UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark One)
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x
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
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For the
fiscal year ended December 31, 2009
or
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o
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the
transition period from __________ to ____________
Commission
File Number 1-10560
BENCHMARK
ELECTRONICS, INC.
(Exact
name of registrant as specified in its charter)
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Texas
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74-2211011
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(State or other
jurisdiction of
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(I.R.S.
Employer
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incorporation or
organization)
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Identification
Number)
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3000
Technology Drive
Angleton,
Texas 77515
(979)
849-6550
(Address,
including zip code, and telephone number, including area code, of principal
executive offices)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
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Name of each exchange on which
registered
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Common Stock, par
value $0.10 per share
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New York Stock
Exchange, Inc.
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Preferred Stock
Purchase Rights
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New York Stock
Exchange, Inc.
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter periods that the registrant was required to
submit and post such files).
Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b–2 of the Act.
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o Smaller
Reporting Company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b–2 of the Act).
Yes o No x
As of
June 30, 2009, the number of outstanding Common Shares was 64,999,858. As of
such date, the aggregate market value of the Common Shares held by
non-affiliates, based on the closing price of the Common Shares on the New York
Stock Exchange on such date, was approximately $926.3 million.
As of
February 25, 2010, there were 63,684,663 Common Shares of Benchmark
Electronics, Inc., par value $0.10 per share, outstanding.
Documents
Incorporated by Reference:
Portions
of the Company’s Proxy Statement for the 2010 Annual Meeting of Shareholders
(Part III, Items 10-14).
TABLE
OF CONTENTS
Page
Background
Benchmark
Electronics, Inc. (Benchmark), formerly named Electronics, Inc., began
operations in 1979 and was incorporated under Texas law in 1981 as a wholly
owned subsidiary of Intermedics, Inc., a medical implant manufacturer based in
Angleton, Texas. In 1986, Intermedics sold 90% of the outstanding common shares
of the Company to Electronic Investors Corp., a corporation formed by Donald E.
Nigbor, Steven A. Barton and Cary T. Fu. Mr. Fu is currently serving as our
Chairman of the Board and Chief Executive Officer. In 1988, Electronic Investors
Corp. was merged into Benchmark, and in 1990 we completed the initial public
offering of our common shares.
General
We are a
world-wide provider of integrated electronic manufacturing
services. We provide our services to original equipment manufacturers
(OEMs) of computers and related products for business enterprises, medical
devices, industrial control equipment, testing and instrumentation products, and
telecommunication equipment. The services that we provide are commonly referred
to as electronics manufacturing services (EMS). We offer our customers
comprehensive and integrated design and manufacturing services, from initial
product design to volume production and direct order fulfillment. We have
recently added certain precision machining assets and capabilities to provide
precision machining, metal joining and complex electro-mechanical manufacturing
services. We also provide specialized engineering services, including product
design, software development, industrial design, assembly automation, printed
circuit board layout, prototyping and test development. We believe that we have
developed strengths in the manufacturing process for large, complex,
high-density printed circuit boards as well as the ability to manufacture high
and low volume products in lower cost regions such as Brazil, China, Malaysia,
Mexico, Romania and Thailand.
We
believe that our global manufacturing presence increases our ability to be
responsive to our customers’ needs by providing accelerated time-to-market and
time-to-volume production of high quality products. These capabilities should
enable us to build stronger strategic relationships with our customers and to
become a more integral part of their operations. Our customers face challenges
in planning, procuring and managing their inventories efficiently due to
fluctuations in customer demand, product design changes, short product life
cycles and component price fluctuations. We employ production management systems
to manage their procurement and manufacturing processes in an efficient and
cost-effective manner so that, where possible, components arrive on a
just-in-time, as-and-when needed basis. We are a significant purchaser of
electronic components and other raw materials, and can capitalize on the
economies of scale associated with our relationships with suppliers to negotiate
price discounts, obtain components and other raw materials that are in short
supply, and return excess components. Our expertise in supply chain management
and our relationships with suppliers across the supply chain enable us to reduce
our customers’ cost of goods sold and inventory exposure.
We
currently operate a total of 54 surface mount production lines (where electrical
components are soldered directly onto printed circuit boards) at our domestic
facilities and 73 surface mount production lines at our international
facilities. Our worldwide facilities include 1.6 million square feet in our
domestic facilities in Alabama, Arizona, California, Minnesota, New
Hampshire, North Dakota, Oregon and Texas; and 1.5 million square feet in our
international facilities in Brazil, China, Ireland, Malaysia, Mexico, the
Netherlands, Romania, Singapore and Thailand.
3
Our
capabilities have continued to grow through acquisitions and through internal
expansion. In 2009, we added certain precision machining assets and capabilities
in Arizona, California and Mexico through a business acquisition, and we leased
a larger facility in Brasov, Romania that expanded our manufacturing capability
in Eastern Europe. In 2008, we completed the construction of a new building in
Suzhou, China and increased our China manufacturing capacity. In January 2007,
we acquired Pemstar Inc. (Pemstar), a publicly traded EMS company headquartered
in Rochester, Minnesota (the Merger). This acquisition expanded our customer
base and added depth to our engineering and systems integration capabilities.
Additionally, we expanded our relationships with certain customers during 2007
and added a new facility in Penang, Malaysia. With these acquisitions and
expansions, our global operations now include 24 facilities in ten
countries.
We
believe our primary competitive advantages are our design, manufacturing,
testing and supply chain management capabilities. We offer our customers
flexible manufacturing solutions throughout the life cycle of their products.
These solutions provide accelerated time-to-market, time-to-volume production,
and reduced production costs. As a result of working closely with our customers
and responding promptly to their needs, we have become an integral part of their
operations.
Our
Industry
The EMS
industry experienced rapid change and growth over most of the past decade as an
increasing number of OEMs outsourced their manufacturing requirements. In
mid-2001 and again in late 2008, the industry’s revenue declined as a result of
significant cut backs in its customers’ production requirements, which was
consistent with overall global economic downturns. OEMs have continued to turn
to outsourcing in order to reduce product cost, achieve accelerated
time-to-market and time-to-volume production, access advanced design and
manufacturing technologies, improve inventory management and purchasing power,
and reduce their capital investment in manufacturing resources. Outsourcing
enables OEMs to concentrate on what they believe to be their core strengths,
such as new product definition, marketing and sales. In addition, the number of
industries serviced by EMS providers and these providers’ market penetration in
certain industries has increased in recent years. We believe further growth
opportunities exist for EMS providers to penetrate the worldwide electronics
markets. However, the recent global economic downturn has had a negative
affect on demand for our customers’ products and thus adversely affected our
sales.
Our
Strategy
Our goal
is to be the EMS outsourcing provider of choice to leading OEMs in the
electronics industry that we perceive from time to time to offer the greatest
potential for growth. To meet this goal, we have implemented the following
strategies:
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Maintain and Develop Close,
Long-Term Relationships with Customers. Our core strategy is to
maintain and establish long-term relationships with leading OEMs in
expanding industries by becoming an integral part of our customers’
manufacturing operations. To accomplish this, we work closely with our
customers throughout the design, manufacturing and distribution process,
and we offer flexible and responsive services. We rely on our local
management teams to respond to frequently changing customer design
specifications and production requirements, which develops stronger
customer relationships.
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4
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Focus on High-End Products in
Growth Industries. EMS providers produce products for a wide range
of OEMs in different industries, such as consumer electronics,
Internet-focused businesses and information technology equipment. The
product scope ranges from easy to assemble, low-cost high-volume products
targeted for the consumer market to complicated state-of-the-art, mission
critical electronic hardware targeted for military, medical and other
high-end computer use. Similarly, OEMs’ customers range from
consumer-oriented companies that compete primarily on price and redesign
their products every year to manufacturers of high-end telecommunications
equipment and computer and related products for business enterprises that
compete on technology and quality. We currently offer state-of-the-art
products for industry leaders who require specialized engineering design
and production services, as well as high volume manufacturing capabilities
to our customer base. Our ability to offer both of these types of services
enables us to expand our business
relationships.
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Deliver Complete High and Low
Volume Manufacturing Solutions Globally. We believe OEMs are
increasingly requiring a wide range of specialized engineering and
manufacturing services from EMS providers in order to reduce costs and
accelerate their time-to-market and time-to-volume production. Building on
our integrated engineering and manufacturing capabilities, we offer
services from initial product design and test to final product assembly
and distribution to OEM customers. Our systems integration assembly and
direct order fulfillment services allow our customers to reduce product
cost and risk of product obsolescence by reducing their total
work-in-process and finished goods inventory. These services are available
at many of our manufacturing locations. In 2009, we added certain
precision machining assets and capabilities to provide precision
machining, metal joining and complex electro-mechanical manufacturing
services in Arizona, California and Mexico. We also offer our
customers high volume production in low cost regions of the world, such as
Brazil, China, Malaysia, Mexico, Romania and Thailand. These full service
capabilities allow us to offer customers the flexibility to move quickly
from design and initial product introduction to production and
distribution. We offer our customers the opportunity to combine the
benefits of low cost manufacturing (for the portions of their products or
systems that can benefit from the use of these geographic areas) with the
benefits and capabilities of our higher complexity support of systems
integration in Asia, Europe or the United
States.
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Leverage Advanced
Technological Capabilities. In addition to traditional strengths in
manufacturing large, complex high-density printed circuit boards we offer
customers advanced design, technology and manufacturing solutions for
their primary products. We provide this engineering expertise through our
design capabilities in each of our facilities, and in our design centers.
We believe our capabilities help our customers improve product performance
and reduce costs.
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Continue to Seek Cost Savings
and Efficiency Improvements. We seek to optimize our facilities to
provide cost-efficient services for our customers. We provide operations
in lower cost locations, including Brazil, China, Malaysia, Mexico,
Romania and Thailand, and we continue to expand our presence in these
lower cost locations to meet the needs of our
customers.
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Continue Our Global Expansion.
A network of strategically positioned facilities can reduce costs,
simplify and shorten an OEM’s supply chain and thus reduce the time it
takes to bring product to market. We are committed to geographic expansion
in order to support our customers with cost-effective and timely delivery
of quality products and services worldwide. Our acquisition of facilities
in Malaysia, Romania and the Netherlands has expanded our service scope to
provide a global manufacturing solution to our customers through our 24
facilities in ten countries located in Brazil, China, Ireland, Malaysia,
Mexico, the Netherlands, Romania, Singapore, Thailand and the United
States.
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5
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Pursue Strategic
Acquisitions. Our capabilities have continued to grow through
acquisitions and we will continue to selectively seek acquisition
opportunities. Our acquisitions have enhanced our business in the
following ways:
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expanded
geographic presence;
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enhanced
customer growth opportunities;
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developed
strategic relationships;
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broadened
service offerings;
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diversified
into new market sectors; and
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added
experienced management teams.
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We
believe that growth by selective acquisitions is critical for achieving the
scale, flexibility and breadth of customer services required to remain
competitive in the EMS industry.
Services
We Provide
We offer
a wide range of engineering, automation, test, manufacturing and fulfillment
solutions that support our customers’ products from initial design through
prototyping, design validation, testing, ramp to volume production, worldwide
distribution and aftermarket support. We support all of our service offerings
with supply chain management systems, superior quality program management and
sophisticated information technology systems. Our comprehensive service
offerings enable us to provide a complete solution for our customers’
outsourcing requirements.
Engineering
Solutions
Our
approach is to coordinate and integrate our design, prototype and other
engineering capabilities. Through this approach, we provide a broad range of
engineering services and, in some cases, dedicated production lines for
prototypes. These services strengthen our relationships with manufacturing
customers and attract new customers requiring specialized engineering
services.
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New Product Design, Prototype,
Test and Related Engineering
Solutions. We offer a full spectrum of new product design,
prototype, test and related engineering solutions. Our concurrent
engineering approach shortens product development cycles and gives our
customers a competitive advantage in time-to-market and time-to-profit.
Our multi-disciplined engineering teams provide expertise in a number of
core competencies critical to serving OEMs in our target markets,
including award-winning industrial design, mechanical and electrical
hardware, firmware, software and systems integration and support. We
create specifications, designs and quick-turn prototypes, and validate and
ramp our customers’ products into high volume
manufacturing.
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Custom Test and Automation Equipment Design
and Build
Solutions. We provide our customers with a comprehensive range of
custom automated test equipment, functional test equipment, process
automation and replication solutions. We have expertise in tooling,
testers, equipment control, systems planning, automation, floor control,
systems integration, replication and programming. Our custom functional
test equipment, process automation and replication solutions are available
to our customers as part of our full service product design and
manufacturing solutions package or on a stand-alone basis for products
designed and manufactured elsewhere. We also provide custom test equipment
and automation system solutions to OEMs. Our ability to provide these
solutions allows us to capitalize on OEMs’ increasing needs for custom
manufacturing solutions and provides an additional opportunity for us to
introduce these customers to our comprehensive engineering and
manufacturing services.
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6
Manufacturing
and Fulfillment Solutions
As OEMs
seek to provide greater functionality in smaller products, they increasingly
require more sophisticated manufacturing technologies and processes. Our
investment in advanced manufacturing equipment and our experience in innovative
packaging and interconnect technologies enable us to offer a variety of advanced
manufacturing solutions. These packaging and interconnect technologies
include:
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Printed Circuit Board
Assembly & Test. We offer a
wide range of printed circuit board assembly and test solutions, including
printed circuit board assembly, assembly of subsystems, circuitry and
functionality testing of printed assemblies, environmental and stress
testing and component reliability
testing.
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Flex Circuit Assembly & Test. We provide
our customers with a wide range of flex circuit assembly and test
solutions. We utilize specialized tooling strategies and advanced
automation procedures to minimize circuit handling and ensure that
consistent processing parameters are maintained throughout the assembly
process.
