UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from: ________________________ to ____________________
Commission file number: 0-23494
BRIGHTPOINT, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-1778566
------------------------------------------------------------ -----------------------------------
State or other jurisdiction of incorporation or organization (I.R.S. Employer Identification No.)
501 Airtech Parkway, Plainfield Indiana 46168
------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
(317) 707-2355
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act) Yes [X] No [ ]
Number of shares of the registrant's common stock outstanding at October 21,
2004: 17,997,950 shares
BRIGHTPOINT, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2004 and 2003................. 3
Consolidated Balance Sheets
September 30, 2004, and December 31, 2003............................... 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003........................... 5
Notes to Consolidated Financial Statements........................................ 6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 19
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk........................ 40
ITEM 4
Controls and Procedures........................................................... 41
PART II. OTHER INFORMATION
ITEM 1
Legal Proceedings................................................................. 42
ITEM 6
Exhibits.......................................................................... 43
Signatures........................................................................ 44
Page 2
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue
Product distribution revenue $ 369,962 $ 471,215 $ 1,145,413 $ 1,068,752
Integrated logistics services revenue 84,156 56,685 213,779 163,239
------------ ------------ ------------ ------------
Total revenue 454,118 527,900 1,359,192 1,231,991
Cost of revenue
Cost of product distribution revenue 356,510 454,834 1,103,887 1,032,579
Cost of integrated logistics services revenue 68,044 46,134 173,048 131,540
------------ ------------ ------------ ------------
Total cost of revenue 424,554 500,968 1,276,935 1,164,119
Gross profit 29,564 26,932 82,257 67,872
Selling, general and administrative expenses 21,205 18,001 61,163 48,816
Facility consolidation charge (benefit) - - (215) 4,461
------------ ------------ ------------ ------------
Operating income from continuing operations 8,359 8,931 21,309 14,595
Interest expense 463 570 1,481 1,427
Interest income (173) (282) (676) (463)
Loss on debt extinguishment - 100 - 365
Net other expenses 314 921 1,284 1,912
------------ ------------ ------------ ------------
Income from continuing operations before income taxes 7,755 7,622 19,220 11,354
Income tax expense 2,399 1,947 5,495 2,419
------------ ------------ ------------ ------------
Income from continuing operations 5,356 5,675 13,725 8,935
Discontinued operations:
Gain (loss) from discontinued operations 35 (799) (722) (2,774)
Gain (loss) on disposal of discontinued operations (215) (32) (4,859) 152
------------ ------------ ------------ ------------
Total discontinued operations (180) (831) (5,581) (2,622)
------------ ------------ ------------ ------------
Net income $ 5,176 $ 4,844 $ 8,144 $ 6,313
============ ============ ============ ============
Basic per share:
Income from continuing operations $ 0.30 $ 0.31 $ 0.73 $ 0.49
Discontinued operations (0.01) (0.04) (0.30) (0.14)
------------ ------------ ------------ ------------
Net income $ 0.29 $ 0.27 $ 0.43 $ 0.35
============ ============ ============ ============
Diluted per share:
Income from continuing operations $ 0.29 $ 0.30 $ 0.71 $ 0.48
Discontinued operations (0.01) (0.04) (0.29) (0.14)
------------ ------------ ------------ ------------
Net income $ 0.28 $ 0.26 $ 0.42 $ 0.34
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 17,970 18,074 18,763 18,060
============ ============ ============ ============
Diluted 18,531 18,932 19,365 18,734
============ ============ ============ ============
See accompanying notes.
Page 3
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
SEPTEMBER 30, December 31,
2004 2003
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 79,920 $ 98,879
Pledged cash 16,658 22,042
Accounts receivable (less allowance for doubtful
accounts of $5,111 and $7,683, respectively) 109,427 132,944
Inventories 84,256 108,665
Contract financing receivable 13,573 10,838
Other current assets 15,958 13,083
-------------- --------------
Total current assets 319,792 386,451
Property and equipment, net 26,877 29,566
Goodwill and other intangibles, net 19,976 19,340
Other assets 9,047 9,333
-------------- --------------
Total assets $ 375,692 $ 444,690
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 152,283 $ 204,242
Accrued expenses 56,314 60,960
Unfunded portion of contract financing receivable 27,216 15,697
Lines of credit 362 16,207
-------------- --------------
Total current liabilities 236,175 297,106
-------------- --------------
COMMITMENTS AND CONTINGENCIES
Shareholders' equity:
Preferred stock, $0.01 par value: 1,000 shares
authorized; no shares issued or outstanding - -
Common stock, $0.01 par value: 100,000 shares
authorized; 19,395 and 19,262 issued
in 2004 and 2003, respectively; 17,998 and
19,262 outstanding in 2004 and 2003,
respectively 194 193
Additional paid-in capital 229,348 227,338
Treasury stock, at cost, 1,398 shares (19,997) -
Retained earnings (deficit) (69,594) (77,738)
Accumulated other comprehensive loss (434) (2,209)
-------------- --------------
Total shareholders' equity 139,517 147,584
-------------- --------------
Total liabilities and shareholders' equity $ 375,692 $ 444,690
============== ==============
See accompanying notes.
Page 4
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended September 30,
2004 2003
------------- -----------
OPERATING ACTIVITIES
Net income $ 8,144 $ 6,313
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,975 9,725
Discontinued operations 5,581 2,622
Net cash used in discontinued operations (1,541) (2,367)
Pledged cash requirements 384 (2,190)
Facility consolidation charge (benefit) (215) 4,461
Loss on debt extinguishment - 365
Tax benefit of incentive stock option exercises 1,435 111
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts receivable, net 12,779 (41,647)
Inventories, net 23,721 (29,285)
Other operating assets (3,536) (4,342)
Accounts payable (43,673) 79,766
Accrued expenses (3,005) 5,661
---------- ----------
Net cash provided by operating activities 8,049 29,193
INVESTING ACTIVITIES
Decrease in funded contract financing receivables, net 9,005 6,568
Capital expenditures (5,115) (3,283)
Purchase acquisitions, net of cash acquired (1,244) (1,972)
Cash effect of divestitures 576 1,328
Decrease in other assets 133 562
---------- ----------
Net cash provided by investing activities 3,355 3,203
FINANCING ACTIVITIES
Purchase of treasury stock (19,997) -
Net payments on revolving credit facilities (15,948) (6,474)
Pledged cash requirements - financing 5,000 -
Proceeds from common stock issuances under employee stock option and purchase plans 560 1,204
Repurchase of convertible notes - (11,980)
---------- ----------
Net cash used in financing activities (30,385) (17,250)
Effect of exchange rate changes on cash and cash equivalents 22 2,677
---------- ----------
Net increase (decrease) in cash and cash equivalents (18,959) 17,823
Cash and cash equivalents at beginning of period 98,879 43,798
---------- ----------
Cash and cash equivalents at end of period $ 79,920 $ 61,621
========== ==========
See accompanying notes.
Page 5
PART I FINANCIAL INFORMATION
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)
1. Basis of Presentation
GENERAL
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results are likely to differ
from those estimates, but management does not believe such differences will
materially affect Brightpoint, Inc.'s (the "Company") financial position or
results of operations. The Consolidated Financial Statements reflect all
adjustments considered, in the opinion of the Company, necessary to fairly
present the results for the periods. Such adjustments are of a normal recurring
nature.
The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned, with the exception of the
Brightpoint India Limited subsidiary that is 85% owned by the Company.
Significant intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in the 2003 Consolidated Financial Statements
have been reclassified to conform to the 2004 presentation.
The Consolidated Balance Sheet at December 31, 2003, has been derived from the
audited Consolidated Financial Statements at that date, but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The unaudited
Consolidated Statements of Income for the three and nine months ended September
30, 2004, and the unaudited Consolidated Statement of Cash Flows for the nine
months ended September 30, 2004, are not necessarily indicative of the operating
results or cash flows that may be expected for the entire year.
Due to seasonal factors, the Company's interim results may not be indicative of
annual results.
The Company has not changed its significant accounting policies from those
disclosed in its Form 10-K for the year ended December 31, 2003. For further
information, reference is made to the audited Consolidated Financial Statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
GROSS PROFIT ACCOUNTING POLICY
The Company determines its gross profit as the difference between revenue and
cost of revenue. Cost of revenue includes the direct product costs, freight,
direct and indirect labor, facilities, equipment and
Page 6
PART I FINANCIAL INFORMATION
related costs, including depreciation, information systems, including related
maintenance and depreciation, and other indirect costs associated with products
sold and services provided.
NET INCOME PER SHARE
Basic net income per share is based on the weighted average number of common
shares outstanding during each period, and diluted net income per share is based
on the weighted average number of common shares and dilutive common share
equivalents outstanding during each period. The table below presents a
reconciliation of the income per share calculations (in thousands, except per
share data):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Income from continuing operations $ 5,356 $ 5,675 $ 13,725 $ 8,935
Discontinued operations (180) (831) (5,581) (2,622)
---------- ---------- ---------- ----------
Net income $ 5,176 $ 4,844 $ 8,144 $ 6,313
========== ========== ========== ==========
Basic:
Weighted average shares outstanding 17,970 18,074 18,763 18,060
========== ========== ========== ==========
Per share amount:
Income from continuing operations $ 0.30 $ 0.31 $ 0.73 $ 0.49
Discontinued operations (0.01) (0.04) (0.30) (0.14)
---------- ---------- ---------- ----------
Net income per share $ 0.29 $ 0.27 $ 0.43 $ 0.35
========== ========== ========== ==========
Diluted:
Weighted average shares outstanding 17,970 18,074 18,763 18,060
Net effect of dilutive stock options, based on the
treasury stock method using average market price 561 858 602 674
---------- ---------- ---------- ----------
Total weighted average shares outstanding 18,531 18,932 19,365 18,734
========== ========== ========== ==========
Per share amount:
Income from continuing operations $ 0.29 $ 0.30 $ 0.71 $ 0.48
Discontinued operations (0.01) (0.04) (0.29) (0.14)
---------- ---------- ---------- ----------
Net income per share $ 0.28 $ 0.26 $ 0.42 $ 0.34
========== ========== ========== ==========
TREASURY STOCK
On June 4, 2004, the Company announced that its Board of Directors had approved
a share repurchase program authorizing the Company to repurchase up to $20
million of the Company's common stock. During June 2004, the Company repurchased
1,397,500 shares of its own common stock at an average price of $14.31 per
share, totaling $20 million, completing the approved share repurchase program.
STOCK OPTIONS
The Company uses the intrinsic value method, as opposed to the fair value
method, in accounting for stock options. Under the intrinsic value method, no
material compensation expense has been recognized for stock options granted to
employees or stock sold pursuant to the employee stock purchase plan ("ESPP").
Page 7
PART I FINANCIAL INFORMATION
The table below presents a reconciliation of the Company's pro forma net loss
giving effect to the estimated compensation expense related to stock options,
the ESPP and the Company's Independent Director Stock Compensation Plan that
would have been reported if the Company utilized the fair value method (in
thousands, except per share data):
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income as reported $ 5,176 $ 4,844 $ 8,144 $ 6,313
Stock-based compensation cost, net of related tax
effects, that would have been included in the
determination of net income if the fair value
method had been applied (667) 205 (1,959) (470)
---------- ---------- ---------- ----------
Pro forma net income $ 4,509 $ 5,049 $ 6,185 $ 5,843
========== ========== ========== ==========
Basic net income per share:
Net income as reported $ 0.29 $ 0.27 $ 0.43 $ 0.35
Stock-based compensation cost, net of related tax
effects, that would have been included in the
determination of net income if the fair value
method had been applied (0.04) 0.01 (0.10) (0.03)
---------- ---------- ---------- ----------
Pro forma net income $ 0.25 $ 0.28 $ 0.33 $ 0.32
========== ========== ========== ==========
Diluted net income per share:
Net income as reported $ 0.28 $ 0.26 $ 0.42 $ 0.34
Stock-based compensation cost, net of related tax
effects, that would have been included in the
determination of net income if the fair value
method had been applied (0.04) 0.01 (0.10) (0.03)
---------- ---------- ---------- ----------
Pro forma net income $ 0.24 $ 0.27 $ 0.32 $ 0.31
========== ========== ========== ==========
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and gains or losses resulting
from currency translations of foreign investments. The details of comprehensive
income for the three and nine months ended September 30, 2004 and 2003, are as
follows:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income $ 5,176 $ 4,844 $ 8,144 $ 6,313
Foreign currency translation amounts 2,515 816 1,775 5,900
---------- ---------- ---------- ----------
Comprehensive income $ 7,691 $ 5,660 $ 9,919 $ 12,213
========== ========== ========== ==========
Page 8
PART I FINANCIAL INFORMATION
2. Facility Consolidation Charge
During 2003, the Company consolidated its Richmond, California, call center
operation into its Plainfield, Indiana, facility to reduce costs and increase
productivity and profitability in its Americas division. During the nine months
ended September 30, 2003, the Company recorded a pre-tax charge of $4.5 million.
