UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FORM 10-K
(Mark One)
☑ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 20192022
or
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the transition period fromto
Commission File Number 1-10560
BENCHMARK ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Texas | 74-2211011 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
56 South Rockford Drive
Tempe, Arizona 85281
(623) Tempe, Arizona85288
(623) 300-7000
(Address, including zip code, and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | |
Common Stock, par value $0.10 per share |
| BHE | The New York Stock Exchange |
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. Yes ☑Yes ☑ No ☐
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 ☐ ☐No No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter periodsperiod that the registrant was required to submit such files). Yes ☑Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☑ | Accelerated filer | ||
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Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant 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. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
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 28, 2019,30, 2022, the number of outstanding common shares was 37,679,265.35,159,562. 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 $0.9$1.0 billion.
As of February 28, 2020,21, 2023, there were 36,755,14435,191,035 common shares of Benchmark Electronics, Inc., par value $0.10 per share, outstanding.
Documents Incorporated by Reference:
Portions of the Company’sregistrant’s Proxy Statement for the 20202023 Annual Meeting of Shareholders, Meetingto 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, 2022, are incorporated herein by reference (Part III, Items 10-14)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. | 1 | |
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 | |
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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 |
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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 | 69 |
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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 | |
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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,” “projection,“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 extent of the 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, global geopolitical events (such as Russia's invasion of Ukraine and U.S. tensions with China), inflationary pressures, future operating results or margins, expected revenue mix, 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. Undue reliance should not be placed on any forward-looking statements. Forward-looking statements are not guarantees of performance. Although Benchmarkthe Company believes these statements are based on and derived from reasonable assumptions, they involve risks, uncertainties and assumptions that are beyond ourthe 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 ourthe 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 severity and continued transmission of its variants, the availability and effectiveness 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 itthe Company assumes no dutyobligation to update them.update.
The Company’sOur fiscal year ends on December 31. Consequently, references to 20192022 relate to the calendar year ended December 31, 2019;2022; references to 20182021 relate to the calendar year ended December 31, 2018,2021, etc.
General
Benchmark Electronics, Inc. (Benchmark)(the Company) is a Texas corporation that began operations in 1979 and is today a worldwide provider of innovative product design, engineering services, technology solutions andprovides advanced manufacturing services (both electronic(electronic manufacturing services (EMS) and precision technology (PT) services)., which includes design and engineering services and technology solutions. 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 market sectors: aerospace and defense (A&D), medical technologies, complex industrials, semiconductor capital equipment (Semi-Cap), next-generation communications and advanced computing. The Company has manufacturing operations located in the United States and Mexico (the Americas), Asia and Europe. 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 high-end computing. Before the second quarter of 2019, results in the semi-cap sector were reported under test and instrumentation.
Our customer engagement focuses on three principal areas:
•Technology Solutions, which involve developing a library of building blocks or reference designs primarily in defense solutions, surveillance systems, radio frequency and high-speed design, and front-end managed connectivity data collection systems. We often merge these technology solutions with engineering services in order to support manufacturing services. Our reference designs can be utilized across a variety of industries but we have significant capabilities in the A&D and next generation telecommunication markets. We have also developed differentiated capabilities in radio frequency (RF) and high speed design for both components and
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substrates. The need to reduce size, weight, and power (SWaP) to accommodate high frequency electronics communications is important to customers in the A&D, medical and next generation telecommunications markets.
•Manufacturing Services, which include printed circuit board assemblies (PCBAs) using both traditional surface mount technologies (SMT) and microelectronics, subsystem assembly, boxsystem build and systems integration. SystemsSystem builds and integration often involvesinvolve building a finished assembly that includes PCBAs, complex subsystem assemblies, mechatronics, displays, optics,mechanicals, and other components. These final products may be configured to order and delivered directly to the end-customer across all the industries we serve. Manufacturing services also includes precision technology services comprised of precision machining, advanced metal joining and welding, cleaning, assembly and functional testing primarily for the semi-cap market (serving semiconductor capital equipment customers) as well as the medical and A&D markets.
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Our core strength lies in our ability to partner with our customers to provide concept-to-production solutions inthrough a tightly integrated and seamless set of design, test, manufacturing, supply chain and support services. The integration of these product realization services along with 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.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 areadvantage is our ability to engage with our customers at any point in their product development to production process by providing our leading edge technical capabilities in engineering services (including full life cycle from product design)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 technologymachining capabilities) provided by highly skilled personnel. We continue to investalso have diversified end market and regulated market experience in our business to expand our skills and service offerings from direct customer inputs. We utilize customer feedback to enhance our future flexibletargeted sectors. To support customers across these sectors, we have strategically invested in global supply chain design and manufacturing solutions in support of the full life cycle of customers’ products. These solutions provide accelerated time-to-market, faster time-to-volume production, and reduced product development costs. Working closely with our customers and responding promptly to their needs, we become an integral part of their process to bring products to market faster and more economically.execution capabilities.
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 aOur culture is customer-centric, organization with a high degree ofcentered on accountability and ownership to develop processes necessaryof process improvement to exceed customer expectations and deliver financial performance aligned to our goals. Through our employee engagement and customer satisfaction feedback process,processes, we continuously solicit and act upon information to improve our company and better support our customers and business processes in the future.processes. We have taken steps to attractinvested in attracting and developing leadership throughout the best leadersorganization and are acceleratingcommitted to diversity and inclusion in our efforts to mentordevelop an innovative and develop key leaders for the future.
forward-thinking workforce.
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 continueare increasingly turning 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 experiencing high outsourcing growth rates. The traditional markets ofat the same rate. Historically we have identified the computing and telecommunications have usedmarkets as traditional markets given their maturity and high level of outsourcing. This compares to the lower level of outsourcing model for a number of years and have a lower outsourcing growth potential than the under-penetratedwithin our other served markets in medical, complex industrials, A&D, and semi-cap, which we have historically referred to has higher value. In recent years, we have focused our efforts within computing and telecommunications to concentrate on lower volume but higher complexity sub-sectors of the markets, which we identifyrefer to as advanced computing and next generation communications, respectively.
Today, we believe that each of our higher-value markets. The higher-value markets typically provide the opportunity for higher profitability than the traditional marketsmarket sectors are high value and in some cases provide the potential for stable growth. The higher-value markets also align wellwell-aligned with Benchmark’sour expertise in more complex and highly regulated products,products. This provides us the opportunity for increased value-add, higher profitability and greater market share as we believe we are well-positionedseek to capitalize on increased outsourcing in theseour served markets.
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Our Strategy
Our goal is to be the solutions provider of choice to the leading OEMs thatwhich we believe offer the greatest potential for profitable growth. To meet this goal, we have implemented the following strategies:
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which rewards the sharing of best practices and implementingimplementation of lean principles. We will continue to drive lean and operational excellence initiatives, withbound by common global processes, that allowwhich enable us to optimize our capacity and efficiency. Our customers benefit from these initiatives by sharing in the cost structure and capacity. In support of our financial goals,savings while having comfort we will continue a strong focus on cash conversion.can scale to meet their future growth needs.
We enhanced ourcore technology capabilities through the following acquisitions:
-In June 2013, we acquired Suntron Corporation (the Suntron Acquisition) to better serve customers in the A&D markets and expand our capabilities in Mexico.
-In October 2013, we acquired the full-service EMS segment of CTS Corporation (the CTS Acquisition). The CTS Acquisition expanded our portfolio of customers in non-traditional and highly regulated markets and strengthened the depth and scopevalue of our services to new product express capabilities on the West Coast.
-In November 2015, we acquired Secure Communication Systems, Inc. and its subsidiaries (collectively, Secure Technology or Secure) (the Secure Acquisition), a leading provider of customized high-performance electronics, sub-systems, and component solutions for mission critical applications in the highly regulated industrial and A&D markets.existing customers.
In addition to expanding our global footprint, these acquisitions have enhanced our business in the following ways:
-improved customer growth opportunities;
-developed strategic relationships;
-broadened service and solution offerings;
-provided vertical solutions;
-diversified our market sectors; and
-added experienced management teams.
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.
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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.
·New Product Design, Prototype, Testing and Related Engineering Services. We offer a full spectrum of new product design, automation, test development, prototype and related engineering for projects contracted by our customers who pay for and own the resulting designs in our contract design services business. We employ a proven seven-step process for concept-to-production in our design services model that enables a shorter product development cycle and gives our customers a competitive advantage in time-to-market and time-to-profit. Our multi-disciplined engineering teams provide expertise in a number of core competencies critical to serving OEMs in our target markets, including award-winning industrial design, mechanical and electrical hardware, firmware, software and systems integration and support. We create specifications, designs and quick-turn prototypes, and validate and ramp our customers’ products into volume manufacturing.
Custom Testing and Automation Equipment Design and Build Services. We provide our customers a comprehensive range of custom automated test equipment, functional test equipment, process automation and replication solutions. We have expertise in tooling, testers, equipment control, systems planning, automation, floor control, systems integration, replication and programming. Our custom functional test equipment, process automation and replication solutions are available to our customers as part of our full-service product design and manufacturing solutions package or on a stand-alone basis for products designed elsewhere. We also provide custom test equipment and automation system solutions to OEMs, which pay for and own the designs. Our ability to provide these solutions allows us to capitalize on OEMs’ increasing needs for custom manufacturing solutions and provides an additional opportunity for us to introduce these customers to our comprehensive engineering and manufacturing services.
Technology Solutions. We are investing in building blocks and solutions such as secure defense turnkey design and reference platforms in avionics, ground vehicle electronics, munitions, and soldier platforms that require ruggedization for harsh environments and secure communications. We are developing advanced manufacturing capabilities for high density interconnect circuits using advanced substrates including liquid crystal polymer, high-frequency filters and a data collection network that integrates sensors, radios, and gateways for data analytics.
Manufacturing Services (Electronics Manufacturing and Testing Services):
As OEMs seek to provide greater functionality in smaller products,form-factors, they increasingly require sophisticated manufacturing technologies and processes. Our investment in advanced manufacturing equipment and process development, as well as our
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experience in innovative packaging and interconnect technologies, enable us to offer a variety of advanced manufacturing solutions. Theseaddress these evolving requirements. Our specialization in packaging and interconnect technologies include but are not limited to:
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We provide our customers with a comprehensive set of PCBA manufacturing technologies and solutions, which include:
Mount Technology
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·through hole technology;Through Hole Technology;
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·soldering processes;Soldering Processes;
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Solutions·solutions
X-ray Inspection
Test
We also provide specialized solutions in support of our customers’ components, products and systems, which include:
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product-specific manufacturing processes utilizing manual, mechanized or fully automated lines to meet our customers’ product volume and quality requirements. We work with our customers to develop product-specific test strategies. Our test capabilities include manufacturing defect analysis, in-circuit tests to check the circuitry of the board and functional tests to confirm that the board or assembly operates in accordance with its final design and manufacturing specifications. We either custom design test equipment and software ourselves or use test equipment and software provided by our customers. We also offer our own internally designed functional test solutions for greater cost savings and flexibility and providein addition to providing environmental stress tests of assemblies of boards or systems. We alsoAdditionally, we provide product life cycle testing services, such as ongoing reliability testing where units are continuously cycled for extended testingperiods while monitoring for early-life failures.
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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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·frames;frame fabrication, welding, grinding, bead blasting and coating; and
painting.·paint.
Our global network of operations includes manufacturing facilities in seven 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, the Netherlands, Romania and Thailand. Our network also includes engineeringdesign centers that lead customer engagements and provide solutions to customers in the Americas, EuropeAsia and Asia.Europe. Additionally, we are compliant with and/or hold the following accreditations, certifications and registrations by geography:
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| Americas | Europe | Asia |
ISO |
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FDA/QSR Compliant – Medical |
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ISO |
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MedAccred |
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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 |
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TL9000 – Telecommunications |
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ANSI ESD S20: |
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ISO |
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ISO |
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Design & Engineering Services and Technology Solutions:
We endeavor to add value to customers through coordination and integration from concept, design, prototype and other engineering services 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 seeking similarly 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.
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. OurUtilizing our agility and expertise in supply chain management and our relationships with suppliers across the supply chain, enable uswe strive to help reduce our customers’ cost of goods sold and inventory exposure.
However, due to the COVID pandemic, global labor and supply disruptions and increased demand for electronics in general, we continue to see component supply chain constraints across several commodity categories which are constraining our ability to produce the full demand forecasts on the timeline requested by our 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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facilities around the world using state-of-the-art statistical process control techniques for continuous process improvements. To enhance our ability to rapidly respond to changes in our customers’ requirements by effectively managing changes in our supply chain, we utilize web-based interfaces and real-time supply chain management software products, which allow for scaling operations to meet customer needs, shifting capacity in response to product demand fluctuations, reducing materials costs and effectively distributing products to our customers or their end-customers.
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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,operations, 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.
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The following table sets forth the percentages of our sales by sector for 2019,20182022, 2021 and 2017.2020.
| Higher-Value Markets |
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Industrials | Industrials |
| 20 | % |
| 19 | % |
| 20 | % |
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| 21 | % |
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| 20 | % |
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| 18 | % |
A&D | A&D |
| 19 |
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| 16 |
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| 16 |
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| 12 |
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| 15 |
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| 21 |
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Medical | Medical |
| 20 |
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| 15 |
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| 15 |
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| 21 |
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| 20 |
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| 24 |
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Semi-Cap | Semi-Cap |
| 12 |
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| 14 |
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| 14 |
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| 25 |
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| 26 |
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| 18 |
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Advanced Computing |
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| 10 |
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| 9 |
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Next Gen Comms |
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| 11 |
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| 10 |
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| 11 |
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| 71 | % |
| 64 | % |
| 65 | % |
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| 100 | % |
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| 100 | % |
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| 100 | % |
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| Traditional Markets |
| 2019 |
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| 2018 |
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| 2017 |
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Computing |
| 16 | % |
| 23 | % |
| 22 | % | |||||||||||||
Telecommunications |
| 13 |
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| 13 |
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| 13 |
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| 29 | % |
| 36 | % |
| 35 | % | ||||||||||||
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| 100 | % |
| 100 | % |
| 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 38%52%, 44%47% and 46%41% of our sales in 2019, 20182022, 2021 and 2017,2020, respectively. In 2019, no single customerSales to Applied Materials represented 10% or more15%, 16% and 12% of our sales. In 2018,total sales to International Business Machines Corporation represented 13% of our sales. In 2017, sales to International Business Machines Corporationin 2022, 2021 and Applied Materials, Inc. represented 12% and 10%, respectively, of our sales.2020, respectively.
During the first quarter of 2019, we indicated we would not renew a legacy computing contract with a long-standing customer that represented $324 million and $285 million in revenue in 2018 and 2017, respectively. When this contract was last renewed in early 2016, it was assumed that the related product line would go end-of-life or decline substantially over time. The opposite happened and business performance on this contract deteriorated due to model mix and supply chain changes. We notified the customer that we would not renew the contract past the expiration date at the end of 2019. We coordinated a transition plan with the customer and completely exited the contract fully in the third quarter of 2019. For additional information, see “Risk Factors—The loss of a major customer would adversely affect us” in Item 1A of this Report and “2019 Highlights” in Item 7 of this Report.
Seasonality
Seasonality in our business has historically been driven by customer and product mix, particularly the industries that our customers serve. Although weWe have historically experienced higher sales during the fourth quarter this pattern does not repeat itself everyaligned with many of our customers end of fiscal 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 would delayhave delayed and are expected to continue delaying shipments and may adversely affect our profitability” in Part I, Item 1A of this Report. Although we occasionally experiencehave experienced component shortages and longer lead times for various components, we have generally been ablecontinually 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 working with OEMs on qualifying alternative components or completing redesigns to eliminate the constrained part, or purchasing components at slightly higher prices from distributors rather than directly from manufacturers. In addition, by developing long-term relationships with
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suppliers, we have been better ableendeavor to minimize the effects of component shortages compared to manufacturers without such relationships. The goal of these procedures is to reduce our inventory risk.
Backlog
We had sales backlog of approximately $1.8 billion at December 31, 2019, as compared to the 2018 year-end backlog of $2.1 billion. Backlog consists of purchase orders received, and other forecast requirements under customer contracts which can be subject to change. Although we expect to fill substantially all of our year-end backlog during 2020, we do not currently have long-term agreements with all of our customers, and customer orders can be canceled, changed or delayed. The timely replacement of canceled, changed or delayed orders with orders from new customers cannot be assured, nor are there any assurances that any of our current customers will continue to utilize our services. Because of these factors, our backlog is not a meaningful indicator of future financial results.
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., Hon Hai Precision Industry Co.Jabil Inc., Ltd., Jabil Circuit, Inc.,Kimball Electronics, Plexus Corp and Sanmina Corporation, some of whom have greater financial, manufacturing or marketing resources than we do.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,some largely outsourced sectors, such as advanced 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 committedimplementing 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 our General Counsel & Chief Legal Officer, who is a member of our senior executive leadership team and provides regular updates to being “sustainable”. Being sustainable describesthe 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. On March 21, 2022, the Company achieved a major milestone in its effort to advance our long-termcomprehensive approach to industry best practicesESG initiatives with the publication of our inaugural 2021 Sustainability Report. The 2021 Sustainability Report 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 emerging normsthe Task Force on Climate-Related Financial Disclosures (TCFD). We expect to publish our 2022 Sustainability Report in the areasfirst quarter of 2023. Our most current sustainability information is posted on our website at https://www.bench.com/sustainability.
Our 2021 Sustainability Report highlights the work we are doing across the globe and within the five tenets of our ESG strategy – Environmental Responsibility, Our People, Governance, Our Community, and Our COVID-19 Response. In 2022, we updated our ESG strategy to focus on four tenets, instead of five, removing “Our COVID-19 Response.” Remaining COVID-19 initiatives and
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activity is now more closely related to the topics covered in the “Our People” tenet and is subsumed in the social dimension of our ESG activities.
Environmental Responsibility
Benchmark’s commitment to environmental responsibility is an ESG focus that starts at the corporate level with meaningful goal setting followed by purposeful action. We expect to minimize our environmental impact with our Energy Management and Saving Guidelines which include procedures for reducing our waste sent to landfills through recycling, purchasing environmentally responsible products, and reducing energy and water consumption. All of Benchmark’s sites also comply with local water laws and regulations. Beyond compliance, wherever possible, sites have demonstrated a commitment to water efficiency and conservation by, among other things, utilizing hands-free faucets, toilets, and water fill stations to limit water usage.
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 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 sustainabilityobjectives. Other environmental priorities include:
Environmental Sustainability:
•We engage our employees to accomplish this by conserving energy; reducing consumption of natural resources; preserving air, soil, and water quality, managing waste properly and encouraging reuse or recycling; reducing use of toxic substances and applyingapply an ethical approach to source reduction and disposal efforts.
Our People
Care for People:
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•We believe in upholding the principle of human rights, worker safety and observing fair labor practices within our organization and our supply chain. We embrace diverse viewpoints and perspectives, recognizing that greater inclusion fosters innovation and achieves better decision making and financial results. Commitment to diversity, equity and inclusion (DEI) has been a major ESG priority for Benchmark. In 2021, the Company formed an Inclusion Council and engaged an experienced consultant to help design and implement a comprehensive DEI strategy. Supporting initiatives included organizational training, refreshed company values and a revitalized recruiting strategy focused on building a more diverse team. In 2022, we created our first Employee Resource Group (ERG), the Women’s Inclusion Network (WIN), supported by the Vice President of Business Systems and Analytics as its executive sponsor. The WIN plans to host quarterly events around its mission to build friendships, develop careers, and foster support for women employees. For additional information, see “Human Capital Management” below.
•
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We are also committed to ensuring that proper working conditions exist for the safety of our employees, such as the implementation of 5S6S lean management concepts (sort, set, shine, standardize, sustain, and safety) and visual management practices, developing, implementing and continuously improving our Occupational Health and Safety Management System, and providing appropriate education, reporting and controls.
•We are committed In 2022, Benchmark introduced a global environment, health and safety (EHS) policy, consolidating and enhancing other related policies and information across the Company. The policy expresses our commitment to participating in the development ofensuring a safe working environment for our surroundingemployees, contractors, customers, and communities and supporting diversity.
•In the fall of 2019,is a strategic customer presented a Benchmark operation with a “Supplier ESG Excellence Award”guide for manufacturing sites to use when developing or updating their “participation, leadershipenvironmental, health and superiority during the Forced and Bonded Labor Prevention Program.”safety programs.
Ethics & Corporate Responsibility:In 2022, Benchmark’s site in Korat, Thailand was named an “Excellent Practices Establishment on Occupational Safety and Health – a national-level award from Thailand’s Ministry of Labour. This was our fourth consecutive year receiving the national OHS award. Our site in Suzhou, China also was awarded the 2022 “Employer of the Year for Employee Care” by the Suzhou City Government. This award recognizes employer efforts to advance relations with their employees.
•Governance
We are committed to ensuring ethical organizational governance, promoting business ethics and integrity, and embracing diversity, equity and inclusion in the board roomboardroom and throughout the organization. Benchmark has comprehensive corporate governance policies and structures in place to foster accountability and transparency. These policies reflect our underlying commitment to maintain the highest standards of ethics and integrity and to operate our business in compliance with all applicable laws and regulations, including anti-corruption, anti-bribery, and antitrust.
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We are also committed to observing fair, transparent and accountable operating practices.
• To this end, Benchmark believes that its ultimate responsibility is to help create and foster the best possible work environment for everyone in our organization. To this end, we implementedWe continue to utilize a “Speak Up!” campaign designed to promote a positive and ethical organizational culture. We believe that each team member, regardless of position, shares in this responsibility, and we encourage all of them to “Speak Up!” with questions or concerns about actual or potential ethical issues, questions about company policies, suggestions about how we can make our organization better and to address any other concerns.
•To facilitate open and honest communication, in 2018 we upgraded our whistleblower Helpline to include globalincludes local phone numbers in each global location, together with language support, that allows reporters to “Speak Up!” in over 150 native languages. In addition, we added ateam members access our web portal that allows online reporting ofto report concerns, a place to ask questions, or quickly access ethics and compliance policies.
•We believe these efforts strengthen our enterprise ethics and compliance efforts and foster the environment where employees and stakeholders can express and have concerns resolved.
Supply Chain Responsibility:From a governance perspective, Benchmark continues to advance its ESG strategy and is implementing and managing long-term, strategic sustainability initiatives. This effort is led by the Company’s ESG/Sustainability Council, and is overseen by the Nominating, Sustainability and Governance Committee of the Board of Directors. Established in 2020, the ESG/Sustainability Council includes a cross-functional team of leaders representing operations, human resources, supply chain, quality and regulatory compliance, finance, marketing communications, investor relations, facilities and legal.
Our Community and Supply Chain Responsibility
We are committed to sourcing with suppliers willing to support our sustainability initiatives.
Benchmark endorses the Responsible Business Alliance (RBA)(formerly (formerly the Electronics Industry Citizenship Coalition or EICC) Code of Conduct, which provides guidance in five critical areas of corporate social responsibility (CSR) performance, including labor, health and safety, environment, management systems, and ethics. Benchmark also seeks the same endorsement from our business partners, requesting that each business partner adhere to the RBA Code of Conduct or its equivalent at initial engagement and flowing these requirements through our commercial contracts to our business partners and supply chain. Benchmark also conducts a supply chain monitoring system to assess adherence in these areas with regard to our supply chain partners.
Benchmark also supports the EcoVadis rating system; Eco Vadis is a provider of sustainability ratings, intelligence and collaborative performance improvement tools for global supply chains. The EcoVadis methodology evaluates criteria across four themes: environment, fair labor practices, ethics/fair business practices and supply chains. In 2022, Benchmark was again awarded the EcoVadis Silver Medal-Sustainability rating, placing it in the top 28% of EcoVadis rated companies.