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Systems Assembly & Test. We work with our
customers to develop product-specific test strategies. Our test
capabilities include manufacturing defect analysis, in-circuit tests to
test the circuitry of the board and functional tests to confirm that the
board or assembly operates in accordance with its final design and
manufacturing specifications. We either custom design test equipment and
software ourselves or use test equipment and software provided by our
customers. In addition, we provide environmental stress tests of
assemblies of boards or systems.
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We also
have expertise in advanced precision and electromechanical technologies and
optical manufacturing services. In order to meet our customers’ demand for
systems assembly and test solutions, we offer subassembly build, final assembly,
functionality testing, configuration and software installation and final
packaging services.
Precision Electromechanical Assembly
and Test. We offer a full spectrum of precision subsystem and system
integration services. These services include assembly, configuration and test of
complex computers and related products for business enterprises, medical
devices, industrial control equipment, testing and instrumentation products, and
telecommunication equipment. We design, develop and build product specific
manufacturing processes utilizing manual, mechanized or fully automated lines to
meet our customers’ product volume and quality requirements. All of our assembly
and test processes are developed according to customer specifications and
replicated within our facilities. Product life cycle testing services are
provided such as Ongoing Reliability Testing where units are continuously cycled
for extended testing while monitoring for early life failures.
Failure Analysis. We
offer creative analytical solutions and expertise to challenging issues that
face our customers. This includes focused techniques for failure mode, failure
mechanism, and root cause determination. Specialized analytical skill sets
associated with electrical, mechanical, and metallurgical disciplines are used
in conjunction with a vast array of equipment such as ion chromatography, x-ray
florescence, and scanning electron microscopy. Our state-of-the-art lab
facilities provide customers detailed reporting and support in an unbiased,
timely, and cost-effective manner. Mastering emerging technologies coupled with
a complete understanding of potential failure mechanisms poises us to exceed
customer expectations and maintain our technological diversity.
7
Direct Order Fulfillment. We
provide direct order fulfillment for certain of our OEM customers. Direct order
fulfillment involves receiving customer orders, configuring products to quickly
fill the orders and delivering the products either to the OEM, a distribution
channel or directly to the end customer. We manage our direct order fulfillment
processes using a core set of common systems and processes that receive order
information from the customer and provide comprehensive supply chain management,
including procurement and production planning. These systems and processes
enable us to process orders for multiple system configurations, and varying
production quantities, including single units. Our direct order fulfillment
services include build-to-order (BTO) and configure-to-order (CTO) capabilities.
BTO involves building a complete system in real-time to a highly customized
configuration ordered by the OEM customer. CTO involves configuring systems to
an end customer’s specifications at the time the product is ordered. The end
customer typically places this order by choosing from a variety of possible
system configurations and options. We are capable of meeting a 2 to 24 hour
turn-around-time for BTO and CTO. We support our direct order fulfillment
services with logistics that include delivery of parts and assemblies to the
final assembly site, distribution and shipment of finished systems, and
processing of customer returns.
Aftermarket Non-Warranty Services. We provide our
customers with a range of aftermarket non-warranty services, including repair,
replacement, refurbishment, remanufacturing, exchange, systems upgrade and spare
part manufacturing throughout a products life cycle. These services are tracked
and supported by specific information technology systems that can be tailored to
meet our customers’ individual requirements.
Value-Added Support
Systems. We support our engineering, manufacturing, distribution and
aftermarket support services with an efficient supply chain management system
and a superior quality management program. All of our value-added support
services are implemented and managed through web-based information technology
systems that enable us to collaborate with our customers throughout all stages
of the engineering, manufacturing and order fulfillment processes.
Supply Chain Management. Our inventory management
and volume procurement capabilities contribute to cost reductions and reduce
total cycle time. Our materials strategy is focused on leveraging our
procurement volume company wide while providing local execution for maximum
flexibility at the division level. In addition, our systems integration
facilities have developed material processes required to support system
integration operations.
We
utilize a full complement of electronic data interchange transactions with our
suppliers to coordinate forecasts, orders, reschedules, and inventory and
component lead times. Our enterprise resource planning systems provide
product and production information to our supply chain management, engineering
change management and floor control systems. Our information systems also
control serialization, production and quality data for all of our facilities
around the world utilizing state-of-the-art statistical process control
techniques for continuous process improvements. To enhance our ability to
rapidly respond to changes in our customers’ requirements by effectively
managing changes in our supply chain, we utilize web-based interfaces and
real-time supply chain management software products which allow for scaling
operations to meet customer needs, shifting capacity in response to product
demand fluctuations, reducing materials costs and effectively distributing
products to our customers or their end-customers.
8
Manufacturing
Technologies. We offer our customers expertise in a wide variety of
traditional and advanced manufacturing technologies. Our technical expertise
supports standard printed circuit board assembly as well as complex products
that require advanced engineering skills and equipment.
We also
provide our customers with a comprehensive set of manufacturing
technologies and solutions which include:
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Pin
Thru Hole;
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Surface
Mount Technology;
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Fine
Pitch;
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Ball
Grid Array;
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Flip
Chip;
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Chip
On Board/Wire bonding;
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In-Circuit
Test;
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Board
Level Functional Test; and
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Stress
Testing.
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We also
provide specialized solutions in support of Optical and Wireless components and
systems which include:
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Adhesives;
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Conformal
Coating;
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Laser
Welding;
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Hybrid
Optical/Electrical Printed Circuit Board Assembly and Test;
and
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Sub-micron
Alignment of Optical
Sub-Assemblies.
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Through
our Component Engineering Services, we are helping our customers deal with the
changing international environmental regulations such as the European Union (EU)
Restriction of the Use of Hazardous Substances in Electrical and Electronic
Equipment (RoHS). Manufacturing sites in the Americas, Asia and European regions
are certified in both water soluble and no-clean processes and are currently
producing products that are RoHS compliant.
Precision Technologies. We provide precision
machining, metal joining and complex electro-mechanical manufacturing services
and utilize the following precision technologies:
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Complex
Small / Medium / Large Computer Numerical Controlled
Machining;
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Precision
Multi-Axis Grinding of Aerospace Engine Blades, Vanes and
Nozzles;
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Precision
Grinding of Mass Spectrometer
Components;
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Sinker
Electrical Discharge Machining;
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Turnkey
Precision Clean Room Module Assembly and Functional Test;
and
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Major
Electro-Mechanical Sub Assembly.
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9
Marketing
and Customers
We market
our services primarily through a direct sales force and in select markets
independent marketing representatives. In addition, our divisional and executive
management teams are an integral part of our sales and marketing teams. We
generally enter into supply arrangements with our customers. These arrangements,
similar to purchase orders, generally govern the conduct of business between our
customer and ourselves relating to, among other things, the manufacture of
products which in many cases were previously produced by the customer itself.
Such arrangements generally identify the specific products to be manufactured,
quality and production requirements, product pricing and materials management.
There can be no assurance that at any time these arrangements will remain in
effect or be renewed.
Our key
customer accounts are supported by a dedicated team, including a global account
manager who is directly responsible for account management. Global account
managers coordinate activities across divisions to effectively satisfy customer
requirements and have direct access to our executive management to quickly
address customer concerns. Local customer account teams further support the
global teams and are linked by a comprehensive communications and information
management infrastructure. In addition, our executive management, including our
chief executive officer, Cary Fu, and our president, Gayla Delly, are heavily
involved in customer relations and devote significant attention to broadening
existing, and developing new, customer relationships.
The
following table sets forth the percentages of our sales by industry for 2009,
2008 and 2007.
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2009
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2008
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2007
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Computers
and related products for business enterprises
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39 | % | 48 | % | 53 | % | ||||||
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Telecommunication
equipment
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23 | 18 | 15 | |||||||||
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Industrial
control equipment
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20 | 16 | 13 | |||||||||
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Medical
devices
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14 | 14 | 13 | |||||||||
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Testing
and instrumentation products
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4 | 4 | 6 | |||||||||
Historically,
a substantial percentage of our sales have been made to a small number of
customers. The loss of a major customer, if not replaced, would adversely affect
us. Sales to our largest customer, Oneida Nation Electronics, Inc. (who
supports one of our customers in the computers and related products for
business enterprises industry), represented 14% of our sales during 2009. Our
future sales are dependent on the success of our customers, some of which
operate in businesses associated with rapid technological change and consequent
product obsolescence. Developments adverse to our major customers or their
products, or the failure of a major customer to pay for components or services,
could have an adverse effect on us.
Suppliers
We
maintain a network of suppliers of components and other materials used in our
operations. We procure components when a purchase order or forecast is received
from a customer and occasionally utilize components or other materials for which
a supplier is the single source of supply. If any of these single source
suppliers were to be unable to provide these materials, a shortage of these
components could temporarily interrupt our operations and lower our profits
until such time as an alternate component could be identified and qualified for
use. Although we experience component shortages and longer lead times for
various components from time to time, we have generally been able to reduce the
impact of the component shortages by working with customers to reschedule
deliveries, by working with suppliers to provide the needed components using
just-in-time inventory programs, or by purchasing components at somewhat higher
prices from distributors, rather than directly from manufacturers. In addition,
by developing long-term relationships with suppliers, we have been better able
to minimize the effects of component shortages compared to manufacturers without
such relationships. These procedures reduce, but do not eliminate, our inventory
risk.
10
Backlog
We had
sales backlog of approximately $1.2 billion at December 31, 2009, as compared to
the 2008 year-end backlog of $1.6 billion. Backlog consists of purchase orders
received, including, in some instances, forecast requirements released for
production under customer contracts. Although we expect to fill substantially
all of our year-end backlog during 2010, we currently do not have long-term
agreements with all of our customers and customer orders can be canceled,
changed or delayed by customers. The timely replacement of canceled, changed or
delayed orders with orders from new customers cannot be assured, nor can there
be any assurance that any of our current customers will continue to utilize our
services. Because of these factors, our backlog is not a meaningful indicator of
future financial results.
Competition
The
electronics manufacturing services we provide are available from many
independent sources as well as from the in-house manufacturing capabilities of
current and potential customers. Our competitors include Celestica Inc.,
Flextronics International Ltd., Hon Hai Precision Industry Co., Ltd., Jabil
Circuit, Inc., and Sanmina-SCI Corporation, who may be more established in the
industry and have substantially greater financial, manufacturing or marketing
resources than we do. We believe that the principal competitive factors in our
targeted markets are engineering capabilities, product quality, flexibility,
cost and timeliness in responding to design and schedule changes, reliability in
meeting product delivery schedules, pricing, technological sophistication and
geographic location.
In
addition, in recent years, original design manufacturers (ODMs) that provide
design and manufacturing services to OEMs have significantly increased their
share of outsourced manufacturing services provided to OEMs in markets such as
notebook and desktop computers, personal computer motherboards, and consumer
electronic products. Competition from ODMs may increase if our business in these
markets grows or if ODMs expand further into or beyond these
markets.
Governmental
Regulation
Our
operations, and the operations of businesses that we acquire, are subject to
certain foreign, federal, state and local regulatory requirements relating to
security clearance, environmental, waste management, and health and safety
matters. We believe we operate in substantial compliance with all applicable
requirements. However, material costs and liabilities may arise from these
requirements or from new, modified or more stringent requirements, which could
affect our earnings and competitive position. In addition, our past, current and
future operations, and those of businesses we acquire, may give rise to claims
of exposure by employees or the public or to other claims or liabilities
relating to environmental, waste management or health and safety
concerns.
We
periodically generate and temporarily handle limited amounts of materials that
are considered hazardous waste under applicable law. We contract for the
off-site disposal of these materials and have implemented a waste management
program to address related regulatory issues.
11
Employees
As of
December 31, 2009, we employed 9,849 people, of whom 7,367 were engaged in
manufacturing and operations, 1,156 in materials control and procurement, 529 in
design and development, 274 in marketing and sales, and 523 in administration.
None of our domestic employees are represented by a labor union. In certain
international locations, our employees are represented by labor unions and by
works councils. Some European countries also often have mandatory legal
provisions regarding terms of employment, severance compensation and other
conditions of employment that are more restrictive than U.S. laws. We have never
experienced a strike or similar work stoppage and we believe that our employee
relations are satisfactory.
Segments
and International Operations
Benchmark
has manufacturing facilities in the Americas, Asia and Europe regions to serve
its customers. Benchmark is operated and managed geographically and management
evaluates performance and allocates Benchmark’s resources on a geographic basis.
We currently operate outside the United States in Brazil, China, Ireland,
Malaysia, Mexico, the Netherlands, Romania, Singapore and Thailand. During 2009
and 2008, 47% and 48%, respectively, of our sales were from our international
operations. As a result of customer demand overseas, we expect foreign sales to
increase. Our foreign sales and operations are subject to risk of doing business
abroad, including fluctuations in the value of currency, export duties, import
controls and trade barriers, including stoppages, longer payment cycles, burdens
of complying with a wide variety of foreign laws and, in certain parts of the
world, political instability. While, to date, these factors have not had a
material adverse effect on Benchmark’s results of operations, there can be no
assurances that there will not be an adverse impact in the future. See Note 9
and Note 13 of Notes to Consolidated Financial Statements in Item 8 of this
report for segment and geographical information.
Available
Information
Our
internet address is http://www.bench.com. We make available free of charge
through our internet website our filings with the Securities and Exchange
Commission (SEC), including our annual reports on Form 10–K, quarterly reports
on Form 10–Q, current reports on Form 8–K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after electronically filing such material with, or
furnishing it to, the SEC. All reports we file with the SEC are also available
free of charge via EDGAR through the SEC’s website at http://www.sec.gov or to
read and copy at the SEC Public Reference Room located at 100 F Street, N.E.,
Washington, D.C. 20549. Information can be obtained on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330.