For the year of 2003, the total pre-tax charge was $5.5 million which included
approximately $3.8 million for the present value of estimated lease costs, net
of an anticipated sublease, non-cash losses on the disposal of assets of
approximately $1.1 million and severance and other costs of approximately $600
thousand. During 2003, $2.1 million of this charge was used. The Company
terminated the lease during the second quarter of 2004 utilizing $2.5 million of
the reserve. The remaining reserve balance is related to final facility
equipment costs and related legal fees.
Reserve activity for the facility consolidation as of September 30, 2004, is as
follows (in thousands):
Lease Employee
Termination Fixed Termination Other Exit
Costs Assets Costs Costs Total
------------ -------- ------------ ------------ ----------
December 31, 2003 $ 3,379 $ - $ - $ 9 $ 3,388
Provisions - - - - -
Cash usage (244) - - (9) -
Non-cash usage - - - - -
------------ -------- ------------ ------------ ----------
March 31, 2004 $ 3,135 $ - $ - $ - $ 3,135
------------ -------- ------------ ------------ ----------
Provisions - - - - -
Cash usage (2,759) - - - (2,759)
Non-cash usage (reversal) (215) - - - (215)
------------ -------- ------------ ------------ ----------
June 30, 2004 $ 161 $ - $ - $ - $ 161
------------ -------- ------------ ------------ ----------
Provisions - - - - -
Cash usage (9) - - - (9)
Non-cash usage - - - - -
------------ -------- ------------ ------------ ----------
SEPTEMBER 30, 2004 $ 152 $ - $ - $ - $ 152
============ ======== ============ ============ ==========
3. Acquisitions
Effective July 31, 2004, through certain of the Company's subsidiaries, the
Company acquired 100% of the issued and outstanding shares of MF-Tukku Oy
("MF-Tukku") for an initial consideration less than $500 thousand with potential
future considerations based on future financial performance of MF-Tukku.
MF-Tukku, based in Helsinki, Finland, is a distributor of Sony Ericsson, Siemens
and Motorola wireless devices and accessories in Finland. Simultaneously with
Brightpoint's acquisition of MF-Tukku, MF-Tukku acquired substantially all of
the assets of Codeal Oy ("Codeal"). Codeal, also based in Helsinki, Finland, was
a distributor of Samsung wireless devices and accessories in Finland.
4. Divestitures
On May 7, 2004, through certain of the Company's subsidiaries, the Company
completed the sale of its collective 100% interest in Brightpoint do Brasil
Ltda. ("Brightpoint Brazil"). The Company recorded a
Page 9
PART I FINANCIAL INFORMATION
$584 thousand loss from the sale, net of income taxes. Brightpoint Brazil was
part of the 2001 Restructuring Plan and has been included in discontinued
operations for all periods presented.
On February 19, 2004, the Company's subsidiary, Brightpoint Holdings B.V.,
completed the sale of its 100% interest in Brightpoint (Ireland) Limited
("Brightpoint Ireland") to Celtic Telecom Consultants Ltd. Consideration for the
sale consisted of cash of approximately $1.7 million. The Company recorded a
$3.8 million loss from the sale and a $310 thousand loss from Brightpoint
Ireland's results of operations during the first quarter of 2004. The loss
includes the non-cash write-off of approximately $1.6 million pertaining to
cumulative currency translation adjustments. Brightpoint Ireland was a part of
the Company's Europe division. The Consolidated Financial Statements include
Brightpoint Ireland's results in discontinued operations for all periods
presented.
5. Discontinued Operations
Details of discontinued operations are as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenue $ - $ 5,806 $ 4,037 $ 21,311
========== ========== ========== ==========
Gain (loss) from discontinued operations
Net operating income (loss) $ 52 $ (715) $ (332) $ (2,461)
Restructuring plan charges (17) (27) (389) 125
Other - (57) (1) (438)
---------- ---------- ---------- ----------
Total gain (loss) from discontinued operations 35 (799) (722) (2,774)
---------- ---------- ---------- ----------
Gain (loss) on disposal of discontinued operations
Restructuring plan charges (211) (26) (496) (1,070)
Other (4) (6) (28) (106)
Recovery of contingent receivable 1,328
Sale of Brightpoint do Brazil Ltda. - - (584) -
Sale of Brightpoint (Ireland) Limited - - (3,751) -
---------- ---------- ---------- ----------
Total gain (loss) on disposal of discontinued operations (215) (32) (4,859) 152
---------- ---------- ---------- ----------
Total discontinued operations $ (180) $ (831) $ (5,581) $ (2,622)
========== ========== ========== ==========
Net assets, including reserves, related to discontinued operations are
classified in the Consolidated Balance Sheets as follows (in thousands):
SEPTEMBER 30, 2004 December 31, 2003
------------------ -----------------
Total current assets $ 439 $ 857
Other non-current assets - 127
------------------ -----------------
Total assets $ 439 $ 984
================== =================
Accounts payable $ - $ 57
Accrued expenses and other liabilities 805 2,760
------------------ -----------------
Total liabilities $ 805 $ 2,817
================== =================
Page 10
PART I FINANCIAL INFORMATION
2001 Restructuring Plan
During 2001, the Company's Board of Directors approved a restructuring plan
("2001 Restructuring Plan") that the Company began to implement in the fourth
quarter of 2001. The primary goal in adopting the 2001 Restructuring Plan was to
better position the Company for long-term and more consistent success by
improving its cost structure and divesting or closing operations in which the
Company believed potential returns were not likely to generate an acceptable
return on invested capital. Therefore, certain operations were sold, or
otherwise discontinued, pursuant to the 2001 Restructuring Plan. In total, the
2001 Restructuring Plan resulted in a headcount reduction of approximately 350
employees across most areas of the Company, including marketing, operations,
finance and administration.
2001 Restructuring Plan specific to the China operations
Additionally, pursuant to the 2001 Restructuring Plan, the Company completed in
January 2002, through certain of its subsidiaries, the formation of a joint
venture with Hong Kong-based Chinatron Group Holdings Limited ("Chinatron").
Chinatron is involved in the global wireless industry. In exchange for a 50%
interest in Brightpoint China Limited pursuant to the formation of the joint
venture, the Company received Chinatron Class B Preference Shares with a face
value of $10 million. On April 29, 2002, the Company announced that it had
completed the sale of its remaining 50% interest in Brightpoint China Limited to
Chinatron. Pursuant to this transaction, the Company received additional
Chinatron Class B Preference Shares with a face value of $11 million. In
accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity
Securities, the Company designated the Chinatron Class B Preference Shares as
held-to-maturity. The carrying value of the aggregate $21 million face value of
the Chinatron Class B Preference Shares was $2 million at September 30, 2004,
and December 31, 2003. Pursuant to these transactions, Chinatron and the Company
entered into a services agreement, whereby Chinatron provides warehouse
management services in Hong Kong supporting the Company's Brightpoint Asia
Limited operations that are managed by Persequor Limited.
As of September 30, 2004, actions called for by the 2001 Restructuring Plan were
substantially complete, however, the Company expects to continue to record
adjustments through discontinued operations as necessary. The Company recorded
charges related to the 2001 Restructuring Plan as presented below (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Cash charges (credits):
Employee termination costs $ - $ 15 $ - $ 20
Sale of Brightpoint do Brazil Ltda. - - 1,138 -
Other exit costs 17 13 109 (15)
---------- ---------- ---------- ----------
Total cash charges 17 28 1,247 5
---------- ---------- ---------- ----------
Non-cash charges (credits):
Write-off of Brightpoint do Brazil Ltda. net assets - - (203) -
Impairment of accounts receivable and inventories - (1) - 11
Impairment of fixed and other assets - - 614 72
Income tax effect of restructuring actions - - (618) (125)
Write-off of cumulative foreign currency translation adjustments 211 26 429 982
---------- ---------- ---------- ----------
Total non-cash charges 211 25 222 940
---------- ---------- ---------- ----------
Total restructuring plan charges $ 228 $ 53 $ 1,469 $ 945
========== ========== ========== ==========
Page 11
PART I FINANCIAL INFORMATION
Utilization of the 2001 Restructuring Plan charges discussed above is as follows
(in thousands):
Lease Employee
Termination Termination Other Exit
Costs Costs Costs Total
------------ ------------ ------------ ------------
January 1, 2001 $ - $ - $ - $ -
Provisions (1) 314 619 1,810 2,743
------------ ------------ ------------ ------------
December 31, 2001 314 619 1,810 2,743
Provisions (1) 348 502 1,199 2,049
Cash usage (457) (1,096) (2,093) (3,646)
Non-cash usage - - (189) (189)
------------ ------------ ------------ ------------
December 31, 2002 $ 205 $ 25 $ 727 $ 957
Provisions (1) 6 - 41 47
Cash usage (201) (25) (214) (440)
Non-cash usage - - (145) (145)
------------ ------------ ------------ ------------
December 31, 2003 $ 10 $ - $ 409 $ 419
------------ ------------ ------------ ------------
Provisions (1) - - - -
Cash usage - - 6 6
Non-cash usage - - 40 40
------------ ------------ ------------ ------------
March 31, 2004 $ 10 $ - $ 363 $ 373
------------ ------------ ------------ ------------
Cash usage - - (22) (22)
Non-cash usage (10) - (277) (287)
------------ ------------ ------------ ------------
June 30, 2004 $ - $ - $ 64 $ 64
------------ ------------ ------------ ------------
CASH USAGE - - (28) (28)
NON-CASH USAGE - - (1) (1)
------------ ------------ ------------ ------------
SEPTEMBER 30, 2004 $ - $ - $ 35 $ 35
============ ============ ============ ============
(1) Provisions do not include items that were directly expensed in the period.
6. Accounts Receivable Transfers
During the nine months ended September 30, 2004 and 2003, the Company entered
into certain transactions or agreements with banks and other third-party
financing organizations in France, Norway and Sweden, with respect to a portion
of its accounts receivable in order to reduce the amount of working capital
required to fund such receivables. During the three and nine months ended
September 30, 2003, the Company also entered into certain transactions or
agreements with banks and other third-party financing organizations in Ireland
with respect to the sale of a portion of its accounts receivable. These
transactions have been treated as sales pursuant to current accounting
principles generally accepted in the United States and, accordingly, are
accounted for as off-balance sheet arrangements with the exception of the
receivable sale facility with GE Factofrance. On April, 2004 the Company through
one of its subsidiaries, Brightpoint (France) SARL, entered into a receivable
sale facility with GE Factofrance. The facility does not meet the requirements
of a transfer under current accounting principles generally accepted in the
United States and therefore amounts advanced under this facility against
receivables not collected by GE Factofrance are included on the Consolidated
Balance Sheet under lines of credit and accounts
Page 12
PART I FINANCIAL INFORMATION
receivable. Net funds received, other than from GE Factofrance, reduced the
accounts receivable outstanding while increasing cash. Fees incurred are
recorded as losses on the sale of assets and are included as a component of "Net
other expenses" in the Consolidated Statements of Income.
Net funds received from the sales of accounts receivable for continuing
operations during the nine months ended September 30, 2004 and 2003, totaled
$278 million and $185 million, respectively. Fees, in the form of discounts,
incurred in connection with these sales totaled $302 thousand and $305 thousand
during the three months ended September 30, 2004 and 2003, respectively. Fees,
in the form of discounts, incurred in connection with these sales totaled $844
thousand and $960 thousand during the nine months ended September 30, 2004 and
2003, respectively.
For discontinued operations, during the three and nine months ended September
30, 2004, there were no sales of accounts receivable or related fees. Net funds
received from the sales of accounts receivable during the three and nine months
ended September 30, 2003, totaled $2.7 million and $15.0 million, respectively.
Fees, in the form of discounts, incurred in connection with these sales totaled
$24 thousand and $135 thousand during the three and nine months ended September
30, 2003, respectively. These fees were originally recorded as a component of
"Net other expenses" in the Consolidated Statements of Income, but have now been
reclassified as a component of "Loss from discontinued operations" in the
Consolidated Statements of Income.