Benchmark also supports Rule 13p-1 under the Securities Exchange Act (Conflict Minerals Law) and efforts to avoid sourcing Conflict Mineralsconflict minerals (tin, tantalum, tungsten, and gold or other derivatives) that directly or indirectly financingfinance or benefit armed groups in the Democratic Republic of Congo (DRC) and in adjoining countries.countries (Covered Countries). Consistent with the Conflict Minerals Law and the OECD Due Diligence Guidance concerning Conflict Minerals,conflict minerals, Benchmark adopted the Conflict Free SourcingResponsible Minerals Initiative Due Diligence reporting process and seeks to obtain Conflict Mineralsconflict minerals content declarations from its suppliers, all in an effort to promotepromoting supply chain
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transparency. Benchmark does not directly source tin, tantalum, tungsten or gold (3TG) from mines, smelters or refiners, and is in most cases several or more levels removed from these supply chain participants. Benchmark therefore expects:expects our suppliers to:
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‒our suppliers topreferentially source 3TG only from smelters and refiners validated as being conflict free and that do not directly or indirectly benefit or finance armed groups in the DRC or other covered country;any Covered Country.
‒our suppliers to declarations;Conflict Minerals (3TG) declarations.
‒ourto CM data collection using the RMI CMRT template, a professional analysis and risk assessment with corrective action on the basis of the CMRTs collected from the suppliers.
Any suppliers not willing to comply with these requirements shall be reviewed by global procurement with regard to future business and sourcing declarations. This conflict minerals policy encourages our suppliers to respect and protect human rights throughout the world.
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.
Culture and Values
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:
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 of our Board of Directors is responsible for overseeing the Company’s human capital practices and management compensation philosophy, including the incentive compensation and equity-based plans for
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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. The Board’s Nominating, Sustainability and Governance Committee has demonstrated its commitment to adding more diversity to our Board with continued female representation, as well as a racially and/or ethnically diverse member as we continue to shift our Board structure. For example, in June 2021, the Company added another female director, Lynn Wentworth. Similarly, in October 2021, Benchmark appointed Ramesh Gopalakrishnan to fill a vacant board position who 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. Sponsored by our Chief Executive Officer and our Chief Human Resources Officer, the Inclusion Council, meets 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 leading inclusively, 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 and 2022 to elicit feedback from employees and is developing action plans for continuous improvement in the areas of leadership, communication, culture, inclusion, learning and development. The Human Capital and Compensation Committee of our Board of Directors reviews these initiatives and results with our CEO and 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. The Company’s Human Capital Management (HCM) system, which was established to provide a common database upon which the Company can centralize people-related data and standardize people management processes across the globe, provides an operating framework to enable leaders to better hire talent and manage teams, including goal setting, performance evaluations, succession planning, and learning and development. The HCM system also provides 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 skills 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 contributions 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.
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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. In response to 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 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. Many of these protocols have evolved, with some becoming more permanent fixtures in our workplace and in the way we conduct certain aspects of our business.
As of December 31, 2022, we employed approximately 11,873 people, approximately 369 of whom were engaged in design and development engineering. Additionally, our contractor workforce included approximately 1,602 people. 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.
Segments and International Operations
We have manufacturing facilities in the Americas (United States and Mexico), Asia (China, Malaysia 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 2022, 2021 and 2020, 61%, 55% and 52%, respectively, of our sales were from our international operations. See 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 and climate change regulations could cause us significant expense” in Part I, Item 1A of this Report.
Employees
As of December 31, 2019, we employed approximately 10,600 people, approximately 370 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 good.
Segments and International Operations
We have manufacturing facilities in the Americas, Asia and Europe to serve our customers. Benchmark is operated and managed geographically, and management evaluates performance and allocates resources on a geographic basis. We currently operate outside the United States in China, Malaysia, Mexico, the Netherlands, Romania and Thailand. During 2019, 2018 and 2017, 47%, 45% and 47%, respectively, of our sales were from our international operations. See Note 10 and Note 15 of Notes to Consolidated Financial Statements in Item 8 of this Report for segment and geographical information.
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 annual report.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
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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.
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We are exposedOperational Risks
Our business, financial condition and results of operations have been and may continue to general economicbe adversely affected by the COVID pandemic, the extent of which is uncertain and market conditions thatdifficult to predict. The widespread outbreak of any other health epidemics could have a material adverse impact onalso adversely affect our business, operatingfinancial condition and results and financial condition.of operations.
Uncertainty overAny outbreaks of contagious diseases, such as the erosionglobal pandemic related to COVID, 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. The COVID outbreak 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 negatively impacted the global consumer confidence, geopolitical issues, the availabilityeconomy, disrupted global supply chains and cost of credit, concerns about volatile energy costs, declining asset values, inflation, rising unemployment,workforce participation, and the stabilitycreated significant volatility and solvencydisruption of financial institutions, financial markets,markets. Since the initial outbreak, more contagious variants of COVID, such as the Omicron variant and its subvariants, have emerged and spread globally, which initially caused many governments and businesses to reimplement various measures, or impose new restrictions, in an effort to lessen the spread of COVID and sovereign nations can slow global economic growth and result in recessionary conditions. Anyits variants. While many of these potential negative economic conditionsrestrictions have been lifted, uncertainty remains as to whether additional restrictions may reduce demand forbe initiated or again reimplemented in response to surges in COVID cases. The lingering impact of the COVID pandemic continues to create significant volatility throughout the global economy, including supply chain constraints, labor supply issues and higher inflation. Accordingly, it is unclear at this point the full impact COVID and its variants will have on the global economy and on 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.Company.
In addition to our customers or potential customers reducing or delaying orders,As a numberresult of other negative effects on our business could materialize,the COVID pandemic, including the insolvencyrelated responses from government authorities, the Company’s operations were impacted worldwide starting in the first quarter of key suppliers,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 could resultresulted in production delays, shorter payment terms from suppliersreduced productivity levels throughout our facilities that negatively impacted our operations. Additionally, the Company experienced a challenging supply chain environment and labor constraints in 2020, and 2021, which continued throughout 2022, as well as increased direct costs, inflationary pressures and under absorption of fixed costs, due to reduced availabilitythe COVID pandemic. For additional information see “—COVID Pandemic Update” in Part II, Item 7 of credit default insurance in the market, the inability of customers to obtain credit, 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.this Report.
In cases whereWith continuing COVID outbreaks in some regions of the evidence suggestsworld and the possibility of new variants emerging, 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:
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; the actions to contain the virus or treat its impact, including the
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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 be ablereturn fully 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.
pre-pandemic levels.
Shortages or price increases of components specified by our customers would delayhave 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. In the past,Currently, supply shortages for components and commodity categories used in manufacturing have substantially curtailed production of all assemblies using a particular component andresulted in industry-wide shortages of electronic components particularlyand have curtailed production of memoryassemblies, primarily as a result of the COVID pandemic, as well as labor and logic devices, have occurred. For example, the 2011 earthquake and tsunami in Japan disrupted the global supply chain for certain components manufactured in Japan that were incorporated in the products we manufactured. The 2011 Thailand flood had a similar impact. Anydisruptions. In some instances, such component shortages may resulthave resulted in delayed shipments, which could have an adverse effect on our profit margins.shipments. Because of the continued increase in demand for surface mount components, we anticipatehave experienced component shortages and longer lead times for certain components to occur from time to time.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, certain componentour 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 could adversely affectto our gross profit margins.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.
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We are dependent on the continued growth, viability and financial stability of our customers. Our customers are OEMs of:
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·equipment
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·computers
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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 throughout the broader semi-capital equipment market in 2018 and 2019 have had a significant impact on us.
The loss of a major customer would adversely affect us.
OurA substantial percentage of our sales are dependent onmade to a small number of customers, and the successloss of our customers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence. Developmentsa 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. 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 38%52%, 44%47% and 46%41% of our sales in 2022, 2021 and 2020, respectively.2019, 2018 and 2017, respectively. Further, as part of our ongoing process to review marginal and dilutive contracts, we made the decision to not renew the legacy contract with a large computing customer that expired at the end of 2019. During the second quarter of 2019, we completed the final buildout of this legacy contract and in the third quarter had an immaterial amount of revenue from this contract.
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, including component parts inventory, 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
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the future. A business downturn resulting from any of these external factors could have a material adverse effect on our operating income. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.
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. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.
We may encounter significant delays or defaults in payments owed to us by customers for products we have manufactured or components we have produced 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. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.
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
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reputation.
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 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 20192022, 2021 and 2020, 61%, 201855% and 2017, 47%, 45% and 47%52%, respectively, of our sales were from our international operations. These international operations are subject to a number of risks, including:
·
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·and outbreaks of war)war, such as Russia’s invasion of Ukraine, and trade restrictions and tariffs), which could impact our ability to ship and/or receive product;
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·import controlstariffs, and trade barriersrestrictions (including quotas and border taxes);
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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 retaliatoryregulatory 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
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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, 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.
We have significant international sales and operations and face risks related to health epidemics such as the coronavirus.
Any outbreaks of contagious diseases and other adverse public health developments in countries where we operate could have a material and adverse effect on our business, financial condition and results of operations. For example, the recent outbreak of a novel strain of coronavirus first identified in Wuhan, Hubei Province, China, has resulted in significant governmental measures being implemented to control the spread of the virus, including restrictions on manufacturing and the movement of employees in many regions of the country. This has affected our manufacturing facilities in China as well as the facilities of our suppliers, customers and our customers’ contract manufacturers. The extent to which the coronavirus will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. In addition, the coronavirus may result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our end customers’ products. Any of these events, including a prolonged disruption to our manufacturing facilities in China, could materially and adversely affect our business and our financial results. The extent of the impact will depend on future developments, which are highly uncertain and cannot be predicted. As a result, at the time of this filing, it is impossible to predict the overall impact of the coronavirus on our business and financial results.
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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 recently went into effect, 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.
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 resources and more geographically diversified international operations than we do. Our competitors include Celestica Inc., Flex Ltd., Hon Hai Precision Industry Co., Ltd., Jabil Circuit, Inc., Plexus Corp and Sanmina Corporation, some of whom have greater financial, manufacturing or marketing resources than we do. 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 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.
We experience intense competition, which can intensify further as more companies enter the markets in which we operate, as existing competitors expand capacity and as the industry consolidates. 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 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:
·the volume of customer orders relative to our capacity;
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·customer introduction and market acceptance of new products;
·changes in demand for customer products;
·seasonality in demand for customer products;
·pricing and other competitive pressures;
·the timing of our expenditures in anticipation of future orders;
·our effectiveness in managing manufacturing processes;
·changes in cost and availability of labor and components;
·changes in our product mix;
·changes in tax laws in the jurisdictions in which we operate;
·changes in tariffs, trade agreements and other trade protection measures;
·fluctuations in currency exchange rates;
·changes in political and economic conditions;
disruptions caused by computer malfunctions or cybersecurity incidents; and
·local factors and events that may affect our production volume, such as local holidays, pandemics or natural disasters.
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.
Acquisitions may pose difficulties for us.
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:
·integration and management of the operations;
·as noted above, demand can vary, and our projections of results may be wrong due to deferred or reduced demand;
·retention of key personnel;
·integration of purchasing operations and information systems;
·retention of the customer base of acquired businesses;
·management of an increasingly larger and more geographically disparate business;
·the possibility that past transactions or practices may lead to future commercial or regulatory risks;
·diversion of management’s attention from other ongoing business concerns, and
·inadequate internal control over financial reporting and our ability to bring such controls into compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner.
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.
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.
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If any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short term.short-term. We may not be able to recoup these start-up costs or replace anticipated new program revenues.
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 may be affected by consolidation inprovide services both as a prime contractor and subcontractor for the electronics industry, which could create increased pricing and competitive pressuresU.S. government. Consequently, a portion of our financial results depends on our business.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
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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.congressional appropriations. 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.
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 countriesprograms in which we have assets or conduct activities. Our tax position, however, is subject to reviewparticipate compete with other programs for consideration and possible challengefunding during the budget and appropriations process, which can be impacted by taxing authoritiesshifting 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.often competing political priorities.
Several countries where we operate allowOur 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 tax holidaysthese contracts may be untested or provideunproven and product requirements and specifications may be modified. Consequently, technological and 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, or tax rates applicable to us in such jurisdictions were otherwise increased, such as the nonrenewal of our tax holiday in China in 2019. In addition, further acquisitionsperformance difficulties 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.
As a result of the U.S. Tax Cuts and Jobs Act (U.S. Tax Reform) enacted in December 2017, we incurred a net estimated tax expense of $93.3 million due to the one-time mandatory transition tax on the deemed repatriation of undistributed foreign earnings and the re-measurement of U.S. deferred tax assets and liabilities. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Income taxes and Note 10 to the Consolidated Financial Statements of this Report for additional information.
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 eventsdelays, cost overruns or circumstances indicateproduct failures. Moreover, there can be no assurance that the carrying valueamounts we spend to develop new products or solutions to compete for a government contract will be recovered since we 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, 2019, we had $192.1 million in goodwill and $75.8 million of identifiable intangible assets. See Note 1(h) toawarded the Consolidated Financial Statements in Item 8 of this Report.
There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our financial position and results of operations.
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The consolidated financial statements included in the periodic reports we file with the SEC are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our financial position and results of operations.
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.
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.
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 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 addition, in the fourth quarter of fiscal 2019, some of our systems were affected by a ransomware incident that encrypted information on our systems and disrupted customer and employee access to our
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systems and services. The Company incurred, and could continue to incur, 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. The Company has found no evidence that customer or employee data was exfiltrated from its network. The Company carries insurance, including cyber insurance. The availability of insurance to offset the full scope of the costs and related impacts of the 2019 ransomware incident has not been fully determined.
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 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 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.
Our stock price is volatile.
Our common shares have experienced significant price volatility, which may continue in the future. The price of our shares can fluctuate widely in response to a range of factors, including our financial results and changing conditions in the economy generally or in our industry in particular. In addition, stock markets generally experience significant price and volume volatility from time to time which may affect the market price of our shares for reasons unrelated to our performance.
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:
a provision in our certificate of formation granting the Board of Directors authority to issue preferred stock in one or more series and to fix the relative rights and preferences of such preferred stock;
provisions in our bylaws restricting shareholders from acting by less than unanimous written consent and requiring advance notification of shareholder nominations and proposals;
a provision in our bylaws restricting anyone, other than the Chief Executive Officer, the President, the Board of Directors or the holders of at least 10% of all outstanding shares entitled to vote, from calling a special meeting of the shareholders;
a statutory restriction on the ability of shareholders to take action by less than unanimous written consent; and
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a statutory restriction on business combinations with some types of interested shareholders.
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.
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. Over the last several years, we have become subject to the RoHS directive and the Waste Electrical and Electronic Equipment Directive. These directives restrict the 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 incur additional direct costs or obligations in complying with any new environmental regulations, 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.
contract.
Our business may be adversely impacted by geopolitical events.
As a global business, we operate and have customers located in many countries. Geopolitical events such as terrorist acts may affect the overall economic environment and negatively impact the demand for our customers’ productsclimate change or our ability to ship or receive products. As a result, customer orders may be lower and our financial results may be adversely affected.
Our business may be adversely impacted by natural disasters.
Some of our facilities including our corporate headquarters, 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
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may not be adequate or may not continue to be available at commercially reasonable rates and terms. See “We“—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.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.
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, 2019, our total outstanding debt (excluding unamortized debt issuance costs and finance leases) was $144.4 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:
increase our vulnerability to general adverse economic and industry conditions;
impair our ability to obtain additional debt or equity financing in the future for working capital, capital expenditures, acquisitions or other purposes;
require us to dedicate a material portion of our cash flows from operations to the payment of principal and interest on our indebtedness, thereby reducing the availability of our cash flows to fund working capital needs, capital expenditures, acquisitions and other purposes;
expose us to the risk of increased interest rates since the Term Loan has a variable rate;
limit our flexibility in planning for, or reacting to, changes in our business or industry;
place us at a disadvantage compared to our competitors that have less debt; and
make it more difficult for us to satisfy our debt obligations.
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 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 (LIBOR), the bank’s prime rate or the federal funds rate. We are also exposed to interest rate risk on our invested cash balances.
Changes in financial accounting standards or policies have affected, and in the future may affect, our reported financial condition or results of operations. Additionally, changes in securities laws and regulations could increase our operating costs.
We prepare our financial statements in conformity with U.S. GAAP. These principles are subject to interpretation by
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the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results and may affect our reporting of transactions that are completed before a change is announced. Changes to those rules or questions as to how we interpret or implement them may have a material adverse effect on our reported financial results or on the way we conduct business. For example, in May 2014 the FASB issued a new standard (commonly referred to as ASC 606) which changed the way we recognize revenue and significantly expanded the disclosures requirements for revenue arrangements. We adopted the requirements of this new standard on January 1, 2018. Under ASC 606, we recognize revenue as the customer takes control of the products. Under the majority of our 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. Accordingly, we now recognize revenue under these contracts earlier than under the previous accounting rules. In addition, in February 2016, the FASB established Topic 842 (ASC 842), Leases, and issued a new accounting standards update which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. We adopted the requirements of this new standard on January 1, 2019. Under ASC 842, leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The most significant effects of adoption related to (1) the recognition of new ROU assets and lease liabilities on the Company’s balance sheet for its real estate and equipment operating leases; and (2) providing significant new disclosures about our leasing activities. See Note 1(q) of the Notes to the Consolidated Financial Statements in Item 8 of this Report for additional information relating to our 2018 adoption of the new revenue recognition standard and our 2019 adoption of the new leases standard.
We review our internal controls over financial reporting annually. In doing so, we may identify deficiencies in those controls. A material weakness or deficiency in our internal controls could increase the likelihood that a material misstatement or lack of disclosure within the annual or interim financial statements will not be prevented or detected. Adverse publicity related to the disclosure of a material weakness or deficiency in internal controls over financial reporting could have a negative impact on our reputation, business and stock price.
Corporate governance, public disclosure and compliance practices continue to evolve based upon government action and the policies of stockholder advisory groups. As a result, the number of rules and regulations applicable to us may increase, which would also increase our legal and financial compliance costs and the amount of time management must devote to compliance activities. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions instituted to improve transparency and accountability concerning the supply of certain minerals originating from the Democratic Republic of Congo (DRC) and adjoining countries that are believed to benefit armed groups. These disclosure requirements may decrease the acceptable sources of supply of such minerals, increase their cost and disrupt our supply chain if we need to obtain components from different suppliers. Since we manufacture products containing such minerals for our customers, we are required to comply with these rules. The compliance process is time-consuming and costly. Failure to comply with applicable new regulations could result in additional costs (including fines and penalties) as well as affect our reputation. Increasing regulatory burdens could also make it more difficult for us to attract and retain members of our board of directors, particularly to serve on our audit committee, and executive officers in light of an increase in actual or perceived workload and liability for serving in such positions.
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. 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
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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
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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 thefuture.
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., Kimball Electronics, Plexus Corporation 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 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.
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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, and other states have passed similar legislation. 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.
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 that expired as of March 31, 2021, for which the Company applied for an extension in 2022, 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 and climate change 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.
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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 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. Further, the cost of implementing our sustainability and/or Environmental, Social and Governance (“ESG”) initiatives, our ability to execute on our sustainability and/or ESG target and objectives as planned, the effectiveness and impact of intended actions, the impact of changing legislation, regulations and directives, and other factors, many of which are beyond the Company’s control, could cause the outcomes, results and achievement of our sustainability and/or ESG targets, goals, objectives, commitments and/or the implementation of our sustainability and/or ESG initiatives to differ materially than those expressed or implied by the Company. In addition, our adherence to certain reporting standards or mandated compliance to certain requirements could necessitate additional investments that could impact our profitability, including investments to meet new or enhanced requirements and/or stakeholder expectations to reduce or mitigate the effects of greenhouse gas emissions and transition to low-carbon alternatives, driven by policy and regulations, low-carbon technology advancement and shifting consumer sentiment and societal preferences.
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 wereare 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
Customer relationships with start-upIf 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 emerging companies may present more risks than with established companies.respond to technological changes in manufacturing
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Customerprocesses 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 monitor, 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 the restriction or theft of vital data including customer supplied data.
We monitor our systems for cyber threats and have processes in place to detect, mitigate 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 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 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 start-upcustomers, 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 ERP system, which we anticipate taking several years. Failure to complete the upgrade timely or emerging companies present specialat 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, 2022, our total outstanding debt (excluding unamortized debt issuance costs and finance leases) was $326.3 million, all of which represented borrowings under our Credit Facility). Our level of indebtedness could have important consequences. For example, it could:
22
Any of these risks because these companies docould 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, 2022, we had $192.1 million in goodwill and $58.2 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 an extensive product history. As a result, there is less demonstrationexposure 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 Bloomberg Short-Term Bank Yield Index Rate (BSBY), the bank’s prime rate or the federal funds rate. We are also exposed to interest rate risk on our invested cash balances.
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 usothers to anticipate needsobtain control of the Company.
Certain provisions of our governing documents and requirementsthe 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:
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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, such as the Russian invasion of Ukraine, global pandemics, such as COVID, the availability and cost of credit, concerns about volatile energy costs, declining asset values, continued inflation, rising interest rates, 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 funding for such companies may be more difficultto 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 relationships may not continue or materializebe able to satisfy its obligation to us, we establish reserves in an amount we determine appropriate for 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 increaseperceived risk. There can be no assurance that our credit risk, especially in trade accounts receivable and inventories. Although we perform ongoing credit evaluationsreserves 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 adjustinventory reserves may be required and restructuring charges may be incurred.
The acquisition, integration and operation of acquired businesses may disrupt our allowance for doubtful accounts receivable for all customers, including start-up customersbusiness and emerging
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companies, based on the information available, these allowancescreate additional expenses, and we may not be adequate. This riskachieve the anticipated benefits of the acquisitions.
Our capabilities have historically grown through acquisitions, and we may exist for any new start-up or emerging company customerspursue 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 workforce and 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. Our ability to attract, develop and retain sufficient qualified personnel may be adversely affected by a number of factors, including labor availability in one or more of our locations, labor law and practices or union activities, wage pressure and changing wage requirements, increasing healthcare costs, local competition, high employment rates and turnover. Moreover, inflationary or other general labor cost increases have become more pronounced due to current economic conditions and if we are unable to offset these labor cost increases through price increases, growth or operational efficiencies, these cost increases could have a material adverse impact on our operating results and cash flow.
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
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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 |
|
| 200,000 | |
Arizona |
|
| 234,180 | |
California |
|
| 306,000 | |
Minnesota |
|
| 456,000 | |
New Hampshire |
|
| 153,000 | |
Texas |
|
| 45,000 | |
Mexico | 502,000 | |||
Asia | ||||
China |
| 326,000 | ||
Malaysia |
| 347,000 | ||
|
|
| 756,000 | |
Europe | ||||
Netherlands |
| 159,000 | ||
Romania |
|
| ||
|
|
| ||
Total |
|
| 3,627,180 |
Our principal manufacturing facilities consist of 1.91.8 million square feet in facilities that we own, with the remaining 1.91.8 million square feet in leased facilities whose terms expire between 20202023 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 40,00026,700 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 1816 to the Consolidated Financial Statementsconsolidated 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.
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PART II | |||||
Item 5. Market for Registrant’s Common Equity, Related ShareholderStockholder 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 28, 2020,21, 2023, as reported by the New York Stock Exchange, was $27.18.$24.25. There were approximately 500 record holders of our common shares as of February 28, 2020.21, 2023. 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 2019,2022, cash dividends paid totaled $23.3$23.2 million. The Board of Directors currently intends to continue paying quarterly dividends and on February 3, 2020, the Company announced its intention to increase its quarterly dividend from $0.15 to $0.16 per share.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.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.
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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, 2019, at a total cost of $3.8 million:2022.