12
Continued
adverse market conditions in the electronics industry could reduce our future
sales and earnings per share.
The
business environment in the electronics industry is challenging due to adverse
worldwide economic conditions. There has been an erosion of global consumer
confidence amidst concerns over declining asset values, inflation, volatility in
energy costs, geopolitical issues, the availability and cost of credit, rising
unemployment, and the stability and solvency of financial institutions,
financial markets, businesses, and sovereign nations. These concerns have slowed
global economic growth and have resulted in recessions in many countries,
including in the United States, Europe and certain countries in Asia. These
economic conditions have resulted, and may result in the future, in lower
information technology spending by businesses, which in turn affects demand for
our customers’ products and thus adversely affects our sales. Consequently, our
past operating results, earnings and cash flows may not be indicative of our
future operating results, earnings and cash flows.
If these
economic conditions worsen, in addition to our customers or potential customers
reducing or delaying orders, a number of other negative effects on our business
could result, including the insolvency of key suppliers, which could result in
production delays, shorter payment terms from suppliers due to reduced
availability of credit default insurance in the market, the inability of
customers to obtain credit, and the insolvency of one or more customers. Any of
these effects could impact our ability to effectively manage inventory levels
and collect receivables, increase our need for cash, and decrease our net
revenue and profitability.
Shortages
or price increases of components specified by our customers would delay
shipments and adversely affect our profitability.
Substantially
all of our sales are derived from electronics manufacturing services in which we
purchase components specified by our customers. In the past, supply shortages
have substantially curtailed production of all assemblies using a particular
component. In addition, industry-wide shortages of electronic components,
particularly of memory and logic devices, have occurred. If shortages of these
components occur or if components received are defective, we may be forced to
delay shipments, which could have an adverse effect on our profit margins.
Decreases in order activity in the first half of 2009 for the major electronic
component suppliers resulted in cutbacks of manufacturing capacity. When demand
started to recover in the third quarter of 2009, the supply base initiated
actions to expand manufacturing capacity back to current levels of demand. This
resulted in the elongation of the lead time for certain components over the
latter part of the third and fourth quarter of 2009. Because of the continued
increase in demand for surface mount components, we anticipate component
shortages and longer lead times for certain components to occur from time to
time. Also, we typically bear the risk of component price increases that occur
between periodic repricings during the term of a customer contract. Accordingly,
certain component price increases could adversely affect our gross profit
margins.
We
are dependent on the success of our customers. When our customers
experience a downturn in their business then we may be similarly
affected.
We are
dependent on the continued growth, viability and financial stability of our
customers. Our customers are OEMs of:
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computers
and related products for business
enterprises;
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medical
devices;
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industrial
control equipment;
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testing
and instrumentation products; and
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telecommunication
equipment.
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13
Often,
these industries are subject to rapid technological change, vigorous
competition, short product life cycles and consequent product obsolescence. When
our customers are adversely affected by these factors, we may be similarly
affected.
The
loss of a major customer would adversely affect us.
Historically,
a substantial percentage of our sales have been made to a small number of
customers. The loss of a major customer, if not replaced, would adversely affect
us. During 2009, our largest customer represented 14% of our sales. Our future
sales are dependent on the success of our customers, some of which operate in
businesses associated with rapid technological change and consequent product
obsolescence. Developments adverse to our major customers or their products, or
the failure of a major customer to pay for components or services, could have an
adverse effect on us.
We expect
to continue to depend on the sales to our largest customers and any material
delay, cancellation or reduction of orders from these customers or other
significant customers would have a material adverse effect on our results of
operations. In addition, we generate significant accounts receivables in
connection with providing manufacturing services to our customers. If one or
more of our customers were to become insolvent or otherwise unable to pay for
the manufacturing services provided by us, our operating results and financial
condition would be adversely affected.
Most
of our customers do not commit to long-term production schedules, which makes it
difficult for us to schedule production and achieve maximum efficiency of our
manufacturing capacity.
The
volume and timing of sales to our customers may vary due to:
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variation
in demand for our customers’
products;
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our
customers’ attempts to manage their
inventory;
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electronic
design changes;
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changes
in our customers’ manufacturing strategy;
and
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acquisitions
of or consolidations among
customers.
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Due in
part to these factors, most of our customers do not commit to firm production
schedules for more than one quarter in advance. Our inability to forecast the
level of customer orders with certainty makes it difficult to schedule
production and maximize utilization of manufacturing capacity. In the past, we
have been required to increase staffing and other expenses in order to meet the
anticipated demand of our customers. Anticipated orders from many of our
customers have, in the past, failed to materialize or delivery schedules have
been deferred as a result of changes in our customers’ business needs, thereby
adversely affecting our results of operations. On other occasions, our customers
have required rapid increases in production, which have placed an excessive
burden on our resources. Such customer order fluctuations and deferrals have had
a material adverse effect on us in the past, and we may experience such effects
in the future. A business downturn resulting from any of these external factors
could have a material adverse effect on our operating income. See Management’s
Discussion and Analysis of Financial Condition and Results of Operations in Item
7 of this report.
Our
customers may cancel their orders, change production quantities, delay
production or change their sourcing strategy.
EMS
providers must provide increasingly rapid product turnaround for their
customers. We generally do not obtain firm, long-term purchase commitments from
our customers and we continue to experience reduced lead-times in customer
orders. Customers may cancel their orders, change production quantities, delay
production or change their sourcing strategy for a number of reasons. The
success of our customers’ products in the market affects our business.
Cancellations, reductions, delays or changes in their sourcing strategy by a
significant customer or by a group of customers could negatively impact our
operating income.
14
In
addition, we make significant decisions, including determining the levels of
business that we will seek and accept, production schedules, component
procurement commitments, personnel needs and other resource requirements, based
on our estimate of customer requirements. The short-term nature of our
customers’ commitments and the possibility of rapid changes in demand for their
products reduces our ability to accurately estimate the future requirements of
those customers.
On
occasion, customers may require rapid increases in production, which can stress
our resources and reduce operating margins. In addition, because many of our
costs and operating expenses are relatively fixed, a reduction in customer
demand can harm our gross profits and operating results. See Management’s
Discussion and Analysis of Financial Condition and Results of Operations in Item
7 of this report.
We
may encounter significant delays or defaults in payments owed to us by customers
for products we have manufactured or components that are unique to particular
customers.
We
structure our agreements with customers to mitigate our risks related to
obsolete or unsold inventory. However, enforcement of these contracts may result
in material expense and delay in payment for inventory. If any of our
significant customers become unable or unwilling to purchase such inventory, our
business may be materially harmed. See Management’s Discussion and Analysis
of Financial Condition and Results of Operations in Item 7 of this
report.
Our
international operations may be subject to certain risks.
We
currently operate outside the United States in Brazil, China, Ireland, Malaysia,
Mexico, the Netherlands, Romania, Singapore and Thailand. During 2009, 2008 and
2007, 47%, 48% and 43%, respectively, of our sales were from our international
operations. These international operations may be subject to a number of risks,
including:
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difficulties
in staffing and managing foreign
operations;
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political
and economic instability (including acts of terrorism and outbreaks of
war), which could impact our ability to ship and/or receive
product;
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unexpected
changes in regulatory requirements and
laws;
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longer
customer payment cycles and difficulty collecting accounts
receivable;
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export
duties, import controls and trade barriers (including
quotas);
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governmental
restrictions on the transfer of
funds;
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burdens
of complying with a wide variety of foreign laws and labor
practices;
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fluctuations
in currency exchange rates, which could affect component costs, local
payroll, utility and other expenses;
and
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inability
to utilize net operating losses incurred by our foreign operations to
reduce our U.S. income taxes.
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In
addition, several of the countries where we operate have emerging or developing
economies, which may be subject to greater currency volatility, negative growth,
high inflation, limited availability of foreign exchange and other risks. These
factors may harm our results of operations, and any measures that we may
implement to reduce the effect of volatile currencies and other risks of our
international operations may not be effective. In our experience, entry into new
international markets requires considerable management time as well as start-up
expenses for market development, hiring and establishing office facilities
before any significant revenues are generated. As a result, initial operations
in a new market may operate at low margins or may be unprofitable.
Our
operations in certain foreign locations receive favorable income tax treatment
in the form of tax holidays or other incentives. In the event that such tax
holidays or other incentives are not extended, are repealed, or we no longer
qualify for such programs, our taxes may increase, which would reduce our net
income.
Additionally,
certain foreign jurisdictions restrict the amount of cash that can be
transferred to the U.S or impose taxes and penalties on such transfers of cash.
To the extent we have excess cash in foreign locations that could be used in, or
is needed by, our operations in the United States, we may incur significant
penalties and/or taxes to repatriate these funds.
15
We
operate in a highly competitive industry.
We
compete against many providers of electronics manufacturing services. Certain of
our competitors have substantially greater resources and more geographically
diversified international operations than we do. Our competitors include large
independent manufacturers such as Celestica Inc., Flextronics International
Ltd., Hon Hai Precision Industry Co., Ltd., Jabil Circuit, Inc. and Sanmina-SCI
Corporation. In addition, we may in the future encounter competition from other
large electronic manufacturers that are selling, or may begin to sell,
electronics manufacturing services.
We also
face competition from the manufacturing operations of our current and future
customers, who are continually evaluating the merits of manufacturing products
internally against the advantages of outsourcing to electronics manufacturing
services providers. In addition, in recent years, ODMs that provide design and
manufacturing services to OEMs, have significantly increased their share of
outsourced manufacturing services provided to OEMs in several markets, such as
notebook and desktop computers, personal computer motherboards, and consumer
electronic products. Competition from ODMs may increase if our business in these
markets grows or if ODMs expand further into or beyond these
markets.
During
periods of recession in the electronics industry, our competitive advantages in
the areas of quick turnaround manufacturing and responsive customer service may
be of reduced importance to electronics OEMs, who may become more price
sensitive. We may also be at a competitive disadvantage with respect to price
when compared to manufacturers with lower cost structures, particularly those
with more offshore facilities located where labor and other costs are
lower.
We
experience intense competition, which can intensify further as more companies
enter the markets in which we operate, as existing competitors expand capacity
and as the industry consolidates. The availability of excess manufacturing
capacity at many of our competitors creates intense pricing and competitive
pressure on the EMS industry as a whole and Benchmark in particular. To compete
effectively, we must continue to provide technologically advanced manufacturing
services, maintain strict quality standards, respond flexibly and rapidly to
customers’ design and schedule changes and deliver products globally on a
reliable basis at competitive prices. Our inability to do so could have an
adverse effect on us.
The
integration of acquired operations may pose difficulties for us.
Our
capabilities have continued to grow through acquisitions and we may pursue
additional acquisitions over time. These acquisitions involve risks,
including:
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integration
and management of the operations;
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retention
of key personnel;
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integration
of purchasing operations and information
systems;
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retention
of the customer base of acquired
businesses;
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management
of an increasingly larger and more geographically disparate business;
and
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diversion
of management’s attention from other ongoing business
concerns.
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Our
profitability will suffer if we are unable to successfully integrate any
acquisition and manage any future acquisitions that we might pursue, or if we do
not achieve sufficient revenue to offset the increased expenses associated with
these acquisitions.
16
We
may experience fluctuations in quarterly results.
Our
quarterly results may vary significantly depending on various factors, many of
which are beyond our control. These factors include:
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the
volume of customer orders relative to our
capacity;
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customer
introduction and market acceptance of new
products;
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changes
in demand for customer products;
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pricing
and other competitive pressures;
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the
timing of our expenditures in anticipation of future
orders;
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our
effectiveness in managing manufacturing
processes;
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changes
in cost and availability of labor and
components;
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changes
in our product mix;
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changes
in political and economic conditions;
and
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local
factors and events that may affect our production volume, such as local
holidays.
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Additionally,
as is the case with many high technology companies, a significant portion of our
shipments typically occurs in the last few weeks of a quarter. As a result, our
sales may shift from one quarter to the next, having a significant effect on
reported results.
Our
investments in auction rate securities are subject to risks which may cause
losses and affect the liquidity of these investments.
As of
December 31, 2009, we held $50.1 million (par value) of auction rate securities,
classified as long-term investments, whose underlying assets were in guaranteed
student loans backed by a U. S. Government agency and municipal issue bonds.
These investments are of a high credit quality with primarily AAA type credit
ratings because of the government agency guarantee and other insurance. Auction
rate securities are adjustable rate debt instruments whose interest rates
were intended to reset every 7 to 35 days through an auction process.
Overall changes in the global credit and capital markets led to failed auctions
for these securities beginning in early 2008. These failed auctions, in addition
to overall global economic conditions, impacted the liquidity of these
investments and resulted in our continuing to hold these securities beyond their
typical auction reset dates. The market for these types of securities remains
illiquid as of December 31, 2009. As a result, our ability to liquidate and
fully recover the carrying value of our adjustable rate securities in the near
term may be limited or not exist. If the issuers of these adjustable rate
securities are unable to successfully close future auctions or their credit
quality deteriorates, we may in the future be required to record an impairment
charge on these investments. We may be required to wait until market stability
is restored for these instruments or until the final maturity of the underlying
notes (up to 40 years) to realize our investments’ recorded value. As of
December 31, 2009, we had $4.4 million of unrealized losses on these securities
that is recorded in other comprehensive loss. We estimated the fair value of
each security using Level 3 inputs with the assistance of an independent
valuation firm. We have not to date incurred any payment defaults on any
maturing auction rate securities we hold.
