ramesh Gopalakrishnan |
|
|
|
|
|
/s/ Kenneth T. Lamneck |
Director |
February 25, 2022 |
Kenneth T. Lamneck |
|
|
|
|
|
/s/ Jeffrey S. McCreary |
Director |
February 25, 2022 |
Jeffrey S. McCreary |
|
|
|
|
|
/s/ Lynn A. Wentworth |
Director |
February 25, 2022 |
Lynn A. Wentworth |
|
|
76