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| Number (or |
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| Approximate |
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| Total Number of |
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| Dollar Value) |
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| Shares (or Units) |
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| Purchased as |
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| Units) that |
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| (a) |
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| Part of |
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| May Yet Be |
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| Total Number of |
| (b) |
| Publicly |
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| Purchased |
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| Shares (or |
| Average Price |
| Announced |
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| Under the |
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| Units) |
| Paid per Share |
| Plans or |
|
| Plans or |
Period |
| Purchased(1) |
| (or Unit)(2) |
| Programs |
|
| Programs(3) | |
October 1 to 31, 2019 |
| 128,855 |
| $29.15 |
| 128,855 |
|
| $79.5 million | |
November 1 to 30, 2019 |
| — |
| — |
| — |
|
| $79.5 million | |
December 1 to 31, 2019 |
| — |
| — |
| — |
|
| $79.5 million | |
Total |
| 128,855 |
| $29.15 |
| 128,855 |
|
|
|
(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, 2022 | — | $ | — | — | $154.6 million | |||||||||
November 1 to 30, 2022 | — | — | — | $154.6 million | ||||||||||
December 1 to 31, 2022 | — | — | — | $154.6 million | ||||||||||
Total | — | $ | — | — |
(1)
(1)All share repurchases were made onOn October 30, 2018, the open market.
(2) Average price paid per share is calculated on a settlement basis and excludes commissions.
(3) On March 6, 2018,Company announced that the Board of Directors approved an expanded stockauthorized the repurchase authorization grantingof $100 million of the Company authority to repurchase up to $250 million inCompany’s common stock in addition to the $100$250 million previously approvedannounced on DecemberMarch 7, 2015.2018. On October 26, 2018,February 24, 2020, the Company announced that the Board of Directors authorized the repurchase of an additional $100$150 million of the Company’s common stock. Net of shares repurchased to date, the total remaining authorization as of December 31, 20192022 is $79.5154.6 million. On February 19, 2020, the Board of Directors authorized the repurchase of an additional $150 million of the Company’s common stock. 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 2019,2022, the Company repurchased a total of 4.70.4 million common shares for an aggregate of $122.1$9.4 million at an average price of $25.86$24.96 per share. Since 2015,2018, the Company has repurchased a total of 18.915.7 million common shares for $473.6an aggregate of $408.5 million at an average price of $24.98$26.06 per share.
30
Performance Graph
The following graph compares the cumulative total shareholder return on our common shares for the five-yearfive‑year period commencing December 31, 20142017 and ending December 31, 2019,2022, 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 Circuit, Inc., Plexus Corp and
26
Sanmina Corporation. Dividend reinvestment has been assumed.The graph assumes that $100 was invested on December 31, 2017 in our common shares and in each of the two indices, and that dividends, if any, were reinvested.
|
|
| Dec-17 |
|
| Dec-18 |
|
| Dec-19 |
|
| Dec-20 |
|
| Dec-21 |
|
| Dec-22 |
| ||||||
Benchmark Electronics, Inc. |
| $ | 100.00 |
|
| $ | 72.30 |
|
| $ | 118.08 |
|
| $ | 92.82 |
|
| $ | 93.13 |
|
| $ | 91.72 |
|
Peer Group |
| $ | 100.00 |
|
| $ | 65.93 |
|
| $ | 104.57 |
|
| $ | 123.52 |
|
| $ | 126.24 |
|
| $ | 162.42 |
|
S&P 500 |
| $ | 100.00 |
|
| $ | 92.97 |
|
| $ | 120.84 |
|
| $ | 140.49 |
|
| $ | 178.27 |
|
| $ | 143.61 |
|
|
| Dec-14 |
| Dec-15 |
| Dec-16 |
| Dec-17 |
| Dec-18 |
| Dec-19 |
Benchmark Electronics, Inc. | $ | 100.00 | $ | 81.30 | $ | 119.90 | $ | 114.40 | $ | 83.30 | $ | 135.10 |
Peer Group | $ | 100.00 | $ | 98.20 | $ | 124.40 | $ | 139.60 | $ | 89.60 | $ | 138.70 |
S&P 500 | $ | 100.00 | $ | 99.30 | $ | 108.70 | $ | 129.90 | $ | 121.80 | $ | 156.90 |
31
Item 6. Selected Financial Data.[Reserved]
|
|
|
|
| Year Ended December 31, | |||||||||||||
(in thousands, except per share data) |
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Selected Statements of Income Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| Sales | $ | 2,268,095 |
| $ | 2,566,465 |
| $ | 2,454,479 |
| $ | 2,322,285 |
| $ | 2,540,873 | |||
| Cost of sales |
| 2,067,689 |
|
| 2,345,872 |
|
| 2,228,559 |
|
| 2,107,600 |
|
| 2,321,619 | |||
|
|
| Gross profit |
| 200,406 |
|
| 220,593 |
|
| 225,920 |
|
| 214,685 |
|
| 219,254 | |
| Selling, general and administrative expenses |
| 141,618 |
|
| 143,205 |
|
| 130,401 |
|
| 113,448 |
|
| 107,462 | |||
| Amortization of intangible assets |
| 9,461 |
|
| 9,485 |
|
| 10,065 |
|
| 11,838 |
|
| 4,962 | |||
| Restructuring charges and other costs(1) |
| 13,101 |
|
| 9,365 |
|
| 8,628 |
|
| 12,539 |
|
| 13,861 | |||
| Ransomware related incident costs, net(2) |
| 7,681 |
|
| — |
|
| — |
|
| — |
|
| — | |||
|
|
| Income from operations |
| 28,545 |
|
| 58,538 |
|
| 76,826 |
|
| 76,860 |
|
| 92,969 | |
| Interest expense |
| (6,664) |
|
| (10,473) |
|
| (9,405) |
|
| (9,304) |
|
| (2,996) | |||
| Interest income |
| 3,829 |
|
| 6,848 |
|
| 5,370 |
|
| 2,136 |
|
| 1,207 | |||
| Other expense |
| 1,559 |
|
| 628 |
|
| (1,786) |
|
| (282) |
|
| (1,141) | |||
| Income tax expense (benefit)(3) |
| 3,844 |
|
| 32,724 |
|
| 102,906 |
|
| 5,477 |
|
| (5,362) | |||
|
|
| Net income (loss) | $ | 23,425 |
| $ | 22,817 |
| $ | (31,901) |
| $ | 63,933 |
| $ | 95,401 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (loss) per share:(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
| Basic |
| $ 0.61 |
|
| $ 0.49 |
|
| $ (0.64) |
|
| $ 1.30 |
|
| $ 1.85 | |
|
|
| Diluted |
| $ 0.60 |
|
| $ 0.49 |
|
| $ (0.64) |
|
| $ 1.28 |
|
| $ 1.83 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
| Basic |
| 38,338 |
|
| 46,332 |
|
| 49,680 |
|
| 49,298 |
|
| 51,573 | |
|
|
| Diluted |
| 38,763 |
|
| 46,655 |
|
| 49,680 |
|
| 49,825 |
|
| 52,088 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash dividends per common share | $ 0.60 |
|
| $ 0.60 |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
| December 31, | ||||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 | ||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Selected Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
| Working capital | $ | 735,837 |
| $ | 866,391 |
| $ | 1,152,340 |
| $ | 1,133,043 |
| $ | 1,068,075 | |||
| Total assets |
| 1,759,874 |
|
| 1,899,783 |
|
| 2,109,304 |
|
| 2,008,925 |
|
| 1,904,247 | |||
| Total debt |
| 147,737 |
|
| 154,070 |
|
| 211,680 |
|
| 223,648 |
|
| 235,193 | |||
| Shareholders’ equity | $ | 1,014,832 |
| $ | 1,132,225 |
| $ | 1,339,138 |
| $ | 1,375,720 |
| $ | 1,332,273 | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)See Note 19 to the Consolidated Financial Statements for a discussion of the restructuring charges occurring in 2019, 2018 and 2017. Also in 2019, we incurred $4.6 million in charges primarily related to our Chief Executive Officer (CEO) transition and our 2019 proxy activity. During 2018 and 2017, we incurred $2.8 million and $3.7 million, respectively, in costs related to the relocation and transition of our corporate headquarters to Arizona. In 2018, we recognized $1.4 million related to a litigation arbitration decision against the Company. In 2016, we also recognized $4.3 million of costs in connection with a proxy contest relating to our 2016 annual shareholders meeting, $3.0 million in connection with the separation of our former CEO in September 2016 and $0.4 million in other charges. During 2015, the Company recognized restructuring charges totaling $13.9 million, related to reductions in workforce and the resizing and closure of certain facilities.
(2)See Note 20 to the Consolidated Financial Statements for a discussion of the ransomware incident related costs, net occurring in 2019.
(3)See Note 10 to the Consolidated Financial Statements for a discussion of income taxes. During the first quarter of 2018, we changed our historical repatriation strategy. We have historically asserted our intention to indefinitely reinvest undistributed foreign earnings. We no longer consider these earnings to be indefinitely reinvested in our foreign subsidiaries. As a result of this change in assertion for undistributed earnings prior to December 31, 2017, we recorded a $30.8 million deferred tax expense for foreign withholding tax from Asia and $9.4 million for deferred U.S. state income tax expense in the first quarter of 2018. During the fourth quarter of 2018, we recorded estimated foreign tax credits totaling $9.2 million associated with the foreign withholding taxes. During the fourth quarter of 2017, the Company recorded the estimated impact of the U.S. Tax Reform totaling $97.7 million. During the fourth quarter of 2016, the Company reduced its unrecognized tax benefits reserve by $8.3 million (including penalties and interest). During the fourth quarter of 2015, the Company reduced its deferred tax valuation allowance by $19.5 million and reduced its unrecognized tax benefits reserve by $1.7 million.
(4)See Note 1(i) to the Consolidated Financial Statements for the basis of computing earnings per share.
32
27
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 Statementsconsolidated 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.
In March 2019, the SEC amended its rules to modernize and simplify certain reporting requirements for public companies. As part of this change, registrants may exclude discussion of the earliest of the three years in Management’s Discussion and Analysis (MD&A). For further discussion and analysis regarding our financial condition and results of operations for the year ended December 31, 20182021 as compared to the year ended December 31, 2017,2020, 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, 2018.2021 filed with the SEC on February 25, 2022.
COVID Pandemic Update
Ransomware IncidentAs 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.
The COVID pandemic continued to affect the Company’s operations into 2022. While end market demand continued to grow as more customers recovered from the pandemic, we continued to see component supply chain constraints across all commodity categories which constrained our ability to produce the full demand forecasts we received from customers. See "2022 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 I, Item 1A of this Report for additional information.
DuringOn March 27, 2020, the fourth quarterCoronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in the United States in response to the COVID pandemic. Among other things, the CARES Act allowed employers to use employee retention tax credits to be taken in U.S. payroll tax filings and allowed for the deferral of the employer portion of social security taxes 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, 2019, some2020 until the end of 2021 and 2022, respectively. During December 2021, the Company paid approximately 50% of the Company’s systems were affected by a ransomware incident that encrypted information on its systemssocial security taxes previously deferred 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.remaining amount was paid in December 2022. The Company has found no evidencealso 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 customer orit is not eligible for employee data was exfiltratedretention 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 its network.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.
As before, 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 new 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.
The Company restored connectivityAccordingly, our current results and resumed operations quickly followingfinancial 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 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.COVID pandemic.
We do have insurance coverage, including cyber insurance, and are working diligently with our insurance carriers on claims to recover costs incurred. We expect that the insurance recovery process will be ongoing throughout 2020.
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.
We expect to incur additional costs related to the ransomware event in 2020, but these are not expected to be significant. Further insurance recoveries will be recorded when considered probable for recovery.
20192022 OVERVIEW
Sales for 20192022 were $2.3 billion,$2,886.3 million, a 12% decrease28% increase from sales of $2.6 billion$2,255.3 million in 2018.2020. During 2019,2022, sales to customers in our various industry sectors fluctuated from 20182021 as follows:
·A&D increased by 6%,
·14%28%,
28
·Semi-cap decreased by 22%,
·Computing decreased by 38%, and
·Telecommunications decreased by 12%.
The overall revenue decreaseincrease was due primarily to our planned exit of a legacystrength in Next Generation Communications, Advanced Computing, contract which was completed in 2019 (as discussed below), in addition to the decline in the overall semi-cap market, reduced revenues
33
from other ComputingIndustrials, Medical and Telecommunications customers and the impact of the ransomware incidentSemi-Cap sectors (as discussed below).
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, canincluding in each case as a result of the COVID pandemic, have adversely affect us.affected us by not fulfilling our total customer demand. 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 38%52% and 44%47% of our total sales in 20192022 and 2018,2021, respectively. In 2019, there was no single customer with sales over 10%Sales to Applied Materials represented 15% and 16% of our sales. In 2018,total sales in 2022 and 2021, respectively. Lead times continue to International Business Machines Corporation (IBM) represented 13%be elongated, and components still are being placed on allocation by suppliers. Additionally, there continues to be pushouts of previously committed component orders and timing restrictions across the component suppliers. These last-minute allocations created inefficiencies in our sales.
As part of our ongoing processoperations and contributed to review contracts that are marginal and dilutive to our gross margin, we made the decision to not renew the contract with a large Computing customer that was to expire at the end of 2019. During the second quarter of 2019, we completed the final build out of this legacy contract andsequential increase in the third quarter had an immaterial amount of revenue from this contract as the transition was completed.
During 2019, we incurred an $11.0 million charge for the write-down of inventory and a provision for accounts receivable associated with the insolvency of a customer. These charges increased cost of sales by $0.9 million and selling, general and administrative expenses by $10.1 million. In 2019, we also recovered $1.7 million of amounts written down in 2018 associated with the insolvency of another customer.
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 and higher-volume programsprogram ramps remain subject to competitive constraints that can exert downward pressure on our margins. During periods of low production volume, we generally have idle capacity and reduced gross profit. Gross profit can also be impacted by other situations, such as the ransomware incident experienced in 2019.
We have undertaken initiatives to restructure our business operations with the intention of improving utilization and reducing costs. During 2019,2022, we recognized $8.5$5.7 million of restructuring chargesin connection with the announced closure of two facilities and other reductionscosts due in workforce ofpart to expenses associated with various site closures and restructuring activities.
During 2021, the Company made the decision to no longer continue certain facilities primarilymanufacturing capabilities in the Americas. In addition, we incurred $4.6connection with that decision, the Company assessed the facility and equipment assets used in those manufacturing capabilities using valuation information from third parties and recorded $4.4 million of impairment charges as a result of that assessment. The asset impairment charges are included in the restructuring charges and other costs line item on the consolidated statements of income as of December 31, 2021. During 2022, the Company completed the sale of the equipment for $1.3 million and recorded a loss on assets held for sale of $2.0 million included in the restructuring charges and other costs line item on the consolidated statements of income. Additionally, during the year ended December 31, 2022, the Company completed the sale of a building in Angleton, Texas for $4.3 million and recorded a gain on assets held for sale of $2.4 million included in the restructuring charges and other costs line item on the consolidated statements of income. Additionally, during the year ended December 31, 2022, the Company agreed to $3.3 million in charges primarily relatedlegal settlements. See Note 17 to the consolidated financial statements in Part II, Item 8 of this Report for additional information on our CEO transition and our 2019 proxy activity.restructuring charges.
29
During 2019, we incurred $7.7 million in ransomware incident related costs, net of estimated insurance recoveries.
RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain items in our Consolidated Statementsconsolidated statements of Incomeincome bear to sales for the periods indicated. The financial information and the discussion below should be read in conjunction with the Consolidated Financial Statementsconsolidated financial statements and Notes thereto in Part II, Item 8 of this Report.
34
|
| Year ended December 31, |
| Year Ended |
| |||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| 2022 |
|
| 2021 |
| ||
Sales | Sales | 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
|
| 100.0 | % |
Cost of sales | Cost of sales | 91.2 |
|
| 91.4 |
|
| 90.8 |
|
| 91.2 |
|
|
| 90.9 |
|
| Gross profit | 8.8 |
|
| 8.6 |
|
| 9.2 |
| |||||||
Gross profit |
| 8.8 |
|
|
| 9.1 |
| |||||||||
Selling, general and administrative expenses | Selling, general and administrative expenses | 6.2 |
|
| 5.6 |
|
| 5.3 |
|
| 5.2 |
|
|
| 6.1 |
|
Amortization of intangible assets | Amortization of intangible assets | 0.4 |
|
| 0.4 |
|
| 0.4 |
|
| 0.2 |
|
|
| 0.3 |
|
Restructuring charges and other costs | Restructuring charges and other costs | 0.6 |
|
| 0.4 |
|
| 0.4 |
|
| 0.3 |
|
|
| 0.6 |
|
Ransomware related incident costs, net | 0.3 |
|
| — |
|
| — |
| ||||||||
| Income from operations | 1.3 |
|
| 2.3 |
|
| 3.1 |
| |||||||
Ransomware related incident costs (recovery), net |
| — |
|
|
| (0.2 | ) | |||||||||
Income from operations |
| 3.1 |
|
|
| 2.4 |
| |||||||||
Other expense, net | Other expense, net | (0.1) |
|
| (0.1) |
|
| (0.2) |
|
| (0.1 | ) |
|
| (0.3 | ) |
| Income before income taxes | 1.2 |
|
| 2.2 |
|
| 2.9 |
| |||||||
Income before income taxes |
| 3.0 |
|
|
| 2.0 |
| |||||||||
Income tax expense | Income tax expense | 0.2 |
|
| 1.3 |
|
| 4.2 |
|
| 0.6 |
|
|
| 0.4 |
|
| Net income (loss) | 1.0 | % |
| 0.9 | % |
| (1.3) | % | |||||||
Net income |
| 2.4 | % |
|
| 1.6 | % |
20192022 Compared With 2018
2021
Sales
As noted above, sales decreased 12%increased 28% in 2019.2022. The percentages of our sales by sector were as follows:
| 2019 |
|
| 2018 |
|
Higher-Value Markets |
|
|
|
|
|
Industrials | 20 | % |
| 19 | % |
A&D | 19 |
|
| 16 |
|
Medical | 20 |
|
| 15 |
|
Semi-Cap | 12 |
|
| 14 |
|
| 71 |
|
| 64 |
|
Traditional Markets |
|
|
|
|
|
Computing | 16 |
|
| 23 |
|
Telecommunications | 13 |
|
| 13 |
|
| 29 |
|
| 36 |
|
Total | 100 | % |
| 100 | % |
|
| 2022 |
|
| 2021 |
| ||
Industrials |
|
| 21 | % |
|
| 20 | % |
A&D |
|
| 12 |
|
|
| 15 |
|
Medical |
|
| 21 |
|
|
| 20 |
|
Semi-Cap |
|
| 25 |
|
|
| 26 |
|
Advanced Computing |
|
| 10 |
|
|
| 9 |
|
Next Generation Communications |
|
| 11 |
|
|
| 10 |
|
Total |
|
| 100 | % |
|
| 100 | % |
Industrials. 20192022 sales decreased 8%increased 39% to $453.6$593.6 million from $493.1$428.4 million in 2018. The decreases were2021 primarily due to continued demand improvements from softer demand from customers in the industrial transportation marketenergy-related control systems and the ramp delays from previously booked newbuilding infrastructure programs.
Aerospace and Defense. 20192022 sales increased 6%decreased 9% to $431.9$347.6 million from $406.4$381.7 million in 20182021 primarily due to increased demand from our defense customers.market constraints, even as end-demand continued to improve throughout the year.
Medical. 20192022 sales increased 14%28% to $448.2$592.9 million from $394.0$461.8 million in 20182021 from higher demandprimarily due to growth with existing customers and new program ramps from new and existing customers.
ramps.
Semiconductor Capital Equipment. 20192022 sales decreased 22%increased 31% to $277.8$722.1 million from $355.0$549.3 million in 2018. The decrease reflected is due to declines in demand throughout the broader semi-capital equipment market.
Computing. 2019 sales decreased 38% to $361.2 million from $580.8 million in 2018. The decrease is primarily due from our planned exit of a legacy Computing contract that was completed in 2019.
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Telecommunications. 2019 sales decreased 12% to $295.4 million from $337.2 million in 2018. The decrease is2021 primarily due to decreasedincreased demand from existing customers.for wafer fab subsystems across our customer base.
Advanced Computing. 2022 sales increased 56% to $310.5 million from $199.4 million in 2021 primarily due to the planned ramp and execution of high-performance computing programs.
Next Generation Communications. 2022 sales increased 36% to $319.6 million from $234.6 million in 2021 primarily due to new program ramps and continued strength in broadband infrastructure programs.
Our international operations are subject to the risks of doing business abroad. See Part I, Item 1A of this Report for risk factors pertaining to international sales, fluctuations in foreign currency exchange rates and a discussion of potential adverse effects in
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operating results associated with the risks of doing business abroad. During 20192022 and 2018, 47%2021, 61% and 45%55%, respectively, of our sales were from international operations.
|
| Year Ended |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Net sales: |
|
|
|
|
|
| ||
Americas |
| $ | 1,475,929 |
|
| $ | 1,203,544 |
|
Asia |
|
| 1,251,475 |
|
|
| 912,560 |
|
Europe |
|
| 284,103 |
|
|
| 228,834 |
|
Elimination of intersegment sales: |
|
| (125,176 | ) |
|
| (89,619 | ) |
Total net sales |
| $ | 2,886,331 |
|
| $ | 2,255,319 |
|
Americas. 2022 sales increased 23% to $1,475.9 million from $1,203.5 million in 2021. The increase was primarily due to increasing demand with existing customers and new program ramps with existing and new customers.
Asia. 2022 sales increased 37% to $1,251.5 million from $912.6 million in 2021. The increase was primarily due to increasing demand with existing customers, production ramps of new programs for existing customers and new customer program ramps.
Europe. 2022 sales increased 24% to $284.1 million from $228.8 million in 2021. The increases were primarily due to increasing demand with existing customers and new customer program ramps.
Gross Profit
Gross profit decreased 9.2%increased 23.9% to $200.4 million for 2019 from $220.6$255.2 million in 2018.2022 from $205.9 million in 2021 primarily due to higher revenues, mix of revenues and improved absorption of fixed and variable manufacturing costs. Gross profit margin increaseddecreased to 8.8% in 20192022 from 8.6%9.1% in 20182021 primarily due to the exit from a legacy Computing contract which was dilutive to our margin.higher supply chain premiums.
Operating Income
2022 operating income increased 70% to $90.1 million from $53.1 million in 2021. The increase was primarily due to an increase in revenue and respective gross profit partially offset by an increase in selling, general and administrative (SG&A) expenses.
Operating income by reportable segment was as follows:
|
| Year Ended |
| |||||
(in thousands) |
| 2022 |
|
| 2021 |
| ||
Operating income: |
|
|
|
|
|
| ||
Americas |
| $ | 55,202 |
|
| $ | 45,807 |
|
Asia |
|
| 134,649 |
|
|
| 90,725 |
|
Europe |
|
| 16,889 |
|
|
| 11,054 |
|
Corporate and other costs |
|
| (116,671 | ) |
|
| (94,524 | ) |
Total operating income |
| $ | 90,069 |
|
| $ | 53,062 |
|
Americas. 2022 operating income increased 21% to $55.2 million from $45.8 million in 2021. The increase was primarily due to higher revenue.
Asia. 2022 operating income increased 48% to $134.6 million from $90.7 million in 2021. The increase was primarily due to higher revenue and improved productivity in labor.
Europe. 2022 operating income increased 53% to $16.9 million from $11.1 million in 2021. The increase was primarily due to higher revenue.
Selling, General and Administrative (SG&A) Expenses
SG&A decreasedincreased to $141.6$150.2 million in 20192022 from $143.2$136.7 million in 2018.2021. The decreaseincrease was primarily due to the decreaseincrease in variable compensation, continued investment in our IT environment and stock-based compensation, partially offset by an increase in the provision to accounts receivable for doubtful accounts. During 2019 and 2018, we had $8.6 million and $1.7 million, respectively, in charges (net of recoveries) for this provision to accounts receivable. Including this provision to accounts receivable, SG&A, as a percentage of sales, increased to 6.2% in 2019 from 5.6% in 2018. Excluding this provision to accounts receivable, SG&A as a percentage of sales increased to 5.9% in 2019 from 5.5% in 2018, primarily due to lower sales.medical expenses.
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Amortization of Intangible Assets
Amortization of intangible assets was $9.5$6.4 million in each of 2019both 2022 and 2018.2021.