Start-up
costs and inefficiencies related to new or transferred programs can adversely
affect our operating results and such costs may not be recoverable if such new
programs or transferred programs are cancelled.
Start-up
costs, the management of labor and equipment resources in connection with the
establishment of new programs and new customer relationships, and the need to
estimate required resources in advance can adversely affect our gross margins
and operating results. These factors are particularly evident in the early
stages of the life cycle of new products and new programs or program transfers
and in the opening of new facilities. These factors also affect our ability to
efficiently use labor and equipment. We are currently managing a number of new
programs. Consequently, our exposure to these factors has increased. In
addition, if any of these new programs or new customer relationships were
terminated, our operating results could be harmed, particularly in the short
term. We may not be able to recoup these start-up costs or replace anticipated
new program revenues.
17
We
are exposed to general economic conditions, which could have a material adverse
impact on our business, operating results and financial condition.
Our
business is cyclical and has experienced economic and industry downturns. If the
economic conditions and demand for our customers’ products deteriorate, we may
experience a material adverse impact on our business, operating results and
financial condition.
In cases
where the evidence suggests a customer may not be able to satisfy its obligation
to us, we set up reserves in an amount we determine appropriate for the
perceived risk. There can be no assurance that our reserves will be adequate to
meet this risk. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
receivable and inventory reserves may be required.
We
may be affected by consolidation in the electronics industry, which could create
increased pricing and competitive pressures on our business.
Consolidation
in the electronics industry could result in an increase in excess manufacturing
capacity as companies seek to close plants or take other steps to increase
efficiencies and realize synergies of mergers. The availability of excess
manufacturing capacity could create increased pricing and competitive pressures
for the electronics manufacturing services industry as a whole and our business
in particular. In addition, consolidation could also result in an increasing
number of very large electronics companies offering products in multiple sectors
of the electronics industry. The growth of these large companies, with
significant purchasing and marketing power, could also result in increased
pricing and competitive pressures for us. Accordingly, industry consolidation
could harm our business.
We
are subject to the risk of increased taxes.
We base
our tax position upon the anticipated nature and conduct of our business and
upon our understanding of the tax laws of the various countries in which we have
assets or conduct activities. Our tax position, however, is subject to review
and possible challenge by taxing authorities and to possible changes in law. We
cannot determine in advance the extent to which some jurisdictions may assess
additional tax or interest and penalties on such additional taxes.
Several
countries in which we are located allow for tax holidays or provide other tax
incentives to attract and retain business. We have obtained holidays or other
incentives where available. Our taxes could increase if certain tax holidays or
incentives are retracted, or if they are not renewed upon expiration, or tax
rates applicable to us in such jurisdictions are otherwise increased. In
addition, further acquisitions may cause our effective tax rate to
increase.
18
We
are exposed to intangible asset risk; our goodwill may become further
impaired.
We have
recorded intangible assets, including goodwill, in connection with business
acquisitions. We are required to perform goodwill and intangible asset
impairment tests at least on an annual basis and whenever events or
circumstances indicate that the carrying value may not be recoverable from
estimated future cash flows. Our annual goodwill impairment analysis in the
fourth quarter of 2008 indicated there was an impairment of goodwill in two of
our reporting segments, the Americas and Europe, primarily due to a decline in
our market capitalization and market turmoil. Accordingly, we recorded a
non-cash impairment charge in the fourth quarter of 2008 totaling $247.5
million. A further significant and sustained decline in our market
capitalization could result in material charges in future periods that could be
adverse to our operating results and financial position. As of December 31,
2009, we had $37.9 million in goodwill and $22.9 million of identifiable
intangible assets. See Note 1(i) to the consolidated financial statements
in Item 8 of this report.
There
are inherent uncertainties involved in estimates, judgments and assumptions used
in the preparation of financial statements in accordance with US GAAP. Any
changes in estimates, judgments and assumptions could have a material adverse
effect on our financial position and results of operations.
The
consolidated financial statements included in the periodic reports we file with
the SEC are prepared in accordance with accounting principles generally accepted
in the United States (US GAAP). The preparation of financial statements in
accordance with US GAAP involves making estimates, judgments and assumptions
that affect reported amounts of assets (including intangible assets),
liabilities and related reserves, revenues, expenses and income. Estimates,
judgments and assumptions are inherently subject to change in the future, and
any such changes could result in corresponding changes to the amounts of assets,
liabilities, revenues, expenses and income. Any such changes could have a
material adverse effect on our financial position and results of
operations.
We
are involved in various legal proceedings.
In the
past, we have been notified of claims relating to various matters including
intellectual property rights, contractual matters or other issues arising in the
ordinary course of business. In the event of such a claim, we may be required to
spend a significant amount of money to defend or otherwise address the claim.
Any litigation, even where a claim is without merit, could result in substantial
costs and diversion of resources. Accordingly, the resolution or adjudication of
such disputes, even those encountered in the ordinary course of business, could
have a material adverse effect on our business, consolidated financial
conditions and results of operations. See Note 15 to the consolidated financial
statements in Item 8 of this report.
Our
success will continue to depend to a significant extent on our key
personnel.
We depend
significantly on our executive officers and other key personnel, including, but
not limited to, Cary T. Fu, Donald F. Adam and Gayla J. Delly. The unexpected
loss of the services of any one of these executive officers would have an
adverse effect on us.
We
must maintain our technological and manufacturing process
expertise.
The
market for our manufacturing services is characterized by rapidly changing
technology and continuing process development. We are continually evaluating the
advantages and feasibility of new manufacturing processes. We believe that our
future success will depend upon our ability to develop and provide manufacturing
services which meet our customers’ changing needs. This requires that we
maintain technological leadership and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely
basis. Our failure to maintain our technological and manufacturing process
expertise could have a material adverse effect on our business.
19
Our
stock price is volatile.
Our
common shares have experienced significant price volatility, and such volatility
may continue in the future. The price of our common shares could fluctuate
widely in response to a range of factors, including variations in our reported
financial results and changing conditions in the economy in general or in our
industry in particular. In addition, stock markets generally experience
significant price and volume volatility from time to time which may affect the
market price of our common shares for reasons unrelated to our
performance.
Provisions
in our shareholder rights plan, our charter documents and state law may make it
harder for others to obtain control of our company even though some shareholders
might consider such a development to be favorable.
Our
shareholder rights plan, which was amended in December 2008, provisions of our
amended and restated articles of incorporation and the Texas Business
Corporation Act may delay, inhibit or prevent someone from gaining control of
our company through a tender offer, business combination, proxy contest or some
other method. These provisions include:
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a
“poison pill” shareholder rights
plan;
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a
statutory restriction on the ability of shareholders to take action by
less than unanimous written consent;
and
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a
statutory restriction on business combinations with some types of
interested shareholders.
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Compliance
or the failure to comply with governmental regulations could cause us
significant expense.
We are
subject to a variety of federal, state, local and foreign environmental laws and
regulations relating to environmental, waste management, and health and safety
concerns, including the handling, storage, discharge and disposal of hazardous
materials used in or derived from our manufacturing processes. If we or
companies we acquire have failed or fail in the future to comply with such laws
and regulations, then we could incur liabilities and fines and our operations
could be suspended. Such laws and regulations could also restrict our ability to
modify or expand our facilities, could require us to acquire costly equipment,
or could impose other significant expenditures. In addition, our operations may
give rise to claims of property contamination or human exposure to hazardous
chemicals or conditions.
Our
worldwide operations are subject to local laws and regulations. Over the last
several years, we have become subject to the RoHS directive and the Waste
Electrical and Electronic Equipment Directive. These directives restrict the
distribution of products within the EU containing certain substances, including
lead, and require a manufacturer or importer to recycle products containing
those substances. In addition, China has recently passed the Management Methods
for Controlling Pollution by Electronic Information Products, which will
eventually prohibit the import of products for use in China that contain
substances similar to those banned by the RoHS directive.
Both
directives affect the worldwide electronics, and electronics components,
industries as a whole. If we or our customers fail to comply with such laws and
regulations, we could incur liabilities and fines and our operations could be
suspended.
In
addition, as global warming issues become more prevalent, the U.S. and foreign
governments are beginning to respond to these issues. This increasing
governmental focus on global warming may result in new environmental regulations
that may negatively affect us, our suppliers and our customers. This could cause
us to incur additional direct costs in complying with any new environmental
regulations, as well as increased indirect costs resulting from our customers,
suppliers or both incurring additional compliance costs that get passed on to
us. These costs may adversely impact our operations and financial
condition.
20
Our
business may be impacted by geopolitical events.
As a
global business, we operate and have customers located in many countries.
Geopolitical events such as terrorist acts may effect the overall economic
environment and negatively impact the demand for our customers’ products or our
ability to ship and/or receive products. As a result, customer orders may be
lower and our financial results may be adversely affected.
Our
business may be impacted by natural disasters.
Some of
our facilities, including our corporate headquarters, are located in areas which
may be impacted by hurricanes, earthquakes, water shortages, tsunamis, floods,
typhoons, fires, extreme weather conditions and other natural or manmade
disasters. Our insurance coverage with respect to natural disasters is limited
and is subject to deductibles and coverage limits. Such coverage may not be
adequate, or may not continue to be available at commercially reasonable rates
and terms.
We
may be exposed to interest rate fluctuations.
We will
have exposure to interest rate risk under our variable rate revolving credit
facilities to the extent we incur indebtedness under such facilities. These
facilities’ interest rates are based on the spread over the bank’s LIBOR rate or
its prime rate. We are also exposed to interest rate risk on our invested
cash balances.
Changes
in financial accounting standards or policies have affected, and in the future
may affect, our reported financial condition or results of operations.
Additionally, changes in securities laws and regulations have increased, and are
likely to continue to increase, our operating costs.
We
prepare our financial statements in conformity with US GAAP. These
principles are subject to interpretation by the Financial Accounting Standards
Board (FASB), the American Institute of Certified Public Accountants (AICPA),
the SEC and various bodies formed to interpret and create appropriate accounting
policies. A change in those policies can have a significant effect on our
reported results and may affect our reporting of transactions which are
completed before a change is announced. Changes to those rules or the
questioning of how we interpret or implement those rules may have a material
adverse effect on our reported financial results or on the way we conduct
business. For example, although not yet currently required, we could be
required to adopt International Financial Reporting Standards (IFRS) which is
different than US GAAP.
In
addition, in connection with our Section 404 certification process, we may
identify from time to time deficiencies in our internal controls. Any material
weakness or deficiency in our internal controls over financial reporting could
materially and negatively impact our reported financial results and the market
price of our stock could significantly decline. Additionally, adverse publicity
related to the disclosure of a material weakness or deficiency in internal
controls over financial reporting could have a negative impact on our
reputation, business and stock price.
On
November 30, 2009, the Company received a letter from the SEC’s Division of
Corporation Finance in connection with its review of the Company’s Form 10-K for
the fiscal year ended December 31, 2008, which was filed with the SEC on
February 27, 2009. The Company responded to that letter and subsequently
received an additional letter from the SEC. Several of the Staff’s comments
requested more robust disclosure which as been incorporated into this document.
We are currently awaiting the completion of the SEC’s review of our response to
their most recent letter. The Company will continue to work with the SEC to
resolve any outstanding comments.
21
Our
customers market numerous products throughout the world and therefore need to
access manufacturing services on a global basis. To enhance our EMS offerings,
we seek to locate our facilities either near our customers and our customers’
end markets in major centers for the electronics industry or, where appropriate,
in lower cost locations. Many of our plants located near customers and their end
markets are focused primarily on final system assembly and test, while plants
located in lower cost areas are engaged primarily in less complex component and
subsystem manufacturing and assembly.
The
following chart summarizes our principal manufacturing facilities owned or
leased by Benchmark and its subsidiaries:
|
Location
|
Sq.
Ft.
|
Ownership
|
|||
|
Almelo,
the Netherlands
|
132,000 |
Leased
|
|||
|
Angleton,
Texas
|
109,000 |
Owned
|
|||
|
Austin,
Texas
|
93,000 |
Leased
|
|||
|
Ayudhaya,
Thailand
|
243,000 |
Owned
|
|||
|
Ayudhaya,
Thailand
|
180,000 |
Owned
|
|||
|
Beaverton,
Oregon
|
77,000 |
Leased
|
|||
|
Brasov,
Romania
|
108,000 |
Leased
|
|||
|
Campinas,
Brazil
|
40,000 |
Leased
|
|||
|
Concord,
California
|
80,000 |
Leased
|
|||
|
Dublin,
Ireland
|
46,000 |
Leased
|
|||
|
Dunseith,
North Dakota
|
47,000 |
Owned
|
|||
|
Dunseith,
North Dakota
|
53,000 |
Leased
|
|||
|
Freemont,
California
|
52,000 |
Leased
|
|||
|
Guadalajara,
Mexico
|
150,000 |
Leased
|
|||
|
Guaymas,
Mexico
|
52,000 |
Leased
|
|||
|
Hudson,
New Hampshire
|
170,000 |
Leased
|
|||
|
Huntsville,
Alabama
|
276,000 |
Owned
|
|||
|
Huntsville,
Alabama
|
144,000 |
Leased
|
|||
|
Korat,
Thailand
|
126,000 |
Owned
|
|||
|
Penang,
Malaysia
|
103,000 |
Owned
|
|||
|
Rochester,
Minnesota
|
260,000 |
Leased
|
|||
|
Suzhou,
China
|
250,000 |
Owned
|
|||
|
Singapore
|
48,000 |
Leased
|
|||
|
Tempe,
Arizona
|
48,000 |
Leased
|
|||
|
Winona,
Minnesota
|
199,000 |
Owned
|
|||
|
Total
|
3,086,000 | ||||
We lease
other facilities in the U.S. with a total of 41,000 sq. ft. that house
individuals that provide engineering services. We also own facilities with a
total of 396,000 sq. ft. and lease facilities with a total of 137,000 sq. ft.
that are currently not in operation. These facilities are both in the U.S. and
abroad. Our leased facility in Beaverton, Oregon with a total of 77,000 sq.
ft. is scheduled to close by the end of the second quarter of 2010.