The Company is the collection agent on behalf of the bank or other third-party
financing organization for many of these arrangements and has no significant
retained interests or servicing liabilities related to accounts receivable that
it has sold. The Company may be required to repurchase certain accounts
receivable sold in certain circumstances, including, but not limited to,
accounts receivable in dispute or otherwise not collectible, accounts receivable
in which credit insurance is not maintained and a violation of, the expiration
or early termination of the agreement pursuant to which these arrangements are
conducted. There were no significant repurchases of accounts receivable sold
during the nine months ended September 30, 2004 and 2003. These agreements
require the Company's subsidiaries to provide collateral in the form of pledged
assets and/or, in certain situations, a guarantee by the Company of its
subsidiaries' obligations.
Pursuant to these arrangements, approximately $35 million and $25 million of
trade accounts receivable were sold to and held by banks and other third-party
financing institutions at September 30, 2004, and 2003, respectively. Amounts
held by banks or other financing institutions at September 30, 2004, were for
transactions related to the Company's Norway, Sweden and France arrangements.
All other arrangements have been terminated or expired.
7. Lines of Credit and Long-term Debt
OUTSTANDING AT:
--------------------------------------------
CREDIT AGREEMENTS SEPTEMBER 30, 2004 December 31, 2003
----------------- ------------------ -----------------
- Asia-Pacific $ - $ 16,171
- The Americas - -
- Europe 362 36
------- ---------
Total $ 362 $ 16,207
------- ---------
Page 13
PART I FINANCIAL INFORMATION
Lines of Credit - Americas Division
On September 23, 2004, the Company's primary North American operating
subsidiaries, Brightpoint North America L.P. and Wireless Fulfillment Services,
LLC (the "Borrowers"), amended its Amended and Restated Credit Facility (the
"Revolver") dated March 18, 2004, between the Borrowers and General Electric
Capital Corporation ("GE Capital"). The amendment reduced the required tangible
net worth covenant by $20 million and allows for further reductions equal to the
purchase price of any issued and outstanding shares of common stock of the
Company repurchased by the Company in the future. GE Capital acted as the agent
for a syndicate of banks (the "Lenders"). The Revolver expires in March of 2007.
The Revolver provides borrowing availability, subject to borrowing base
calculations and other limitations, of up to a maximum of $70 million and
currently bears interest, at the Borrowers' option, at the prime rate plus 0.75%
or LIBOR plus 2.50%. The applicable interest rate that the Borrowers are subject
to can be adjusted quarterly based upon certain financial measurements defined
in the Revolver. The Revolver is guaranteed by Brightpoint, Inc., and is secured
by, among other things, all of the Borrowers' assets. The Revolver is subject to
certain financial covenants, which include maintaining a minimum fixed charge
coverage ratio. The Revolver is a secured asset-based facility where a borrowing
base is calculated periodically using eligible accounts receivable and
inventory, subject to certain adjustments. Eligible accounts receivable and
inventories fluctuate over time, which can increase or decrease borrowing
availability. The Company also has pledged certain intellectual property and the
capital stock of certain of its subsidiaries as collateral for the Revolver. At
September 30, 2004, and December 31, 2003, there were no amounts outstanding
under the Revolver with available funding, net of the applicable required
availability minimum and letters of credit, of approximately $26 million and $27
million, respectively.
Lines of Credit - Asia-Pacific
In December of 2002, the Company's primary Australian operating subsidiary,
Brightpoint Australia Pty Ltd, entered into a revolving credit facility (the
"Facility") with GE Commercial Finance in Australia. The Facility, which matures
in December of 2005, provides borrowing availability, subject to borrowing base
calculations and other limitations, of up to a maximum amount of 50 million
Australian dollars (approximately $36 million U.S. dollars at September 30,
2004). Borrowings under the Facility are used for general working capital
purposes. The Facility is subject to certain financial covenants, which include
maintaining a minimum fixed charge coverage ratio and bears interest at the Bank
Bill Swap Reference rate plus 2.9% (totaling 8.38% at September 30, 2004). The
Facility is a secured asset-based facility where a borrowing base is calculated
periodically using eligible accounts receivable and inventory, subject to
certain adjustments. Eligible accounts receivable and inventories fluctuate over
time, which can increase or decrease borrowing availability. At September 30,
2004, there was no amount outstanding under the Facility with available funding
of $26 million. At December 31, 2003, there was $11.9 million outstanding under
the Facility at an interest rate of approximately 7.8% with available funding of
$13.4 million.
In December of 2003, the Company's Brightpoint India Private Limited subsidiary
entered into a short-term credit facility with ABN Amro. At December 31, 2003,
$4.3 million was outstanding at an interest rate of 6.5%. In January 2004, this
credit facility was paid and terminated.
In July of 2003, the Company's primary operating subsidiary in the Philippines,
Brightpoint Philippines, Inc. ("Brightpoint Philippines") entered into a credit
facility with Banco de Oro. The facility, which matures in April of 2005,
provides borrowing availability, up to a maximum amount of 50 million Philippine
Pesos
Page 14
PART I FINANCIAL INFORMATION
(approximately $891 thousand U.S. dollars, at September 30, 2004), and is
guaranteed by Brightpoint, Inc. The facility bears interest at the Prime Lending
Rate (12% at September 30, 2004). At September 30, 2004, and December 31, 2003,
the facility had no amounts outstanding with available funding of approximately
$2.9 million. In April, 2004, Brightpoint Philippines entered into another
credit facility with Banco De Oro. This facility allows for letters of credit to
be issued to one of Brightpoint Philippine's main suppliers up to a total of $4
million. As of September 30, 2004, $2 million in letters of credit have been
issued under this facility.
In November 2003, the Company's primary operating subsidiary in New Zealand,
Brightpoint New Zealand Limited, entered into a revolving credit facility with
GE Commercial Finance in Australia. This facility, which matures in November of
2006, provides borrowing availability, subject to borrowing base calculations
and other limitations, of up to a maximum amount of 12 million New Zealand
dollars (approximately $7.9 million U.S. dollars at September 30, 2004).
Borrowings under the facility will be used for general working capital purposes.
The facility is subject to certain financial covenants, which include
maintaining a minimum fixed charge coverage ratio and bears interest at the New
Zealand Index Rate plus 3.15% (9.62% at September 30, 2004). The facility is a
secured asset-based facility where a borrowing base is calculated periodically
using eligible accounts receivable and inventory, subject to certain
adjustments. Eligible accounts receivable and inventories fluctuate over time,
which can increase or decrease borrowing availability. At September 30, 2004,
and December 31, 2003, there were no amounts outstanding under the facility with
available funding of approximately $5.9 million and $3.9 million, respectively.
Lines of Credit - Europe
The Company's primary operating subsidiary in Sweden, Brightpoint Sweden AB, has
a short-term line of credit facility with SEB Finans AB. The facility has
borrowing availability of up to 15 million Swedish Krona (approximately $2.0
million U.S. dollars at September 30, 2004) and bears interest at the SEB Banken
Base plus 0.75% (2.75% at September 30, 2004). The facility is supported by a
guarantee provided by the Company. At September 30, 2004, and December 31, 2003,
there were no amounts outstanding under the facility with available funding of
approximately $2.0 million and $2.1 million, respectively.
At September 30, 2004 and December 31, 2003, the Company and its subsidiaries
were in compliance with the covenants in its credit agreements. Interest expense
was approximately $463 thousand and $1.5 million for the three and nine months
ended September 30, 2004. Interest expense includes fees paid for unused
capacity on credit lines and amortization of deferred financing fees.
A cash-secured standby letter of credit of $15 million supporting the Company's
Brightpoint Asia Limited's vendor credit line has been issued by financial
institutions on the Company's behalf and was outstanding at December 31, 2003,
and September 30, 2004. The related cash collateral has been reported under the
heading "Pledged cash" in the Consolidated Balance Sheet.
In December 2003, the Company pledged $5 million to support a $4.2 million
short-term line of credit in India primarily due to restrictions on foreign
capital, which precluded us from utilizing our own funds, other than the amount
pledged, to meet these needs. This short-term line of credit was paid in the
first quarter of 2004, thus releasing the pledged cash. The related cash
collateral has been reported under the heading "Pledged cash" in the
Consolidated Balance Sheet.
Page 15
PART I FINANCIAL INFORMATION
8. Guarantees
In 2002, the Financial Accounting Standards Board issued Interpretation No. 45
(FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires
guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosure, even when the likelihood of making any payments
under the guarantee is remote.
The Company has issued certain guarantees on behalf of its subsidiaries with
regard to lines of credit and long-term debt, for which the liability is
recorded in the Company's financial statements. Although the guarantees relating
to lines of credit and long-term debt are excluded from the scope of FIN 45, the
nature of these guarantees and the amount outstanding are described in Note 7 to
the consolidated financial statements.
In some circumstances, the Company purchases inventory with payment terms
requiring letters of credit. As of September 30, 2004, the Company has issued
$21 million in standby letters of credit. These standby letters of credit are
generally issued for a one-year term and are supported by either availability
under the Company's credit facilities or cash deposits. The underlying
obligations for which these letters of credit have been issued are recorded in
the financial statements at their full value. Should the Company fail to pay its
obligation to one or all of these suppliers, the suppliers may draw on the
standby letter of credit issued for them. The maximum future payments under
these letters of credit are $21 million.
Additionally, the Company has issued certain guarantees on behalf of its
subsidiaries with regard to accounts receivable transferred, the nature of which
is described in Note 6. While the Company does not currently anticipate the
funding of these guarantees, the maximum potential amount of future payments
under these guarantees at September 30, 2004, is approximately $35 million.
The Company has entered into indemnification agreements with its officers and
directors, to the extent permitted by law, pursuant to which the Company has
agreed to reimburse its officers and directors for legal expenses in the event
of litigation and regulatory matters. The terms of these indemnification
agreements provide for no limitation to the maximum potential future payments.
The Company has a directors and officers insurance policy that may mitigate the
potential liability and payments.
Page 16
PART I FINANCIAL INFORMATION
9. Operating Segments
The Company's operations are divided into three geographic operating segments.
These operating segments represent its three divisions: Asia-Pacific, The
Americas and Europe. These divisions all derive revenues from sales of wireless
devices, accessory programs and fees from the provision of integrated logistics
services.
The Company evaluates the performance of, and allocates resources to, these
segments based on operating income from continuing operations including
allocated corporate selling, general and administrative expenses. All amounts
presented below exclude the results of operations that have been discontinued. A
summary of the Company's operations by segment is presented below (in thousands)
for the three and nine months ended September 30, 2004 and 2003:
Integrated Operating
Distribution Logistics Services Total Income (Loss)
Revenue from Revenue from Revenue from
External External from External Continuing
Customers Customers Customers Operations (1)
--------- --------- --------- --------------
THREE MONTHS ENDED SEPTEMBER 30, 2004:
ASIA-PACIFIC $ 219,906 $ 11,266 $ 231,172 $ 1,814
THE AMERICAS 96,452 30,040 126,492 6,850
EUROPE 53,604 42,850 96,454 (305)
----------- --------- ----------- ---------
$ 369,962 $ 84,156 $ 454,118 $ 8,359
=========== ========= =========== =========
Three months ended September 30, 2003:
Asia-Pacific $ 306,985 $ 7,310 $ 314,295 $ 4,408
The Americas 113,710 18,935 132,645 2,464
Europe 50,520 30,440 80,960 2,059
----------- --------- ----------- ---------
$ 471,215 $ 56,685 $ 527,900 $ 8,931
=========== ========= =========== =========
NINE MONTHS ENDED SEPTEMBER 30, 2004:
ASIA-PACIFIC $ 690,906 $ 33,897 $ 724,803 $ 6,376
THE AMERICAS 289,825 76,936 366,761 13,353
EUROPE 164,682 102,946 267,628 1,580
----------- --------- ----------- ---------
$ 1,145,413 $ 213,779 $ 1,359,192 $ 21,309
=========== ========= =========== =========
Nine months ended September 30, 2003:
Asia-Pacific $ 668,832 $ 25,186 $ 694,018 $ 9,434
The Americas (2) 272,427 55,873 328,300 937
Europe 127,493 82,180 209,673 4,224
----------- --------- ----------- ---------
$ 1,068,752 $ 163,239 $ 1,231,991 $ 14,595
=========== ========= =========== =========
(1) Certain corporate expenses are allocated to the segments based on total
revenue.
(2) Operating income includes $4.5 million facility consolidation charge.
Page 17
PART I FINANCIAL INFORMATION
SEPTEMBER 30, December 31,
2004 2003
------------- ------------
TOTAL SEGMENT ASSETS:
Asia-Pacific $ 147,342 $ 159,005
The Americas (1) 139,281 190,077
Europe 89,069 95,608
--------- ---------
$ 375,692 $ 444,690
========= =========
(1) Corporate assets are included in the Americas segment.