Restructuring Charges and Other Costs
During 2019,2022, we recognized $8.5$5.7 million of restructuring charges in connection with the announced closure of two facilities and other reductionscosts due primarily to expenses associated with announced site closures, reduction in workforce of certain facilitiesforce and other restructuring activities primarily in the Americas. In addition, we incurred $4.6 million in charges primarily related to our CEO transition and our 2019 proxy activity. During 2018,2021, we recognized $5.2$9.3 million of restructuring chargesand other costs due primarily to expenses associated with announced site closures, reduction in connection with reductionsforce and other restructuring activities primarily in workforce ofthe Americas.
During 2021, the Company made the decision to no longer continue certain facilities primarilymanufacturing capabilities in the Americas. In addition, we incurred $2.8connection with that decision, the Company assessed the facility and equipment assets used in those manufacturing capabilities using valuation information from third parties and recorded $4.4 million of impairment charges as a result of that assessment. The asset impairment charges are included in the restructuring charges and other costs line item on the consolidated statements of income as of December 31, 2021. During 2022, the Company completed the sale of the equipment for $1.3 million and recorded a loss on assets held for sale of $2.0 million included in the restructuring charges and other costs line item on the consolidated statements of income. Additionally, during the year ended December 31, 2022, the Company completed the sale of a building in Angleton, Texas for $4.3 million and recorded a gain on assets held for sale of $2.4 million included in the restructuring charges and other costs line item on the consolidated statements of income. Additionally, during the year ended December 31, 2022, the Company agreed to $3.3 million in costs relatedlegal settlements. See Note 17 to the relocation and transition of our corporate headquarters to Arizona and $1.4 million related to a litigation arbitration decision against the Company. See Note 19 to the Consolidated Financial Statementsconsolidated 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, we incurred $7.7 million in ransomware incident related costs incurred totaled $12.7 million or $7.7 million, net of $5 million estimated insurance recoveries.recoveries of $5.0 million. These costs were primarily comprised of certain employee related expenses and various third party professional fees forthird-party consulting activities,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 decreasedincreased to $6.7 million during 2019 from $10.5$12.9 million in 2018 period2022 from $8.5 million in 2021 primarily due to lower debt levels in 2019 andadditional borrowings to support our growth as well as the 2018 $2.0 million write-offhigher interest rate environment.of deferred financing costs in connection with the refinancing of our credit facilities.
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Interest Income
Interest income increased to $1.7 million in 2022 from $0.5 million in 2021 primarily due to higher interest rates.
InterestOther Income (Expense)
Other income decreased(expense) increased to $3.8$5.4 million in 20192022 from $6.8$0.3 million in 20182021 primarily due lower invested cash equivalents.to gains on litigation settlements partially offset by foreign exchange losses.
Income Tax Expense.
Expense
Income tax expense of $3.8$16.1 million in 20192022 represented a 14.1%19.1% effective tax rate for 2019,2022, compared with $32.7$9.6 million for 20182021 representing an effective tax rate of 58.9%21.2%. The higher effective tax rate in 20182021 is the result of changing our historical repatriation strategy. We have historically asserted our intention to indefinitely reinvest undistributed foreign earnings. We no longer consider all these earnings to be indefinitely reinvestedthe mix of profits in our foreign subsidiaries. As a result of this change in assertion for undistributed earnings prior to December 31, 2017, we recorded during 2018 a net tax expense of $21.6 million consisting of $30.8 million relating to foreign withholding taxes from Asia and a net benefit of $9.2 million for U.S. foreign tax credits to offset the foreign taxes paid during 2018. In addition, we also recorded applicable U.S. state income tax expense net of federal benefits related to the cash repatriation and we incurred a net $4.4 million benefit associated with finalizing the provisional impact of the U.S. Tax Reform as required by SAB 118. Excluding these tax items, the effective tax rate would have been 13.1% in 2018 compared to 14.1% in 2019.jurisdictions.
We haveThe Company has been granted certain tax incentives, including tax holidays, for ourits subsidiaries in China, Malaysia, and Thailand that will expire at various dates, unless extended or otherwise renegotiated through 2021and are subject to certain conditions with which the Company expects to comply. The expiration dates of these tax incentives are as follows: 2023 in MalaysiaChina and 20282030 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 108 to the Consolidated Financial Statementsconsolidated financial statements in Part II, Item 8 of this Report.
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Net Income
We reported a net income of $23.4$68.2 million, or $0.60$1.91 per diluted share for 2019,2022, compared with a net income of $22.8$35.8 million, or $0.49$0.99 per diluted share, for 2018.2021. The net increase of $0.6$32.4 million in 20192022 is primarily the result of items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our organic growth and operations through funds generated from operations and occasional borrowings under our revolving credit facility.Credit Agreement (as defined below). Cash and cash equivalents and restricted cash totaled $364.0$207.4 million at December 31, 20192022 and $458.1$271.7 million at December 31, 2018, of which $197.82021. During 2022 and 2021, we repatriated $20.0 million and $154.4 million, respectively, were held outside the U.S. in various foreign subsidiaries. During 2019 and 2018, we repatriated $52.1 million and $560.6$35.0 million, respectively, of foreign earnings to the U.S.
Cash provided byused in operating activities was $93.1$177.5 million in 2019.2022. The cash provided byused in operations during 20192022 consisted primarily of $23.4$68.2 million of net income, adjusted for $48.4$44.3 million of depreciation and amortization, and an increase in advance payments from customers of $79.8 million, primarily offset by a $134.9$206.2 million increase in inventory, a $136.5 million increase in accounts receivable, a $28.4 million increase in contract assets, a $16.7 million decrease in accounts receivable,payable, a $5.2$6.3 million decrease in accrued liabilities, and a $6.5 million increase in inventories, a $10.3 million decrease in income tax liabilities, netprepaid expenses and a $121.9 million decrease in accounts payable. The decrease in accounts receivable and accounts payable was primarily a result of the impact of our exit from a legacy Computing contract described above.other assets. Working capital was $0.9 billion at December 31, 2022 and $0.7 billion at December 31, 2019 and $0.9 billion at December 31, 2018.
2021.
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. IfWhen shortages of these components and other material supplies used in operations occur,have occurred, vendors may nothave at times been unable to ship the quantities we need for production, and we may be forcedforcing 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 $34.9$41.2 million in 20192022 primarily due to purchases of additional property, plant and equipment totaling $32.6of $43.4 million and additions to purchased software of $3.4 million, partially offset by proceeds from the sale of assets held for sale of $5.4 million. The purchases of property, plant and equipment were primarily for machinery
37
and equipment in the Americas and Asia.
Cash used inprovided by financing activities was $152.8$159.2 million in 2019. Share repurchases2022. Borrowings under the Credit Agreement totaled $122.1 million, principal payments on long-term debt and finance lease obligations totaled $6.8 million, dividends paid totaled $23.3$828.0 million and we received $1.6$0.7 million from the exercise of stock options.options, partially offset by principal payments on our Credit Agreement of $633.0 million, finance lease obligations of $0.2 million, share repurchases of $9.4 million and dividends paid of $23.2 million.
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 our $650.0 million credit agreement (Credit Agreement),the Amended and Restated Credit Agreement, in addition to the $150.0$131.3 million Term Loan facility, we have a $500.0$250.0 million five-year revolving credit facility to be used for general corporate purposes, both with a maturity date of JulyDecember 21, 2026. On May 20, 2023.2022, the Company entered into Amendment No. 1 (the Amendment) to the Amended and Restated Credit Agreement (as amended, the Credit Agreement). The Amendment, among other things, increased the revolving credit facility commitments from $250 million to $450 million. The Credit Agreement includes an accordion feature pursuant to which totalthe Company is permitted to add one or more incremental term loans and/or increase commitments under the revolving credit facility may be increased byin an additional $275.0aggregate amount of $100 million or a higher amount, subject to the satisfaction of certain conditions.conditions and exceptions. As of December 31, 2019,2022, we had $144.4$131.3 million in borrowings outstanding under the Term Loanterm loan facility and $3.0$195.0 million outstanding and $3.9 million in letters of credit outstanding under our revolving credit facility. During 2019, the Company did not borrow under the revolving credit facility. $497.0As of December 31, 2022, $251.1 million remains available for future borrowings under the revolving credit facility. See Note 75 to the Consolidated Financial Statementsconsolidated financial statements in Part II, Item 8 of this Report for more information regarding the terms of the Credit Agreement.
The Credit Agreement contains certain financial covenants asrelated to interest coverage and debt leverage, and certain customary affirmative and negative covenants, including restrictions on our ability to incur additional debt and liens, pay dividends, repurchase shares, sell assets and merge or consolidate with other persons. Amounts due under the Credit Agreement could be accelerated upon specified events of default, including a failure to pay amounts due, breach of a covenant, material inaccuracy of a representation, or occurrence of bankruptcy or insolvency, subject, in some cases, to cure periods. As of December 31, 2019,2022, 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
33
acquire, may give rise to claims of exposure by employees or the public, or to other claims or liabilities relating to environmental, waste management or health and safety concerns.
As of December 31, 2019,2022, we had cash and cash equivalents, including restricted cash, totaling $364.0$207.4 million and $497.0$251.1 million available for borrowings under the Credit Agreement. During the next 12 months, we believe our capital expenditures will approximate $50$60 million to $55$70 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 shares of common stockin addition to the $100 million approved on December 7, 2015. On February 19, 2020 and October 26, 2018, the Board of Directors authorized an additional $100 million shares for repurchase above our existing program. As of December 31, 2019, we had $79.5 million remaining under the share repurchase authorization to purchase additional shares. On February 19, 2020, the Board of Directors authorized the repurchase of an additional $150 million and $100 million, respectively, of shares of the Company’s common stock. As of December 31, 2022, we had $154.6 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. During 2019 and 2018, cash dividends paid totaled $23.3 million and $21.0 million, respectively. On December 16, 2019, the Company declared a quarterly cash dividend of $0.15 per share of the Company’s common stock to shareholders of record as of December 30, 2019. The dividend of $5.5 million was paid on January 13, 2020. In February 2020, the Board of Directors approved a quarterly dividend increase, raising the quarterly dividend from $0.15 to $0.16 per
38
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 2022 and 2021, cash dividends paid totaled $23.2 million and $23.3 million, respectively. On December 12, 2022, 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, 2022. The dividend of $5.8 million was paid on January 13, 2023. 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. Dividend payments are not mandatory or guaranteed; there can be no assurance that the Company will continue to pay a dividend in the future.
Management believes that our existing cash balances, and funds generated from operations, 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 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.
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 U.S. GAAP.accounting principles generally accepted in the United States. Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statementsconsolidated 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.
Allowance for Doubtful Accounts
Our accounts receivable balance is recorded net of allowances for amounts not expected to be collected from our customers. Because our accounts receivable are typically unsecured, we periodically evaluate their collectability based on a combination of factors, including a particular customer’s ability to pay as well as the age of the receivables. To evaluate a specific customer’s ability to pay, we analyze financial statements, payment history and various information or disclosures by the customer or other publicly available information. In cases where the evidence suggests a customer may not be able to satisfy its obligation to us, we establish a specific allowance in an amount we determine appropriate for the perceived risk. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventory Obsolescence
We purchase inventory based on forecasted demand and record inventory at the lower of cost or net realizable value. We write down inventory for estimated obsolescence, as necessary, in an amount equal to the difference between the cost of inventory and estimated market value based on assumptions of future demands and market conditions. We evaluate our inventory on a quarterly basis based on current and forecasted usage and the latest forecasts of product demand and production requirements from our customers. Customers frequently make changes to their forecasts, which requires us to make changes to our inventory purchases, commitments, and production scheduling and may require us to cancel open purchase commitments with our vendors. This process may lead to on-hand inventory quantities and on-order purchase commitments that exceed our customers’ revised needs, or parts that become obsolete before use in production. We write down excess and obsolete inventory when we determine that our
39
customers are not responsible for it, or if we believe our customers will be unable to fulfill their obligation to ultimately purchase it. If actual market conditions are less favorable than those we projected, additional inventory write-downs may be required.
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 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
34
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 isit 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, 20192022 of $16.0$18.7 million primarily relates to deferred tax assets from our foreign and U.S. state net operating loss tax carryforwards of $15.4 million.
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,our foreign locations, future accretive acquisitions in the United States and any movement in the mix of profits from our international operations to the United Statesforeign locations, 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 or foreign locations generating additional operating loss carryforwards and potential movements in the mix of profits to international locations wouldcould possibly result in an increase in theany valuation allowance and would decrease income in the period such determination was made.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the tax effects of the U.S. Tax Reform. SAB 118 provided a measurement period that would not extend beyond one year from the U.S. Tax Reform enactment date for companies to complete their accounting of the impact on income taxes. Until the accounting was complete, companies could record provisional estimates. As a result of the U.S. Tax Reform, we recorded provisional amounts in relation to the accounting of the transition tax in 2017. We have finalized our accounting for SAB 118 as of December 31, 2018 within the measurement period. See Note 10 to the Consolidated Financial Statements in Item 8 of this Report.
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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 quantitative impairment test for goodwill. This two-step 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 1513 to the Consolidated Financial Statementsconsolidated financial statements in Part II, Item 8 of this Report. As of December 31, 20192022 and 2018,2021, 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, 2019, 20182022, 2021 and 2017,2020, 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.
35
Stock-Based Compensation
We recognize stock-based compensation expense in our consolidated statements of income. For performance-based restricted stock unit awards, compensation expense is based on the probability that the performance goals will be achieved, which is monitored by management throughout the measurement period. If it becomes probable, based on our expectation of performance during that 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. If actual results or future changes in estimates differ significantly from our current estimates, stock-based compensation could increase or decrease. See Note 1(l) to the Consolidated Financial Statements in Item 8 of this Report.
Recently Enacted Accounting Principles
See Note 1(q)1(r) to the Consolidated Financial Statementsconsolidated financial statements in Part II, Item 8 of this Report for a discussion of recently enacted accounting principles.
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CONTRACTUAL OBLIGATIONS
We have certain contractual obligations that extend beyond 20202023 under lease obligations and debt arrangements. Non-cancelableNon-cancellable purchase commitments do not typically extend beyond the 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 several weeks. Purchasesemiconductors and electronics components seeking to prevent customers from over-ordering quantities beyond their true demand, are now requiring all new purchase orders to have non-cancellable, non-returnable (NCNR) purchase order terms. Most purchase orders beyond this time frame are typically cancelable.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. The total contractual cash obligations in existence at December 31, 2019 due pursuant to contractual commitments are:
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| years |
| 5 years |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
| $ | 101,471 |
| $ | 14,552 |
| $ | 22,567 |
| $ | 18,336 |
| $ | 46,016 |
|
Finance lease obligations |
|
| 5,915 |
|
| 1,781 |
|
| 3,669 |
|
| 465 |
|
| — |
|
Long-term debt obligations |
|
| 144,375 |
|
| 7,500 |
|
| 15,000 |
|
| 121,875 |
|
| — |
|
Deemed repatriation tax (1) |
|
| 57,506 |
|
| 6,439 |
|
| 12,878 |
|
| 28,170 |
|
| 10,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations |
| $ | 309,267 |
| $ | 30,272 |
| $ | 54,114 |
| $ | 168,846 |
| $ | 56,035 |
|
A summary of our operating lease obligations as of December 31, 2022 can be found in Note 6 to the consolidated financial statements in Part II, Item 8 of this Report.
(1) U.SA summary of our long-term debt obligations as of December 31, 2022 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 7four years pursuant to the U.S. Tax Reform. See Note 108 to the Consolidated Financial Statementsconsolidated financial statements in Part II, Item 8 of this Report.
OFF-BALANCE SHEET ARRANGEMENTS
36
As of December 31, 2019, we did not have any significant off-balance sheet arrangements. See Note 12 to the Consolidated Financial Statements in Item 8 of this Report.
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. 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. Our sales are substantially denominated in U.S. dollars. Our foreign currency cash flows are generated in certain European and Asian countries and Mexico. We are also exposed to market risk for changes in interest rates on our financial instruments, a portion of which relates to our invested cash balances. We do not use derivative financial instruments in our investing activities. We place cash and cash equivalents and investments with various major financial institutions. We protect our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by generally investing in investment grade securities. We are also exposed to interest rate risk on borrowings under our Credit Agreement. As of December 31, For additional information, see Note Item 8. Financial Statements and Supplementary Data. BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, (in thousands, except par value) 2019 2018 Assets Current assets: Cash and cash equivalents $ 347,558 $ 458,102 Restricted cash 16,398 — Accounts receivable, net of allowance for doubtful accounts of $10,085 and $1,733, respectively 324,424 468,161 Contract assets 161,061 140,082 Inventories 314,956 309,975 Prepaid expenses and other assets 29,566 27,024 Income taxes receivable 1,119 206 Total current assets 1,195,082 1,403,550 Property, plant and equipment, net 205,819 210,954 Operating lease right-of-use assets 76,859 — Goodwill 192,116 192,116 Deferred income taxes 5,274 2,478 Other, net 84,724 90,685 $ 1,759,874 $ 1,899,783 Liabilities and Shareholders’ Equity Current liabilities: Current installments of long-term debt $ 8,825 $ 6,793 Accounts payable 302,994 422,053 Income taxes payable 7,895 10,435 Accrued liabilities 139,531 97,878 Total current liabilities 459,245 537,159 Long-term debt, less current installments 138,912 147,277 Operating lease liabilities 67,898 — Other long-term liabilities 65,483 68,799 Deferred income taxes 13,504 14,323 Shareholders’ equity: Preferred stock, $0.10 par value; 5,000 shares authorized, none issued — — Common stock, $0.10 par value; 145,000 shares authorized; issued and outstanding – 36,957 and 41,357, respectively 3,696 4,136 Additional paid-in capital 512,019 554,939 Retained earnings 515,876 584,274 Accumulated other comprehensive loss (16,759) (11,124) Total shareholders’ equity 1,014,832 1,132,225 Commitments and contingencies $ 1,759,874 $ 1,899,783 BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, December 31, (in thousands, except par value) 2022 2021 Assets Current assets: Cash and cash equivalents $ 207,430 $ 271,749 Accounts receivable, net of allowance for doubtful accounts of 491,957 355,883 Contract assets 183,613 155,243 Inventories 727,749 523,240 Prepaid expenses and other assets 41,392 41,688 Income taxes receivable 8 341 Total current assets 1,652,149 1,348,144 Property, plant and equipment, net 211,478 186,666 Operating lease right-of-use assets 93,081 99,158 Goodwill 192,116 192,116 Deferred income taxes 12,235 5,972 Other assets, net 66,272 71,824 $ 2,227,331 $ 1,903,880 Liabilities and Shareholders’ Equity Current liabilities: Current installments of long-term debt $ 4,275 $ 985 Accounts payable 424,272 426,555 Advance payments from customers 197,937 118,124 Income taxes payable 12,236 6,164 Accrued liabilities 110,416 102,554 Total current liabilities 749,136 654,382 Long-term debt, less current installments 320,675 129,289 Operating lease liabilities 86,687 90,878 Other long-term liabilities 43,922 55,445 Deferred income taxes 495 84 Commitments and contingencies Shareholders’ equity: Preferred stock, $0.10 par value; 5,000 shares authorized, none — — Common stock, $0.10 par value; 145,000 shares authorized; 3,516 3,521 Additional paid-in capital 519,238 507,447 Retained earnings 519,895 479,992 Accumulated other comprehensive loss (16,233 ) (17,158 ) Total shareholders’ equity 1,026,416 973,802 $ 2,227,331 $ 1,903,880 See accompanying notes to consolidated financial statements. BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Income BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Income (Loss) Year ended December 31, (in thousands, except per share data) 2019 2018 2017 Sales $ 2,268,095 $ 2,566,465 $ 2,454,479 Cost of sales 2,067,689 2,345,872 2,228,559 Gross profit 200,406 220,593 225,920 Selling, general and administrative expenses 141,618 143,205 130,401 Amortization of intangible assets 9,461 9,485 10,065 Restructuring charges and other costs 13,101 9,365 8,628 Ransomware related incident costs, net 7,681 — — Income from operations 28,545 58,538 76,826 Interest expense (6,664) (10,473) (9,405) Interest income 3,829 6,848 5,370 Other income (expense) 1,559 628 (1,786) Income before income taxes 27,269 55,541 71,005 Income tax expense 3,844 32,724 102,906 Net income (loss) $ 23,425 $ 22,817 $ (31,901) Earnings (loss) per share: Basic $ 0.61 $ 0.49 $ (0.64) Diluted $ 0.60 $ 0.49 $ (0.64) Weighted-average number of shares outstanding: Basic 38,338 46,332 49,680 Diluted 38,763 46,655 49,680 Year Ended (in thousands, except per share data) 2022 2021 2020 Sales $ 2,886,331 $ 2,255,319 $ 2,053,131 Cost of sales 2,631,096 2,049,418 1,878,083 Gross profit 255,235 205,901 175,048 Selling, general and administrative expenses 150,215 136,700 122,195 Amortization of intangible assets 6,384 6,384 9,099 Restructuring charges and other costs 8,567 13,699 19,970 Ransomware related incident costs (recovery), net — (3,944 ) (1,350 ) Income from operations 90,069 53,062 25,134 Interest expense (12,894 ) (8,472 ) (8,364 ) Interest income 1,730 540 1,196 Other income (expense) 5,437 277 (673 ) Income before income taxes 84,342 45,407 17,293 Income tax expense 16,113 9,637 3,238 Net income $ 68,229 $ 35,770 $ 14,055 Earnings per share: Basic $ 1.94 $ 1.00 $ 0.38 Diluted $ 1.91 $ 0.99 $ 0.38 Weighted-average number of shares outstanding: Basic 35,179 35,655 36,524 Diluted 35,718 36,101 36,817 See accompanying notes to consolidated financial statements. 