22
We are
involved in various legal actions arising in the ordinary course of business. In
the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on our consolidated financial position or results
of operations.
Our
common shares are listed on the New York Stock Exchange under the symbol “BHE.”
The following table shows the high and low sales prices for our common
shares as reported on the New York Stock Exchange for the quarters (or portions
thereof) indicated.
|
High
|
Low
|
|||||||
|
2010
|
||||||||
|
First quarter (through February
25, 2010)
|
$ | 20.68 | $ | 17.67 | ||||
|
2009
|
||||||||
|
Fourth
quarter
|
$ | 19.81 | $ | 16.42 | ||||
|
Third
quarter
|
$ | 18.34 | $ | 13.42 | ||||
|
Second
quarter
|
$ | 14.98 | $ | 10.77 | ||||
|
First
quarter
|
$ | 13.60 | $ | 8.60 | ||||
|
2008
|
||||||||
|
Fourth
quarter
|
$ | 14.36 | $ | 8.75 | ||||
|
Third
quarter
|
$ | 19.11 | $ | 13.88 | ||||
|
Second
quarter
|
$ | 18.97 | $ | 16.22 | ||||
|
First
quarter
|
$ | 19.98 | $ | 14.90 | ||||
The last
reported sale price of our common shares on February 25, 2010, as reported by
the New York Stock Exchange, was $20.11. There were approximately 1,023 record
holders of our common shares as of February 25, 2010.
We have
not paid any cash dividends on our common shares in the past. In addition, our
credit facility includes restrictions on the amount of dividends we may pay to
shareholders. We currently expect to retain future earnings for use in the
operation and expansion of our business and do not anticipate paying cash
dividends in the foreseeable future.
23
Issuer
Purchases of Equity Securities
The
following table provides information about the Company’s repurchases of its
equity securities that are registered pursuant to Section 12 of the Exchange Act
during the quarter ended December 31, 2009, at a total cost of $17.9
million:
|
(d)
Maximum
|
|||||||||||||
|
(c)
Total
|
Number
(or
|
||||||||||||
|
Number
of
|
Approximate
|
||||||||||||
|
Shares
(or
|
Dollar
Value)
|
||||||||||||
|
Units)
|
of
Shares (or
|
||||||||||||
|
Purchased
as
|
Units)
that
|
||||||||||||
|
(a)
Total
|
Part
of
|
May
Yet Be
|
|||||||||||
|
Number
of
|
(b)
Average
|
Publicly
|
Purchased
|
||||||||||
|
Shares
(or
|
Price
Paid per
|
Announced
|
Under
the
|
||||||||||
|
Units)
|
Share
(or
|
Plans
or
|
Plans
or
|
||||||||||
|
Purchased
(1)
|
Unit)
(2)
|
Programs
|
Programs
(3)
|
||||||||||
|
October
1 to 31, 2009
|
330,000 | $ | 18.00 | 330,000 |
62.2
million
|
||||||||
|
November
1 to 30, 2009
|
317,533 | $ | 17.91 | 317,533 |
56.5
million
|
||||||||
|
December
1 to 31, 2009
|
330,000 | $ | 18.91 | 330,000 |
50.3
million
|
||||||||
|
Total
|
977,533 | $ | 18.28 | 977,533 | |||||||||
(1) All
share repurchases were made on the open market.
(2) Average
price paid per share is calculated on a settlement basis and excludes
commission.
(3) On
July 24, 2008, the Board of Directors of the Company approved the repurchase of
up to $100 million of the Company’s outstanding common shares. Purchases under
the plan commenced on July 28, 2008. Share purchases may be made in the open
market, in privately negotiated transactions or block transactions, at the
discretion of the Company’s management and as market conditions warrant.
Purchases will be funded from available cash and may be commenced, suspended or
discontinued at any time without prior notice. Shares repurchased under the
program will be retired.
During
the year ended December 31, 2009, the Company repurchased a total of 1,671,588
common shares for $27.9 million at an average price of $16.67 per share. All
share purchases were made in the open market and the shares repurchased through
December 31, 2009 were retired.
24
Performance
Graph
The
following Performance Graph compares the cumulative total shareholder return on
our common shares for the five-year period commencing December 31,
2004 and ending December 31, 2009, with the cumulative total return of the
Standard & Poor’s 500 Stock Index (which does not include Benchmark),
and the Peer Group Index, which is composed of Celestica Inc., Suntron Corp,
Flextronics International, Ltd., Jabil Circuit, Inc., Plexus Corp and
Sanmina-SCI Corp. Dividend reinvestment has been assumed.
|
Dec-04
|
Dec-05
|
Dec-06
|
Dec-07
|
Dec-08
|
Dec-09
|
|||||||||||||||||||
|
Benchmark
Electronics, Inc.
|
$ | 100.00 | $ | 98.60 | $ | 107.20 | $ | 78.00 | $ | 56.20 | $ | 83.20 | ||||||||||||
|
Peer
Group
|
$ | 100.00 | $ | 89.30 | $ | 77.80 | $ | 66.90 | $ | 22.30 | $ | 56.40 | ||||||||||||
|
S&P
500
|
$ | 100.00 | $ | 103.00 | $ | 117.00 | $ | 121.20 | $ | 74.50 | $ | 92.00 | ||||||||||||
NOTES: Assumes
$100 invested on December 31, 2004 in Benchmark Electronics, Inc. Common Shares,
in the S&P 500, and in the Peer Group Index. Reflects month-end dividend
reinvestment, and annual reweighting of the Peer Group Index
portfolios.
25
|
Year
Ended December 31,
|
||||||||||||||||||||
|
(in
thousands, except per share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Selected
Statements of Income (Loss) Data
|
||||||||||||||||||||
|
Sales
|
$ | 2,089,253 | $ | 2,590,167 | $ | 2,915,919 | $ | 2,907,304 | $ | 2,257,225 | ||||||||||
|
Cost
of sales
|
1,942,674 | 2,414,231 | 2,717,425 | 2,708,144 | 2,095,623 | |||||||||||||||
|
Gross
profit
|
146,579 | 175,936 | 198,494 | 199,160 | 161,602 | |||||||||||||||
|
Selling,
general and administrative
|
||||||||||||||||||||
|
expenses
|
85,500 | 92,154 | 96,614 | 70,109 | 62,322 | |||||||||||||||
|
Restructuring
charges and
|
||||||||||||||||||||
|
integration costs (1)
|
8,264 | 2,780 | 11,581 | 4,723 | — | |||||||||||||||
|
Goodwill
impairment (2)
|
— | 247,482 | — | — | — | |||||||||||||||
|
Income
(loss) from operations
|
52,815 | (166,480 | ) | 90,299 | 124,328 | 99,280 | ||||||||||||||
|
Interest
expense
|
(1,399 | ) | (1,455 | ) | (2,183 | ) | (354 | ) | (330 | ) | ||||||||||
|
Interest
income
|
2,210 | 8,675 | 11,217 | 8,824 | 7,786 | |||||||||||||||
|
Other
income (expense)
|
(1,705 | ) | 1,772 | 693 | (2,214 | ) | (922 | ) | ||||||||||||
|
Income
tax benefit (expense) (3)
|
1,974 | 21,856 | (7,670 | ) | (19,762 | ) | (25,225 | ) | ||||||||||||
|
Net income
(loss)
|
$ | 53,895 | $ | (135,632 | ) | $ | 92,356 | $ | 110,822 | $ | 80,589 | |||||||||
|
Earnings
(loss) per share: (4)
|
||||||||||||||||||||
|
Basic
|
$ | 0.83 | $ | (2.02 | ) | $ | 1.28 | $ | 1.72 | $ | 1.29 | |||||||||
|
Diluted
|
$ | 0.83 | $ | (2.02 | ) | $ | 1.27 | $ | 1.70 | $ | 1.25 | |||||||||
|
Weighted-average
number of
|
||||||||||||||||||||
|
shares
outstanding:
|
||||||||||||||||||||
|
Basic
|
64,758 | 67,060 | 72,061 | 64,306 | 62,682 | |||||||||||||||
|
Diluted
|
65,116 | 67,060 | 72,829 | 65,121 | 64,279 | |||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
(in
thousands)
|
2009
|
2008(5)
|
2007(5)
|
2006(5)
|
2005(5)
|
|||||||||||||||
|
Selected
Balance Sheet Data
|
||||||||||||||||||||
|
Working
capital (5)
|
$ | 859,095 | $ | 813,876 | $ | 879,263 | $ | 755,011 | $ | 640,482 | ||||||||||
|
Total
assets (5)
|
1,465,720 | 1,433,040 | 1,756,967 | 1,400,239 | 1,292,527 | |||||||||||||||
|
Total
debt
|
11,681 | 11,939 | 12,526 | — | — | |||||||||||||||
|
Shareholders’
equity (5)
|
$ | 1,090,903 | $ | 1,050,574 | $ | 1,283,367 | $ | 979,459 | $ | 840,238 | ||||||||||
|
(1)
|
See
Note 16 to the Consolidated Financial Statements for a discussion of the
restructuring charges and integration costs occurring in 2009, 2008 and
2007. During 2006, the Company recognized restructuring charges totaling
$4.7 million related to reductions in workforce and the resizing and
closure of certain facilities.
|
|
(2)
|
During
the fourth quarter of 2008, the Company recorded a non-cash goodwill
impairment charge totaling $247.5 million. See Note 1(i) to the
Consolidated Financial Statements for a discussion of the impairment
charge.
|
|
(3)
|
During
the third quarter of 2009, the Company recorded a $2.7 million discrete
tax benefit related to a previously closed facility, a $2.4 million tax
benefit related to a revaluation loss in Mexico and a $1.2 million tax
benefit related to intercompany pricing deductions. During the third
quarter of 2008, the Company recorded a $3.4 million discrete tax benefit
related to a previously closed facility. During the third quarter of 2007,
the Company recorded a $6.5 million discrete tax benefit related to a
previously closed facility. During the first quarter of 2006, the Company
recorded a $4.8 million tax benefit for the write-off of the investment in
the Leicester, England subsidiary.
|
|
(4)
|
See
Note 1(j) to the Consolidated Financial Statements for the basis of
computing earnings (loss) per
share.
|
|
(5)
|
See
Note 1(r) to the Consolidated Financial Statements for a discussion of the
correction of an immaterial error related to deferred income
taxes.
|
26
References
in this report to “the Company,” “Benchmark,” “we,” or “us” mean Benchmark
Electronics, Inc. together with its subsidiaries. The following Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are
identified as any statement that does not relate strictly to historical or
current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,”
“projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,”
“expect,” “may,” “will,” or the negative of those terms or other variations of
them or comparable terminology. In particular, statements, express or implied,
concerning future operating results or the ability to generate sales, income or
cash flow are forward-looking statements. Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties and assumptions,
including those discussed under Item 1A of this report. The future results of
our operations may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results are beyond our ability to control or predict. Undue reliance should not
be placed on any forward-looking statements. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto in Item 8 of this report.
OVERVIEW
We are a
world-wide provider of integrated electronic manufacturing
services. We provide our services to original equipment manufacturers
(OEMs) of computers and related products for business enterprises, medical
devices, industrial control equipment, testing and instrumentation products, and
telecommunication equipment. The services that we provide are commonly referred
to as electronics manufacturing services (EMS). We offer our customers
comprehensive and integrated design and manufacturing services, from initial
product design to volume production and direct order fulfillment. Our
manufacturing and assembly operations include printed circuit boards and
subsystem assembly, box build and systems integration, the process of
integrating subsystems and, often, downloading and integrating software, to
produce a fully configured product. We have recently added precision
mechanical manufacturing capabilities to compliment our proven electronic
manufacturing expertise. We also are able to provide specialized engineering
services, including product design, printed circuit board layout, prototyping,
and test development. We believe that we have developed strengths in the
manufacturing process for large, complex, high-density printed circuit boards as
well as the ability to manufacture high and low volume products in lower cost
regions such as Brazil, China, Malaysia, Mexico, Romania and
Thailand.
During
the past several years, we have made the necessary changes to align our business
operations with our customers’ demand. These changes include, among other
activities, moving production between facilities, reducing staff levels,
realigning our business processes and reorganizing our management. During the
year ended December 31, 2009, the Company recognized $8.3 million (pre-tax)
of restructuring charges, primarily related to capacity reduction in Europe and
employee termination costs associated with the involuntary terminations of
employees in connection with reductions in workforce of certain facilities
worldwide. During the year ended December 31, 2008, the Company recognized $2.8
million (pre-tax) of restructuring charges, primarily employee termination costs
associated with the involuntary terminations of employees in connection with
reductions in workforce of certain facilities. During the year ended December
31, 2007, we incurred $4.7 million (pre-tax) of restructuring charges, primarily
related to the closure of our Redmond, Washington facility, the transfer of the
Company’s printed circuit board assembly (PCBA) operations in Dublin, Ireland to
Brasov, Romania and the consolidation and resizing of certain other facilities,
as we continued to expand our low-cost capacity while realigning and further
strengthening our global footprint to support continued business opportunities.
In connection with the acquisition of Pemstar Inc. (Pemstar) on January 8, 2007,
a total of $7.0 million (pre-tax) in integration costs were incurred during the
year ended December 31, 2007. These costs included redundant operating
costs that have been eliminated.
