Summary Of Significant Accounting Policies

12 Months Ended

Dec. 31, 2018

Note 1—Summary of Significant Accounting Policies

(a) Business

Benchmark Electronics, Inc. (the Company) is a Texas corporation that provides innovative product design, engineering services, technology solutions and advanced manufacturing services. From initial product concept to volume production, including direct order fulfillment and aftermarket services, the Company has been providing integrated services and solutions to original equipment manufacturers (OEMs) since 1979. The Company serves the following industries: aerospace and defense (A&D), medical technologies, complex industrials, test and instrumentation, next-generation telecommunications and high-end computing. The Company has manufacturing operations located in the United States and Mexico (the Americas), Asia and Europe.

(b) Principles of Consolidation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the financial statements of Benchmark Electronics, Inc. and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Effective January 1, 2018, the Company adopted the requirements of a new accounting standard related to revenue recognition as discussed in Note 1(q). All amounts and disclosures set forth in this Form 10-K have been updated to comply with the new standard, as indicated by the “as adjusted” column heading.

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 $265.4 million and $581.4 million at December 31, 2018 and 2017, respectively, consisted primarily of money-market funds and time deposits with an initial term of less than three months.

(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, and various information or disclosures by the customer or other publicly available information. Accounts receivable are charged against the allowance after all reasonable efforts to collect the full amount (including litigation, where appropriate) have been exhausted. During both the third quarter of 2018 and the first quarter of 2017, the Company recorded $1.7 million in charges for a provision to accounts receivable associated with the insolvency of two customers.

(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.

(g) 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.

(h) Impairment of Long-Lived Assets and Goodwill

Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Assets to be disposed of would be separately disclosed and 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.

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 two-step goodwill impairment test, otherwise no further analysis is required. In connection with its annual qualitative goodwill impairment assessments as of December 31, 2018, 2017 and 2016, the Company concluded that goodwill was not impaired.

(i) Earnings (Loss) Per Share

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

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

			Year Ended December 31,
(in thousands, except per share data)			2018		2017		2016
				(as adjusted)
Net income (loss)		$	22,817	$	(31,901)	$	63,933

Denominator for basic earnings per share – weighted-average number of
	common shares outstanding during the period		46,332		49,680		49,298
Incremental common shares attributable to exercise of dilutive options			104		—		313
Incremental common shares attributable to outstanding
	restricted stock units		219		—		214
Denominator for diluted earnings per share			46,655		49,680		49,825
Basic earnings (loss) per share			$ 0.49		$ (0.64)		$ 1.30
Diluted earnings (loss) per share			$ 0.49		$ (0.64)		$ 1.28

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. Options to purchase 0.4 million common shares in 2016 were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

(j) Revenue Recognition

The Company recognizes revenue as the customer takes control of the manufactured products built to customer specifications. Under the majority of the Company’s manufacturing contracts with customers, the customer controls all of the work-in-progress as products are being built. Revenues under these contracts are recognized over time based on the cost-to-cost method. Under other manufacturing contracts, the customer does not take control of the product until it is completed. Under these contracts, the Company continues to recognize revenue upon transfer of control of product to the customer, which is generally when the goods are shipped. Revenue from design, development and engineering services also continues to be recognized over time as the services are performed.

The Company’s performance obligations generally have an expected duration of one year or less. The Company applies the practical expedients and does not disclose information about remaining performance obligations that have original expected durations of one year or less or any significant financing components in the contracts.

The Company recognizes the incremental costs, if any, of obtaining contracts as an expense when incurred since the amortization period of the assets that the Company otherwise would have recognized is one year less.

(k) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce its deferred tax assets to the amounts that are more likely than not to be realized. The Company has considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in assessing the need for the valuation allowance.

(l) Stock-Based Compensation

All share-based payments to employees, including grants of employee stock options (which have not been awarded since 2015), are recognized in the financial statements based on their grant date fair values. The total compensation cost recognized for stock-based awards was $10.1 million, $7.8 million and $5.3 million for 2018, 2017 and 2016, respectively. The total income tax benefit recognized in the income statement for stock-based awards was $2.4 million, $2.8 million and $1.1 million for 2018, 2017 and 2016, 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.