39 BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) Year ended December 31, (in thousands) 2019 2018 2017 Net income (loss) $ 23,425 $ 22,817 $ (31,901) Other comprehensive income (loss): Foreign currency translation adjustments (585) (2,273) 4,977 Unrealized gain on investments, net of tax — 41 33 Unrealized gain (loss) on derivative, net of tax (3,716) (1,362) 1,192 Other (1,334) 619 (175) Other comprehensive gain (loss) (5,635) (2,975) 6,027 Comprehensive income (loss) $ 17,790 $ 19,842 $ (25,874) Year Ended (in thousands) 2022 2021 2020 Net income $ 68,229 $ 35,770 $ 14,055 Other comprehensive income (loss): Foreign currency translation adjustments (3,148 ) (4,354 ) 4,050 Unrealized gain (loss) on derivatives, net of tax 4,160 3,370 (3,142 ) Other (87 ) 477 (800 ) Other comprehensive income (loss) 925 (507 ) 108 Comprehensive income $ 69,154 $ 35,263 $ 14,163 See accompanying notes to consolidated financial statements. 40 BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity Accumulated Additional other Total Common paid-in Retained comprehensive shareholders’ (in thousands) Shares stock capital earnings loss equity Balances, December 31, 2016 49,330 $ 4,933 $ 626,093 $ 758,870 $ (14,176) $ 1,375,720 Cumulative effect of accounting change — — 213 (213) — — Stock-based compensation expense — — 7,815 — — 7,815 Shares repurchased and retired (963) (97) (10,676) (18,575) — (29,348) Stock options exercised 582 58 11,150 — — 11,208 Vesting of restricted stock units, net of restricted share forfeitures 206 21 (21) — — — Shares withheld for taxes (12) (1) (382) — — (383) Net loss — — — (31,901) — (31,901) Other comprehensive income — — — — 6,027 6,027 Balances, December 31, 2017 49,143 4,914 634,192 708,181 (8,149) 1,339,138 Stock-based compensation expense — — 10,089 — — 10,089 Shares repurchased and retired (8,236) (823) (91,520) (119,515) — (211,858) Stock options exercised 200 20 3,611 — — 3,631 Vesting of restricted stock units 306 31 (31) — — — Shares withheld for taxes (56) (6) (1,402) — — (1,408) Dividends declared — — — (27,209) — (27,209) Net income — — — 22,817 — 22,817 Other comprehensive loss — — — — (2,975) (2,975) Balances, December 31, 2018 41,357 4,136 554,939 584,274 (11,124) 1,132,225 Stock-based compensation expense — — 10,194 — — 10,194 Shares repurchased and retired (4,719) (472) (52,436) (69,202) — (122,110) Stock options exercised 82 8 1,577 — — 1,585 Vesting of restricted stock units 311 31 (31) — — — Shares withheld for taxes (74) (7) (2,224) — — (2,231) Dividends declared — — — (22,621) — (22,621) Net income — — — 23,425 — 23,425 Other comprehensive loss — — — — (5,635) (5,635) Balances, December 31, 2019 36,957 $ 3,696 $ 512,019 $ 515,876 $ (16,759) $ 1,014,832 (in thousands) Shares Common Additional Retained Accumulated Total Balances, December 31, 2019 36,957 $ 3,696 $ 512,019 $ 515,876 $ (16,759 ) $ 1,014,832 Stock-based compensation expense — — 10,398 — — 10,398 Shares repurchased and retired (964 ) (97 ) (10,704 ) (14,419 ) — (25,220 ) Stock options exercised 55 5 953 — — 958 Vesting of restricted stock units 336 34 (34 ) — — — Shares withheld for taxes (89 ) (9 ) (2,227 ) — — (2,236 ) Dividends declared — — — (23,307 ) — (23,307 ) Net income — — — 14,055 — 14,055 Other comprehensive income — — — — 108 108 Balances, December 31, 2020 36,295 $ 3,629 $ 510,405 $ 492,205 $ (16,651 ) $ 989,588 Stock-based compensation expense — — 15,262 — — 15,262 Shares repurchased and retired (1,380 ) (138 ) (15,362 ) (24,716 ) — (40,216 ) Stock options exercised 30 3 343 — — 346 Vesting of restricted stock units 377 38 (38 ) — — — Shares withheld for taxes (109 ) (11 ) (3,163 ) — — (3,174 ) Dividends declared — — — (23,267 ) — (23,267 ) Net income — — — 35,770 — 35,770 Other comprehensive loss — — — — (507 ) (507 ) Balances, December 31, 2021 35,213 $ 3,521 $ 507,447 $ 479,992 $ (17,158 ) $ 973,802 Stock-based compensation expense — — 18,485 — — 18,485 Shares repurchased and retired (376 ) (37 ) (4,177 ) (5,177 ) — (9,391 ) Stock options exercised 45 4 712 — — 716 Vesting of restricted stock units 407 41 (41 ) — — — Shares withheld for taxes (125 ) (13 ) (3,188 ) — — (3,201 ) Dividends declared — — — (23,149 ) — (23,149 ) Net income — — — 68,229 — 68,229 Other comprehensive income — — — — 925 925 Balances, December 31, 2022 35,164 $ 3,516 $ 519,238 $ 519,895 $ (16,233 ) $ 1,026,416 See accompanying notes to consolidated financial statements. BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Year Ended December 31, (in thousands) 2019 2018 2017 Cash flows from operating activities: Net income (loss) $ 23,425 $ 22,817 $ (31,901) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 37,112 38,439 36,668 Amortization 11,315 13,400 12,004 Provision for doubtful accounts 8,608 1,712 1,697 Deferred income taxes (2,367) 7,628 7,422 Asset impairments 834 96 42 Insurance recoveries (5,000) — — Gain on the sale of property, plant and equipment 53 (262) (202) Stock-based compensation expense 10,194 10,089 7,815 Changes in operating assets and liabilities, net of effects from business acquisitions: Accounts receivable 134,926 (33,952) 4,657 Contract assets (20,979) 6,414 9,710 Inventories (5,238) (43,264) (24,570) Prepaid expenses and other assets 2,494 10,238 (7,812) Accounts payable (121,860) 61,391 29,542 Accrued liabilities 28,877 5,778 13,519 Operating leases 1,029 — — Income taxes (10,287) (23,837) 87,251 Net cash provided by operations 93,136 76,687 145,842 Cash flows from investing activities: Proceeds from sales of investments at par 50 522 250 Additions to property, plant and equipment (32,576) (62,808) (50,786) Proceeds from the sale of property, plant and equipment 259 239 280 Additions to purchased software (2,542) (3,924) (3,720) Business acquisitions, net of cash acquired — (2,731) — Other (54) (147) (2,145) Net cash used in investing activities (34,863) (68,849) (56,121) Cash flows from financing activities: Proceeds from stock options exercised 1,585 3,631 11,208 Employee taxes paid for shares withheld (2,231) (1,408) (383) Dividends paid (23,287) (21,005) — Borrowings under credit agreement — 50,000 100,000 Principal payments on long-term debt and capital lease obligations (6,794) (108,024) (112,396) Share repurchases (122,110) (211,858) (29,348) Debt issuance costs — (2,303) (433) Net cash used in financing activities (152,837) (290,967) (31,352) Effect of exchange rate changes 418 (1,315) 2,744 Net increase (decrease) in cash and cash equivalents and restricted cash (94,146) (284,444) 61,113 Cash and cash equivalents and restricted cash at beginning of year 458,102 742,546 681,433 Cash and cash equivalents and restricted cash at end of year $ 363,956 $ 458,102 $ 742,546 Consolidated Statements of Cash Flows Year Ended (in thousands) 2022 2021 2020 Cash flows from operating activities: Net income $ 68,229 $ 35,770 $ 14,055 Adjustments to reconcile net income to net cash Depreciation 33,339 35,003 37,739 Amortization 10,913 9,149 11,053 Provision for doubtful accounts 489 — 2,160 Deferred income taxes (7,248 ) (6,883 ) (7,312 ) Asset impairments — 4,357 6,950 Loss (gain) on the sale of property, plant and equipment (289 ) 148 (155 ) Gain on assets held for sale (393 ) — — Stock-based compensation expense 18,485 15,262 10,398 Changes in operating assets and liabilities: Accounts receivable (136,455 ) (46,967 ) 13,586 Contract assets (28,370 ) (12,464 ) 18,282 Inventories (206,247 ) (197,867 ) (10,799 ) Prepaid expenses and other assets (6,467 ) (12,201 ) 4,080 Accounts payable (16,656 ) 139,952 (15,553 ) Advance payments from customers 79,813 34,002 46,611 Accrued liabilities 6,303 (508 ) (9,826 ) Operating leases 441 (167 ) 724 Income taxes 6,646 792 (1,555 ) Net cash (used in) provided by operations (177,467 ) (2,622 ) 120,438 Cash flows from investing activities: Additions to property, plant and equipment (43,357 ) (38,794 ) (34,584 ) Proceeds from the sale of property, plant and equipment 321 239 368 Proceeds from the sale of assets held for sale 5,372 — — Additions to purchased software (3,417 ) (3,383 ) (4,935 ) Cash received from business divestitures — — 4,714 Other (93 ) 63 54 Net cash used in investing activities (41,174 ) (41,875 ) (34,383 ) Cash flows from financing activities: Debt issuance costs (574 ) (1,150 ) — Proceeds from stock options exercised 716 346 958 Employee taxes paid for with shares withheld (3,201 ) (3,174 ) (2,236 ) Dividends paid (23,156 ) (23,260 ) (23,041 ) Borrowings under credit agreement 828,000 150,000 110,000 Borrowings under finance leases — — 864 Principal payments on credit agreement (633,000 ) (155,625 ) (117,500 ) Principal payments on finance leases (165 ) (873 ) (1,351 ) Share repurchases (9,391 ) (40,216 ) (25,220 ) Net cash provided by (used in) financing activities 159,229 (73,952 ) (57,526 ) Effect of exchange rate changes (4,907 ) (5,792 ) 3,505 Net (decrease) increase in cash and cash equivalents and restricted cash (64,319 ) (124,241 ) 32,034 Cash and cash equivalents and restricted cash at beginning of year 271,749 395,990 363,956 Cash and cash equivalents and restricted cash at end of year $ 207,430 $ 271,749 $ 395,990 See accompanying notes to consolidated financial statements. 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 (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. The following table summarizes the activity in the Company’s allowance for doubtful accounts during 2022, 2021 and Balance at Balance at Beginning Charges to End of (in thousands) of Period Operations Deductions Period Year ended December 31, 2022: Allowance for doubtful accounts(1) $ 788 489 (763 ) $ 514 Year ended December 31, 2021: Allowance for doubtful accounts(1) $ 1,371 — (583 ) $ 788 Year ended December 31, 2020: Allowance for doubtful accounts(1) $ 10,085 2,160 (10,874 ) $ 1,371 (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. (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 – 5 to 40 years for buildings and building improvements, 2 to 15 years for machinery and equipment, 2 to 12 years for furniture and fixtures and 2 to 8 years for vehicles. Leasehold improvements are amortized on the straight-line method over the shorter of the useful life of the improvement or the remainder of the lease term. 43 (g) Leases (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. 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 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 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. The following table sets forth the calculation of basic and diluted earnings Year Ended (in thousands, except per share data) 2022 2021 2020 Net income $ 68,229 $ 35,770 $ 14,055 Denominator for basic earnings per share – weighted-average 35,179 35,655 36,524 Incremental common shares attributable to exercise of dilutive 17 39 36 Incremental common shares attributable to outstanding restricted stock units 522 407 257 Denominator for diluted earnings per share 35,718 36,101 36,817 Basic earnings per share $ 1.94 $ 1.00 $ 0.38 Diluted earnings per share $ 1.91 $ 0.99 $ 0.38 44 Year Ended December 31, (in thousands, except per share data) 2019 2018 2017 Net income (loss) $ 23,425 $ 22,817 $ (31,901) Denominator for basic earnings per share – weighted-average number of common shares outstanding during the period 38,338 46,332 49,680 Incremental common shares attributable to exercise of dilutive options 90 104 — Incremental common shares attributable to outstanding restricted stock units 335 219 — Denominator for diluted earnings per share 38,763 46,655 49,680 Basic earnings (loss) per share $ 0.61 $ 0.49 $ (0.64) Diluted earnings (loss) per share $ 0.60 $ 0.49 $ (0.64) 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 The Company’s performance obligations generally have an expected duration of one year or less. The Company applies the practical 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. 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. 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 As of December 31, Performance- based Restricted Restricted Stock Stock (in thousands) (in thousands) Units Units(1) Restricted Performance- Unrecognized compensation cost $ 17,621 $ 2,834 Remaining weighted-average amortization period 2.5 years 1 years (1) Based on the probable achievement of the performance goals identified in each award. Unrecognized compensation cost $ 21,578 $ 6,125 Remaining weighted-average amortization period 2.5 years 1.6 years The total cash received as a result of stock option exercises in 45 The Company awarded performance-based restricted stock units to employees during 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. accounts receivable, inventories, income taxes, long-lived assets, leases, goodwill, stock-based compensation and contingencies and litigation. Actual results could differ from those estimates. 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. 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, 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 gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in other 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 46 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. Government incentives are recorded in reduction of expense, or an offset to the related capital asset. The benefit is generally recorded when all conditions attached to the incentive have been met or are expected to be met and there is reasonable assurance of their receipt. The Company recorded $0.9 million in new government incentives for the year ended December 31, 2022 compared to $0.5 million of incentives recorded during the year ended December 31, 2021 as reductions of costs of sales and selling, general and administrative expense in the consolidated statements of income. As of December 31, 2022 and 2021, none and $0.5 million was recorded in prepaid and other assets in the consolidated balance sheets. (s) New Accounting Pronouncements In In disclosures. The Company has determined that other recently issued accounting standards will either not have December 31, (in thousands) 2019 2018 Beginning balance as of December 31 $ 140,082 $ 146,496 Revenue recognized 2,076,680 2,387,333 Amounts collected or invoiced (2,055,701) (2,393,747) Ending balance as of December 31 $ 161,061 $ 140,082 Note Inventory costs are summarized as follows: December 31, (in thousands) 2019 2018 Raw materials $ 304,069 $ 300,439 Work in process 8,282 7,321 Finished goods 2,605 2,215 $ 314,956 $ 309,975 December 31, (in thousands) 2022 2021 Raw materials $ 710,494 $ 504,307 Work in process 15,546 15,338 Finished goods 1,709 3,595 $ 727,749 $ 523,240 47 Note Property, plant and equipment consists of the following: December 31, (in thousands) 2019 2018 Land $ 6,169 $ 6,169 Buildings and building improvements 87,605 97,103 Machinery and equipment 538,037 514,450 Furniture and fixtures 10,558 9,343 Vehicles 1,268 1,341 Leasehold improvements 35,366 30,122 Construction in progress 5,504 13,134 684,507 671,662 Less accumulated depreciation (478,688) (460,708) $ 205,819 $ 210,954 December 31, (in thousands) 2022 2021 Land $ 5,867 $ 5,867 Buildings and building improvements 79,178 76,139 Machinery and equipment 542,034 506,652 Furniture and fixtures 11,430 10,035 Vehicles 1,099 1,125 Leasehold improvements 54,272 42,288 Construction in progress 3,147 17,719 697,027 659,825 Less accumulated depreciation (485,549 ) (473,159 ) $ 211,478 $ 186,666 Note G (in thousands) Americas Asia Total Goodwill as of December 31, 2016 $ 153,514 $ 38,102 $ 191,616 Goodwill as of December 31, 2017 $ 153,514 $ 38,102 $ 191,616 Acquisition 500 — 500 Goodwill as of December 31, 2018 $ 154,014 $ 38,102 $ 192,116 Goodwill as of December 31, 2019 $ 154,014 $ 38,102 $ 192,116 (in thousands) Americas Asia Total Goodwill as of December 31, 2022, 2021 and 2020 $ 154,014 $ 38,102 $ 192,116 Other assets, net consist primarily of acquired identifiable intangible assets and capitalized purchased software costs. Acquired identifiable intangible assets and purchased software as of December 31, Gross Net Carrying Accumulated Carrying (in thousands) (in thousands) Amount Amortization Amount Gross Accumulated Net Customer relationships $ 100,123 $ (46,981) $ 53,142 Purchased software costs 41,604 (32,012) 9,592 Technology licenses 28,800 (24,100) 4,700 Trade names and trademarks 7,800 — 7,800 Other 868 (309) 559 Intangible assets, December 31, 2019 $ 179,195 $ (103,402) $ 75,793 Gross Net Carrying Accumulated Carrying (in thousands) Amount Amortization Amount Customer relationships $ 100,146 $ (40,661) $ 59,485 Purchased software costs 39,069 (30,626) 8,443 Technology licenses 28,800 (21,006) 7,794 Trade names and trademarks 7,800 — 7,800 Other 868 (285) 583 Intangible assets, December 31, 2018 $ 176,683 $ (92,578) $ 84,105 Customer relationships $ 100,072 $ (65,958 ) $ 34,114 Purchased software costs 52,483 (36,702 ) 15,781 Technology licenses 15,500 (15,500 ) — Trade names and trademarks 7,800 — 7,800 Other 868 (377 ) 491 Intangible assets, December 31, 2022 $ 176,723 $ (118,537 ) $ 58,186 (in thousands) Gross Accumulated Net Customer relationships $ 100,136 $ (59,680 ) $ 40,456 Purchased software costs 49,788 (34,325 ) 15,463 Technology licenses 26,800 (26,800 ) — Trade names and trademarks 7,800 — 7,800 Other 868 (356 ) 512 Intangible assets, December 31, 2021 $ 185,392 $ (121,161 ) $ 64,231 Customer relationships are being amortized on a straight-line basis over a period of 10 to 14 years. Capitalized purchased software costs are amortized straight-line over the estimated useful life of the related software, which ranges from 2 to 48 and Year Ended December 31, (in thousands) 2019 2018 2017 Amortization of intangible assets $ 9,461 $ 9,485 $ 10,065 Amortization of capitalized purchased software costs 1,393 1,198 1,078 Amortization of debt costs 461 2,717 861 $ 11,315 $ 13,400 $ 12,004 Year Ended (in thousands) 2022 2021 2020 Amortization of intangible assets $ 6,384 $ 6,384 $ 9,099 Amortization of capitalized purchased software costs 4,113 2,128 1,493 Amortization of debt costs 416 637 461 $ 10,913 $ 9,149 $ 11,053 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 2020 $ 10,695 2021 8,098 2022 7,946 2023 6,718 2024 5,555 Year ending December 31, Amount 2023 $ 5,979 2024 $ 4,817 2025 $ 4,817 2026 $ 4,817 2027 $ 4,817 Note Long-term debt outstanding as of December 31, December 31, (in thousands) 2019 2018 Term loan, due 2023 $ 144,375 $ 150,000 Less unamortized debt issuance costs (1,616) (2,077) Long-term debt $ 142,759 $ 147,923 December 31, (in thousands) 2022 2021 Revolving credit facility $ 195,000 $ — Term loan 131,250 131,250 Less unamortized debt issuance costs (1,829 ) (1,670 ) Long-term debt $ 324,421 $ 129,580 On July 20, 2018, the Company entered into a On December 21, 2021, the Company amended and restated the Prior Credit Agreement by entering into a $381 million amended and restated credit agreement (the Amended and Restated Credit Agreement). The Amended and Restated Credit Agreement is comprised of a five-year $250 million revolving credit facility (the Revolving Credit Facility) and a five-year $131.3 million term loan facility (the Term Loan Facility), both extending the original revolving credit facility and term loan facility maturity dates from July 20, 2023 to December 21, 2026. On May 20, 2022, the Company entered into Amendment No. 1 (the Amendment) to the Amended and Restated Credit Agreement (as amended, the Credit Agreement). The Amendment increased the Revolving Credit Facility commitments from $250 million to $450 million. The Amendment also established that the interest on outstanding borrowings starting on the next reset date and any new borrowings under the Amendment (other than swingline loans) will accrue, at the Company’s option, at (a) BSBY plus the Applicable Rate (as defined in the Credit Agreement, approximately 1.00% to 2.00% per annum depending on various factors) or (b) for U.S. Dollar denominated loans, the base rate (which is the highest of (i) the federal funds rate plus 0.50%, (ii) the Bank of America, N.A. prime rate, (iii) the one month BSBY adjusted daily plus 1.00% and (iv) 1.00%). The Revolving Credit Facility is available for general corporate purposes. The Credit Agreement includes an accordion feature pursuant to which the Company is permitted to add one or more incremental term 49 The Term Loan Facility is As of December 31, The Credit Agreement is generally secured by a pledge of (a) all the capital stock of the Company’s domestic subsidiaries and The Credit Agreement contains certain financial covenants As of December 31, addition to other debt covenant restrictions. The aggregate maturities of long-term debt for each of the five years subsequent to December 31, Note 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 The components of lease expense were as follows: Year Ended (in thousands) December 31, 2019 Finance lease cost: Amortization of right-of-use assets (included in depreciation expense) $ 711 Interest on lease liabilities 548 Operating lease cost 17,014 Short-term lease cost 566 Variable lease cost 1,899 Total lease cost $ 20,738 Other information: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used for finance lease $ 578 Operating cash flows used for operating leases $ 15,169 Financing cash flows used for finance lease $ 1,168 Right-of-use assets obtained in exchange for new operating lease liabilities $ 15,501 Year Ended (in thousands) 2022 2021 Finance lease cost: Amortization of right-of-use assets (included in depreciation expense) $ 96 $ 444 Interest on lease liabilities 29 192 Operating lease cost 17,485 16,155 Short-term lease cost 307 339 Variable lease cost 1,892 1,737 Total lease cost $ 19,809 $ 18,867 Other information: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used for finance lease $ 29 $ 212 Operating cash flows used for operating leases $ 17,277 $ 16,721 Financing cash flows used for finance lease $ 165 $ 873 Right-of-use assets obtained in exchange for new operating lease liabilities $ 11,694 $ 32,811 The lease assets and liabilities as of December 31, 50 December 31, 2019 December 31, Finance lease right-of-assets (included in other assets) $ 2,311 2022 2021 Finance lease right-of-use assets (included in other assets) $ 664 $ 760 Operating lease right-of-use assets Operating lease right-of-use assets $ 76,859 $ 93,081 $ 99,158 Finance liability, current (included in current installments of long-term debt) $ 1,325 Finance lease liability, current (included in current installments of long-term debt) $ 173 $ 165 Finance lease liability, noncurrent (included in long-term debt) Finance lease liability, noncurrent (included in long-term debt) $ 3,654 $ 355 $ 529 Operating lease liabilities, current (included in accrued liabilities) Operating lease liabilities, current (included in accrued liabilities) $ 11,043 $ 12,020 $ 13,465 Operating lease liabilities, noncurrent Operating lease liabilities, noncurrent $ 67,898 $ 86,687 $ 90,878 Weighted average remaining lease term – finance leases Weighted average remaining lease term – finance leases 3.5 years 2.9 years 3.9 years Weighted average remaining lease term – operating leases Weighted average remaining lease term – operating leases 10.2 years 9.8 years 10.0 years Weighted average discount rate – finance leases Weighted average discount rate – finance leases 10.1% 4.8 % 4.8 % Weighted average discount rate – operating leases Weighted average discount rate – operating leases 4.7% 4.1 % 4.1 % Future annual minimum lease payments and finance lease commitments as of December 31, Operating Finance Year ending December 31, Leases Leases 2020 $ 14,552 $ 1,781 2021 12,168 1,816 2022 10,399 1,853 2023 9,751 465 2024 8,585 — 2025 and thereafter 46,016 — Total minimum lease payments $ 101,471 $ 5,915 Less: imputed interest (22,530) (936) Present value of lease liabilities $ 78,941 $ 4,979 Year ending December 31, Operating Finance 2023 14,949 194 2024 13,654 194 2025 12,869 178 2026 11,473 — 2027 10,369 — 2028 and thereafter 57,531 — Total minimum lease payments $ 120,845 $ 566 Less: imputed interest (22,138 ) (38 ) Present value of lease liabilities $ 98,707 $ 528 As of December 31, 2032 Operating Capital Year ending December 31, Leases Leases 2019 $ 15,272 $ 1,746 2020 14,518 1,781 2021 12,203 1,816 2022 10,466 1,853 2023 9,890 465 Thereafter 47,868 — Total minimum lease payments $ 110,217 $ 7,661 Less: amount representing interest (1,514) Present value of minimum lease payments 6,147 Less: current installments (1,168) Capital lease obligations, less current installments $ 4,979 2.4 million. Note Dividends The Company began declaring and paying quarterly dividends during the first quarter of 2018. During 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 $250 million in common stock in addition to the $100 million previously approved on December 7, 2015. On October 26, 2018 and February 19, 2020, the Board of Directors authorized the repurchase of an additional $100 million and $150 million of the Company’s common stock, respectively. As of December 31, 2022, the Company had $154.6 million remaining under the stock repurchase authorization. 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 2022, the Company repurchased a total of 0.4 million common shares for an aggregate of $9.4 million at an average price of $24.96 per share. 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 51 $29.11 per share. During 2020, the Company repurchased a total of 1.0 million common shares for an aggregate of $25.2 million at an average price of $26.16 per share. Stock-Based Compensation The As of December 31, The following table summarizes activities related to the Company’s stock options: Weighted- Weighted- Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic (in thousands, except per share data) Options Price Term (Years) Value Outstanding as of December 31, 2016 1,197 $ 19.51 Exercised (582) 19.28 Forfeited or expired (19) 19.76 Outstanding as of December 31, 2017 596 19.72 Exercised (200) 18.21 Forfeited or expired (22) 22.99 Outstanding as of December 31, 2018 374 20.35 Exercised (100) 21.21 Forfeited or expired (4) 21.29 Outstanding as of December 31, 2019 270 $ 20.02 3.49 $ 3,878 Exercisable as of December 31, 2019 270 $ 20.02 3.49 $ 3,878 (in thousands, except per share data) Number of Weighted- Weighted- Aggregate Outstanding as of December 31, 2019 270 $ 20.02 Exercised (76 ) 19.87 Forfeited or expired (6 ) 23.08 Outstanding as of December 31, 2020 188 $ 19.98 Exercised (54 ) 19.77 Forfeited or expired (2 ) 20.16 Outstanding as of December 31, 2021 132 $ 20.06 Exercised (53 ) 17.16 Forfeited or expired (22 ) 22.36 Outstanding and exercisable as of December 31, 2022 57 $ 21.85 1.36 $ 277 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 As of December 31, Restricted stock units, time-based and performance-based, remain outstanding as detailed below. 