27
We
believe that our global manufacturing presence increases our ability to be
responsive to our customers’ needs by providing accelerated time-to-market and
time-to-volume production of high quality products. These capabilities should
enable us to build stronger strategic relationships with our customers and to
become a more integral part of their operations. Our customers face challenges
in planning, procuring and managing their inventories efficiently due to
customer demand fluctuations, product design changes, short product life cycles
and component price fluctuations. We employ production management systems to
manage their procurement and manufacturing processes in an efficient and
cost-effective manner so that, where possible, components arrive on a
just-in-time, as-and-when needed basis. We are a significant purchaser of
electronic components and other raw materials, and can capitalize on the
economies of scale associated with our relationships with suppliers to negotiate
price discounts, obtain components and other raw materials that are in short
supply, and return excess components. Our expertise in supply chain management
and our relationships with suppliers across the supply chain enables us to
reduce our customers’ cost of goods sold and inventory exposure.
We
recognize revenue from the sale of circuit board assemblies, systems and excess
inventory when title and risk of ownership have passed, the price to the buyer
is fixed and determinable and collectibility is reasonably assured, which
generally is when the goods are shipped. Revenue from design, development and
engineering services is recognized when the services are performed and
collectibility is reasonably certain. Such services provided under fixed price
contracts are accounted for using the percentage of completion method. We
assume no significant obligations after product shipment as we typically warrant
workmanship only. Therefore, our warranty provisions are
immaterial.
Our cost
of sales includes the cost of materials, electronic components and other
materials that comprise the products we manufacture, the cost of labor and
manufacturing overhead, and adjustments for excess and obsolete inventory. Our
procurement of materials for production requires us to commit significant
working capital to our operations and to manage the purchasing, receiving,
inspection and stocking of materials. Although we bear the risk of fluctuations
in the cost of materials and excess scrap, we periodically negotiate cost of
materials adjustments with our customers. Our gross margin for any product
depends on the sales price, the proportionate mix of the cost of materials in
the product and the cost of labor and manufacturing overhead allocated to the
product. We typically have the potential to realize higher gross margins on
products where the proportionate level of labor and manufacturing overhead is
greater than that of materials. As we gain experience in manufacturing a
product, we usually achieve increased efficiencies, which result in lower labor
and manufacturing overhead costs for that product and higher gross
margins. Our operating results are impacted by the level of capacity
utilization of manufacturing facilities. Operating income margins have generally
improved during periods of high production volume and high capacity utilization.
During periods of low production volume, we generally have idle capacity and
reduced operating income margins.
Summary
of 2009 Results
Sales for
the year ended December 31, 2009 decreased 19% to $2.1 billion compared to $2.6
billion in 2008 primarily as a result of the overall economic downturn that has
been impacting businesses worldwide since mid 2008. The decline in sales has
been broad based and impacted customers in three of the five industries that we
serve when comparing 2009 to 2008. During the year ended December 31, 2009,
sales to customers in the computers and related products for business
enterprises industry, medical devices industry, and the testing and
instrumentation products industry declined 33%, 24% and 17%, respectively, from
2008. Sales to our customers in the telecommunication equipment industry
increased 3% from 2008 while sales to our customers in the industrial control
equipment industry remained consistent when comparing periods. Sales to our
customers in the computers and related products for business enterprises
industry sector represented 39% of our sales in 2009 compared to 48% of our
sales in 2008. Sales to this industry sector decreased $0.4 billion from $1.2
billion in 2008 to $0.8 billion in 2009 due to reduced demand.
28
Our
future sales are dependent on the success of our customers, some of which
operate in businesses associated with rapid technological change and consequent
product obsolescence. Developments adverse to our major customers or their
products, or the failure of a major customer to pay for components or services,
could have an adverse effect on us. Adverse worldwide economic conditions
have resulted, and may result in the future, in lower information technology
spending by businesses, which in turn affects demand for our customers’ products
and thus adversely affects our sales.
Our gross
profit as a percentage of sales increased to 7.0% in 2009 from 6.8% in
2008 primarily due to a better product mix, operating efficiencies and an
aggressive management of our costs. We experience fluctuations in gross profit
from period to period. Different programs can contribute different gross profits
depending on factors such as the types of services involved, location of
production, size of the program, complexity of the product, and level of
material costs associated with the various products. New programs can
contribute relatively less to our gross profit in their early stages when
manufacturing volumes are usually lower, resulting in inefficiencies and
unabsorbed manufacturing overhead costs. In addition, new and higher volume
programs remain subject to competitive constraints that could exert downward
pressure on our margins. During periods of low production volume, we
generally have idle capacity and reduced gross profit.
We have
undertaken initiatives to restructure our business operations with the intention
of improving utilization and realizing cost savings in the future. During the
year ended December 31, 2009, the Company recognized $8.3 million (pre-tax)
of restructuring charges, primarily related to capacity reduction in Europe and
employee termination costs associated with the involuntary terminations of
employees in connection with reductions in workforce of certain facilities
worldwide.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management’s
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Our significant accounting policies are summarized in Note 1 to the
Consolidated Financial Statements in Item 8 of this report. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to allowance for doubtful
accounts, inventories, deferred taxes, impairment of long-lived assets, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ materially from these estimates. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Allowance
for doubtful accounts
Our
accounts receivable balance is recorded net of allowances for amounts not
expected to be collected from our customers. Because our accounts receivable are
typically unsecured, we periodically evaluate the collectibility of our accounts
based on a combination of factors, including a particular customer’s ability to
pay as well as the age of the receivables. To evaluate a specific customer’s
ability to pay, we analyze financial statements, payment history, third-party
credit analysis reports and various information or disclosures by the customer
or other publicly available information. In cases where the evidence suggests a
customer may not be able to satisfy its obligation to us, we set up a specific
allowance in an amount we determine appropriate for the perceived risk. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
29
Inventory
obsolescence reserve
We
purchase inventory based on forecasted demand and record inventory at the lower
of cost or market. We reserve for estimated obsolescence as necessary in an
amount equal to the difference between the cost of inventory and estimated
market value based on assumptions of future demands and market conditions. We
evaluate our inventory valuation on a quarterly basis based on current and
forecasted usage and the latest forecasts of product demand and production
requirements from our customers. Customers frequently make changes to their
forecasts, requiring us to make changes to our inventory purchases, commitments,
and production scheduling and may require us to cancel open purchase commitments
with our vendors. This process may lead to on-hand inventory quantities and
on-order purchase commitments that are in excess of our customers’ revised
needs, or parts that become obsolete before use in production. We record
inventory reserves on excess and obsolete inventory. These reserves are
established on inventory which we have determined that our customers are not
responsible for or on inventory which we believe our customers will be unable to
fulfill their obligation to ultimately purchase. If actual market conditions are
less favorable than those we projected, additional inventory write-downs may be
required.
Income
Taxes
We
estimate our income tax provision in each of the jurisdictions in which we
operate, including estimating exposures related to uncertain tax positions. We
must also make judgments regarding the ability to realize the deferred tax
assets. We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
subsequently determine that we would be able to realize our deferred tax assets
in excess of our net recorded amount, an adjustment to the valuation allowance
would increase income in the period such determination was made. Similarly,
should we determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the valuation allowance
would reduce income in the period such determination was made.
We are
subject to examination by tax authorities for varying periods in various U.S.
and foreign tax jurisdictions. During the course of such examinations disputes
occur as to matters of fact and/or law. Also, in most tax jurisdictions the
passage of time without examination will result in the expiration of applicable
statutes of limitations thereby precluding the taxing authority from conducting
an examination of the tax period(s) for which such statute of limitations has
expired. We believe that we have adequately provided for our tax
liabilities.
Impairment
of Long-Lived Assets
Long-lived
assets, such as property, plant, and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated undiscounted future cash flows, an impairment
charge would be recognized by the amount that the carrying amount of the asset
exceeds the fair value of the asset.
Goodwill
is tested annually for impairment, and is tested for impairment more frequently
if events and circumstances indicate that the asset might be impaired. An
impairment loss would be recognized to the extent that the carrying amount
exceeds the asset’s fair value. Goodwill is measured at the reporting unit
level, which we have determined to be consistent with our operating segments as
defined in Note 13 to the Consolidated Financial Statements in Item 8 of this
report, by determining the fair values of the reporting units and comparing
those fair values to the carrying values, including goodwill, of the reporting
unit. We determined the fair value of our reporting units, with the assistance
of an independent valuation firm, based upon a combination of the income
approach (discounted cash flow method) and market approach (market comparable
model) methodologies. In concluding on the fair value estimates of our
reporting units, the income approach was given a 75% weighting and the market
approach was given a 25% weighting based on the quality and suitability of
information available in performing the income approach, relative to the market
approach.
30
The
income approach methodology utilized in estimating the fair value of our
reporting units for purposes of the goodwill impairment testing required various
judgmental assumptions about revenues, operating margins, growth rates, working
capital requirements and appropriate discount rate. In determining those
judgmental assumptions, we considered a variety of data, including—for each
reporting unit—its annual budget for the upcoming year, its longer-term business
plan, anticipated future cash flows, market data, and historical cash flow
growth rates. The key assumptions used to estimate the fair value of our
reporting units under the discounted cash flow method were (i) projected revenue
growth over a ten-year period and the annual compounded average growth rate;
(ii) projected operating margins over a ten year period; and (iii) a
weighted-average cost of capital.
Under the
market approach, the value of our reporting units was estimated by comparing it
to publicly-traded firms in similar lines of business and geographic markets.
The market approach takes into account, among other things, the market value of
total invested capital to earnings before interest, taxes, depreciation and
amortization (EBITDA) multiples of comparable companies adjusted to reflect
differences in size and growth prospects. The selected multiples were then
applied to the present value of our reporting unit’s projected EBITDA to arrive
at an indicated range of value. This value was then adjusted for a control
premium of 35% in 2009 and 25% in 2008 based on a review of premiums paid for
companies similar in nature to our reporting units and then adjusted for any
working capital requirement excess (deficit) to determine a final value under
the market approach.
Changes
in economic and operating conditions that occur after the annual impairment
analysis or an interim impairment analysis, and that impact these assumptions,
may result in a future goodwill impairment charge. Our annual goodwill
impairment analysis as of December 31, 2008 indicated there was an impairment of
goodwill in two of our reporting units, the Americas and Europe, primarily due
to a decline in our market capitalization and recent market turmoil.
Accordingly, we recorded a non-cash impairment charge in the fourth quarter of
2008 totaling $247.5 million. We estimated that the fair value of our Asia
business segment exceeded its carrying amount by approximately 16% at the time
our 2008 impairment test was performed. As of December 31, 2009, we had goodwill
associated with our Asia business segment of approximately $37.9 million. We
completed the annual impairment test during the fourth quarter of 2009 and
determined that no impairment existed as of December 31, 2009. We estimated that
the fair value of our Asia business segment exceeded its carrying amount by
approximately 147% at the time our 2009 impairment test was performed.
Circumstances that may lead to future impairment of goodwill include, but are
not limited to, unforeseen decreases in future performance or industry demand,
or the restructuring of our operations as a result of a change in our business
strategy.
Stock-Based
Compensation
We
recognize stock-based compensation expense in our consolidated
statements of income. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model. Option-pricing
models require the input of subjective assumptions, including the expected life
of the option and the expected stock price volatility. Judgment is also required
in estimating the number of option awards that are expected to vest as a result
of satisfaction of time-based vesting schedules. If actual results or future
changes in estimates differ significantly from our current estimates,
stock-based compensation could increase or decrease. See Note 1 to the
Consolidated Financial Statements in Item 8 of this report.
Recently
Enacted Accounting Principles
See Note
1 to the Consolidated Financial Statements in Item 8 of this report for a
discussion of recently enacted accounting principles.
31
RESULTS
OF OPERATIONS
The
following table presents the percentage relationship that certain items in our
Consolidated Statements of Income (Loss) bear to sales for the periods
indicated. The financial information and the discussion below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto in Item
8 of this report.
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of sales
|
93.0 | 93.2 | 93.2 | |||||||||
|
Gross
profit
|
7.0 | 6.8 | 6.8 | |||||||||
|
Selling,
general and administrative expenses
|
4.1 | 3.6 | 3.3 | |||||||||
|
Restructuring
charges and integration costs
|
0.4 | 0.1 | 0.4 | |||||||||
|
Goodwill
impairment
|
— | 9.6 | — | |||||||||
|
Income
(loss) from operations
|
2.5 | (6.4 | ) | 3.1 | ||||||||
|
Other
income, net
|
(0.0 | ) | 0.3 | 0.3 | ||||||||
|
Income (loss) before income
taxes
|
2.5 | (6.1 | ) | 3.4 | ||||||||
|
Income
tax benefit (expense)
|
0.1 | 0.8 | (0.3 | ) | ||||||||
|
Net income
(loss)
|
2.6 | % | (5.2 | )% | 3.2 | % | ||||||
Year
Ended December 31, 2009 Compared With Year Ended December 31, 2008
Sales
Sales for
the year ended December 31, 2009 decreased 19% to $2.1 billion compared to $2.6
billion in 2008 primarily as a result of the overall economic downturn that has
been impacting businesses worldwide since mid 2008. The decline in sales has
been broad based and impacted customers in three of the five industries that we
serve when comparing 2009 to 2008. The following table sets forth the
percentages of our sales by industry for 2009 and 2008.
|
2009
|
2008
|
|||||||
|
Computers
and related products for business enterprises
|
39 | % | 48 | % | ||||
|
Telecommunication
equipment
|
23 | 18 | ||||||
|
Industrial
control equipment
|
20 | 16 | ||||||
|
Medical
devices
|
14 | 14 | ||||||
|
Testing
and instrumentation products
|
4 | 4 | ||||||
| 100 | % | 100 | % | |||||
During
the year ended December 31, 2009, sales to customers in the computers and
related products for business enterprises industry, medical devices industry,
and the testing and instrumentation products industry declined 33%, 24% and 17%,
respectively, from 2008. Sales to our customers in the telecommunication
equipment industry increased 3% from 2008 while sales to our customers in the
industrial control equipment industry were essentially flat when comparing
periods.