As of December 31, 2018, the unrecognized compensation cost and remaining weighted-average amortization related to stock-based awards were as follows:

				Performance-
				based
			Restricted	Restricted
		Stock	Stock	Stock
(in thousands)		Options	Units	Units⁽¹⁾
	Unrecognized compensation cost	$ 44	$ 12,738	$ 2,461
	Remaining weighted-average amortization period	0.2 years	2.4 years	1.2 years

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

The total cash received as a result of stock option exercises in 2018, 2017 and 2016 was approximately $3.6 million, $11.2 million and $18.8 million, respectively. The actual tax benefit realized as a result of stock option exercises and the vesting of other share-based awards during 2018, 2017 and 2016 was $2.5 million, $5.0 million and $3.7 million, respectively. For 2018, 2017 and 2016, the total intrinsic value of stock options exercised was $2.3 million, $7.7 million and $5.1 million, respectively.

The Company awarded performance-based restricted stock units to employees during 2018, 2017 and 2016. 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 growth, operating margin expansion, and return on invested capital. If the performance goals are not met based on the Company’s financial results, the applicable performance-based restricted stock units will not vest and will be forfeited. Shares subject to forfeited performance-based restricted stock units will be available for issuance under the Company’s 2010 Omnibus Incentive Compensation Plan (the 2010 Plan).

(m) Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in accordance with U.S. GAAP. On an ongoing basis, management evaluates these estimates, including those related to accounts receivable, inventories, income taxes, long-lived assets, stock-based compensation and contingencies and litigation. Actual results could differ from those estimates.

(n) Fair Values of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-tier fair value hierarchy of inputs is employed to determine fair value measurements.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets and liabilities.
Level 2 inputs are observable prices that are not quoted on active exchanges, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities.

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 capital lease obligations. The Company believes that the carrying values of these instruments approximate their fair value. As of December 31, 2018, all of the Company’s long-term investments and derivative instruments were recorded at fair value using Level 3 inputs. See Note 12.

(o) Foreign Currency

For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expenses are translated at average exchange rates. The effects of these translation adjustments are reported in other comprehensive income. Exchange losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in other expense and totaled approximately $1.0 million, $2.1 million and $0.5 million in 2018, 2017 and 2016, respectively. These amounts include the amount of gain (loss) recognized in income due to forward currency exchange contracts.

(p) Derivative Instruments

All derivative instruments are recorded on the balance sheet at fair value. The Company uses derivative instruments to manage the variability of foreign currency obligations and interest rates. The Company does not enter into derivative arrangements for speculative purposes. Generally, if a derivative instrument is designated as a cash flow hedge, the change in the fair value of the derivative is recorded in other comprehensive income to the extent the derivative is effective, and recognized in the consolidated statement of income when the hedged item affects earnings. Changes in fair value of derivatives that are not designated as hedges are recorded in earnings. Cash receipts and cash payments related to derivative instruments are recorded in the same category as the cash flows from the items being hedged on the consolidated statements of cash flows.

(q) New Accounting Pronouncements

Adopted in 2018

In May 2017, the Financial Accounting Standards Board (FASB) issued a new accounting standards update that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company adopted the new guidance effective January 1, 2018. The impact of adoption on the Company's consolidated financial statements is dependent on future changes to stock-based compensation awards.

In August 2016, the FASB issued a new accounting standards update, which seeks to reduce the existing diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted this new update effective January 1, 2018. The adoption of this guidance had no impact on the consolidated financial statements of the Company.

In May 2014, the FASB issued a new standard (commonly referred to as ASC 606), which changed the way the Company recognizes revenue and significantly expanded the disclosure requirements for revenue arrangements. The Company adopted ASC 606 with a date of the initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.