52 The following table summarizes the activities related to the Company’s time-based restricted stock units: Weighted- Average Number of Grant Date (in thousands, except per share data) Units Fair Value Non-vested awards outstanding as of December 31, 2016 525 $ 22.57 Granted 314 31.56 Vested (206) 21.84 Forfeited (40) 24.21 Non-vested awards outstanding as of December 31, 2017 593 27.47 Granted 407 29.44 Vested (306) 27.25 Forfeited (99) 27.52 Non-vested awards outstanding as of December 31, 2018 595 $ 28.93 Granted 632 27.36 Vested (254) 28.09 Forfeited (80) 28.97 Non-vested awards outstanding as of December 31, 2019 893 $ 28.06 (in thousands, except per share data) Number of Weighted- Non-vested awards outstanding as of December 31, 2019 893 $ 28.06 Granted 533 26.52 Vested (336 ) 27.69 Forfeited (64 ) 28.54 Non-vested awards outstanding as of December 31, 2020 1,026 $ 27.35 Granted 503 28.52 Vested (377 ) 26.77 Forfeited (95 ) 28.47 Non-vested awards outstanding as of December 31, 2021 1,057 $ 28.02 Granted 616 25.90 Vested (407 ) 28.08 Forfeited (81 ) 27.44 Non-vested awards outstanding as of December 31, 2022 1,185 $ 26.93 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, 2016 227 $ 21.43 Granted(1) 172 31.60 Forfeited (53) 18.81 Non-vested units outstanding as of December 31, 2017 346 26.88 Granted(1) 120 29.60 Forfeited (147) 24.06 Non-vested units outstanding as of December 31, 2018 319 $ 29.19 Granted(1) 198 27.45 Vested (57) 31.40 Forfeited (76) 21.23 Non-vested units outstanding as of December 31, 2019 384 $ 28.89 Weighted- Average Number of Grant Date (in thousands, except per share data) Units Fair Value Non-vested units outstanding as of December 31, 2019 384 $ 28.89 Granted(1) 165 28.02 Forfeited (181 ) 30.04 Non-vested units outstanding as of December 31, 2020 368 $ 27.93 Granted(1) 234 28.60 Forfeited (60 ) 29.38 Non-vested units outstanding as of December 31, 2021 542 $ 28.06 Granted(1) 177 25.97 Forfeited (174 ) 27.29 Non-vested units outstanding as of December 31, 2022 545 $ 27.62 Income tax expense (benefit) based on income before income taxes consisted of the following: Year Ended (in thousands) 2022 2021 2020 Current: U.S. Federal $ 903 $ 6 $ 1,406 State and local 107 1,702 24 Foreign 22,351 14,812 9,120 23,361 16,520 10,550 Deferred: U.S. Federal (6,544 ) (6,179 ) (3,784 ) State and local (1,734 ) (1,380 ) (1,021 ) Foreign 1,030 676 (2,507 ) (7,248 ) (6,883 ) (7,312 ) $ 16,113 $ 9,637 $ 3,238 Note 10—Income Taxes Income tax expense (benefit) based on income before income taxes consisted of the following: Year Ended December 31, (in thousands) 2019 2018 2017 Current: U.S. Federal $ (1,697) $ (14,831) $ 85,633 State and local (3,567) 10,110 804 Foreign 11,474 29,817 9,047 6,210 25,096 95,484 Deferred: U.S. Federal 1,815 (249) 8,337 State and local 1,409 (550) (213) Foreign (5,590) 8,427 (702) (2,366) 7,628 7,422 $ 3,844 $ 32,724 $ 102,906 Worldwide income (loss) before income taxes consisted of the following: Year Ended December 31, (in thousands) 2019 2018 2017 United States $ (13,756) $ (23,645) $ (14,984) Foreign 41,025 79,186 85,989 $ 27,269 $ 55,541 $ 71,005 53 Worldwide income (loss) before income taxes consisted of the following: Year Ended (in thousands) 2022 2021 2020 United States $ (45,390 ) $ (34,930 ) $ (33,790 ) Foreign 129,732 80,337 51,083 $ 84,342 $ 45,407 $ 17,293 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) 2019 2018 2017 Tax at statutory rate $ 5,727 $ 11,664 $ 24,852 State taxes, net of federal tax effect (1,705) 7,553 384 Effect of foreign operations and tax incentives (5,870) (11,945) (20,703) Change in valuation allowance (2,283) 2,114 (203) Stock-based compensation 118 (143) (1,658) Provisional impact of U.S. Tax Reform — (4,353) 97,707 Impact of cash repatriation — 21,612 — GILTI 955 3,206 — Losses in foreign jurisdictions for which no benefit has been provided 4,379 1,423 106 Change in uncertain tax benefits reserve 200 (317) — Other 2,323 1,910 2,421 Total income tax expense $ 3,844 $ 32,724 $ 102,906 Year Ended (in thousands) 2022 2021 2020 Tax at statutory rate $ 17,713 $ 9,536 $ 3,632 State taxes, net of federal tax effect (1,285 ) (36 ) (788 ) Effect of foreign operations and tax incentives (3,907 ) (4,048 ) (6,372 ) Change in valuation allowance 41 (336 ) (3,029 ) Stock-based compensation 447 (69 ) 347 GILTI 1,768 2,104 1,667 Foreign tax refund benefit — (7,285 ) — Losses in foreign jurisdictions for which no benefit has been provided 3 2,608 5,798 Change in uncertain tax benefits reserve 40 8,858 (31 ) Other 1,293 (1,695 ) 2,014 Total income tax expense $ 16,113 $ 9,637 $ 3,238 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. 54 During 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) 2019 2018 Deferred tax assets: Carrying value of inventories $ 3,212 $ 2,787 Accrued liabilities and allowances deductible for tax purposes on a cash basis 8,945 6,108 Goodwill 1,976 2,351 Stock-based compensation 2,500 2,347 Operating right-of-use lease liabilities 19,087 — Net operating loss carryforwards 19,493 20,028 Tax credit carryforwards 2,421 1,923 Other 5,148 4,373 62,782 39,917 Less: valuation allowance (15,992) (13,709) Net deferred tax assets 46,790 26,208 Deferred tax liabilities: Plant and equipment, due to differences in depreciation (10,428) (7,617) Operating right-of-use lease assets (18,826) — Intangible assets, due to differences in amortization (16,302) (18,593) Foreign withholding tax (7,181) (9,212) Other (2,283) (2,631) Gross deferred tax liability (55,020) (38,053) Net deferred tax liability $ (8,230) $ (11,845) The net deferred tax liability is classified as follows: Long-term asset $ 5,274 $ 2,478 Long-term liability (13,504) (14,323) Total $ (8,230) $ (11,845) December 31, (in thousands) 2022 2021 Deferred tax assets: Carrying value of inventories $ 4,809 $ 2,704 Accrued liabilities and allowances deductible for tax purposes on a cash basis 7,811 10,592 Goodwill 937 1,320 Stock-based compensation 5,032 3,741 Operating right-of-use lease liabilities 23,252 24,851 Net operating loss carryforwards 16,848 17,417 Tax credit carryforwards 5,805 4,629 Interest rate swap — 1,133 Research and experimentation 10,691 — Other 4,086 5,961 79,271 72,348 Less: valuation allowance (18,743 ) (18,702 ) Net deferred tax assets 60,528 53,646 Deferred tax liabilities: Plant and equipment, due to differences in depreciation (7,957 ) (4,887 ) Operating right-of-use lease assets (22,991 ) (24,590 ) Intangible assets, due to differences in amortization (10,502 ) (11,687 ) Foreign withholding tax (4,902 ) (4,902 ) Interest rate swap (263 ) — Other (2,173 ) (1,692 ) Gross deferred tax liability (48,788 ) (47,758 ) Net deferred tax liability $ 11,740 $ 5,888 The net deferred tax liability is classified as follows: Long-term asset $ 12,235 $ 5,972 Long-term liability (495 ) (84 ) Total $ 11,740 $ 5,888 All deferred taxes are classified as non-current on the balance sheet as of December 31, During 2022, the Company has capitalized research and experimentation expenses that are required to be capitalized as an amortizable asset under IRC Section 174 and amortized over a period of five years. This requirement is based on the implementation of the US Tax Reform Act of 2017 beginning as of January 1, 2022. As of December 31, 2022, the Company has a net deferred tax asset from capitalized research and experimentation expenses of $10.7 million. 55 The net change in the total valuation allowance for 2022. As of December 31, 2026. The Company also has U.S. research and development tax credit carryforwards of $4.1 million which will expire from 2038 through 2042. The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in China, Malaysia, and Thailand that Year Ended December 31, (in thousands) 2019 2018 2017 China $ — $ 1,884 $ 1,398 Malaysia 3,010 3,287 4,295 Thailand 2,025 2,715 1,545 $ 5,035 $ 7,886 $ 7,238 Year Ended (in thousands) 2022 2021 2020 China $ 643 $ 443 $ — Malaysia — 1,946 4,945 Thailand 8,362 5,360 2,496 $ 9,005 $ 7,749 $ 7,441 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, December 31, (in thousands) 2019 2018 2017 Balance as of January 1 $ 313 $ 708 $ 7,791 Additions related to current year tax positions — 137 220 Additions related to prior year tax positions 200 — 894 Decreases related to prior year tax positions — (532) (8,197) Balance as of December 31 $ 513 $ 313 $ 708 December 31, (in thousands) 2022 2021 2020 Balance as of January 1 $ 9,121 $ 499 $ 513 Additions related to current year tax positions — 7,424 — Additions related to prior year tax positions — 1,575 — Decreases related to prior year tax positions — (138 ) — Decreases related to lapse of statutes (60 ) (239 ) (14 ) Balance as of December 31 $ 9,061 $ 9,121 $ 499 During 56 The reserve is classified as a current or long-term liability in the consolidated balance 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, The Company and its subsidiaries in Brazil, China, Ireland, Malaysia, Mexico, Note 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) 2019 2018 2017 International Business Machines Corporation $ * $ 323,795 $ 284,636 Applied Materials, Inc. $ * $ * $ 248,183 Year ended (in thousands) 2022 2021 2020 Applied Materials, Inc. and subsidiaries $ 424,436 $ 353,673 $ 241,522 Note The Company’s financial instruments include cash equivalents, accounts As of December 31, 2022, 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, Europe and Asia. The Company has an interest rate swap agreement with a notional amount of 57 and pays fixed rate interest payments. The fixed interest rate for the contract is The fair value of the interest rate swap agreements was a As of December 31, 2022, 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 Instruments Asset Derivatives Liability Derivatives Balance Sheet December 31, December 31, Balance Sheet December 31, December 31, (in thousands) Location 2022 2021 Location 2022 2021 Derivatives designated as hedging instruments: Forward currency exchange contracts Other current assets $ 407 $ — Accrued liabilities $ — $ 178 Interest rate swap Other current assets $ 639 $ — Accrued liabilities $ — $ 4,332 Financial instruments that subject the Company to credit risk consist of cash and cash equivalents Note 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. Note As of December 31, 58 During the years ended December 31, income. Note 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. Corporate and intersegment eliminations includes (1) corporate expenses not allocated to the Company’s three reporting segments, which are primarily general and administrative expenses such as corporate employee payroll and benefit costs and corporate facility costs, and (2) income from operations on intersegment sales between reporting segments. Corporate functions include legal, finance, tax, treasury, information technology, risk management, human resources, business development and other administrative functions. 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. Information about operating segments is as follows: Year Ended December 31, (in thousands) 2019 2018 2017 Net sales: Americas $ 1,428,795 $ 1,647,402 $ 1,584,729 Asia 741,630 801,312 777,616 Europe 176,384 186,517 176,954 Elimination of intersegment sales (78,714) (68,766) (84,820) $ 2,268,095 $ 2,566,465 $ 2,454,479 Depreciation and amortization: Americas $ 21,784 $ 22,668 $ 21,972 Asia 11,108 11,496 11,849 Europe 3,035 3,498 2,891 Corporate 12,500 14,177 11,960 $ 48,427 $ 51,839 $ 48,672 Income from operations: Americas $ 55,749 $ 61,731 $ 68,433 Asia 47,862 72,442 74,701 Europe 6,983 10,229 10,805 Corporate and intersegment eliminations (82,049) (85,864) (77,113) 28,545 58,538 76,826 Interest expense (6,664) (10,473) (9,405) Interest income 3,829 6,848 5,370 Other income (expense) 1,559 628 (1,786) Income before income taxes $ 27,269 $ 55,541 $ 71,005 Capital expenditures: Americas $ 15,822 $ 44,204 $ 27,139 Asia 9,493 14,400 18,115 Europe 3,702 2,388 4,915 Corporate 6,101 5,740 4,337 $ 35,118 $ 66,732 $ 54,506 Total assets: Americas $ 792,180 $ 852,776 $ 812,187 Asia 533,508 540,094 674,783 Europe 139,977 113,165 470,786 Corporate and other 294,209 393,748 151,548 $ 1,759,874 $ 1,899,783 $ 2,109,304 Year Ended (in thousands) 2022 2021 2020 Net sales: Americas $ 1,475,929 $ 1,203,544 $ 1,209,032 Asia 1,251,475 912,560 746,661 Europe 284,103 228,834 174,547 Elimination of intersegment sales (125,176 ) (89,619 ) (77,109 ) $ 2,886,331 $ 2,255,319 $ 2,053,131 Depreciation and amortization: Americas $ 19,574 $ 20,589 $ 22,802 Asia 10,192 10,660 11,018 Europe 3,289 2,878 2,842 Corporate 11,197 10,025 12,130 $ 44,252 $ 44,152 $ 48,792 Income from operations: Americas $ 55,202 $ 45,807 $ 32,629 Asia 134,649 90,725 63,880 Europe 16,889 11,054 6,077 Corporate and intersegment eliminations (116,671 ) (94,524 ) (77,452 ) 90,069 53,062 25,134 Interest expense (12,894 ) (8,472 ) (8,364 ) Interest income 1,730 540 1,196 Other expense 5,437 277 (673 ) Income before income taxes $ 84,342 $ 45,407 $ 17,293 Capital expenditures: Americas $ 30,105 $ 28,673 $ 24,392 Asia 10,534 4,253 7,836 Europe 4,509 6,072 1,838 Corporate 1,626 3,179 5,453 $ 46,774 $ 42,177 $ 39,519 December 31, December 31, December 31, (in thousands) 2022 2021 2020 Total assets: Americas $ 1,055,533 $ 885,574 $ 777,658 Asia 764,164 663,881 532,793 Europe 183,443 178,263 146,277 Corporate 224,191 176,162 287,507 $ 2,227,331 $ 1,903,880 $ 1,744,235 59 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 Year Ended December 31, (in thousands) 2019 2018 2017 Geographic net sales: United States $ 1,508,966 $ 1,741,321 $ 1,650,791 Asia 391,029 423,245 432,530 Europe 266,216 299,676 291,006 Other 101,884 102,223 80,152 $ 2,268,095 $ 2,566,465 $ 2,454,479 Long-lived assets: United States $ 247,073 $ 190,056 $ 167,858 Asia 76,507 79,051 77,750 Europe 20,258 9,537 11,042 Other 23,563 22,945 25,830 $ 367,402 $ 301,589 $ 282,480 Year Ended (in thousands) 2022 2021 2020 Geographic net sales: United States $ 1,569,232 $ 1,328,754 $ 1,322,728 Singapore 457,889 326,688 222,285 Other Asia 332,144 202,792 168,500 Europe 387,276 285,017 240,672 Other 139,790 112,068 98,946 $ 2,886,331 $ 2,255,319 $ 2,053,131 December 31, December 31, December 31, (in thousands) 2022 2021 2020 Long-lived assets: United States $ 249,409 $ 240,430 $ 235,193 Asia 68,283 65,327 69,669 Europe 29,338 29,588 18,002 Other 23,801 22,303 21,980 $ 370,831 $ 357,648 $ 344,844 Note The Company’s revenues are generated primarily from its manufacturing services, which entails 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 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. 60 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, 2019 (in thousands) Americas Asia Europe Total Market Sector: Industrials $ 165,163 $ 214,575 $ 73,838 $ 453,576 A&D 400,326 — 31,597 431,923 Medical 263,688 167,296 17,218 448,202 Semi-Cap 102,908 123,764 51,093 277,765 Computing 308,077 53,051 85 361,213 Telecommunications 143,686 149,890 1,840 295,416 External revenue 1,383,848 708,576 175,671 2,268,095 Elimination of intersegment sales 44,947 33,054 713 78,714 Segment revenue $ 1,428,795 $ 741,630 $ 176,384 $ 2,346,809 Year Ended December 31, 2018 Americas Asia Europe Total Market Sector: Industrials $ 184,500 $ 241,765 $ 66,798 $ 493,063 A&D 374,852 — 31,550 406,402 Medical 235,287 144,528 14,152 393,967 Semi-Cap 155,687 135,299 63,992 354,978 Computing 504,391 69,657 6,797 580,845 Telecommunications 162,813 171,520 2,877 337,210 External revenue 1,617,530 762,769 186,166 2,566,465 Elimination of intersegment sales 29,872 38,543 351 68,766 Segment revenue $ 1,647,402 $ 801,312 $ 186,517 $ 2,635,231 Year Ended December 31, 2017 (as adjusted) (in thousands) Americas Asia Europe Total Market Sector: Industrials $ 213,699 $ 213,504 $ 69,233 $ 496,436 A&D 361,200 2,430 28,060 391,690 Medical 204,677 149,650 19,458 373,785 Semi-Cap 158,151 140,967 47,223 346,341 Computing 444,401 85,988 9,971 540,360 Telecommunications 172,122 130,954 2,791 305,867 External revenue 1,554,250 723,493 176,736 2,454,479 Elimination of intersegment sales 30,479 54,123 218 84,820 Segment revenue $ 1,584,729 $ 777,616 $ 176,954 $ 2,539,299 Year Ended (in thousands) Americas Asia Europe Total Market Sector: Industrials $ 89,949 $ 363,398 $ 140,258 $ 593,605 A&D 286,230 43,701 17,654 347,585 Medical 319,823 228,571 44,500 592,894 Semi-Cap 286,322 357,634 78,146 722,102 Advanced Computing 258,206 52,301 2 310,509 Next Generation Communications 170,424 148,772 440 319,636 External revenue 1,410,954 1,194,377 281,000 2,886,331 Elimination of intersegment sales 64,976 57,100 3,100 125,175 Segment revenue $ 1,475,930 $ 1,251,477 $ 284,100 $ 3,011,506 Year Ended (in thousands) Americas Asia Europe Total Market Sector: Industrials $ 79,726 $ 262,546 $ 86,174 $ 428,446 A&D 360,030 1,692 20,009 381,731 Medical 220,635 189,614 51,585 461,834 Semi-Cap 215,596 266,065 67,640 549,301 Advanced Computing 163,423 35,842 140 199,405 Next Generation Communications 120,739 112,684 1,179 234,602 External revenue 1,160,149 868,443 226,727 2,255,319 Elimination of intersegment sales 43,395 44,117 2,107 89,619 Segment revenue $ 1,203,544 $ 912,560 $ 228,834 $ 2,344,938 Year Ended (in thousands) Americas Asia Europe Total Market Sector: Industrials $ 110,063 $ 196,209 $ 66,789 $ 373,061 A&D 401,599 — 21,972 423,571 Medical 255,246 211,567 31,657 498,470 Semi-Cap 158,380 159,016 51,578 368,974 Advanced Computing 140,109 31,228 — 171,337 Next Generation Communications 96,937 119,987 794 217,718 External revenue 1,162,334 718,007 172,790 2,053,131 Elimination of intersegment sales 46,698 28,654 1,757 77,109 Segment revenue $ 1,209,032 $ 746,661 $ 174,547 $ 2,130,240 During 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, 2022 and 2021, the Company had $183.6 million and $155.2 million, respectively, in contract assets from contracts with customers. The contract assets primarily relate to the Company’s right to consideration for work completed but not billed at the reporting date. The contract assets are transferred to accounts receivable when the rights become unconditional. 61 Year Ended (in thousands) 2022 2021 Beginning balance as of December 31 $ 155,243 $ 142,779 Revenue recognized 2,623,585 2,037,206 Amounts collected or invoiced (2,595,215 ) (2,024,742 ) Ending balance as of December 31 $ 183,613 $ 155,243 As of December 31, 2022 and 2021, the Company had $197.9 million and $118.1 million, respectively, in advance payments from customers. Of those amounts $178.9 million and $79.9 million, respectively, were related to both customer deposits and prepayments of inventory and $18.9 million and $38.2 million, respectively, were related to the contractual timing of payments. The advance payments are not considered a significant financing component because they are used to meet working capital demands of a contract, offset inventory risks and protect the company from the failure of other parties to fulfill obligations under a contract. Note 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 Note 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 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 $5.7 million of restructuring charges during The following table summarizes the 2022 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, 2022: Balance as of Foreign Balance as of December 31, Restructuring Cash Non-Cash Exchange December 31, (in thousands) 2021 Charges Payment Activity Adjustments 2022 Restructuring: Severance $ 3,257 $ 2,428 $ (1,713 ) $ (289 ) $ — $ 3,683 Lease facility costs 17 1,261 (1,261 ) — — 17 Other exit costs 237 2,021 (2,056 ) (121 ) — 81 Total $ 3,511 $ 5,710 $ (5,030 ) $ (410 ) $ — $ 3,781 The components of the restructuring charges during 2022 were as follows: 62 (in thousands) Americas Asia Europe Total Severance costs $ 2,298 $ 130 $ — $ 2,428 Lease facility costs 1,261 — — 1,261 Other exit costs 2,021 — — 2,021 $ 5,580 $ 130 $ — $ 5,710 The Company recognized restructuring charges during 2021 and 2020 primarily related to the closure of facilities in the Americas and capacity The following table summarizes the Balance as of Foreign Balance as of December 31, Restructuring Cash Non-Cash Exchange December 31, (in thousands) 2018 Charges Payment Activity Adjustments 2019 2019 Restructuring: Severance $ — $ 6,449 $ (2,493) $ — $ — $ 3,956 Other exit costs — 1,597 (653) (944) — — — 8,046 (3,146) (944) — 3,956 2018 Restructuring: Severance 282 — (282) — — — Other exit costs 918 461 (1,379) — — — 1,200 461 (1,661) — — — 2017 Restructuring: Severance — — — — — — Other exit costs 135 — (124) — (11) — 135 — (124) — (11) — Total $ 1,335 $ 8,507 $ (4,931) $ (944) $ (11) $ 3,956 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 $ 3,996 $ 4,130 $ (4,685 ) $ (184 ) $ — $ 3,257 Lease facility costs 50 2,745 (2,618 ) (160 ) — 17 Other exit costs 408 2,470 (2,252 ) (389 ) — 237 Total $ 4,454 $ 9,345 $ (9,555 ) $ (733 ) $ — $ 3,511 The components of the restructuring charges initiated during 2019 were as follows: (in thousands) Americas Asia Europe Total Severance costs $ 4,499 $ 1,950 $ — $ 6,449 Other exit costs 1,561 36 — 1,597 $ 6,060 $ 1,986 $ — $ 8,046 The components of the restructuring charges during 2021 were as follows: (in thousands) Americas Asia Europe Total Severance costs $ 4,084 $ 46 $ — $ 4,130 Lease facility costs 2,581 164 — 2,745 Other exit costs 2,470 — — 2,470 $ 9,135 $ 210 $ — $ 9,345 The following table summarizes the Balance as of Foreign Balance as of December 31, Restructuring Cash Non-Cash Exchange December 31, (in thousands) 2017 Charges Payment Activity Adjustments 2018 2018 Restructuring: Severance $ — $ 2,815 $ (2,533) $ — $ — $ 282 Other exit costs — 1,773 (855) — — 918 — 4,588 (3,388) — — 1,200 2017 Restructuring: Severance 47 3 (50) — — — Lease facility costs — 96 (96) — — — Other exit costs 198 270 (309) — (24) 135 245 369 (455) — (24) 135 2016 Restructuring: Severance 29 (6) (23) — — — Other exit costs 16 246 (146) (116) — — 45 240 (169) (116) — — Total $ 290 $ 5,197 $ (4,012) $ (116) $ (24) $ 1,335 The components of the restructuring charges initiated during 2018 were as follows: (in thousands) Americas Asia Europe Total Severance costs $ 2,496 $ 274 $ 45 $ 2,815 Other exit costs 1,773 — — 1,773 $ 4,269 $ 274 $ 45 $ 4,588 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 $ 3,956 $ 7,010 $ (6,666 ) $ (304 ) $ — $ 3,996 Lease facility costs — 3,716 (2,394 ) (1,272 ) — 50 Other exit costs — 2,174 (655 ) (1,111 ) — 408 Total $ 3,956 $ 12,900 $ (9,715 ) $ (2,687 ) $ — $ 4,454 The components of the restructuring charges (in thousands) Americas Asia Total Severance costs $ 1,985 $ 187 $ 2,172 Lease facility costs 264 — 264 Other exit costs 531 — 531 $ 2,780 $ 187 2,967 (in thousands) Americas Asia Europe Total Severance costs $ 5,829 $ 1,181 $ — $ 7,010 Lease facility costs 3,716 — — 3,716 Other exit costs 2,088 86 — 2,174 $ 11,633 $ 1,267 $ — $ 12,900 63 sale of the equipment for $1.3 million and 3.3 million in legal settlements. Note 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 In 2019, ransomware incident related costs incurred totaled Note 2019 Quarter (in thousands, except per share data) 1st 2nd 3rd 4th Sales $ 602,820 $ 601,602 $ 555,229 $ 508,444 Gross profit 53,800 52,998 52,883 40,725 Net income (loss) 13,773 9,447 7,136 (6,931) Earnings (loss) per share: Basic 0.34 0.25 0.19 (0.19) Diluted 0.34 0.24 0.19 (0.19) 2018 Quarter (in thousands, except per share data) 1st 2nd 3rd 4th Sales $ 608,136 $ 660,591 $ 640,688 $ 657,050 Gross profit 58,318 54,299 52,777 55,199 Net income (loss) (23,641) 10,943 7,799 27,716 Earnings (loss) per share: Basic (0.49) 0.23 0.17 0.64 Diluted (0.49) 0.23 0.17 0.64 2017 Quarter (in thousands, except per share data) 1st 2nd 3rd 4th Sales $ 557,903 $ 619,611 $ 610,929 $ 666,036 Gross profit 47,532 59,484 58,243 60,661 Net income (loss) 8,555 18,074 17,831 (76,361) Earnings (loss) per share: Basic 0.17 0.36 0.36 (1.54) Diluted 0.17 0.36 0.35 (1.54) The changes in accumulated other comprehensive loss by component were as follows: Foreign Unrealized Foreign currency Derivative loss on Currency Derivative translation instruments, investments, Translation Instruments, (in thousands) (in thousands) adjustments net of tax net of tax Other Total Adjustments Net of Tax Other Total Balances, December 31, 2016 $ (14,544) 286 (74) 156 $ (14,176) Other comprehensive gain (loss) before reclassifications 4,977 1,192 33 (175) 6,027 Net current period other comprehensive loss 4,977 1,192 33 (175) 6,027 Balances, December 31, 2017 (9,567) 1,478 (41) (19) (8,149) Other comprehensive gain (loss) before reclassifications (2,273) (1,126) 41 619 (2,739) Amounts reclassified from accumulated other comprehensive loss — (236) — — (236) Balances, December 31, 2019 $ (12,425 ) $ (3,600 ) $ (734 ) $ (16,759 ) Other comprehensive gain (loss) before 4,050 (2,024 ) (800 ) 1,226 Amounts reclassified from accumulated — (1,118 ) — (1,118 ) Net current period other comprehensive gain (loss) Net current period other comprehensive gain (loss) (2,273) (1,362) 41 619 (2,975) 4,050 (3,142 ) (800 ) 108 Balances, December 31, 2018 (11,840) 116 — 600 (11,124) Other comprehensive gain (loss) before reclassifications (585) (2,474) — (1,334) (4,393) Amounts reclassified from accumulated other comprehensive loss — (1,242) — — (1,242) Balances, December 31, 2020 $ (8,375 ) $ (6,742 ) $ (1,534 ) $ (16,651 ) Other comprehensive gain (loss) before reclassifications (4,354 ) 3,018 477 (859 ) Amounts reclassified from accumulated other — 352 — 352 Net current period other comprehensive gain (loss) Net current period other comprehensive gain (loss) (585) (3,716) — (1,334) (5,635) (4,354 ) 3,370 477 (507 ) Balances, December 31, 2019 $ (12,425) $ (3,600) $ — $ (734) $ (16,759) Balances, December 31, 2021 $ (12,729 ) $ (3,372 ) $ (1,057 ) $ (17,158 ) Other comprehensive gain (3,148 ) 4,641 (87 ) 1,406 Amounts reclassified from accumulated other — (481 ) — (481 ) Net current period other comprehensive gain (loss) (3,148 ) 4,160 (87 ) 925 Balances, December 31, 2022 $ (15,877 ) $ 788 $ (1,144 ) $ (16,233 ) See Note Note 20—Supplemental Cash Flow and The following is additional information concerning supplemental disclosures of cash payments. Note 23—Supplemental Cash Flow and Non-Cash Information The following is additional information concerning supplemental disclosures of cash payments. Year ended December 31, (in thousands) 2019 2018 2017 Income taxes paid, net $ 16,895 $ 48,918 $ 6,453 Interest paid $ 8,347 $ 7,868 $ 8,698 Non-cash investing activity: Additions to property, plant and equipment in accounts payable $ 9,119 $ 6,148 $ 7,761 Year Ended (in thousands) 2022 2021 2020 Income taxes paid, net $ 28,478 $ 20,558 $ 18,071 Interest paid $ 11,627 $ 8,207 $ 9,048 Non-cash investing activity: Additions to property, plant and equipment in accounts payable $ 23,734 $ 8,614 $ 3,164 On February 3, 2023, the Company entered into Amendment No. 2 to the Credit Agreement which increases the maximum amount of trade accounts that the Company may elect to sell at any one time to $200.0 million. 