Sales to
our customers in the computers and related products for business enterprises
industry sector represented 39% of our sales in the 2009 compared to 48% of our
sales in 2008. Sales to this industry sector decreased $0.4 billion from
$1.2 billion in 2008 to $0.8 billion in 2009 due to reduced
demand.
Our
future sales are dependent on the success of our customers, some of which
operate in businesses associated with rapid technological change and consequent
product obsolescence. Developments adverse to our major customers or their
products, or the failure of a major customer to pay for components or services,
could have an adverse effect on us. Adverse worldwide economic conditions have
impacted our customers. See Note 10 to the Consolidated Financial Statements in
Item 8 of this report.
32
A
substantial percentage of our sales have been made to a small number of
customers, and the loss of a major customer, if not replaced, would adversely
affect us. Sales to our largest customer, Oneida Nation Electronics, Inc. (who
supports one of our customers in the computers and related products for business
enterprises industry), represented 14% of our sales during 2009.
Our
international operations are subject to the risks of doing business abroad.
These risks have not had a material adverse effect on our results of operations
through December 31, 2009. However, we can make no assurances that there will
not be an adverse impact in the future. See Item 1A for factors pertaining to
our international sales and fluctuations in the exchange rates of foreign
currency and for further discussion of potential adverse effects in operating
results associated with the risks of doing business abroad. During 2009 and
2008, 47% and 48%, respectively, of our sales were from our international
operations.
We had a
backlog of approximately $1.2 billion at December 31, 2009, as compared to the
2008 year-end backlog of $1.6 billion. Backlog consists of purchase orders
received, including, in some instances, forecast requirements released for
production under customer contracts. Although we expect to fill substantially
all of our backlog at December 31, 2009 during 2010, we do not have long-term
agreements with all of our customers and customer orders can be canceled,
changed or delayed by customers. The timely replacement of canceled, changed or
delayed orders with orders from new customers cannot be assured, nor can there
be any assurance that any of our current customers will continue to utilize our
services. Because of these factors, backlog is not a meaningful indicator of
future financial results.
Gross
Profit
Gross
profit decreased 17% to $146.6 million for 2009 from $175.9 million in 2008
primarily as a result of a decrease in sales. Gross profit as a percentage of
sales increased to 7.0% in 2009 from 6.8% during 2008 primarily due to a better
product mix, operating efficiencies and aggressive management of our costs. We
experience fluctuations in gross profit from period to period. Different
programs contribute different gross profits depending on factors such as the
types of services involved, location of production, size of the program,
complexity of the product, and level of material costs associated with the
various products. Moreover, new programs can contribute relatively less to
our gross profit in their early stages when manufacturing volumes are usually
lower, resulting in inefficiencies and unabsorbed manufacturing overhead costs.
In addition, a number of our new and higher volume programs remain subject to
competitive constraints that could exert downward pressure on our
margins. During periods of low production volume, we generally have idle
capacity and reduced gross profit.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses decreased 7% to $85.5 million in 2009 from
$92.2 million in 2008. Selling, general and administrative expenses, as a
percentage of sales, were 4.1% and 3.6%, respectively, for 2009 and 2008. The
decrease in selling, general and administrative expenses is primarily due to
reduced overhead resulting from cost controls and lower employee related
expenses due to the overall lower sales volume when comparing the
periods. The increase in selling, general and administrative expenses as a
percentage of sales is also due to the impact of lower sales volumes during
2009.
33
Restructuring
Charges
We
recognized $8.3 million in restructuring charges during 2009 primarily related
to capacity reduction in Europe and reductions in workforce in certain
facilities worldwide.
The
recognition of the restructuring charges requires that we make certain judgments
and estimates regarding the nature, timing and amount of costs associated with
planned exit activities. To the extent our actual results in exiting these
facilities differ from our estimates and assumptions, we may be required to
revise the estimates of future liabilities, requiring the recognition of
additional restructuring charges or the reduction of liabilities already
recognized. At the end of each reporting period, we evaluate the remaining
accrued balances to ensure that no excess accruals are retained and the
utilization of the provisions are for their intended purpose in accordance with
developed exit plans. See Note 16 to the Consolidated Financial Statements
in Item 8 of this report.
Income
Tax Benefit
Income
tax benefit of $2.0 million represented an effective tax rate of negative 3.8%
for 2009, compared with income tax benefit $21.9 million at an effective tax
rate of 13.9% for the same period in 2008. In the third quarter of 2008, we
recorded a benefit related to a previously closed facility that generated a
worthless stock deduction of $3.4 million, compared to $2.7 million recorded in
the third quarter of 2009. In addition, in the third quarter of 2009, we
recorded a tax benefit related to a revaluation loss in Mexico of $2.4 million
and tax benefits totaling $1.9 million primarily related to intercompany
pricing deductions. Excluding these tax benefits, the effective tax rate would
have been 9.7% in 2009 compared to 11.7% in 2008. The decrease in the effective
tax rate is primarily a function of the mix of tax rates in the various
jurisdictions in which we do business, a shift in the proportion of consolidated
taxable income earned in jurisdictions taxed at lower tax rates and a non
deductible goodwill impairment recorded in 2008. See Note 9 to the Consolidated
Financial Statements in Item 8 of this report.
Net
Income (Loss)
We
reported net income of approximately $53.9 million, or $0.83 per diluted share
for 2009, compared with net loss of approximately $(135.6) million, or a loss
per diluted share of $2.02 for 2008. The net increase of $189.5 million in 2009
was due to the factors discussed above.
Year
Ended December 31, 2008 Compared With Year Ended December 31, 2007
Sales
Sales for
the year ended December 31, 2008 and 2007 were $2.6 billion and $2.9 billion,
respectively. The following table sets forth the percentages of our sales by
industry for 2008 and 2007.
|
2008
|
2007
|
|||||||
|
Computers
and related products for business enterprises
|
48 | % | 53 | % | ||||
|
Telecommunication
equipment
|
18 | 15 | ||||||
|
Industrial
control equipment
|
16 | 13 | ||||||
|
Medical
devices
|
14 | 13 | ||||||
|
Testing
and instrumentation products
|
4 | 6 | ||||||
| 100 | % | 100 | % | |||||
Sales to
customers in the computers and related products for business enterprises
industry and the testing and instrumentation products industry declined 21% and
43%, respectively, from 2007 to 2008. In 2008, these declines were partially
offset by sales increases to customers in the industrial control equipment (9%)
and telecommunication equipment (7%) industries.
During
2008 and 2007, 48% and 43%, respectively, of our sales were from our
international operations.
34
We had a
backlog of approximately $1.6 billion at December 31, 2008, as compared to the
2007 year-end backlog of $1.7 billion.
Gross
Profit
Gross
profit decreased 11% to $175.9 million for 2008 from $198.5 million in 2007 as a
result of a decrease in sales. Gross profit as a percentage of sales was 6.8%
during 2008 and 2007.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses decreased 5% to $90.4 million in 2008 from
$94.8 million in 2007. Selling, general and administrative expenses, as a
percentage of sales, were 3.5% and 3.3%, respectively, for 2008 and 2007. The
decrease in selling, general and administrative expenses was primarily due to
reduced overhead resulting from cost controls and lower variable compensation
and employee related expenses. The increase in selling, general and
administrative expenses as a percentage of sales was primarily associated with
the impact of lower sales volumes in 2008.
Restructuring
Charges and Integration Costs
We
recognized $2.8 million in restructuring charges during 2008 primarily related
to reductions in workforce in certain facilities around the globe. In 2007, we
recognized $11.6 million in restructuring charges and integration costs related
to reductions in workforce, the re-sizing and closure of certain facilities and
the integration of the facilities acquired in the Merger.
Interest
Expense
Interest
expense for 2008 and 2007 was $1.5 million and $2.2 million, respectively. The
decrease was due to the repayment of the debt assumed in the Merger. See Note 6
to the Consolidated Financial Statements in Item 8 of this report.
Income
Tax Benefit (Expense)
Income
tax benefit of $21.9 million represented an effective tax rate of 13.9% for
2008, compared with income tax expense $(7.7) million at an effective tax rate
of 7.7% for the same period in 2007. The change in the effective tax rate is
primarily due to non deductible goodwill impairment recorded in 2008. See Note 9
to the Consolidated Financial Statements in Item 8 of this report.
Net
Income (Loss)
We
reported net income (loss) of approximately $(135.6) million, or a loss per
diluted share of $2.02 for 2008, compared with net income of approximately $92.4
million, or $1.27 per diluted share for 2007. The net decrease of $228.0 million
in 2008 was due to the factors discussed above.
LIQUIDITY
AND CAPITAL RESOURCES
We have
historically financed our growth and operations through funds generated from
operations, proceeds from the sale and maturity of our investments and funds
borrowed under our credit facilities. Cash and cash equivalents increased to
$421.2 million at December 31, 2009 from $359.7 million at December 31,
2008.
Cash
provided by operating activities was $123.6 million in 2009. The cash provided
by operations during 2009 consisted primarily of net income of $53.9 million
adjusted for $39.8 million of depreciation and amortization, a $6.3 million
decrease in accounts receivable, and a $36.5 million decrease in
inventories offset by a $14.9 million decrease in accounts payable. Working
capital was $859.1 million at December 31, 2009 and $813.9 million at December
31, 2008.
We are
continuing the practice of purchasing components only after customer orders or
forecasts are received, which mitigates, but does not eliminate, the risk of
loss on inventories. Supplies of electronic components and other materials used
in operations are subject to industry-wide shortages. In certain instances,
suppliers may allocate available quantities to us. If shortages of these
components and other material supplies used in operations occur, vendors may not
ship the quantities we need for production and we may be forced to delay
shipments, which would increase backorders. Decreases in order activity in
the first half of 2009 for the major electronic component suppliers resulted in
cutbacks of manufacturing capacity. When demand started to recover in the third
quarter of 2009, the supply base initiated actions to expand manufacturing
capacity back to current levels of demand. This resulted in the elongation of
the lead time for certain components over the latter part of the third and
fourth quarter of 2009.
35
Cash used
in investing activities was $40.5 million for the year ended December 31,
2009 primarily due to the $11.3 million purchase of an intangible asset,
the $10.6 million business acquisition of certain precision machining assets and
capabilities and additional purchases of property, plant and equipment. Capital
expenditures of $22.3 million were primarily concentrated in manufacturing
production equipment in the Americas and Asia to support our ongoing business
and to expand certain existing manufacturing operations.
Cash used
in financing activities was $24.4 million for the year ended December 31, 2009.
During the year ended December 31, 2009, share repurchases totaled $27.9 million
and we received $3.6 million from the exercise of stock options. Principal
payments of capital lease obligations were $0.3 million in 2009.
Under the
terms of a credit agreement (the Credit Agreement), we have a $100.0 million
five-year revolving credit facility for general corporate purposes with a
maturity date of December 21, 2012. The Credit Agreement includes an accordion
feature under which total commitments under the facility may be increased by an
additional $100 million, subject to satisfaction of certain conditions. Interest
on outstanding borrowings under the Credit Agreement is payable quarterly, at
our option, at LIBOR plus 0.75% to 1.75% or a prime rate plus 0.00% to 0.25%,
based upon our debt ratio as specified in the Credit Agreement. A commitment fee
of 0.15% to 0.35% per annum (based upon our debt ratio) on the unused portion of
the revolving credit line is payable quarterly in arrears. As of December 31,
2009, we had no borrowings outstanding under the Credit Agreement, $0.1 million
in outstanding letters of credit and $99.9 million was available for future
borrowings.
The
Credit Agreement is secured by our domestic inventory and accounts receivable,
100% of the stock of our domestic subsidiaries, and 65% of the voting capital
stock of each direct foreign subsidiary and substantially all of our and our
domestic subsidiaries’ other tangible and intangible assets. The Credit
Agreement contains customary financial covenants as to working capital, debt
leverage, fixed charges, and consolidated net worth, and restricts our ability
to incur additional debt, pay dividends, sell assets and to merge or consolidate
with other persons. As of December 31, 2009, we were in compliance
with all such covenants and restrictions.
Our
Thailand subsidiary has a multi-purpose credit facility with Kasikornbank Public
Company Limited (the Thai Credit Facility) that provides for approximately $10.5
million (350 million Thai baht) in working capital availability. The Thai Credit
Facility is secured by land and buildings in Thailand. Availability of funds
under the Thai Credit Facility is reviewed annually and is currently accessible
through April 2010. As of December 31, 2009, our Thailand subsidiary had no
working capital borrowings outstanding.
Our
operations, and the operations of businesses we acquire, are subject to certain
foreign, federal, state and local regulatory requirements relating to
environmental, waste management, health and safety matters. We believe we
operate in substantial compliance with all applicable requirements and we seek
to ensure that newly acquired businesses comply or will comply substantially
with applicable requirements. To date, the costs of compliance and workplace and
environmental remediation have not been material to us. However, material costs
and liabilities may arise from these requirements or from new, modified or more
stringent requirements in the future. In addition, our past, current and future
operations, and the operations of businesses we have or may acquire, may give
rise to claims of exposure by employees or the public, or to other claims or
liabilities relating to environmental, waste management or health and safety
concerns.