10. Contingencies
The Company is from time to time involved in certain legal proceedings in the
ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its
Consolidated Financial Statements as a whole.
The Company's subsidiary in South Africa, whose operations were discontinued
pursuant to the 2001 Restructuring Plan, has received an assessment from the
South Africa Revenue Service ("SARS") regarding value-added taxes the SARS
claims are due, relating to certain product sale and purchase transactions
entered into by the Company's subsidiary in South Africa from 2000 to 2002.
Although the Company's liability pursuant to this assessment by the SARS, if
any, cannot currently be determined, the Company believes the range of the
potential liability is between $0 and $1.0 million U.S. dollars (at current
exchange rates) including penalties and interest. The potential assessment is
not estimable and, therefore, is not reflected as a liability or recorded as an
expense.
A complaint was filed on November 23, 2001, against the Company and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
that we and other defendants have infringed 7 patents alleged to cover bar code
technology. The case seeks unspecified damages, treble damages and injunctive
relief. The Court has ordered the case stayed pending the decision in a related
case in which a number of bar code equipment manufacturers have sought a
declaration that the patents asserted are invalid and unenforceable. That trial
concluded in January 2003. In January 2004, the Court rendered its decision that
the patents asserted by Lemelson were found to be invalid and unenforceable.
Lemelson filed an appeal to the Court of Appeals for the Federal Circuit on June
23, 2004. The Company continues to dispute these claims and intend to defend
this matter vigorously.
Page 18
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
This discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion and analysis
of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of financial statements in conformity with generally accepted accounting
principles requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of any contingent assets
and liabilities at the financial statement date and reported amounts of revenue
and expenses during the reporting period. On an on-going basis we review our
estimates and assumptions. Our estimates were based on our historical experience
and various other assumptions that we believe to be reasonable under the
circumstances. Actual results are likely to differ from those estimates under
different assumptions or conditions, but we do not believe such differences will
materially affect our financial position or results of operations. Our critical
accounting policies, the policies we believe are most important to the
presentation of our financial statements and require the most difficult,
subjective and complex judgments are outlined in our Annual Report on Form 10-K,
for the year ended December 31, 2003, and have not changed significantly.
Certain statements made in this report may contain forward-looking statements.
For a description of risks and uncertainties relating to such forward-looking
statements, see the cautionary statements contained in Exhibit 99.1 to this
report and our Annual Report on Form 10-K for the year ended December 31, 2003.
Our operating results are influenced by a number of seasonal factors, which may
cause our revenue and operating results to fluctuate on a quarterly basis. These
fluctuations are the result of several factors, including, but not limited to:
- promotions and subsidies by mobile operators;
- the timing of local holidays and other events affecting consumer
demand;
- the timing of the introduction of new products by our suppliers and
competitors;
- purchasing patterns of customers in different markets; and
- weather patterns.
Due to seasonal factors, our interim results may not be indicative of annual
results.
Effective July 31, 2004, through certain of our subsidiaries, we acquired 100%
of the issued and outstanding shares of MF-Tukku Oy ("MF-Tukku") for an initial
consideration less than $500 thousand with potential future considerations based
on future financial performance of MF-Tukku. MF-Tukku, based in Helsinki,
Finland, is a distributor of Sony Ericsson, Siemens and Motorola wireless
devices and accessories in Finland. Simultaneously with the acquisition of
MF-Tukku, MF-Tukku acquired substantially all of the assets of Codeal Oy
("Codeal"). Codeal, also based in Helsinki, Finland, was a distributor of
Samsung wireless devices and accessories in Finland.
During the third quarter of 2004, we commenced operations in Bratislava, the
Slovak Republic. We are currently providing integrated logistics services to a
mobile operator in the geographical region consisting of the Slovak Republic.
Page 19
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE AND WIRELESS DEVICES HANDLED FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2004
(Amounts in 000s)
Change from
% of % of 2003 to
September 30, 2004 Total September 30, 2003 Total 2004
------------------ ----- ------------------ ----- -----------
REVENUE BY DIVISION:
Asia-Pacific $231,172 51% $314,295 60% (26%)
The Americas 126,492 28% 132,645 25% (5%)
Europe 96,454 21% 80,960 15% 19%
-------- --- -------- --- ---
Total $454,118 100% $527,900 100% (14%)
======== === ======== === ===
REVENUE BY SERVICE LINE:
Product distribution $369,962 81% $471,215 89% (21%)
Integrated logistics services 84,156 19% 56,685 11% 48%
-------- --- -------- --- ---
Total $454,118 100% $527,900 100% (14%)
======== === ======== === ===
WIRELESS DEVICES HANDLED BY DIVISION:
Asia-Pacific 1,670 25% 2,537 42% (34%)
The Americas 4,774 71% 3,227 54% 48%
Europe 301 4% 226 4% 33%
-------- --- -------- --- ---
Total 6,745 100% 5,990 100% 13%
======== === ======== === ===
WIRELESS DEVICES HANDLED BY SERVICE LINE:
Product distribution 2,470 37% 3,600 60% (31%)
Integrated logistics services 4,275 63% 2,390 40% 79%
-------- --- -------- --- ---
Total 6,745 100% 5,990 100% 13%
======== === ======== === ===
Globally, the availability of feature-rich devices, compelling pricing by
manufacturers, mobile operator promotional activities and the deployment of
wireless data services caused subscribers to upgrade their wireless devices.
During the third quarter of 2004, we experienced a 13% increase in wireless
devices handled with a notable mix shift from product distribution sales to
fee-based integrated logistics services. Revenue in the third quarter of 2004
was $454 million, a decrease of 14% from $528 million in the third quarter of
2003. The revenue decrease was primarily attributable to a 31% decrease in
wireless devices handled through our distribution business, which was
significantly caused by an 89% decline in shipments to India CDMA customers that
was partially offset by a 79% increase in wireless devices handled through our
fee-based logistics services business, which was attributable to significant
increases in demand by logistics customers in our Americas division, and to a
lesser extent, in our Australia subsidiary. The decrease in revenue was
partially offset by increased sales of prepaid wireless airtime, an overall 9%
increase, on a constant currency basis, in the average selling price of wireless
devices sold, and the strengthening of foreign currencies relative to the U.S.
dollar, which had approximately a 3 percentage points favorable effect. The
increase in the average selling price of wireless devices sold was due to the
replacement cycle driven by more fully featured wireless devices, a more
diversified product offering and the decline in shipments of low-end CDMA
products to India.
Page 20
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Wireless devices handled, as compared to the third quarter of 2003:
The number of wireless devices sold through our distribution business
decreased 31%, primarily as a result of an 89% decline in shipments to
India CDMA customers. We launched our India business in the third quarter
of 2003, in which we fulfilled orders of significant size to Reliance
Infocomm, who heavily promoted a specific Nokia CDMA handset model. Since
then, this mobile operator has changed its promotional activities and
airtime offerings, which has affected its handset buying patterns. We are
in the process of transitioning our business model in India to sell
products through channels to reach independent dealers, who can now
activate handsets on CDMA networks, including Reliance Infocomm's network.
We believe this will result in a more predictable business model. However,
there are no assurances of the result. This decline in our distribution
business volume was partially offset by efforts to diversify and grow our
base of wireless device suppliers.
The number of wireless devices handled through our integrated logistics
business increased 79% as a result of increased demand in the Americas
division and Australia from current logistics services customers, the
addition of a new significant logistics services customer in 2004 in the
Americas, and our entry into the Slovak Republic.
Revenue by division, as compared to the third quarter of 2003:
The revenue decrease of 26% in the Asia-Pacific division was attributable
to the 89% decline in shipments to India CDMA customers and a decline in
our Hong Kong and Singapore export businesses partially offset by an 11%
increase, on a constant currency basis, in the average selling price of
wireless devices and the strengthening of foreign currencies relative to
the U.S. dollar, which had approximately a 3 percentage point effect. The
increase, on a constant currency basis, in the average selling price of
wireless devices was a result of the decreased mix of lower-priced Nokia
CDMA volumes in India partially offset by an increase in lower-priced
prepaid wireless devices in Australia.
The revenue decrease of 5% in the Americas division was attributable to a
14% decline in product distribution sales mostly offset by a 59% increase
in fee-based logistics services. The decline in distribution revenue was
ascribable to several factors including mobile operators taking more
control of their indirect channels, an increase in market competition
amongst distributors and manufacturers resulting from the migration from
TDMA, which is handled by fewer distributors, to GSM or CDMA technology,
which is handled by more distributors, and the related decline in overall
market share of Nokia, one of our key suppliers. The decline in
distribution revenue was mostly offset by the 59% increase in revenue from
integrated logistics services, which was attributable to increased demand
experienced by our mobile operator customers, including mobile virtual
network operators, sales of prepaid wireless airtime, the increased scope
of value-added services to some logistics customers and the addition of a
new significant customer.
The revenue increase of 19% in the Europe division was primarily
attributable to the strengthening of foreign currencies relative to the
U.S. dollar, which accounted for approximately 13 percentage
Page 21
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
points of the increase in revenue, the increased sales of prepaid wireless
airtime, the addition of wireless devices sold in certain markets, a 9%
increase, on a constant currency basis, in the average selling price of
wireless devices sold and our entry into the Finnish and Slovak markets.
The revenue increase was partially offset by a decline in wireless devices
sold in certain markets where seasonal promotional campaigns did not
recur.
Revenue by service line, as compared to the third quarter of 2003:
We experienced a 21% decrease in revenue from product distribution was
largely attributable to the 89% decline in shipments to India CDMA
customer, a decline in our Hong Kong and Singapore export businesses and a
16% decline in shipments in the Americas division. The decrease in revenue
was partially offset by an overall 9% increase in average selling prices,
on a constant currency basis, and our entry into Finland.
We experienced a 48% increase in revenue from integrated logistics
services primarily as a result of increased sales of prepaid wireless
airtime across all divisions and a 79% growth rate in wireless devices
handled as a result of increased demand from current logistics services
customers and the addition of new significant customers in the Americas
and Australia. The increase in logistics services revenue was less than
the unit growth rate in wireless devices handled due to changes in the
scope and mix of services and related tiered-fee structures provided to
customers.
REVENUE AND WIRELESS DEVICES HANDLED FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2004
Change from
% of % of 2003 to
(Amounts in 000s) September 30, 2004 Total September 30, 2003 Total 2004
----------------- ------------------ ----- ------------------ ----- -----------
REVENUE BY DIVISION:
Asia-Pacific $ 724,803 53% $ 694,018 56% 4%
The Americas 366,762 27% 328,300 27% 12%
Europe 267,627 20% 209,673 17% 28%
---------- --- ---------- --- --
Total $1,359,192 100% $1,231,991 100% 10%
========== === ========== === ==
REVENUE BY SERVICE LINE:
Product distribution $1,145,413 84% $1,068,752 87% 7%
Integrated logistics services 213,779 16% 163,239 13% 31%
---------- --- ---------- --- --
Total $1,359,192 100% $1,231,991 100% 10%
========== === ========== === ==
WIRELESS DEVICES HANDLED BY DIVISION:
Asia-Pacific 5,180 28% 4,772 34% 9%
The Americas 12,451 68% 8,657 62% 44%
Europe 714 4% 551 4% 30%
---------- --- ---------- --- --
Total 18,345 100% 13,980 100% 31%
========== === ========== === ==
WIRELESS DEVICES HANDLED BY SERVICE LINE:
Product distribution 7,592 41% 7,392 53% 3%
Integrated logistics services 10,753 59% 6,588 47% 63%
---------- --- ---------- --- --
Total 18,345 100% 13,980 100% 31%
========== === ========== === ==
Page 22
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Globally, the availability of feature-rich devices, compelling pricing by
manufacturers, mobile operator promotional activities and the deployment of
wireless data services caused subscribers to upgrade their wireless devices. We
experienced a 31% increase in wireless devices handled with a notable shift from
product distribution sales to fee-based integrated logistics services. Revenue
in the nine months ended September 30, 2004, was $1.4 billion, an increase of
10% as compared to $1.2 billion in the nine months ended September 30, 2003.
Wireless devices handled increased by 31% as compared to the nine months ended
September 30, 2003. The revenue increase was attributable to the strong market
demand for our products and services, manufacturer and mobile operator
promotional activity in many of the markets where we operate, the strengthening
of foreign currencies relative to the U.S. dollar, which accounted for
approximately 4 percentage points of the increase in revenue, and the growth of
sales of prepaid wireless airtime across all divisions. The revenue increase was
partially offset by a sales mix shift from product distribution sales to
fee-based logistics services, which was driven by a high growth rate of
logistics services in the Americas division and Australia. The increase in
revenue and wireless devices handled was pervasive throughout all divisions and
service lines.