The Company applied ASC 606 using the full retrospective transition method. The Company elected the ASC 606 practical expedient and does not disclose the information about remaining performance obligations that have original expected durations of one year or less. Amounts prior to January 1, 2018 that have been adjusted in accordance with ASC 606 as described herein are noted “as adjusted”.

Previously, the Company recognized revenue from the sale of manufactured products built to customer specifications and other inventory when title and risk of ownership passed, the price to the buyer was fixed or determinable and recoverability was reasonably assured, which was generally when the goods were shipped. Under ASC 606, the Company recognizes revenue as the customer takes control of the products. 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. Accordingly, the Company will recognize revenue under these contracts earlier than under the previous accounting rules.

The following tables summarize the impacts of ASC 606 adoption on the Company’s 2017 and 2016 consolidated financial statements.

Consolidated Balance Sheet
December 31, 2017

		Impact of changes in accounting policies
		As previously
(in thousands)			reported	Adjustments		As adjusted
	Contract assets	$	—	$	146,496	$	146,496
	Inventories		397,181		(128,264)		268,917
	Prepaid expenses and other assets		42,263		(6,245)		36,018
	Total assets	$	2,097,317	$	11,987	$	2,109,304

	Income taxes payable	$	11,662	$	1	$	11,663
	Deferred income taxes		7,027		1,667		8,694
	Total liabilities		768,498		1,668		770,166
	Retained earnings		697,862		10,319		708,181
	Total shareholders’ equity		1,328,819		10,319		1,339,138
	Total liabilities and shareholders’ equity	$	2,097,317	$	11,987	$	2,109,304

Consolidated Statement of Income
Year Ended December 31, 2017

		Impact of changes in accounting policies
		As previously
(in thousands, except per share data)			reported	Adjustments		As adjusted

Sales		$	2,466,811	$	(12,332)	$	2,454,479
Cost of sales			2,239,114		(10,555)		2,228,559
Income tax expense			104,747		(1,841)		102,906
Net loss		$	(31,965)	$	64	$	(31,901)

Earnings (loss) per share:
	Basic	$	(0.64)	$	—	$	(0.64)
	Diluted	$	(0.64)	$	—	$	(0.64)

Weighted-average number of shares outstanding:
	Basic		49,680		49,680		49,680
	Diluted		49,680		49,680		49,680


Consolidated Statement of Income
Year Ended December 31, 2016

		Impact of changes in accounting policies
		As previously
(in thousands, except per share data)			reported	Adjustments		As adjusted

Sales		$	2,310,415	$	11,870	$	2,322,285
Cost of sales			2,096,952		10,648		2,107,600
Income tax expense			4,141		1,336		5,477
Net income		$	64,047	$	(114)	$	63,933

Earnings per share:
	Basic	$	1.30	$	—	$	1.30
	Diluted	$	1.29	$	(0.01)	$	1.28

Weighted-average number of shares outstanding:
	Basic		49,298		49,298		49,298
	Diluted		49,825		49,825		49,825

Consolidated Statement of Cash Flows
Year Ended December 31, 2017

					Impact of changes in accounting policies
					As previously
(in thousands)						reported	Adjustments		As adjusted

	Net loss				$	(31,965)	$	64	$	(31,901)
	Adjustments to reconcile net loss to net cash provided
		by operating activities:
			Depreciation			36,668		—		36,668
			Amortization			12,004		—		12,004
			Provision for doubtful accounts			1,697		—		1,697
			Deferred income taxes			9,262		(1,840)		7,422
			Gain on the sale of property, plant and equipment			(202)		—		(202)
			Asset impairments			42		—		42
			Stock-based compensation expense			7,815		—		7,815
	Changes in operating assets and liabilities:
			Accounts receivable			4,657		—		4,657
			Contract assets			—		9,710		9,710
			Inventories			(14,015)		(10,555)		(24,570)
			Prepaid expenses and other assets			(10,434)		2,622		(7,812)
			Accounts payable			29,542		—		29,542
			Accrued liabilities			13,519		—		13,519
			Income taxes			87,252		(1)		87,251
				Net cash provided by operations		145,842		—		145,842