65 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, 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, 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 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 assurance regarding 66 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 Evaluation of income tax expense As discussed in Notes 1 and 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 We have served as the Company’s auditor since 1986. 67 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, 2022. The effectiveness of the Company’s internal control over financial reporting as of December 31, 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. 68 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. PART III Item 10. Directors, Executive Officers and Corporate Governance. The information Item 11. Executive Compensation. The information 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, Plan Category Number of Weighted- Number of Equity compensation plans approved by security 1,785,767(1) $20.06(1) 2,859,231 Additional information required by this item can be found in the 2023 Proxy Statement and is incorporated herein by reference. The information required by this item can be found in the 2023 Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services. Our independent registered public accounting firm is KPMG LLP, Phoenix, Arizona, Auditor Firm ID: 185. The information required by this item can be found in the 2023 Proxy Statement and is incorporated herein by reference. 70 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. 71 2.1 3.1 3.2 4.1 4.2 10.1 10.2 (1) 10.3 (1) 10.4 (1) 10.5 (1) 10.6 (1) 10.7 (1) 10.8 (1) 10.9 (1) 10.10 (1) 10.11 (1) 10.12 (1) 10.13 (1) 10.14 (1) 72 10.15 (1) 10.16 (3) 10.16.1 (3) 10.16.2 (2) 10.17 10.18 (1) 10.19 (1) Schedule II - Valuation Accounts Additions Balance at Balance at Beginning Charges to End of (in thousands) of Period Operations Other Deductions Period Year ended December 31, 2019: Allowance for doubtful accounts(1) $ 1,733 10,323 — 1,971 10,085 Year ended December 31, 2018: Allowance for doubtful accounts(1) $ 105 1,718 — 90 1,733 Year ended December 31, 2017: Allowance for doubtful accounts(1) $ 2,838 1,697 — 4,430 105 (1) Deductions in the allowance for doubtful accounts represent write-offs, net of recoveries, of amounts determined to be uncollectible. See accompanying Report of Independent Registered Public Accounting Firm incorporated herein by reference. 14.1 21 (2) 23 (2) 31.1 (2) 31.2 (2) 32.1 (2) 32.2 (2) 73 101.INS 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. 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: 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 David W. Scheible /s/ Jeffrey W. Benck President, Chief Executive Officer and Director Jeffrey W. Benck (principal executive officer) /s/ Roop K. Lakkaraju Chief Financial Officer Roop K. Lakkaraju (principal financial and accounting officer) /s/ Director /s/ Anne De Greef-Safft Director Anne De Greef-Safft /s/ Robert K. Gifford Director Robert K. Gifford /s/ Ramesh Gopalakrishnan Director February 24, 2023 Ramesh Gopalakrishnan /s/ Kenneth T. Lamneck Director Kenneth T. Lamneck /s/ Jeffrey S. McCreary Director Jeffrey S. McCreary /s/ Director 75TheCertain forward contractcurrency exchange contracts in place as of December 31, 2019 has2022 have not been designated as an accounting hedgehedges and, therefore, changes in fair value are recorded within our Consolidated Statementsconsolidated statements of Income.income.422019,2022, we had $144.4$131.3 million outstanding on the floating rate term loanTerm Loan facility, and we have an interest rate swap agreement with a notional amount of $144.4$121.9 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.1210 to the Notes to Consolidated Financial Statementsconsolidated financial statements in Part II, Item 8 of this Report.4337
$514 and $788, respectively
issued
issued and outstanding – 35,164 and 35,213, respectively4438
December 31,45
December 31,46
Stock
Paid-in
Capital
Earnings
Other
Comprehensive
Loss
Shareholders’
Equity4741
December 31,
(used in) provided by operating activities:4842innovative productadvanced manufacturing services, which includes design and engineering services and technology solutions and advanced manufacturing services.solutions. 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, semi-cap,semiconductor capital equipment (semi-cap), next-generation telecommunicationscommunications and high-endadvanced computing. The Company has manufacturing operations located in the United States and Mexico (the Americas), Asia and Europe.$154.4$88.9 million and $265.4$76.2 million at December 31, 20192022 and 2018,2021, respectively, consisted primarily of money-market funds and time deposits with an initial term of less than three months. Restricted cash represents cash received from customers to settle invoices sold under accounts receivable purchase agreements that is contractually required to be set aside until the cash is remitted to the purchaser. During 2019, 20182017, the Company recorded $8.6 million, $1.7 million and $1.7 million in charges for a provision to accounts receivable, net of recoveries.2020:49(g)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. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statements of income. Management elected the short-term lease recognition exemption for all of the Company’s leases that qualify, in addition to the practical expedient to not separate lease and non-lease components.(h)(i) Impairment of Long-Lived Assets and Goodwillwould be separately disclosed andare reported at the lower of the carrying amount or estimated fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be disclosed separately in the appropriate asset and liability sections of the consolidated balance sheet.two-step goodwill impairment test,quantitative assessment, otherwise no further analysis is required. In connection with its annual qualitative goodwill impairment assessments as of December 31, 2019, 20182022, 2021 and 2017,2020, the Company concluded that goodwill was not impaired.(i)(j) Earnings (Loss) Per Share50(loss) per share.
December 31,
number of common shares outstanding during the period
optionsPotentiallyThere were no potentially dilutive securities excluded from the computation of diluted earnings per share in 2022. Restricted stock units totaling less than 0.1 million and 0.1 million common shares in 2019for 2021 and 2018, respectively,2020, were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. Potentially dilutive securities totaling 0.6 million common shares in 2017 were not included in the computation of diluted loss per share because their effect would have decreased the loss per share.(j)(k) Revenue Recognitionover timeprogressively based on the cost-to-cost method. UnderFor 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.expedientsexpedient 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.(k)(l) Income Taxes51(l)(m) Stock-Based Compensation$10.2$18.5 million, $10.1$15.3 million and $7.8$10.4 million for 2019, 20182022, 2021 and 2017,2020, respectively. The total incomefuture tax benefit recognized in the income statement forof these stock-based awards as of the grant date was $2.4$4.4 million, $2.4$3.6 million and $2.8$2.4 million for 2019, 2018each of 2022, 2021 and 2017,2020, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. Awards of restricted stock units and performance-based restricted stock units are valued at the closing market price of the Company’s common stock on the date of grant. For performance-based restricted stock units, compensation expense is based on the probability that the performance goals will be achieved, which is monitored by management throughout the requisite service period. When it becomes probable, based on the Company’s expectation of performance during the measurement period, that more or less than the previous estimate of the awarded shares will vest, an adjustment to stock-based compensation expense is recognized as a change in accounting estimate.2019,2022, the unrecognized compensation cost and remaining weighted-average amortization period related to stock-based awards were as follows:
Stock Units
based
Restricted
Stock Units (1)2019, 20182022, 2021 and 20172020 was approximately $ 1.60.7 million, $3.6$0.3 million and $11.2$1.0 million, respectively. The actual tax benefit realized as a result of stock option exercises and the vesting of other share-based awards during 2019, 20182022, 2021 and 20172020 was $2.3$2.5 million, $2.5$2.7 million and $5.0$2.1 million, respectively. For 2019, 20182022, 2021 and 2017,2020, the total intrinsic value of stock options exercised was $ 0.7 million, $2.3 million and $7.70.5 million, respectively.2019, 20182022, 2021 and 2017.2020. The number of performance-based restricted stock units that will ultimately be earned will not be determined until the end of the corresponding performance periods, and may vary from as low as zero to as high as 2.5 times the target number depending on the level of achievement of certain performance goals. The level of achievement of these goals is based upon the financial results of the Company for the last full calendar year within the performance period. The performance goals consist of certain levels of achievement using the following financial metrics: revenue, operating income margin, and return on invested capital. If the performance goals are not met based on the Company’s financial results, the applicable performance-based restricted stock units will not vest and will be forfeited. Shares subject to forfeited performance-based restricted stock units will be available for issuance under the Company’s 2019 Omnibus Incentive Compensation Plan (the 2019 Plan).(m)(n) Use of EstimatesGAAP.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 to52(n)(o) Fair Values of Financial Instruments2019, all2022, 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 Company’s derivative instruments were recorded at fair value using Level 3 inputs.hierarchy. See Note 12.10.(o)(p) Foreign Currencyexpenseincome (expense) and totaled approximately $1.7was a gain of $0.6 million, $1.0a loss of $0.3 million and $2.1a loss of $1.8 million in 2019, 20182022, 2021 and 2017,2020, respectively. These amounts include the amount of gain (loss) recognized in income due to forward currency exchange contracts.(p)(q) Derivative Instrumentsstatementstatements of income when the hedged item affects earnings. Changes in fair value of derivatives that are not designated as cash flow hedges are(q) New Accounting Pronouncements(r) Government Assistance Programs and IncentivesAdoptedThe operation of our business is impacted by various government programs, incentives, and other arrangements.2019our consolidated financial statements in accordance with their purpose as aFebruary 2016,March 2020, the Financial Accounting Standards Board (FASB)issued Accounting Standards Update (ASU) No. 2016-02, Leases2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 842)848). The pronouncement provides temporary optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate (e.g., amended byLondon Interbank Offered Rate (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. In December 2022, the FASB issued ASU No. 2018-01, Land Easement Practical Expedient for Transition2022-06, Deferral of the Sunset Date of Topic 848 (Topic 848), which defers the sunset date of ASC 848 from December 31, 2022 to Topic 842December 31, 2024. On May 20, 2022, the Company entered into an amendment to the Amended and Restated Credit Agreement (as defined in Note 5), which triggered a transition from LIBOR to the Bloomberg Short-Term Bank Yield Index Rate (BSBY). This transition and the adoption of ASU No. 2018-10, 2020-04 did not have a material impact on our consolidated financial statements.Codification Improvements to Topic 842, Leases and ASU No. 2018-11,53Targeted Improvements. The new standard established a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.The Company adopted this standard on its effective date of January 1, 2019 using the effective date as its date of initial application under the modified retrospective approach. Therefore, financial information for prior periods were not restated. Management elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019, which permits the Company to carry forward its original assessment about lease identification, lease classification and initial directs costs. For all new and modified leases after adoption, management elected the short-term lease recognition exemption for all of the Company’s leases that qualify, in addition to the practical expedient to not separate lease and nonlease components.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. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. See Note 8.Not Yet AdoptedJune 2016,November 2021, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses2021-10: Disclosures by Business Entities about Government Assistance (Topic 326)832). The pronouncement intends to increase transparency in financial reporting by requiring business entities to disclose information about certain types of government assistance (e.g., which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit lossesforgivable loans, cash grants and requires considerationgrants of a broader range of reasonable and supportable information to inform credit loss estimates.other assets) they receive. This update is effective for financial statements issued for annual reporting periods beginning after December 15, 2019.2021. Early application is permitted. The Company doesadoption of ASU No. 2021-10 did not expect the implementation of this update to have a material impact on itsour consolidated financial position, results of operationsstatements or cash flows, and will adopt this update effective January 1, 2020.noa material impact on its consolidated financial position, results of operations or cash flows, or will not apply to its operations.Note 2—AcquisitionNot Yet AdoptedDuring 2018,In September 2022, the Company completed an individually immaterial business acquisition for $2.7 million. The allocationFASB issued ASU No. 2022-04: Disclosure of Supplier Finance Program Obligations (Subtopic 405-50), which requires a buyer in a supplier finance program to disclose sufficient information about the net purchase price resulted in $0.5 millionprogram to allow a user of goodwill. The goodwill recognized in connection withfinancial statements to understand the acquisition represents the future economic benefit arising from assets acquired that could not be individually identified and separately recognized, and is attributable to the general reputation, acquisition synergies and expected future cash flows of the acquisition.Note 3 – Contract AssetsAs of December 31, 2019 and 2018, the Company had $161.1 million and $140.1 million, respectively, in contract assets from contracts with customers. The contract assets primarily relate to the Company’s right to consideration for work completed but not billed at the reporting date. The contract assets are transferred to accounts receivable when the rights become unconditional.54Significant changes in the contract asset balanceprogram's nature, activity during the period, are as follows:changes from period to period, and potential magnitude. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently in the process of assessing the impacts of the guidance.4—2—Inventories5—3—Property, Plant and Equipment6—4—Goodwill and Other Intangible AssetsThe changes each year in goodwilloodwill allocated to the Company’s reportable segments were as follows:During 2018, the Company completed an individually immaterial business acquisition for $2.7 million. See Note 2.5520192022 and 20182021 were as follows:
Carrying
Amount
Amortization
Carrying
Amount
Carrying
Amount
Amortization
Carrying
Amount1014 years. Technology licenses are being amortized over their estimated useful lives in proportion to the economic benefits consumed. During 2019, 2018 2022, 20212017, 2020, $$2.53.4million, $3.9$3.4 million and $3.7$4.9 million, respectively, of purchased software costs were capitalized. Amortization on the statements of cash flow for 2019, 20182022, 2021 and 20172020 was as follows:
December 31,567—5—Borrowing Facilities20192022 and 20182021 consists of the following:$650$650 million credit agreement (the Prior Credit Agreement) by and among the Company, certain of its subsidiaries, the lenders party thereto and Bank of America, N.A., as Administrative Agent, Swingline Lender and a L/C Issuer. The Prior Credit Agreement iswas comprised of a five-year $500 $500 million revolving credit facility (the Revolving Credit Facility) and a five-year $150151 million term loan facility, (the Term Loan Facility), both withwhich had a maturity date of July 20, 2023.2023. The Term Loan Facilityterm loan facility proceeds were used to (i) refinance a portion of existing indebtedness and terminate all commitments under the Company’s prior $430$430 million credit agreement and (ii) pay the fees, costs and expenses associated with the foregoing and the negotiation, execution and delivery of the Prior Credit Agreement.loanloans and/or increase commitments under the Revolving Credit Facility in an aggregate amount not exceeding $275of $100 million or a higher amount, subject to the satisfaction of certain conditions.conditions and exceptions.payable in subject to quarterly principal installments equal to 0.625% of $1.9 millionthe initial aggregate term loan advances to be paid commencing JuneDecember 31, 2022 through September 30, 2019, with2024 and 1.25% of the balance payable on July 20, 2023.Interest on outstanding borrowings underinitial aggregate term loan advances from December 31, 2024 until the Credit Agreement (other than swingline loans) accrues, at the Company’s option, at (a) the London Interbank Offered Rate (LIBOR) plus maturity date.1.0% to 2.0% or (b) the base rate plus 0.0% to 1.0%.2019, $144.42022, a portion of the $131.3 million of the outstanding debt under the Credit Agreement is effectively at a fixed interest rate of 2.928%2.928% as a result of a $144.4$121.9 million notional interest rate swap contract discussed in Note 12.10. A commitment fee of 0.20%0.20% to 0.30%0.30% per annum (based on the debt to EBITDA ratio) on the unused portion of the revolving credit lineRevolving Credit Facility is payable quarterly in arrears.65%65% of the capital stock of its directly owned foreign subsidiaries, (b) all or substantially all other personal property of Benchmark and its domestic subsidiaries (including, but not limited to, accounts receivable, contract assets, inventory, intellectual property and fixed assets of Benchmark and its domestic subsidiaries), in each case, subject to customary exceptions and limitations, and (c) all proceeds and products of the property and assets described in (a) and (b) above.asrelated to interest coverage and debt leverage, and certain customary affirmative and negative covenants, including restrictions on the Company’s ability to incur additional debt and liens, pay dividends, repurchase shares, sell assets and merge or consolidate with other persons. Amounts due under the Credit Agreement could be accelerated upon specified events of default, including a failure to pay amounts due, breach of a covenant, material inaccuracy of a representation, or occurrence of bankruptcy or insolvency, subject, in some cases, to cure periods.As of December 31, 2019, the Company was in compliance with all of these covenants and restrictions.572019,2022, the Company had $144.4$131.3 million in borrowings outstanding under the Term Loan Facility and $3.0$195.0 million outstanding and $3.9 million in letters of credit outstanding under theour Revolving Credit Facility. The Company had $497.0$251.1 million available for future borrowings under the Revolving Credit Facility.As of December 31, 2018, the Company’s Thailand subsidiary had a multi-purpose credit facilityFacility subject to compliance with Kasikornbank Public Company Limited (the Thai Credit Facility) that provided for 350 million Thai baht (approximately $11.7 million) working capital availability. The Thai Credit Facility was secured by landfinancial covenants as to interest coverage and buildingsdebt leverage, in Thailand owned by the Company’s Thailand subsidiary. This Thai Credit Facility expired in October 2019 and was not renewed. As of December 31, 2018, there were no working capital borrowings outstanding under the facility.20192022 are as follows: 2020, $7.52023, $4.1 million; 2021, $7.52024, $4.1 million; 2022, $7.52025, $6.6 million; and 2023, $121.92026, $116.5 million.86 – Leasesnonleasenon-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease.58
December 31,20192021 were as follows (in thousands):20192021 were as follows (in thousands):
Leases
Leases2019,2022, the Company’s future operating leases that have not yet commenced are immaterial.include a new facility lease in an existing location in the Americas which expires Futureand contains renewal options. The aggregate amount of the initial annual minimum lease payments and capitalof this lease commitments in effect as of December 31, 2018 having a noncancelable term in excess of one year as determined prior to the adoption of ASU 842 were as follows (in thousands):is approximately $599—7—Common Stock and Stock-Based Awards PlansOn March 6, 2018, the Board of Directors approved an expanded stock repurchase authorization granting the Company authority to repurchase up to $250 million in common stock in addition to the $100 million previously approved on December 7, 2015. On October 26, 2018, the Board of Directors authorized the repurchase of an additional $100 million of the Company’s common stock. As of December 31, 2019, the Company had $79.5 million remaining under the stock repurchase authorization. On February 19, 2020, the Board of Directors authorized the repurchase of an additional $150 million of the Company’s common stock.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 2019, the Company repurchased a total of 4.7 million common shares for an aggregate of $122.1 million at an average price of $25.86 per share. During 2018, the Company repurchased a total of 8.2 million common shares for an aggregate of $211.9 million at an average price of $25.71 per share. During 2017, the Company repurchased a total of 1.0 million common shares for an aggregate of $29.3 million at an average price of $30.46 per share.20192022, 2021 and 2018,2020, cash dividends paid totaled $23.3$23.2 million, $23.3 million and $21.0$23.0 million, respectively. On December 16, 2019, the Company declared a quarterly cash dividend of $0.15 per share of the Company’s common stock to shareholders of record as of December 30, 2019. The dividend of $5.5 million was paid on January 13, 2020. In February 2020, the Board of Directors approved a quarterly dividend increase, raising the quarterly dividend from $0.15$0.15 to $0.16$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. On December 12, 2022, 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, 2022. The dividend of $5.8 million was paid on January 13, 2023. 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.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.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 fourfour-year-year period from the date of grant and have a term of 10 years.years. Time-based restricted stock units granted to employees generally vest over a four-year period from the date of grant, subject to the continued employment of the employee by the Company. Performance-based restricted stock units generally vest over a three-year performance cycle, which includes the year of the grant, and are based upon the Company’s achievement of specified performance metrics. Awards under the 2019 Plan to non-employee directors have been in the form of restricted stock units, which vest in annually,, starting on the grant date.2019, 3.32022, 2.9 million additional common shares were available for issuance under the Company’s 2019 Plan.60
Options
Average
Exercise
Price
Average
Remaining
Contractual
Term
(Years)
Intrinsic
Value20192022 for options that had exercise prices that were below the closing price.2019, 20182022, 2021 and 2017,2020, the number of options exercisable was 0.30.1 million, 0.30.1 million and 0.40.2 million, respectively, and the weighted-average exercise price of those options was $20.02, $20.07$21.85, $20.06 and $18.56,$19.98, respectively.61
Units
Average
Grant Date
Fair Value62Note 8—Income Taxes
December 31,
December 31,