Wireless devices handled, as compared to the nine months ended September 30,
2003:
The number of wireless devices sold through our distribution business
increased 3% primarily as a result of increased demand fueled by
competitive pricing by Nokia, one of our key suppliers, and mobile
operator promotional programs in several of the markets where we operate.
The increase in the number of wireless devices sold was largely offset by
declines in shipments to India CDMA customers.
The number of wireless devices handled through our logistics services
business increased 63% primarily as a result of increased demand from
current logistics services customers in the Americas and Australia, the
addition of a new customers and our entry into the Slovak Republic.
Revenue by division, as compared to the nine months ended September 30, 2003:
The revenue increase of 4% in the Asia-Pacific division was attributable
to increased demand fueled by competitive pricing by Nokia, one of our key
suppliers, the strengthening of foreign currencies relative to the U.S.
dollar, which accounted for approximately 4 percentage points of the
increase in revenue, various mobile operator promotional programs in
certain markets and the sales of prepaid wireless airtime. The increase in
revenue was mostly offset by a 6% decrease, on a constant currency basis,
in the average selling price of wireless devices sold as a result of
competitive pricing, an increase in prepaid wireless devices, which
carries a lower average selling price in Australia and a shift in sales
mix toward lower-end wireless devices in Australia.
The revenue increase of 12% in the Americas division was attributable to a
13% increase in the average selling price of wireless devices sold and a
38% increase in logistics services revenues. The increase in the average
selling price of wireless devices sold was due to the replacement cycle
for more fully featured wireless devices and a more diversified product
offering. The increase in revenue from integrated logistics services was
primarily as a result of a 60% growth rate in
Page 23
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
wireless devices handled from the increased demand by our mobile operator
customers, the addition of new customers and growth in sales of prepaid
wireless airtime. The increase in logistics services revenue in the
Americas division was less than the unit growth rate due to changes in the
scope and mix of services provided to customers and reduced tiered-fee
structures provided to customers.
The revenue increase of 28% in the Europe division was primarily
attributable to a 30% increase in wireless devices handled due to mobile
operator promotional programs in Sweden, the addition of wireless devices
sold in certain markets, including our entry into Finland, the
strengthening of foreign currencies relative to the U.S. dollar, which
accounted for approximately 12 percentage points of the increase in
revenue, expansion of electronic prepaid card distribution, a 13% increase
in the average selling price of wireless devices sold and our entry into
the Slovak Republic. The increase in the average selling price of wireless
devices sold was due to the replacement cycle driven by more fully
featured wireless devices and a more diversified product offering.
Revenue by service line, as compared to the nine months ended September 30,
2003:
We experienced a 7% increase in revenue from product distribution
primarily as a result of the increase in wireless devices handled due to
competitive pricing by Nokia, one of our key suppliers, in conjunction
with strong market demand in certain markets in the Asia-Pacific division,
increased demand for feature-rich products, which resulted in a 13%
increase in average selling prices in the Americas and Europe division,
increased demand initiated through mobile operator promotional programs in
many of the markets where we operate, the addition of wireless devices
sold in certain markets, including our entry into Finland and the
strengthening of foreign currencies relative to the U.S. dollar, which
accounted for approximately 4 percentage points of the increase in
revenue. The increase in revenue was mostly offset by declines in
shipments to India CDMA customers and reduced average selling prices in
certain markets in the Asia-Pacific division due to a shift in sales mix
toward lower-end and prepaid wireless devices.
We experienced a 31% increase in revenue from integrated logistics
services primarily as a result of growth in the sales of prepaid wireless
airtime across all divisions and a 63% growth rate in wireless devices
handled. The growth rate in wireless devices handled was a result of
increased demand from current logistics services customers and the
addition of new customers, substantially in the Americas division and to a
lesser extent in Australia. The increase in logistics services revenue was
less than the unit growth rate due to the scope and mix of services and
related tiered-fee structures provided to customers.
Page 24
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Gross Profit and Gross Margin
Three Months Ended Nine Months Ended Percent Change
------------------------------ ---------------------------- ------------------------
SEPTEMBER 30, September 30, September 30, September 30, Q3 2003 to YTD 2003 to
(Amounts in 000s) 2004 2003 2004 2003 Q3 2004 YTD 2004
----------------- ------------- ------------- ------------- ------------- ---------- -----------
Product distribution $ 13,452 $ 16,381 $ 41,526 $ 36,173 (18%) 15%
Integrated logistics services 16,112 10,551 40,731 31,699 53% 28%
-------- -------- -------- -------- --- ----
Gross profit $ 29,564 $ 26,932 $ 82,257 $ 67,872 10% 21%
-------- -------- -------- -------- --- ----
Product distribution 3.6% 3.5% 3.6% 3.4% 0.1 pt 0.2 pts
Integrated logistics services 19.1% 18.6% 19.1% 19.4% 0.5 pts (0.3) pts
-------- -------- -------- -------- --- ----
Gross margin 6.5% 5.1% 6.1% 5.5% 1.4 pt 0.6 pts
-------- -------- -------- -------- --- ----
Gross profit and gross margin by service line, as compared to the third quarter
of 2003:
The overall 10% increase in gross profit was primarily attributable to a
48% increase in integrated logistics services revenue, which was partially
offset by a 21% decrease in product distribution revenue. Our overall
gross margin increased from 5.1% to 6.5%, principally as a result of a 13%
increase in wireless devices handled with a notable mix shift from product
distribution sales to fee-based integrated logistics services, which
generally yield a higher gross margin.
The 18% decrease in gross profit from product distribution revenue was
primarily attributable to a 31% decrease in wireless devices sold, which
led to a 21% decrease in product distribution revenue. The decrease in
gross profit was less than the revenue decline due to a 0.1 percentage
point increase in gross margin. The improvement in gross margin was
primarily in the Europe division, which was a result of a shift to higher
gross margin products and increased operating leverage due to higher
volumes. The majority of the improvements in gross margin were offset by
product mix changes, including a reduction in higher margin accessory
business in the Americas division and the growth of an existing lower
margin accessories product line in the Asia-Pacific division.
The 53% increase in gross profit from integrated logistics services was
attributable to a 48% increase in logistics services revenue. The slightly
higher rate of growth of gross profit, as compared to revenue growth, was
due to a 0.5 percentage point improvement in gross margin. The increase in
gross margin from integrated logistics services was primarily due to
efficiency improvements gained through leveraging existing capacity to
service increased volumes and changes in the scope and mix of services
provided. The improvements in gross margin were partially offset by
increased volume of prepaid wireless airtime, which generally yields a
relatively lower gross margin.
Gross profit and margin by service line, as compared to the nine months ended
September 30, 2003:
The overall 21% increase in gross profit was mostly attributable to a 31%
increase in wireless devices handled contributing to a 10% increase in
total revenue, improved operational efficiencies,
Page 25
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
which included the consolidation of the Richmond, California, call center
with our Plainfield, Indiana, call center and the result of other
efficiency initiatives in the Americas division.
The 15% increase in gross profit from product distribution revenue was
mostly ascribed to a 7% increase in product distribution revenue. The
growth in gross profit was larger than the revenue growth due to 0.2
percentage point increase in gross margin. The increase in gross margin
from product distribution was primarily the result of increased leverage
of the cost infrastructure in the Americas division due to higher volumes
and a shift to higher margin products in the Europe division.
The 28% increase in gross profit from integrated logistics services was
attributable to a 31% increase in logistics services revenue. The growth
in gross profit was less than revenue growth due to the 0.3 percentage
point decline in gross margin. The decrease in gross margin from
integrated logistics services was primarily a result of the growth of
prepaid airtime, which generally yields a relatively lower gross margin.
Selling, General and Administrative Expenses
Three Months Ended Nine Months Ended Percent Change
----------------------------- ---------------------------- -----------------------
SEPTEMBER 30, September 30, September 30, September 30, Q3 2003 to YTD 2003 to
(Amounts in 000s) 2004 2003 2004 2003 Q3 2004 YTD 2004
----------------- ------------- ------------- ------------- ------------- ---------- -----------
Selling, general and
administrative expenses $ 21,205 $ 18,001 $ 61,163 $ 48,816 18% 25%
As a percent of revenue 4.7% 3.4% 4.5% 4.0% 1.3 pts 0.5 pts
As compared to the third quarter of 2003, SG&A expenses increased $3.2 million,
or 18%. The $3.2 million increase in spending primarily resulted from an
estimated $1.7 million unfavorable effect of the strengthening of foreign
currencies relative to the U.S. dollar, a $940 thousand increase in bad debt and
related expense in the Europe division, an $858 thousand increase in expenses
related to being a publicly traded company, which included $710 thousand related
to compliance efforts with Section 404 of the Sarbanes-Oxley Act of 2002, our
entry into Finland and the Slovak Republic, severance costs in certain markets
in the Europe division and continued business development in India. The increase
in spending was partially offset by a reduction in variable management fees due
to reduced volumes in Brightpoint Asia Limited, a reduction in depreciation
expense and improved credit management in the Americas division.
As compared to the nine months ended September 30, 2003, SG&A expenses increased
$12.3 million, or 25%. The $12.3 million increase in spending primarily resulted
from increased costs in support of the increased sales activities, an estimated
$3.7 million unfavorable effect from the strengthening of foreign currencies
relative to the U.S. dollar, a $1.8 million increase in expenses related to
being a publicly traded company, which included $1.1 million related to
compliance efforts with Section 404 of the Sarbanes-Oxley Act of 2002 and
increased insurance premiums, an increase in bad debt and related expense in the
Europe division, our continued business development in India, which began late
in the second quarter of 2003, the benefit of a $900 thousand legal expense
recovery in 2003, which did not recur in 2004, and severance costs in certain
markets in the Europe division. The increase in spending was partially offset by
Page 26
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
a reduction in depreciation expense, improved credit management in the Americas
division and a reduction in variable management fees due to reduced volumes in
Brightpoint Asia Limited.
Facility Consolidation Charge
On February 19, 2003, we announced that we would consolidate our Richmond,
California, call center operation into our Plainfield, Indiana, facility to
reduce costs and increase productivity and profitability in our Americas
division. We completed the consolidation of the facility in April of 2003. In
the nine months ended September 30, 2003, we recorded a pre-tax charge of $4.5
million relating to the facility consolidation which included approximately $2.8
million for the present value of estimated lease costs, net of an anticipated
sublease, non-cash losses on the disposal of assets of approximately $1.1
million and severance and other costs of approximately $600 thousand. During the
second quarter of 2004, we terminated the lease and related liabilities at $215
thousand less than expected.
Operating Income and Margin from Continuing Operations
Three Months Ended Nine Months Ended Percent Change
------------------------------ --------------------------- ------------------------
SEPTEMBER 30, September 30, September 30, September 30, Q3 2003 to YTD 2003 to
(Amounts in 000s) 2004 2003 2004 2003 Q3 2004 YTD 2004
----------------- ------------- ------------- ------------- ------------- ----------- -----------
OPERATING INCOME (LOSS):
Asia-Pacific $ 1,814 $ 4,408 $ 6,376 $ 9,434 (59%) (32%)
The Americas (1) 6,850 2,464 13,353 937 178% N/M
Europe (305) 2,059 1,580 4,224 N/M (63%)
------- ------- -------- -------- --- ----
Total $ 8,359 $ 8,931 $ 21,309 $ 14,595 (6%) 46%
======= ======= ======== ======== === ====
OPERATING MARGIN:
Asia-Pacific 0.8% 1.4% 0.9% 1.4% (0.6) pts (0.5) pts
The Americas (1) 5.4 1.9 3.6 0.3 3.5 pts 3.3 pts
Europe (0.3) 2.5 0.6 2.0 (2.8) pts (1.4) pts
------- ------- -------- -------- --- ----
Total 1.8% 1.7% 1.6% 1.2% 0.1 pts 0.4 pts
======= ======= ======== ======== === ====
(1) Includes a facility consolidation charge of $4.5 million for the nine months
ended September 30, 2003.
N/M = not meaningful
As compared to the third quarter of 2003, operating income from continuing
operations decreased $572 thousand. The decrease in operating income from
continuing operations was primarily a result of the 18% increase in SG&A
expenses, which was higher than the 10% increase in gross profit. The increase
in SG&A primarily resulted from an estimated $1.7 million unfavorable effect of
the strengthening of foreign currencies relative to the U.S. dollar, a $940
thousand increase in bad debt and related expense in the Europe division, an
$858 thousand increase in expenses related to being a publicly traded company,
which included $710 thousand related to compliance efforts with Section 404 of
the Sarbanes-Oxley Act of 2002, our entry into Finland and the Slovak Republic,
severance costs in certain markets in the Europe division and continued business
development in India. The increase in spending was partially offset by a
reduction in variable management fees due to reduced volumes in Brightpoint Asia
Limited, a reduction in depreciation expense and improved credit management in
the Americas division. The overall 10% increase in gross profit was chiefly
attributable to a 13% increase in wireless devices handled.