				Net cash used in investing activities		(56,121)		—		(56,121)

				Net cash used in financing activities		(31,352)		—		(31,352)
	Effect of exchange rate changes					2,744		—		2,744
	Net increase in cash and cash equivalents					61,113		—		61,113
	Cash and cash equivalents at beginning of year					681,433		—		681,433
	Cash and cash equivalents at end of period				$	742,546	$	—	$	742,546

Consolidated Statement of Cash Flows
Year Ended December 31, 2016

					Impact of changes in accounting policies
					As previously
(in thousands)						reported	Adjustments		As adjusted

	Net income				$	64,047	$	(114)	$	63,933
	Adjustments to reconcile net income to net cash provided
		by operating activities:
			Depreciation			41,398		—		41,398
			Amortization			13,741		—		13,741
			Deferred income taxes			7,055		1,335		8,390
			Gain on the sale of property, plant and equipment			(224)		—		(224)
			Asset impairments			142		—		142
			Stock-based compensation expense			5,322		—		5,322
			Excess tax benefits from stock-based compensation			(663)		—		(663)
	Changes in operating assets and liabilities:
			Accounts receivable			37,573		—		37,573
			Contract assets			—		(10,931)		(10,931)
			Inventories			27,749		10,648		38,397
			Prepaid expenses and other assets			3,147		(940)		2,207
			Accounts payable			76,039		—		76,039
			Accrued liabilities			(28)		—		(28)
			Income taxes			(2,210)		2		(2,208)
				Net cash provided by operations		273,088		—		273,088

				Net cash used in investing activities		(21,245)		—		(21,245)

				Net cash used in financing activities		(35,310)		—		(35,310)
	Effect of exchange rate changes					(1,095)		—		(1,095)
	Net increase in cash and cash equivalents					215,438		—		215,438
	Cash and cash equivalents at beginning of year					465,995		—		465,995
	Cash and cash equivalents at end of period				$	681,433	$	—	$	681,433

Not Yet Adopted

In February 2018, the FASB issued optional new accounting guidance that allows the reclassification of certain tax effects from accumulated other comprehensive income to retained earnings. This guidance is effective January 1, 2019, with early adoption permitted. The Company is evaluating whether it will adopt this new guidance along with any impacts on the Company’s financial position, results of operations and cash flows, none of which are expected to be material.

In June 2016, the FASB issued a new accounting standards update, which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This update is effective for annual reporting periods beginning after December 15, 2019. The Company does not expect the implementation of this update to have a material impact on its consolidated financial position, results of operations or cash flows; and will adopt this update effective January 1, 2020.

In February 2016, the FASB established Topic 842, Leases, and issued a new accounting standards update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently 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. 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. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The Company adopted the new standard on its effective date of January 1, 2019 using the effective date as our date of initial application under the modified retrospective transition approach. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients in transition. Management elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Management does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company. Management elected all of the new standard’s available transition practical expedients.

The Company has completed its preliminary assessment of adopting ASC 842 as of January 1, 2019. The adoption of the standard will have a material effect on its financial statements. The most significant effects of adoption relate 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 beginning with the Quarterly Report on Form 10-Q for the first quarter of 2019. Management does not expect a significant change in the Company’s leasing activities as a result of the adoption.

On adoption, the Company expects to recognize additional operating liabilities in the range of approximately $85 million to $90 million, with corresponding ROU assets based on the present value of the remaining expected rental payments.

The new standard also provides practical expedients for an entity’s ongoing accounting. Management currently expects to elect the short-term lease recognition exemption for all of the Company’s leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also expects to elect the practical expedient to not separate lease and non-lease components for all of its leases other than leases of real estate.

The Company has determined that other recently issued accounting standards will either have no material impact on its consolidated financial position, results of operations or cash flows, or will not apply to its operations.