December 31,6335%35% to a flat 21%21% rate, effective January 1, 2018. The Company recorded the effects of the changes in the tax rate in the Company’s deferred tax assets and liabilities as of December 31, 2017.On December 22, 2017, additional guidance was issued on accounting for the tax effects of the U.S. Tax Reform (Staff Accounting Bulletin No. 118 (SAB 118)). SAB 118 provided a measurement period that should not extend beyond one year from the U.S. Tax Reform enactment date for companies to complete their accounting. The Company recordedincurred a provisional tax expense of $101.6 million for thetotal Transition Tax liability of $80.5 million after reduction for net operating loss carryforwards, US tax credit carryforwards, and recognized a provisional deferredforeign tax benefit of $3.9 million for acredit carryforwards that were allowed to be utilized against the total net expense of $97.7 milliontax liability as of December 31, 2017. As of December 31, 2018, the Company completed the accounting for the tax effects of U.S. Tax Reform within the period required from the enactment date. The Company recognized duringmade an election to pay the fourth quarter of 2018 after filing its U.S. incomenet tax return,liability in installments. The Company has a discrete tax benefit adjustment of $6.4 million for the Transition Tax, and recorded a discrete tax expense adjustment of $2.0 million for the finalization of the deferred tax assets and liabilities for a net total adjustment of $4.4 million. These adjustments were based on additional analysis of undistributed cumulative foreign earnings, cumulative foreign taxes, changes in interpretations, and additional regulatory guidance that was issued during 2018 by the Internal Revenue Service (IRS).As a result of the completed accounting for the Transition Tax, the Company determined that its total Transition Tax liability as of December 31, 2019 is currently $57.5 million after reduction for U.S. tax carryforward losses, U.S. tax credit carryforwards, and foreign tax credit carrybacks that are allowed to be utilized against the total liability.2022 of $48.3 million. The Company intends to pay this liability over the remaining seventhree year payment period as prescribed by the U.S. Tax Reform and regulatory guidance issued by the IRS. $51.0$48.3 million of the Transition Tax liability is included in other long termlong-term liabilities. Payments for years subsequent to December 31, 2022 are as follows: 2023, $12.1 million; 2024, $16.1 million; 2025, $20.1 million.20192022 and 2018,2021, the Company repatriated $52.1$20.0 million and $560.6$35.0 million, respectively, of foreign earnings to the U.S. As of December 31, 2019,2022, the Company has approximately $313.9$455.0 million in cumulative undistributed foreign earnings of its foreign subsidiaries. These earnings would not be subject to U.S. federal income tax, if distributed to the Company. The Company changed its assertion during 2018 on its foreign subsidiaries earnings that are permanently reinvested. A certain amount of earnings from specific foreign subsidiaries are permanently reinvested, and certain foreign earnings from other specific foreign subsidiaries is considered to be non-permanently reinvested and is available for immediate distribution to the Company. Income taxes have been accrued on the non-permanently reinvested foreign earnings including the 2017 Transition Tax, the U.S. tax on GILTI, and any applicable foreign or local withholding taxes. The Company estimates that it has approximately $1.7$6.0 million of unrecognized deferred tax liability related to any remaining undistributed permanently reinvested foreign earnings that have not already been subject to the 2017 Transition Tax, the U.S. tax on GILTI, and any applicable foreign income tax or local withholding taxes on cash distributions.As a result of this change in assertion during 2018, in relation to undistributed earnings prior to December 31, 2017,During 2022, the Company recorded a netan additional tax expense of $21.6 million consisting of tax expense of $30.8 million relating to foreign withholding tax from Asia and a net benefit of $9.2$7.3 million for U.S.with respect to a refund claim of foreign tax credits to offset the foreigncash taxes paid during 2018. In addition, the Company recorded applicable U.S. state income tax expense net of federal benefits related to the cash repatriation. Also during 2018, the Company incurred a net $4.4$16.5 million benefit associated with finalizing the provisional impactthat was filed in 2021. $9.2 million of the U.S. Tax Reform described above as required by SAB 118, and incurred a $3.2 million tax expense as a result of GILTI.total refund claim was recorded previously in 2018.6420192022 and 2018.2021. All deferred tax assets and liabilities are offset and presented as a single net noncurrent amount by each tax jurisdiction.2019, 20182022, 2021 and 20172020 was a $2.3$0.04 million increase, a $0.3 million decrease, and a $2.1$3.0 million increase, and a $0.2 million decrease, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances as of December 31, 2019.2019,2022, the Company had $16.5 million inno U.S. Federal operating loss carryforwards which will expire from 2027 to 2036;carryforward as the final balance of the US loss carryforward was utilized in 2022. The Company has US state operating loss carryforwards of approximately $44.5$13.8 million which will expire from6520372020 to 2031;2042; foreign operating loss carryforwards of approximately $24.8$11.5 million with indefinite carryforward periods; and foreign operating loss carryforwards of approximately $27.5$47.2 million which will expire at varying dates through 2029.2031. The utilization of these net operating loss carryforwards is limited to the future operations of the Company in the tax jurisdictions in which such carryforwards arose. The Company has state tax credit carryforwards of $1.9$1.7 million which will expire at varying dates through 2026.will expire at various dates, unless extended or otherwise renegotiated through 2018 in China, 2021 in Malaysia and 2028 in Thailand, 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 2030 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. We have not yet received any official response for the Malaysia tax holiday application. The net impact of these tax incentives was to lower income tax expense for 2019, 2018,2022, 2021, and 20172020 by approximately $5.0$9.0 million (approximately $0.13$0.25 per diluted share), $7.9$4.5 million (approximately $0.17$0.13 per diluted share) and $7.2$5.0 million (approximately $0.15$0.13 per diluted share), respectively, as follows:
December 31,2019,2022, the total amount of the reserve for uncertain tax benefits including interest and penalties was $0.6$9.5 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:2019,2022, the Company released $60 thousand of uncertain tax benefits related to lapse of statutes. During 2021, the Company recorded $0.2 million ofadditional uncertain tax benefits related to prior year and current tax positions.positions of $1.6 million and $7.4 million, respectively. During 2018,2020, the Company released $0.5 million of uncertain tax benefits from an IRS audit related to the Secure Communication Systems, Inc. acquisition. Also during the first quarter of 2018, the IRS indicated that this examination of years 2013 to 2015 was closed. In addition, the IRS also notified the Company that the examination of the Company’s consolidated U.S. income tax return filings for 2014 was also closed with no additional tax costs. During 2017, the Company released $0.9 million$14 thousand of uncertain tax benefits related to the liquidationlapse of a foreign subsidiary company. Also during 2017, the Company received a denial of its appeal to the local tax authorities related to an examination for a subsidiary in Thailand for the years 2004 to 2005. Consequently, the Company recorded $0.9 million of additional accruals for uncertain tax benefits. The Company decided not to challenge this decision and therefore, the $7.3 million reserve for uncertain tax benefits was written off. This decrease in the unrecognized tax benefit reserve did not impact the Company’s effective tax rate.statutes.sheetsheets based on the Company’s6620192022 is $0.1$0.4 million. There is no reserve for penalties currently. The amount of accrued potential interest on unrecognized tax benefits included in the reserve as of December 31, 2021 is $0.3 million. The reserve for potential penalties is $17.0$17 thousand. The Company did 0tnot record any interest and penalties during 2019. The total amount of interest and penalties included in income tax expense was $0.1 million during 2018. The Company did 0t incur any interest and penalties in 2017.2020. the Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 20112015 to 2019. Currently, the Company does not have any ongoing income tax examinations by any jurisdiction.2022. 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.11—9—Major Customers10ten largest customers represented 38%52%, 44%47% and 46%41% of total sales for 2019, 20182022, 2021 and 2017,2020, respectively. Sales to our largest customers were as follows for the indicated periods:
December 31,* amount is less than 10% of total sales.During 2022 and 2021, net sales attributable to our largest customer were reported in the Americas and Asia reportable segments.12—10—Financial Instruments and Concentration of Credit Riskandreceivable, other receivables, accounts payable, accrued liabilities and long-term debt and finance lease obligations.debt. The Company believes that the carrying values of these instruments approximate fair value. Asvalue because of December 31, 2019, the Company’s long-term investments and derivative instruments were recorded at fair value using Level 3 inputs.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 derivative arrangementsderivatives for speculative purposes.TheOn July 30, 2021, the Company entered into forward currency exchange contractcontracts designated as cash flow hedges of forecasted foreign currency expenses with a notional amount of $10.2 million as of December 31, 2022. 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, 2022, the Company recorded an unrealized loss of $0.6 million ($0.4 million net of tax) on the forward currency exchange contracts in other comprehensive income and transferred unrealized gains of $0.5 million to cost of sales. During the year ended December 31, 2021, the Company recorded an unrealized loss of $0.2 million ($0.1 million net of tax) on the forward currency exchange contracts in other comprehensive income and transferred unrealized losses $0.4 million to cost of sales. See Note 19. The Company also has forward currency exchange contracts in place as of December 31, 2019 has2022 that have not been designated as accounting hedgehedges and, therefore, changes in fair value are recorded within the Consolidated Statementscondensed consolidated statements of Income.income.$144.4$121.9 million and $150.0$129.4 million as of December 31, 20192022 and 2018,2021, respectively, to hedge a portion of its interest rate exposure on outstanding borrowings under the Credit Agreement. Under this interest rate swap agreement, the Company receives variable rate interest payments based on the one-month LIBOR rate672.928%2.928%. The effect of this swap is to convert alla portion of the floating rate interest expense on the borrowing under the Credit Agreement to fixed interest rate expense. Based on the terms of the interest rate swap contract and the underlying borrowings outstanding under the Credit Agreement, the interest rate contract was determined to be highly effective, and thus qualifies and has been designated as a cash flow hedge. As such, changes in the fair value of the interest rate swap are recorded in other comprehensive income on the accompanying Consolidated Balance Sheetsconsolidated balance sheets until earnings are affected by the variability of cash flows. As of December 31, 2017, the Company had an interest rate swap agreement with a notional amount of $155.3 million with a fixed interest rate of 1.4935%. During 2018, the Company terminated this agreement for $3.5 million and the gain is being amortized to offset interest expense over the original term of the swap agreement.$6.3$0.6 million asset as of December 31, 2022 and a $4.3 million liability as of December 31, 2019 and a $3.0 million liability as of December 31, 2018.2021 recorded in accrued liabilities in the consolidated balance sheets. During the year ended December 31, 2019,2022, the Company recorded unrealized losses of $3.3$5.0 million ($2.53.7 million net of tax) on the swaps in other comprehensive income and transferred unrealized gains of $1.7 million ($1.2 million net of tax) on the swaps to interest expense.loss. During the year ended December 31, 2018,2021 the Company recorded unrealized gains of $1.5$4.7 million ($1.13.5 million net of tax) on the swap in other comprehensive income and transferred unrealized gains of $0.3 million ($0.2 million net of tax) on the swaps to interest expense.loss. During the year ended December 31, 2017,2020, the Company recorded unrealized gainslosses of $1.5$2.7 million ($0.92.0 million net of tax) on the swap in other comprehensive income.loss and transferred unrealized gains of $1.5 million ($1.1 million net of tax) on the terminated swap to interest expense. See Note 22.19.investmentsand restricted cash and trade accounts receivable. ManagementThe Company maintains the majority of the Company’s cash and cash equivalents with recognized financial institutions. One of the most significant credit risks is the ultimate realization of accounts receivable. This risk is mitigated by (i) sales to well established companies, (ii) ongoing credit evaluation of customers, and (iii) frequent contact with customers, thus enabling management to monitor current changes in business operations and to respond accordingly. Management considers these concentrations of credit risks in establishing our allowance for doubtful accounts and believes these allowances are adequate. The Company had one customer whose gross accounts receivable exceeded 10%10% of total gross accounts receivable as of December 31, 2019.2022. Our largest That customer represented 12.1%17% of our total gross accounts receivable.13—11—Concentrations of Business Risk14—12—Accounts Receivable Sale Program2019,2022, 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 $120.0$120.0 million of specific accounts receivable at any one time. On February 3, 2023, the Company entered into Amendment No. 2 to the Credit Agreement which increases the maximum amount to $200.0 million.20192022, 2021 and 2018,2020, the Company sold $284.0$445.4 million, $394.6 million and $160.0$305.8 million, respectively, of accounts receivable under this program, and in exchange, the Company received cash proceeds of $283.2$443.6 million, $394.0 million and $159.5$305.2 million, respectively, net of the discount. The loss on the sale resulting from the discount was recorded to other expense within the Consolidated Statementsconsolidated statements of Income.6815—13—Segment and Geographic Information69
December 31,asset.asset and includes property, plant and equipment, net, operating lease right-of-use assets, and other long-term assets, net.
December 31,1614 – Revenuecustomer.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.70
December 31, 2022
December 31, 2021
December 31, 20202019, 20182022, 2021 and 2017, 91.5%2020, 90.8%, 93.0%90.3% and 93.4%90.2%, respectively, of the Company’s revenue was recognized as products and services arewere transferred over time.71
December 31,17—15—Employee Benefit Plans2019, 20182022, 2021 and 2017,2020, the Company made contributions to the plans of approximately $6.2$6.5 million, $5.6$3.3 million and $5.2$3.1 million, respectively. The Company also has defined contribution benefit plans for certain of its international employees primarily dictated by the custom of the regions in which it operates. During 2019, 2018each of 2022, 2021 and 2017,2020, the Company made contributions to the international plans of approximately $0.1 million, $0.1 million and $0.1 million, respectively.$0.1 million.18—16—Contingencies19—17—Restructuring Charges2019, 2018the year ended December 31, 2022 primarily related to the previously announced closures of our sites in San Jose, California, Angleton, Texas, and 2017Moorpark, California in the Americas, and other smaller activities involving capacity reductions and reductions in workforce in certain facilities across various regions. San Jose, California operations have ceased and all restructuring activity was complete as of March 31, 2022. Angleton, Texas operations have ceased and all restructuring activity is complete as of June 30, 2022 upon the disposition of the facility. Moorpark, California operations are expected to cease at the end of March 31, 2023 with restructuring activity estimated to be completed shortly thereafter. reduction and reductions in the workforce inof certain facilities across various regions.regions in Asia and Europe, respectively.7220192021 activity in the accrued restructuring, balanceswhich is included in accrued liabilities in the condensed consolidated balance sheets, related to the various restructuring activities initiated prior to December 31, 2019:2021:During 2019, the Company recognized $6.4 million of employee termination costs associated with the involuntary terminations (both executed and planned) of 468 employees in connection with reductions in workforce worldwide. The identified involuntary employee terminations by reportable geographic region amounted to approximately 386, 81 and 1 for the Americas, Asia and Europe, respectively.7320182020 activity in the accrued restructuring, balanceswhich is included in accrued liabilities in the condensed consolidated balance sheets, related to the various restructuring activities initiated prior to December 31, 2018:2020:During 2018, the Company recognized $2.8 million of employee termination costs associated with the involuntary terminations (both executed and planned) of 490 employees in connection with reductions in workforce worldwide. The identified involuntary employee terminations by reportable geographic region amounted to approximately 432, 23 and 35 for the Americas, Asia and Europe, respectively.initiated during 20172020 were as follows:During 2017,Additionally, during the year ended December 31, 2021, the Company recognized $2.2made the decision to no longer continue certain manufacturing capabilities in the Americas. In connection with that decision, the Company assessed the facility and equipment assets used in those manufacturing capabilities using valuation information from third parties and recorded $4.4 million of employee terminationimpairment charges as a result of that assessment. The asset impairment charges are included in the restructuring charges and other costs associated withline item on the involuntary terminations (both executedconsolidated statements of income as of December 31, 2021. During the year ended December 31, 2022, the Company completed theplanned)recorded a loss on assets held for sale of 163 employees$2.0 million included in connection with reductionsthe restructuring charges and other costs line item on the consolidated statements of income. Additionally, during the year ended December 31, 2022, the Company completed the sale of a building in workforce worldwide. The identified involuntary employee terminations by reportable geographic region amountedAngleton, Texas for $4.3 million and recorded a gain on assets held for sale of $2.4 million included in the restructuring charges and other costs line item on the consolidated statements of income. During the year ended December 31, 2020, the Company incurred $5.7 million and $1.0 million in costs related to approximately 160 and 3 forasset impairments in the Americas and Asia, respectively.74Additionally, during the year ended December 31, 2022, the Company agreed to $20—18—Ransomware Incident do have insurance coverage, including cyber insurance, and are workingworked diligently with our insurance carriers on claims to recover costs incurred. We expect that the insurance recovery process will be ongoing throughout 2020.incurred, as discussed further below.$7.7$12.7 million or $7.7 million, net of estimated insurance recoveries of $5.0$5.0 million. These costs were primarily comprised of certain employee related expenses and various third partythird-party consulting services, including forensic experts, legal counsel and other IT professional expenses. During the year ended December 31, 2020, the Company collected $6.6 million of insurance recoveries, which included $5.0 million of estimated insurance recoveries recorded in 2019 and an additional $1.6 million recorded in 2020. During the 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.We expect to incur additional costs related to the ransomware event in 2020, but these are not expected to be significant. Further insurance recoveries will be recorded when considered probable for recovery.647521—Quarterly Financial Data (Unaudited)The following table sets forth certain unaudited quarterly information with respect to the Company’s results of operations for the years 2019, 2018 and 2017. Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total earnings per share amounts for the fiscal year.76Note 22—19—Accumulated Other Comprehensive Loss
reclassifications
other comprehensive loss
comprehensive loss
(loss) before reclassifications
comprehensive loss1210 for further explanation of the change in derivative instruments that is recorded to Accumulated Other Comprehensive Loss. Amounts reclassified from accumulated other comprehensive loss during 2019loss.2018 primarily affected interest expense and selling, general and administrative expenses, respectively.Non-Cash Information
December 31,77Note 21—Subsequent Events20192022 and 2018,2021, the related consolidated statements of income, (loss), comprehensive income, (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019,2022, and the related notes and financial statement Schedule II – Valuation Accounts listed in Item 15(a)(2) (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.20192022 and 2018,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,2022, 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, 20192022 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Change in Accounting PrincipleAs discussed in Notes 1 and 8 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842, ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Targeted Improvements.Management’sManagement'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.78judgment.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.108 to the consolidated financial statements, the Company has recorded income tax expense of $3.8$16.1 million for the year ended December 31, 2019.2022. 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.matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls over the Company’s income tax expense process, includingprocess. 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 LLPHouston, TexasPhoenix, Arizona
March 2, 202079February 24, 2023802019.20192022 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.69under the captions “Election of Directors,” “Executive Officers” and “Delinquent Section 16(a) Reports”required by this item can be found in the Company’s Proxy Statement for the 20202023 Annual Meeting of Shareholders Meeting (the 20202023 Proxy Statement), to be filed with the SEC not later than 120 days after the closeend of the Company’s fiscal year ended December 31, 2022 and is incorporated herein by reference in response to this item.reference.under the captions “Compensation Discussion and Analysis,” “Compensation Tables and Narratives” and “Compensation Committee Report”required by this item can be found in the 20202023 Proxy Statement and is incorporated herein by reference in response to this item.reference.81The information under the caption “Common Share Ownership of Certain Beneficial Owners and Management” in the 2020 Proxy Statement is incorporated herein by reference in response to this item.2019:2022:
securities
to be issued
upon exercise
of outstanding
options, warrants
and rights
average
exercise
price of
outstanding
options,
warrants
and rights
securities
remaining
available
for future
issuance
holdersNumber ofsecurities to beWeighted-Number ofissued uponaverage exercisesecuritiesexercise ofprice ofremainingoutstandingoutstandingavailableoptions, warrantsoptions, warrantsfor futurePlan Categoryand rightsand rightsissuance1,547,361(1)$20.02(1)3,321,635(1) Includes 1,276,992 restricted share units and performance restricted share units. The weighted-average exercise priceItem 13. Certain Relationships and Related Transactions, and Director Independence.The information under the caption “Election of Directors” in the 2020 Proxy Statement is incorporated herein by reference in response to this item.82Item 14. Principal Accounting Fees and Services.The information under the caption “Audit Committee Report” in the 2020 Proxy Statement is incorporated herein by reference in response to this item.PART IVItem 15. Exhibits, Financial Statement Schedules.(a)(1) Financial statements of the Company filed as part of this Report:See Item 8 - Financial Statements and Supplementary Data.(2) Financial statement schedule filed as part of this Report:(b) Exhibits83ExhibitNumber 10.20 (1)Description of Exhibit84ExhibitNumber 10.20.1 (1)Description of Exhibit85ExhibitNumber 10.21 (1)Description 10.22 (1)21 (2)Subsidiaries of Benchmark Electronics, Inc.31.1 (2)Section 302 Certification of Chief Executive Officer31.2 (2)Section 302 Certification of Chief Financial Officer32.1 (2)Section 1350 Certification of Chief Executive Officer32.2 (2)Section 1350 Certification of Chief Financial Officer(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 document101.SCH (2)Inline XBRL Taxonomy Extension Schema Document101.CAL (2)Inline XBRL Taxonomy Extension Calculation Linkbase Document101.LAB (2)Inline XBRL Taxonomy Extension Label Linkbase Document101.PRE (2)Inline XBRL Taxonomy Extension Presentation Linkbase Document101.DEF (2)Inline XBRL Taxonomy Extension Definition Linkbase Document104(2)Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document(1) (2)(2)86(3)None.7487 March 2, 2020February 24, 2023March 2, 2020February 24, 2023March 2, 2020February 24, 2023March 2, 2020February 24, 2023Bruce A. CarlsonDouglas BrittMarch 2, 2020February 24, 2023Bruce A. CarlsonDouglas BrittMarch 2, 2020February 24, 2023/s/ Douglas G. DuncanDirectorMarch 2, 2020Douglas G. DuncanMarch 2, 2020February 24, 2023March 2, 2020February 24, 2023March 2, 2020February 24, 2023Merilee RainesLynn A. WentworthMarch 2, 2020February 24, 2023Merilee RainesLynn A. Wentworth88