Page 27
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As compared to the nine months ended September 30, 2003, operating income from
continuing operations increased $6.7 million. The increase in operating income
from continuing operations was primarily a result of the 10% increase in
revenue, the associated 21% increase in gross profit, and the $4.5 million
facility consolidation charge incurred in 2003, which did not recur in 2004. The
increase in revenue and associated gross profit was primarily attributable to
the strong market demand for our products and services, manufacturer and mobile
operator promotional activity in many of the markets where we operate, the
strengthening of foreign currencies relative the U.S. dollar, which accounted
for approximately 4 percentage points of the increase in revenue, and the growth
of sales of prepaid wireless airtime across all divisions. The increase in
revenue and gross profit was partially offset by the $12.3 million increase in
SG&A expenses, which primarily resulted from increased costs in support of the
increased sales activities, an estimated $3.7 million unfavorable effect from
the strengthening of foreign currencies relative to the U.S. dollar, a $1.8
million increase in expenses related to being a publicly traded company, which
included $1.1 million related to compliance efforts with Section 404 of the
Sarbanes-Oxley Act of 2002 and increased insurance premiums, an increase in bad
debt and related expense in the Europe division, our continued business
development in India, which began late in the second quarter of 2003, the
benefit of a $900 thousand legal expense recovery in 2003, which did not recur
in 2004, and severance costs in certain markets in the Europe division. The
increase in spending was partially offset by a reduction in depreciation
expense, improved credit management in the Americas division and a reduction in
variable management fees due to reduced volumes in Brightpoint Asia Limited.
Income from Continuing Operations
Three Months Ended Nine Months Ended Percent Change
---------------------------- --------------------------- ------------------------
SEPTEMBER 30, September 30, September 30, September 30, Q3 2003 to YTD 2003 to
(Amounts in 000s) 2004 2003 2004 2003 Q3 2004 YTD 2004
----------------- ------------- ------------- ------------- ------------ ---------- -----------
Income from continuing
operations $ 5,356 $ 5,675 $ 13,725 $ 8,935 (6%) 54%
As a percent of revenue 1.2% 1.1% 1.0% 0.7% 0.1 pt 0.3 pts
Diluted shares outstanding 18,531 18,932 19,365 18,734 (2%) 3%
Income per diluted share from
continuing operations $ 0.29 $ 0.30 $ 0.71 $ 0.48 3% 48%
Income from continuing operations, as compared to the third quarter of 2003:
Income from continuing operations decreased by $319 thousand. The decrease
was primarily a result of the increased SG&A and income tax expenses,
partially offset by the 10% increase in gross profit and the $450 thousand
fine in 2003 in connection with our settlement with the SEC, which did not
recur in 2004. The increase in SG&A primarily resulted from an estimated
$1.7 million unfavorable effect of the strengthening of foreign currencies
relative to the U.S. dollar, a $940 thousand increase in bad debt and
related expense in the Europe division, an $858 thousand increase in
expenses related to being a publicly traded company, which included $710
thousand related to compliance efforts with Section 404 of the
Sarbanes-Oxley Act of 2002, our entry into Finland and the Slovak
Republic, severance costs in certain markets in the Europe division and
continued business development in India. The increase in spending was
partially offset by a reduction in variable management fees due to reduced
volumes in Brightpoint Asia Limited, a
Page 28
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
reduction in depreciation expense and improved credit management in the
Americas division. The increase in income taxes was a result of a 31%
effective income tax rate in 2004 as compared to a 26% effective income
tax rate in third quarter of 2003. The increase in the effective income
tax rate was primarily attributable to the increased profitability in the
Americas division in proportion to the other divisions, which have lower
average statutory tax rates than the Americas division. The overall 10%
increase in gross profit was chiefly attributable to a 13% increase in
wireless devices handled.
Income per diluted share from continuing operations was $0.29 for the
third quarter of 2004, as compared to $0.30 in the third quarter of 2003.
Income from continuing operations, as compared to the nine months ended
September 30, 2003:
Income from continuing operations increased $4.8 million. The increase in
income from continuing operations was mainly a result of the 10% increase
in revenue, the associated 21% increase in gross profit, the $4.5 million
facility consolidation charge incurred in 2003, which did not recur in
2004, and the $450 thousand fine in 2003 in connection with our settlement
with the SEC, which did not recur in 2004. The increase in revenue and
associated gross profit was primarily attributable to the strong market
demand for our products and services, manufacturer and mobile operator
promotional activity in many of the markets where we operate, the
strengthening of foreign currencies relative the U.S. dollar, which
accounted for approximately 4 percentage points of the increase in
revenue, and the growth of sales of prepaid wireless airtime across all
divisions. The increase in revenue and gross profit was partially offset
by the increase in SG&A expenses and income tax expense. The $12.3 million
increase in SG&A expenses primarily resulted from increased costs in
support of the increased sales activities, an estimated $3.7 million
unfavorable effect from the strengthening of foreign currencies relative
to the U.S. dollar, a $1.8 million increase in expenses related to being a
publicly traded company, which included $1.1 million related to compliance
efforts with Section 404 of the Sarbanes-Oxley Act of 2002 and increased
insurance premiums, an increase in bad debt and related expense in the
Europe division, our continued business development in India, which began
late in the second quarter of 2003, the benefit of a $900 thousand legal
expense recovery in 2003, which did not recur in 2004, and severance costs
in certain markets in the Europe division. The increase in spending was
partially offset by a reduction in depreciation expense, improved credit
management in the Americas division and a reduction in variable management
fees due to reduced volumes in Brightpoint Asia Limited. The increase in
income taxes was a result of a 29% effective income tax rate in 2004 as
compared to a 21% effective income tax rate for the nine months ended
September 30, 2003. The increase in the effective income tax rate was
primarily attributable to the increased profitability in the Americas
division in proportion to the other divisions, which have lower average
statutory tax rates than the Americas division.
Income per diluted share from continuing operations was $0.71 for the nine
months ended September 30, 2004, as compared to $0.48 in 2003.
Page 29
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Discontinued Operations
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
SEPTEMBER 30, September 30, September 30, September 30,
(Amounts in 000s) 2004 2003 2004 2003
----------------- ------------- ------------- ------------- -------------
Income (loss) from discontinued operations $ 35 $ (799) $ (722) $ (2,774)
Income (loss) on disposal of discontinued
operations (215) (32) (4,859) 152
-------- -------- -------- --------
Total discontinued operations $ (180) $ (831) $ (5,581) $ (2,622)
As a percent of revenue 0.0% 0.2% 0.4% 0.2%
Diluted shares outstanding 18,531 18,932 19,365 18,734
Loss per diluted share from discontinued
operations $ (0.01) $ (0.04) $ (0.29) $ (0.14)
The total loss from discontinued operations in the third quarter of 2004 was
primarily attributable to unrealized foreign currency translation losses caused
by the strengthening of foreign currencies relative to the U.S. dollar.
The loss from discontinued operations in the third quarter of 2003 was primarily
attributable to losses incurred by Brightpoint (Ireland) Limited ("Brightpoint
Ireland"), which was sold in the first quarter of 2004.
The loss from discontinued operations for the nine months ended September 30,
2004 was mainly ascribable to losses incurred in Brightpoint Ireland's
operations, an unrealizable asset written off and various professional and
liquidation fees. The loss on disposal of discontinued operations for the nine
months ended September 30, 2004, was primarily attributable to a $3.8 million
loss on the sale of Brightpoint Ireland, a $584 thousand loss on the sale of one
of our subsidiaries, Brightpoint do Brazil Ltda., and unrealized foreign
currency translation losses caused by the strengthening of foreign currencies
relative to the U.S. dollar. On February 19, 2004, our subsidiary, Brightpoint
Holdings B.V., completed the sale of its 100% interest in Brightpoint Ireland to
Celtic Telecom Consultants Ltd. Cash consideration for the sale was
approximately $1.7 million. The $3.8 million loss included the non-cash
write-off of approximately $1.6 million of cumulative currency translation
adjustments.
The loss from discontinued operations for the nine months ended September 30,
2003, was primarily attributable to losses incurred by Brightpoint Ireland's
operations of $1.7 million and various professional and liquidation fees. Net
gains on disposal of discontinued operations for the nine months ended September
30, 2003, were significantly comprised of the receipt of $1.3 million in
contingent consideration relating to the divestiture of our Middle East
operations in the third quarter of 2002, substantially offset by unrealized
foreign currency translation losses caused by the strengthening of foreign
currencies relative to the U.S. dollar and various professional and liquidation
fees.
Page 30
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net Income
Three Months Ended Nine Months Ended Percent Change
----------------------------- ---------------------------- -------------------------
SEPTEMBER 30, September 30, September 30, September 30, Q3 2003 to YTD 2003 to
(Amounts in 000s) 2004 2003 2004 2003 Q3 2004 YTD 2004
----------------- ------------- ------------- ------------- ------------- ---------- -----------
Net income $ 5,176 $ 4,844 $ 8,144 $ 6,313 7% 29%
As a percent of revenue 1.1% 0.9% 0.6% 0.5% 0.2 pts 0.1 pt
Diluted shares outstanding 18,531 18,932 19,365 18,734 (2%) 3%
Net income per diluted share $ 0.28 $ 0.26 $ 0.42 $ 0.34 8% 24%
Net income, as compared to the third quarter of 2003:
Net income increased by $332 thousand. The increase in net income was
primarily a result of reduced losses in discontinued operations of $651
thousand partially offset by decline in income from continuing operations
of $319 thousand. In accordance with SFAS 144, a $629 thousand net loss
incurred by our former Ireland operation was reclassified from continuing
operations to discontinued operations in the presentation of the results
of the third quarter of 2003. The decline in income from continuing
operations was primarily a result of the increased SG&A and income tax
expenses, partially offset by the 10% increase in gross profit and the
$450 thousand fine in 2003 in connection with our settlement with the SEC,
which did not recur in 2004. The increase in SG&A primarily resulted from
an estimated $1.7 million unfavorable effect of the strengthening of
foreign currencies relative to the U.S. dollar, a $940 thousand increase
in bad debt and related expense in the Europe division, an $858 thousand
increase in expenses related to being a publicly traded company, which
included $710 thousand related to compliance efforts with Section 404 of
the Sarbanes-Oxley Act of 2002, our entry into Finland and the Slovak
Republic, severance costs in certain markets in the Europe division and
continued business development in India. The increase in spending was
partially offset by a reduction in variable management fees due to reduced
volumes in Brightpoint Asia Limited, a reduction in depreciation expense
and improved credit management in the Americas division. The increase in
income taxes was a result of a 31% effective income tax rate in 2004 as
compared to a 26% effective income tax rate in third quarter of 2003. The
increase in the effective income tax rate was primarily attributable to
the increased profitability in the Americas division in proportion to the
other divisions, which have lower average statutory tax rates than the
Americas division. The overall 10% increase in gross profit was chiefly
attributable to a 13% increase in wireless devices handled.
Net income per diluted share was $0.28 for the third quarter of 2004, as
compared to $0.26 in the third quarter of 2003.
Net income, as compared to the nine months ended September 30, 2003:
Net income increased by $1.8 million. The increase in net income was
primarily a result of the $4.7 million increase in income from continuing
operations and the reduced losses in discontinued operations of $3.0
million. The increase in income from continuing operations was mainly a
result of the 10% increase in revenue, the associated 21% increase in
gross profit, the $4.5 million facility consolidation charge incurred in
2003, which did not recur in 2004, and the $450 thousand fine in 2003 in
connection with our settlement with the SEC, which did not recur in 2004.