36
As of
December 31, 2009, we had cash and cash equivalents totaling $421.2 million and
$99.9 million available for borrowings under our revolving credit line. We
believe that during the next twelve months, our capital expenditures will be
approximately $35 to $45 million, principally for machinery and equipment to
support our ongoing business around the globe. On July 24, 2008, our Board of
Directors approved the repurchase of up to $100 million of our outstanding
common shares (the 2008 Repurchase Program). As of December 31, 2009, we have
$50.3 million remaining under the 2008 Repurchase Program to repurchase
additional shares. We are under no commitment or obligation to repurchase any
particular amount of common shares. Management believes that our existing cash
balances and funds generated from operations will be sufficient to permit us to
meet our liquidity requirements over the next twelve months. Management further
believes that our ongoing cash flows from operations and any borrowings we may
incur under our credit facilities will enable us to meet operating cash
requirements in future years. Should we desire to consummate significant
acquisition opportunities, our capital needs would increase and could possibly
result in our need to increase available borrowings under our revolving credit
facility or access public or private debt and equity markets. There can be no
assurance, however, that we would be successful in raising additional debt or
equity on terms that we would consider acceptable.
CONTRACTUAL
OBLIGATIONS
We have
certain contractual obligations that extend out beyond 2010 under lease
obligations and debt arrangements. Non-cancelable purchase commitments do not
typically extend beyond the normal lead-time of several weeks. Purchase orders
beyond this time frame are typically cancelable. We do not utilize off-balance
sheet financing techniques other than traditional operating leases and we have
not guaranteed the obligations of any entity that is not one of our wholly owned
subsidiaries. The total contractual cash obligations in existence at December
31, 2009 due pursuant to contractual commitments are:
|
Payments
due by period
|
||||||||||||||||||||
|
Less
than
|
1-3
|
3-5
|
More
than
|
|||||||||||||||||
|
(in
thousands)
|
Total
|
1
year
|
years
|
years
|
5
years
|
|||||||||||||||
|
Operating
lease obligations
|
$ | 47,309 | $ | 12,210 | $ | 19,333 | $ | 8,622 | $ | 7,144 | ||||||||||
|
Capital
lease obligations
|
21,928 | 1,469 | 3,019 | 3,131 | 14,309 | |||||||||||||||
|
Total
obligations
|
$ | 69,237 | $ | 13,679 | $ | 22,352 | $ | 11,753 | $ | 21,453 | ||||||||||
The
amount of unrecognized tax benefits as of December 31, 2009 including
interest and penalties was $19.7 million. We have not provided a detailed
estimate of the timing of future cash outflows associated with the liabilities
recognized in this balance due to the uncertainty of when the related tax
settlements will become due. See Note 9 to the Consolidated Financial Statements
in Item 8 of this report.
OFF-BALANCE
SHEET ARRANGEMENTS
As of
December 31, 2009, we did not have any significant off-balance sheet
arrangements. See Note 11 to the Consolidated Financial Statements in Item 8 of
this report.
37
Our
international sales are a significant portion of our net sales; we are exposed
to risks associated with operating internationally, including the
following:
|
|
•
|
Foreign
currency exchange risk;
|
|
|
•
|
Import
and export duties, taxes and regulatory
changes;
|
|
|
•
|
Inflationary
economies or currencies; and
|
|
|
•
|
Economic
and political instability.
|
We do not
use derivative financial instruments for speculative purposes. As of December
31, 2009, we did not have any foreign currency hedges. In the future,
significant transactions involving our international operations may cause us to
consider engaging in hedging transactions to attempt to mitigate our exposure to
fluctuations in foreign exchange rates. These exposures are primarily, but not
limited to, vendor payments and intercompany balances in currencies other than
the currency in which our foreign operations primarily generate and expend cash.
Our international operations in some instances operate in a natural hedge
because both operating expenses and a portion of sales are denominated in local
currency. Our sales are substantially denominated in U.S. dollars. Our foreign
currency cash flows are generated in certain Asian and European countries,
Mexico and Brazil.
We are
also exposed to market risk for changes in interest rates, a portion of which
relates to our invested cash balances. We do not use derivative financial
instruments in our investing activities. We place cash and cash equivalents and
investments with various major financial institutions. We protect our invested
principal funds by limiting default risk, market risk and reinvestment risk. We
mitigate default risk by generally investing in investment grade securities. As
of December 31, 2009, the outstanding amount in the long-term investment
portfolio included $50.1 million (par value) of auction rate securities
with an average return of approximately 0.45%.
38
BENCHMARK
ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
December
31,
|
||||||||
|
(in
thousands, except for par value)
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash and cash
equivalents
|
$ | 421,243 | $ | 359,694 | ||||
|
Accounts receivable, net of
allowance for doubtful accounts of $417
|
||||||||
|
and $1,072,
respectively
|
417,268 | 422,058 | ||||||
|
Inventories,
net
|
315,743 | 343,163 | ||||||
|
Prepaid expenses and other
assets
|
31,034 | 28,308 | ||||||
|
Income taxes
receivable
|
3,526 | — | ||||||
|
Deferred income
taxes
|
9,861 | 2,184 | ||||||
|
Total current
assets
|
1,198,675 | 1,155,407 | ||||||
|
Long-term
investments
|
45,686 | 48,162 | ||||||
|
Property, plant and equipment,
net
|
126,250 | 134,618 | ||||||
|
Goodwill,
net
|
37,912 | 37,912 | ||||||
|
Deferred income
taxes
|
17,713 | 24,317 | ||||||
|
Other, net
|
39,484 | 32,624 | ||||||
| $ | 1,465,720 | $ | 1,433,040 | |||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current installments of capital
lease obligations
|
$ | 300 | $ | 256 | ||||
|
Accounts
payable
|
275,900 | 288,045 | ||||||
|
Income taxes
payable
|
6,464 | 3,745 | ||||||
|
Accrued
liabilities
|
56,916 | 49,485 | ||||||
|
Total current
liabilities
|
339,580 | 341,531 | ||||||
|
Capital lease obligations, less
current installments
|
11,381 | 11,683 | ||||||
|
Other long-term
liabilities
|
23,856 | 29,252 | ||||||
|
Shareholders’
equity:
|
||||||||
|
Preferred shares, $0.10 par
value; 5,000 shares authorized, none issued
|
— | — | ||||||
|
Common shares, $0.10 par value;
145,000 shares authorized;
|
||||||||
|
issued – 64,208 and 65,337,
respectively;
|
||||||||
|
outstanding – 64,097 and 65,226
respectively
|
6,410 | 6,523 | ||||||
|
Additional paid-in
capital
|
732,956 | 741,813 | ||||||
|
Retained
earnings
|
356,802 | 312,695 | ||||||
|
Accumulated other comprehensive
loss
|
(4,993 | ) | (10,185 | ) | ||||
|
Less treasury shares, at cost;
111 shares
|
(272 | ) | (272 | ) | ||||
|
Total shareholders’
equity
|
1,090,903 | 1,050,574 | ||||||
|
Commitments and
contingencies
|
||||||||
| $ | 1,465,720 | $ | 1,433,040 | |||||
See
accompanying notes to consolidated financial statements.
39
BENCHMARK
ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated
Statements of Income (Loss)
|
Year
ended December 31,
|
||||||||||||
|
(in
thousands, except per share data)
|
2009
|
2008
|
2007
|
|||||||||
|
Sales
|
$ | 2,089,253 | $ | 2,590,167 | $ | 2,915,919 | ||||||
|
Cost
of sales
|
1,942,674 | 2,414,231 | 2,717,425 | |||||||||
|
Gross
profit
|
146,579 | 175,936 | 198,494 | |||||||||
|
Selling,
general and administrative expenses
|
85,500 | 92,154 | 96,614 | |||||||||
|
Restructuring
charges and integration costs
|
8,264 | 2,780 | 11,581 | |||||||||
|
Goodwill
impairment
|
— | 247,482 | — | |||||||||
|
Income
(loss) from operations
|
52,815 | (166,480 | ) | 90,299 | ||||||||
|
Interest
expense
|
(1,399 | ) | (1,455 | ) | (2,183 | ) | ||||||
|
Interest
income
|
2,210 | 8,675 | 11,217 | |||||||||
|
Other
income (expense)
|
(1,705 | ) | 1,772 | 693 | ||||||||
|
Income
(loss) before income taxes
|
51,921 | (157,488 | ) | 100,026 | ||||||||
|
Income
tax benefit (expense)
|
1,974 | 21,856 | (7,670 | ) | ||||||||
|
Net income
(loss)
|
$ | 53,895 | $ | (135,632 | ) | $ | 92,356 | |||||
|
Earnings
(loss) per share:
|
||||||||||||
|
Basic
|
$ | 0.83 | $ | (2.02 | ) | $ | 1.28 | |||||
|
Diluted
|
$ | 0.83 | $ | (2.02 | ) | $ | 1.27 | |||||
|
Weighted-average
number of shares outstanding:
|
||||||||||||
|
Basic
|
64,758 | 67,060 | 72,061 | |||||||||
|
Diluted
|
65,116 | 67,060 | 72,829 | |||||||||
See
accompanying notes to consolidated financial statements.
40
BENCHMARK
ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income (Loss)
|
Year
ended December 31,
|
||||||||||||
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
income (loss)
|
$ | 53,895 | $ | (135,632 | ) | $ | 92,356 | |||||
|
Other
comprehensive income (loss):
|
||||||||||||
|
Foreign currency translation
adjustments
|
4,393 | (6,462 | ) | 8,019 | ||||||||
|
Unrealized gain (loss) on
investments, net of tax
|
924 | (5,313 | ) | — | ||||||||
|
Other
|
(125 | ) | (26 | ) | 76 | |||||||
|
Comprehensive
income (loss)
|
$ | 59,087 | $ | (147,433 | ) | $ | 100,451 | |||||
The
components of accumulated other comprehensive loss are as
follows:
|
December
31,
|
||||||||
|
(in
thousands)
|
2009
|
2008
|
||||||
|
Foreign
currency translation losses
|
$ | (453 | ) | $ | (4,846 | ) | ||
|
Unrealized
loss on investments, net of tax
|
(4,389 | ) | (5,313 | ) | ||||
|
Other
|
(151 | ) | (26 | ) | ||||
| $ | (4,993 | ) | $ | (10,185 | ) | |||
See
accompanying notes to consolidated financial statements.
41
BENCHMARK
ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated
Statements of Shareholders’ Equity
|
(in
thousands)
|
Shares
|
Common
Shares
|
Additional
paid-in
capital
|
Retained
earnings
|
Accumulated
other comprehensiveincome
(loss)
|
Treasury
shares
|
Total shareholders’ |
|||||||||||||||||||||
|
Balances,
December 31, 2006
|
64,751 | $ | 6,475 | $ | 587,522 | $ | 392,213 | $ | (6,479 | ) | $ | (272 | ) | $ | 979,459 | |||||||||||||
|
Adjustment
from adoption of
|
||||||||||||||||||||||||||||
|
new income tax
standard
|
— | — | — | 19,335 | — | — | 19,335 | |||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | 4,454 | — | — | — | 4,454 | |||||||||||||||||||||
|
Merger
|
7,302 | 730 | 215,240 | — | — | — | 215,970 | |||||||||||||||||||||
|
Conversion
of debt
|
351 | 35 | 4,965 | — | — | — | 5,000 | |||||||||||||||||||||
|
Shares
repurchased and retired
|
(2,602 | ) | (260 | ) | (27,991 | ) | (24,718 | ) | — | — | (52,969 | ) | ||||||||||||||||
|
Stock
options exercised
|
774 | 78 | 9,134 | — | — | — | 9,212 | |||||||||||||||||||||
|
Federal
tax benefit of
|
||||||||||||||||||||||||||||
|
stock options
exercised
|
— | — | 2,455 | — | — | — | 2,455 | |||||||||||||||||||||
|
Comprehensive
income
|
— | — | — | 92,356 | 8,095 | — | 100,451 | |||||||||||||||||||||
|
Balances,
December 31, 2007
|
70,576 | 7,058 | 795,779 | 479,186 | 1,616 | (272 | ) | 1,283,367 | ||||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | 4,732 | — | — | — | 4,732 | |||||||||||||||||||||
|
Shares
repurchased and retired
|
(5,802 | ) | (580 | ) | (62,394 | ) | (30,859 | ) | — | — | (93,833 | ) | ||||||||||||||||
|
Stock
options exercised
|
312 | 31 | 2,902 | — | — | — | 2,933 | |||||||||||||||||||||
|
Issuance
of restricted shares
|
140 | 14 | (14 | ) | — | — | — | — | ||||||||||||||||||||
|
Federal
tax benefit of
|
||||||||||||||||||||||||||||
|
stock options
exercised
|
— | — | 808 | — | — | — | 808 | |||||||||||||||||||||
|
Comprehensive
loss
|
— | — | — | (135,632 | ) | (11,801 | ) | — | (147,433 | ) | ||||||||||||||||||
|
Balances,
December 31, 2008
|
65,226 | 6,523 | 741,813 | 312,695 | (10,185 | ) | (272 | ) | 1,050,574 | |||||||||||||||||||
|
Stock-based
compensation expense
|
— | — | 5,356 | — | — | — | 5,356 | |||||||||||||||||||||
|
Shares
repurchased and retired
|
(1,672 | ) | (167 | ) | (17,964 | ) | (9,788 | ) | — | — | (27,919 | ) | ||||||||||||||||
|
Stock
options exercised
|
366 | 36 | 3,566 | — | — | — | 3,602 | |||||||||||||||||||||
|
Issuance
of restricted shares
|
150 | 15 | (15 | ) | — | — | — | — | ||||||||||||||||||||