The
Page 31
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
increase in revenue and associated gross profit was primarily attributable
to the strong market demand for our products and services, manufacturer
and mobile operator promotional activity in many of the markets where we
operate, the strengthening of foreign currencies relative the U.S. dollar,
which accounted for approximately 4 percentage points of the increase in
revenue, and the growth of sales of prepaid wireless airtime across all
divisions. The increase in revenue and gross profit was partially offset
by the increase in SG&A expenses and income tax expense. The $12.3 million
increase in SG&A expenses primarily resulted from increased costs in
support of the increased sales activities, an estimated $3.7 million
unfavorable effect from the strengthening of foreign currencies relative
to the U.S. dollar, a $1.8 million increase in expenses related to being a
publicly traded company, which included $1.1 million related to compliance
efforts with Section 404 of the Sarbanes-Oxley Act of 2002 and increased
insurance premiums, an increase in bad debt and related expense in the
Europe division, our continued business development in India, which began
late in the second quarter of 2003, the benefit of a $900 thousand legal
expense recovery in 2003, which did not recur in 2004, and severance costs
in certain markets in the Europe division. The increase in spending was
partially offset by a reduction in depreciation expense, improved credit
management in the Americas division and a reduction in variable management
fees due to reduced volumes in Brightpoint Asia Limited. The increase in
income taxes was a result of a 29% effective income tax rate in 2004 as
compared to a 21% effective income tax rate for the nine months ended
September 30, 2003. The increase in the effective income tax rate was
primarily attributable to the increased profitability in the Americas
division in proportion to the other divisions, which have lower average
statutory tax rates than the Americas division. The losses in discontinued
operations were primarily attributable to the loss on sale of Brightpoint
Ireland. In accordance with SFAS 144, a $2.4 million net loss incurred by
our former Ireland operation was reclassified from continuing operations
to discontinued operations in the presentation of the results of the third
quarter of 2003.
Net income per diluted share was $0.42 for the nine months ended September
30, 2004, as compared to $0.34 in 2003.
Page 32
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RETURN ON INVESTED CAPITAL FROM OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
RETURN ON INVESTED CAPITAL FROM OPERATIONS ("ROIC")
We believe that it is equally important for a business to manage its balance
sheet as well as to monitor its statement of income results. A measurement that
ties the statement of income performance with the balance sheet performance is
Return on Invested Capital from Operations, or ROIC. We believe if we are able
to grow our earnings while minimizing the use of invested capital, we will be
optimizing shareholder value and concurrently preserving resources in
preparation for potential growth opportunities. We take a straight-forward
approach in calculating ROIC: we apply an estimated average tax rate to the
operating income of our continuing operations with adjustments for unusual
items, such as facility consolidation charges, and apply this tax-adjusted
operating income to our average capital base, which, in our case, is our
shareholders' equity and debt. We use ROIC to measure the effectiveness of our
use of invested capital to generate profits. Returns on invested capital for the
quarters and trailing four quarters ending September 30, 2004, and 2003, were as
follows:
Three Months Ended Trailing Four Quarters Ended
-------------------------------- -----------------------------
SEPTEMBER 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Operating income after taxes:
Operating income (loss) from continuing
operations $ 8,359 $ 8,931 $ 30,408 $ 20,614
Plus: Facility consolidation charge - - 785 4,461
Less: Estimated income taxes (1) (2,586) (2,281) (8,824) (5,623)
--------- --------- --------- ---------
Estimated operating income after taxes $ 5,773 $ 6,650 $ 22,369 $ 19,452
========= ========= ========= =========
Invested capital:
Debt $ 362 $ 5,687 $ 362 $ 5,687
Shareholders' equity 139,517 127,169 139,517 127,169
--------- --------- --------- ---------
Invested capital $ 139,879 $ 132,856 $ 139,879 $ 132,856
========= ========= ========= =========
Average invested capital (2) $ 135,450 $ 133,278 $ 143,202 $ 133,786
========= ========= ========= =========
ROIC (3) 17% 20% 16% 15%
========= ========= ========= =========
(1) Estimated income taxes were calculated by multiplying the sum of operating
income from continuing operations and the facility consolidation charge by
the respective periods' effective tax rate.
(2) Average invested capital for quarterly periods represents the simple
average of the beginning and ending invested capital amounts for the
respective quarter. Average invested capital for the trailing four quarter
periods represents the average of the ending invested capital amounts for
the current and four prior quarter period ends.
(3) ROIC is calculated by dividing operating income after taxes by average
invested capital. ROIC for quarterly periods is stated on an annualized
basis and is calculated by dividing operating income after taxes by
average invested capital and multiplying the result by four (4) to state
ROIC on an annualized basis.
Our annualized ROIC for the third quarter of 2004 was 17%, as compared to 20% in
the third quarter of 2003. The reduction was a result of lower operating income
and a slightly higher average invested capital base.
Page 33
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the trailing four quarters, our annualized ROIC increased to 16% from 15%
for the prior period ending September 30, 2003, as a result of higher operating
income partially offset by a higher average invested capital base. Since we
earned income in 2003 and 2004, increased our common stock and additional
paid-in capital through the exercise of employee stock options, partially offset
by our purchase of $20 million of treasury stock, and experienced a reduction in
accumulated other comprehensive loss due to the general strengthening of foreign
currencies relative to the U.S. dollar, the average equity component in this
calculation has increased from $127 million as of September 30, 2003, to $139
million as of September 30, 2004, and has therefore added to our invested
capital base.
CASH CONVERSION CYCLE
Management utilizes the cash conversion cycle days metric and its components to
evaluate the Company's ability to manage its working capital and its cash flow
performance. Cash conversion cycle days and its components for the quarters
ending September 30, 2004 and 2003, were as follows:
Three Months Ended
----------------------------
SEPTEMBER 30, September 30,
2004 2003
------------- -------------
Days sales outstanding in accounts receivable 20 26
Days inventory on-hand 19 20
Days payable outstanding (34) (42)
--- ---
Cash Conversion Cycle Days 5 4
=== ===
A key source of our liquidity is our ability to invest in inventory, sell the
inventory to our customers, collect cash from our customers, and pay our
suppliers. We refer to this as the cash conversion cycle. For additional
information regarding this measurement and the detail calculation of the
components of the cash conversion cycle, please refer to our Annual Report on
Form 10-K for the year ended December 31, 2003.
During the third quarter of 2004, the cash conversion cycle increased to 5 days
from 4 days as compared to the third quarter of 2003. The change in the cash
conversion cycle was the result of a 8-day decrease in the days of payable
outstanding, partially offset by a 6 day decrease in the days of sales
outstanding. The decrease in days of payable outstanding was substantially due
to the timing of inventory received in conjunction with related payment terms
from certain suppliers, a mix shift in purchases from our largest supplier from
whom we have negotiated certain credit terms to other suppliers with whom our
purchasing power is limited and were not able to negotiate comparable credit
terms, and amounts to be received from certain suppliers for promotional
activities. The decrease in the days of sales outstanding was mostly due to
improved collections.
Five days is a low number for a distribution company and it is unlikely that we
can sustain this short cycle for an extended period of time. Increases in the
cash conversion cycle would have the effect of consuming our cash, potentially
causing us to borrow from lenders or issuing common stock to fund the related
increase in working capital. Our potential investments in new markets may cause
us to increase our inventory levels in conditions where our customer base is
relatively new and whose
Page 34
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
purchasing behavior is less predictable. This situation can have the effect of
increasing our cash conversion cycle and consequently consume our cash or
increase our debt levels.
We were able to attain days of sales outstanding of 20 days by collecting cash
prior to product delivery from certain customers, selling receivables in certain
markets and therefore collecting cash prior to the customer invoice due dates,
focusing on credit and collections, and offering customers early-pay discounts.
The $2.6 million reduction of the allowance for doubtful accounts from December
31, 2003 was mostly the result of $3.1 million fully-reserved accounts
receivable in our discontinued operation Brightpoint Brazil, which was sold in
May 2004, and utilizations of the bad debt reserve against accounts receivable
in the Americas division. We were able to attain days of inventory on hand of 19
days by monitoring our inventory levels very closely and consciously striving to
keep our investment low while still holding enough inventory to meet customer
demand. From time to time, we may pay our suppliers prior to the invoice due
date in order to take advantage of early settlement discounts. This may consume
our cash or may cause us to borrow from lenders.
CONSOLIDATED STATEMENTS OF CASH FLOWS
We use the indirect method of preparing and presenting our statements of cash
flows. In our opinion, it is more practical than the direct method and provides
the reader with a good perspective and analysis of the Company's cash flows.
OPERATING ACTIVITIES
For the nine months ended September 30, 2004, net cash provided by operating
activities was $8.0 million. Net cash provided by operating activities was
primarily a result of cash generated by operations as measured by earnings
before interest, taxes, depreciation and amortization ("EBITDA"). The cash
generated by operations was partially offset by the use of cash in operating
assets and liabilities. Although we experienced declines in accounts receivable,
inventories and accounts payable, the amount of the decrease in accounts payable
was greater than the decreases in accounts receivable and inventories combined,
which consumed cash during the period. The reduction in accounts receivable
during the nine months ended September 30, 2004, was attributable to the
successful acceleration of our accounts receivable collection cycle and sales or
financing transactions of certain accounts receivable to banks and other
financing organizations. The decrease in inventories was due to our continued
focus in minimizing inventory levels. The decrease in accounts payable was due
primarily to timing of inventory receipts and related payments. The 15%
reduction in revenue in the third quarter of 2004, as compared to the fourth
quarter of 2003, reduced the required level of investment in accounts receivable
and inventories.
Page 35
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EBITDA
Three Months Ended Nine Months Ended
---------------------------- -------------------------------
SEPTEMBER 30, September 30, September 30, September 30,
(Amounts in 000s) 2004 2003 2004 2003
----------------- ------------- ------------- ------------- -------------
Net income $ 5,176 $ 4,844 $ 8,144 $ 6,313
Net interest expense 290 288 805 964
Income taxes (includes income taxes included in
Discontinued Operations) 2,399 1,947 5,495 2,419
Depreciation and amortization 2,750 3,074 7,975 9,725
-------- -------- -------- ---------
EBITDA $ 10,615 $ 10,153 $ 22,419 $ 19,421
======== ======== ======== =========
During the three months ended September 30, 2004, we generated a similar EBITDA
of approximately $10.6 million as compared to $10.2 million for the same period
in 2003. During the nine months ended September 30, 2004, we generated an EBITDA
of approximately $22 million as compared to $19.4 million for the same period in
2003. EBITDA provides management with an indicator of how much cash we generate,
excluding any changes in working capital. Since we have experienced cash outlays
for interest and taxes and has experienced cash inflows and outflows related to
changes in working capital, EBITDA is not a comprehensive measure of cash flow.
It is an indicator, however, of the business' ability to generate cash by
maintaining revenues and related margins at a higher level than cash operating
expenses. Note that EBITDA is a non-GAAP financial measure.
SEPTEMBER 30, December 31,
(Amounts in 000s) 2004 2003
----------------- ------------ ------------
Working capital $ 83,617 $ 89,345
Current ratio 1.35 : 1 1.30 : 1
We have historically satisfied our working capital requirements principally
through cash flow from operations, vendor financing, bank borrowings and the
issuance of equity and debt securities. The decrease in working capital at
September 30, 2004, compared to December 31, 2003, was primarily comprised of
the $20 million repurchase of our common stock, the effect of a decrease in
accounts payable and lines of credit partially offset by decreases in inventory,
accounts receivable and funded contract financing activities. We believe that
cash flow from operations and available bank borrowings will be sufficient to
continue funding our short-term capital requirements. However, significant
changes in our business model, significant operating losses or expansion of
operations in the future may require us to seek additional and alternative
sources of capital. Consequently, there can be no assurance that we will be able
to obtain any additional funding on terms acceptable to us or at all.
INVESTING ACTIVITIES
For the nine months ended September 30, 2004, net cash provided by investing
activities was $3.4 million. Net cash provided by investing activities was
primarily due to a $9.0 million decrease in net funded contract financing
receivables partly offset by $5.1 million used for capital expenditures. We
offer financing of inventory and receivables to certain mobile operator
customers and their agents and manufacturer customers under contractual
arrangements. Under these contracts we manage and finance inventories and
receivables for these customers resulting in a contract financing receivable.
The decrease in contract financing receivables was due to timing of product
receipts and payments at the end of the quarter. Capital expenditures were
primarily directed toward improving our information systems,
Page 36
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
particularly in the United States, our entry into India and the Slovak Republic,
which included new office space and basic information systems infrastructure,
and retail development in France.
FINANCING ACTIVITIES
For the nine months ended September 30, 2004, net cash used in financing
activities was $30 million. Net cash used in financing activities was primarily
comprised of $20 million repurchase of our common stock and $16 million for
repayment of credit facilities, partially offset by a reduction in pledged cash
of $5 million. On June 4, 2004, we announced that our Board of Directors had
approved a share repurchase program authorizing the Company to repurchase up to
$20 million of our common stock. We made such repurchases in June of 2004
through open market and privately negotiated transactions. Detail of the
repurchases is provided in the table below. In December 2003, we pledged $5
million to support a $4.2 million short-term line of credit in India, due to
restrictions on foreign capital, which precluded us from utilizing our own
funds, other than the amount pledged, to meet these needs. This short-term line
of credit was paid in the first quarter of 2004, thus releasing the pledged
cash. We may from time to time pledge cash to collateralize lines of credit in
markets where there are restrictions of the movement of funds.
Issuer purchases of equity securities:
Total number Average Total number of shares Maximum dollar value of
(Amounts in 000s) of shares price paid purchased as part of the shares that may yet be
Month of purchase purchased per share publicly announced program purchased under the program
----------------- --------- --------- -------------------------- ---------------------------
June 2004 1,397,500 $14.31 1,397,500 none
LINES OF CREDIT
The table below summarizes lines of credit that were available to us as of
September 30, 2004:
Gross Letters of Credit &
(Amounts in 000s) Commitment Availability Outstanding Guarantees Net Availability
----------------- ---------- ------------ ----------- ---------- ----------------
North America $ 70,000 $ 28,109 $ - $ 2,500 $ 25,609
Australia 35,566 29,575 - 3,973 25,602
New Zealand 7,875 5,870 - - 5,870
Sweden 2,005 2,005 - - 2,005
Philippines 4,891 4,891 - 2,000 2,891
--------- -------- ------ ---------- --------
Total $ 120,337 $ 70,450 $ - $ 8,473 $ 61,977
========= ======== ====== ========== ========
France (1) N/A - 362 -
--------- -------- ------ ----------
Total $ 120,337 $ 70,405 $ 362 $ 8,473
========= ======== ====== ==========
(1) The amount outstanding in France is related to accounts receivable sold
with recourse and not collected as of September 30, 2004.
Additional details on the above lines of credit are disclosed in Note 7 of the
Notes to Consolidated Financial Statements. Interest expense was approximately
$463 thousand and $1.5 million for the three and nine months ended September 30,
2004. Interest expense includes fees paid for unused capacity on credit lines
and amortization of deferred financing fees.
Page 37
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS - ACCOUNTS RECEIVABLES TRANSFERS
During the nine months ended September 30, 2004 and 2003, we entered into
certain transactions or agreements with banks and other third-party financing
organizations in France, Norway and Sweden, with respect to a portion of its
accounts receivable in order to reduce the amount of working capital required to
fund such receivables. During the three and nine months ended September 30,
2003, the Company also entered into certain transactions or agreements with
banks and other third-party financing organizations in Ireland with respect to
the sale of a portion of its accounts receivable. These transactions have been
treated as sales pursuant to current accounting principles generally accepted in
the United States and, accordingly, are accounted for as off-balance sheet
arrangements with the exception of the receivable sale facility with GE
Factofrance. On April, 2004 we through one of our subsidiaries, Brightpoint
(France) SARL, entered into a receivable sale facility with GE Factofrance. The
facility does not meet the requirements of a transfer under current accounting
principles generally accepted in the United States and therefore amounts
advanced under this facility against receivables not collected by GE Factofrance
are included on the Consolidated Balance Sheet under lines of credit and
accounts receivable. Net funds received, other than from GE Factofrance, reduced
the accounts receivable outstanding while increasing cash. Fees incurred are
recorded as losses on the sale of assets and are included as a component of "Net
other expenses" in the Consolidated Statements of Income.
Net funds received from the sales of accounts receivable for continuing
operations during the nine months ended September 30, 2004 and 2003, totaled
$278 million and $185 million, respectively. Fees, in the form of discounts,
incurred in connection with these sales totaled $302 thousand and $305 thousand
during the three months ended September 30, 2004 and 2003, respectively. Fees,
in the form of discounts, incurred in connection with these sales totaled $844
thousand and $960 thousand during the nine months ended September 30, 2004 and
2003, respectively.
For discontinued operations, during the three and nine months ended September
30, 2004, there were no sales of accounts receivable or related fees. Net funds
received from the sales of accounts receivable during the three and nine months
ended September 30, 2003, totaled $2.7 million and $15.0 million, respectively.
Fees, in the form of discounts, incurred in connection with these sales totaled
$24 thousand and $135 thousand during the three and nine months ended September
30, 2003, respectively. These fees were originally recorded as a component of
"Net other expenses" in the Consolidated Statements of Income, but have now been
reclassified as a component of "Loss from discontinued operations" in the
Consolidated Statements of Income.
We are the collection agent on behalf of the bank or other third-party financing
organization for many of these arrangements and have no significant retained
interests or servicing liabilities related to accounts receivable that we have
sold. We may be required to repurchase certain accounts receivable sold in
certain circumstances, including, but not limited to, accounts receivable in
dispute or otherwise not collectible, accounts receivable in which credit
insurance is not maintained and a violation of, the expiration or early
termination of the agreement pursuant to which these arrangements are conducted.
There were no significant repurchases of accounts receivable sold during the
nine months ended
Page 38
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
September 30, 2004 and 2003. These agreements require our subsidiaries to
provide collateral in the form of pledged assets and/or, in certain situations,
a guarantee by us of our subsidiaries' obligations.
Pursuant to these arrangements, approximately $35 million and $25 million of
trade accounts receivable were sold to and held by banks and other third-party
financing institutions at September 30, 2004, and 2003, respectively. Amounts
held by banks or other financing institutions at September 30, 2004, were for
transactions related to our Norway, Sweden and France arrangements. All other
arrangements have been terminated or expired.
LIQUIDITY ANALYSIS
Our measurement for liquidity is the summation of total unrestricted cash and
unused borrowing availability. We use this measurement as an indicator of how
much access to cash we have to either grow the business through investment in
new markets, acquisitions, or through expansion of existing service or product
lines or to contend with adversity such as unforeseen operating losses
potentially caused by reduced demand for our products and services, a material
uncollectible accounts receivable, or a material inventory write-down, as
examples. The table below shows this calculation.
SEPTEMBER 30, December 31,
(Amounts in 000s) 2004 2003 % Change
------------- ------------ --------
Unrestricted cash $ 79,920 $ 98,879 (19%)
Borrowing availability 61,977 45,361 37%
--------- --------- ---
Liquidity $ 141,897 $ 144,240 (2%)
========= ========= ===
As of September 30, 2004, our liquidity decreased $2.3 million from December 31,
2003. The predominant cause for the reduction was the initiation and completion
of the $20 million repurchase of our common stock in 2004 largely offset by $8.0
million of net cash provided by operating activities, $3.4 million of net cash
provided by investing activities and an increase in our borrowing availability.
Our cash balances fluctuate throughout the year as we routinely make large
payments to suppliers and collect large receipts from customers. These payments
or collections can be in excess of $10 million on any given day and the timing
of these payments or collections can cause a need to draw against our existing
credit facilities. Additionally, we may utilize our credit facilities to take
advantage of early pay discounts offered by suppliers. During the third quarter
of 2004, our largest outstanding borrowings on a given day were approximately
$19.2 million with an average outstanding balance of approximately $9.1 million.
A cash-secured standby letter of credit of $15 million supporting our
Brightpoint Asia Limited's vendor credit line has been issued by a financial
institution on our behalf and was outstanding at December 31, 2003, and
September 30, 2004. The related cash collateral has been reported under the
heading "Pledged cash" in the Consolidated Balance Sheet.
In December 2003, we pledged $5 million to support a $4.2 million short-term
line of credit in India primarily due to restrictions on foreign capital, which
precluded us from utilizing our own funds, other than the amount pledged, to
meet these needs. This short-term line of credit was paid in the first quarter
Page 39
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
of 2004, thus releasing the pledged cash. The related cash collateral has been
reported under the heading "Pledged cash" in the Consolidated Balance Sheet.
While it is difficult to quantify the adequacy of our liquidity for future
needs, with our unrestricted cash balance and unused borrowing availability,
totaling $142 million on September 30, 2004, no significant debt obligations,
and a positive quarterly EBITDA, we believe we have adequate liquidity to
operate the business with our own resources for the next 12 months and to invest
in potential growth opportunities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE AND FOREIGN CURRENCY EXCHANGE RATE RISKS
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate interest rate risks, we have
historically utilized interest rate swaps to convert certain portions of our
variable rate debt to fixed interest rates. To mitigate foreign currency
exchange rate risks, we periodically utilize derivative financial instruments
under the Foreign Currency Risk Management Policy approved by our Board of
Directors. We do not use derivative instruments for speculative or trading
purposes.
We are exposed to changes in interest rates on our variable interest rate
revolving lines of credit. A 10% increase in short-term borrowing rates during
the quarter would have resulted in only a nominal increase in interest expense.
We did not have any interest rate swaps outstanding at September 30, 2004.
A substantial portion of our revenue and expenses are transacted in markets
worldwide and may be denominated in currencies other than the U.S. dollar.
Accordingly, our future results could be adversely affected by a variety of
factors, including changes in specific countries' political, economic or
regulatory conditions and trade protection measures.
Our foreign currency risk management program is designed to reduce, but not
eliminate, unanticipated fluctuations in earnings and cash flows caused by
volatility in currency exchange rates by hedging. Generally, through purchase of
forward contracts, we hedge transactional currency risk, but do not hedge
foreign currency revenue or operating income. Also, we do not hedge our
investment in foreign subsidiaries, where fluctuations in foreign currency
exchange rates may affect our comprehensive income or loss. An adverse change
(defined as a 10% strengthening of the U.S. dollar) in all exchange rates,
relative to our foreign currency risk management program, would have had no
material impact on our results of operations for 2004 or 2003. At September 30,
2004, there were no cash flow or net investment hedges open. Our sensitivity
analysis of foreign currency exchange rate movements does not factor in a
potential change in volumes or local currency prices of our products sold or
services provided. Actual results may differ materially from those discussed
above.
Page 40
PART I FINANCIAL INFORMATION
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in reaching a reasonable level of assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the Securities and Exchange
Commission's rules and forms.
The principal executive officer and principal financial officer also conducted
an evaluation of the Company's internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f)) ("Internal Control") to determine
whether any changes in Internal Control occurred during the quarter ended
September 30, 2004, that have materially affected or which are reasonably likely
to materially affect Internal Control. Based on that evaluation, there has been
no such change during such period.
Page 41
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in certain legal proceedings in the
ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its
Consolidated Financial Statements as a whole.
The Company's subsidiary in South Africa, whose operations were discontinued
pursuant to the 2001 Restructuring Plan, has received an assessment from the
South Africa Revenue Service ("SARS") regarding value-added taxes the SARS
claims are due, relating to certain product sale and purchase transactions
entered into by the Company's subsidiary in South Africa from 2000 to 2002.
Although the Company's liability pursuant to this assessment by the SARS, if
any, cannot currently be determined, the Company believes the range of the
potential liability is between $0 and $1.0 million U.S. dollars (at current
exchange rates) including penalties and interest. The potential assessment is
not estimable and, therefore, is not reflected as a liability or recorded as an
expense.
A complaint was filed on November 23, 2001, against us and 87 other defendants
in the United States District Court for the District of Arizona, entitled
Lemelson Medical, Education and Research Foundation LP v. Federal Express
Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims that we
and other defendants have infringed 7 patents alleged to cover bar code
technology. The case seeks unspecified damages, treble damages and injunctive
relief. The Court has ordered the case stayed pending the decision in a related
case in which a number of bar code equipment manufacturers have sought a
declaration that the patents asserted are invalid and unenforceable. That trial
concluded in January 2003. In January 2004, the Court rendered its decision that
the patents asserted by Lemelson were found to be invalid and unenforceable.
Lemelson filed an appeal to the Court of Appeals for the Federal Circuit on June
23, 2004. We continue to dispute these claims and intend to defend this matter
vigorously.
Page 42
PART II OTHER INFORMATION
ITEM 6. EXHIBITS
The list of exhibits is hereby incorporated by reference to the Exhibit Index on
page 45 of this report.
Page 43
PART II OTHER INFORMATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Brightpoint, Inc.
(Registrant)
Date: October 28, 2004 /s/ Frank Terence
---------------------------------------
Frank Terence
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: October 28, 2004 /s/ Lisa M. Kelley
---------------------------------------
Lisa M. Kelley
Sr. Vice President,
Chief Accounting Officer and
Corporate Controller
(Principal Accounting Officer)
Page 44
EXHIBIT INDEX
Exhibit No. Description
----------- -------------------------------------------------------------------------
10.48 Form of Restricted Stock Unit Award Agreement between the Company and
Grantee
10.49 Form of Stock Option Agreement pursuant to 2004 Long-Term Incentive Plan
between the Company and Executive Grantee
10.50 Form of Stock Option Agreement pursuant to 2004 Long-Term Incentive Plan
between the Company and Non-executive Grantee
10.51 Form of Indemnification Agreement between the Company and Officers
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, implementing Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934 implementing Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Cautionary Statements
Page 45