BENCHMARK ELECTRONICS INC - Annual Report: 2009 (Form 10-K)
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 | ) | — | — | — | — | ||||||||||||||||||||
|
Warrants
exercised
|
27 | 3 | 200 | — | — | — | 203 | |||||||||||||||||||||
|
Comprehensive
income
|
— | — | — | 53,895 | 5,192 | — | 59,087 | |||||||||||||||||||||
|
Balances,
December 31, 2009
|
64,097 | $ | 6,410 | $ | 732,956 | $ | 356,802 | $ | (4,993 | ) | $ | (272 | ) | $ | 1,090,903 | |||||||||||||
See
accompanying notes to consolidated financial statements.
42
BENCHMARK
ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
Year
Ended December 31,
|
||||||||||||
|
(in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 53,895 | $ | (135,632 | ) | $ | 92,356 | |||||
|
Adjustments to reconcile net
income (loss) to net cash provided
|
||||||||||||
|
by operating
activities:
|
||||||||||||
|
Depreciation and
amortization
|
39,807 | 40,668 | 43,132 | |||||||||
|
Deferred income
taxes
|
(1,073 | ) | (26,502 | ) | 6,154 | |||||||
|
Asset
impairments
|
236 | 247,482 | 1,453 | |||||||||
|
Gain on the sale of property,
plant and equipment
|
(9 | ) | (70 | ) | (409 | ) | ||||||
|
Stock-based compensation
expense
|
5,356 | 4,732 | 4,454 | |||||||||
|
Excess tax benefit of stock
options exercised
|
— | (602 | ) | (1,659 | ) | |||||||
|
Changes in operating assets and
liabilities, net of effects
|
||||||||||||
|
from business
acquisitions:
|
||||||||||||
|
Accounts
receivable
|
6,346 | 61,296 | 111,613 | |||||||||
|
Inventories
|
36,515 | 15,985 | 134,781 | |||||||||
|
Prepaid expenses and other
assets
|
(222 | ) | 33,718 | 23,512 | ||||||||
|
Accounts
payable
|
(14,922 | ) | (70,160 | ) | (109,250 | ) | ||||||
|
Accrued
liabilities
|
3,744 | (7,529 | ) | (23,906 | ) | |||||||
|
Income
taxes
|
(6,103 | ) | 83 | (142 | ) | |||||||
|
Net cash provided by
operations
|
123,570 | 163,469 | 282,089 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases of
investments
|
— | (162,709 | ) | (551,050 | ) | |||||||
|
Proceeds from sales and
maturities of investments
|
3,400 | 292,050 | 468,685 | |||||||||
|
Additions to property, plant and
equipment
|
(22,291 | ) | (35,873 | ) | (17,003 | ) | ||||||
|
Proceeds from the sale of
property, plant and equipment
|
315 | 291 | 2,056 | |||||||||
|
Additions to purchased
software
|
(105 | ) | (271 | ) | (3,569 | ) | ||||||
|
Purchase of intangible
asset
|
(11,300 | ) | — | — | ||||||||
|
Net cash acquired (used) in
business acquisitions
|
(10,552 | ) | — | 3,415 | ||||||||
|
Other
|
— | — | 400 | |||||||||
|
Net
cash provided by (used in) investing activities
|
(40,533 | ) | 93,488 | (97,066 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds from stock options
exercised
|
3,602 | 2,933 | 9,212 | |||||||||
|
Excess tax benefit of stock
options exercised
|
— | 602 | 1,659 | |||||||||
|
Debt issuance
cost
|
— | (234 | ) | (228 | ) | |||||||
|
Principal payments on long-term
debt and capital lease obligations
|
(254 | ) | (621 | ) | (88,910 | ) | ||||||
|
Proceeds from long-term
debt
|
— | — | 16,760 | |||||||||
|
Share
repurchases
|
(27,919 | ) | (93,833 | ) | (52,969 | ) | ||||||
|
Proceeds from exercise of
warrants
|
203 | — | — | |||||||||
|
Net cash used in financing
activities
|
(24,368 | ) | (91,153 | ) | (114,476 | ) | ||||||
|
Effect
of exchange rate changes
|
2,880 | (5,308 | ) | 4,779 | ||||||||
|
Net
increase in cash and cash equivalents
|
61,549 | 160,496 | 75,326 | |||||||||
|
Cash and cash equivalents at
beginning of year
|
359,694 | 199,198 | 123,872 | |||||||||
|
Cash and cash equivalents at end
of year
|
$ | 421,243 | $ | 359,694 | $ | 199,198 | ||||||
See
accompanying notes to consolidated financial statements.
43
Notes
to Consolidated Financial Statements
(amounts
in thousands, except per share data, unless otherwise noted)
Note
1—Summary of Significant Accounting Policies
(a)
Business
Benchmark
Electronics, Inc. (the Company) is a Texas corporation that provides world-wide
integrated electronic manufacturing services. The Company provides
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 Company has manufacturing operations located in the Americas, Asia and
Europe.
(b)
Principles of Consolidation
The
consolidated financial statements include the financial statements of Benchmark
Electronics, Inc. and its wholly owned and majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(c)
Cash and Cash Equivalents
The
Company considers all highly liquid debt instruments with an original maturity
at the date of purchase of three months or less to be cash equivalents. Cash
equivalents of $360.5 million and $209.6 million at December 31, 2009 and 2008,
respectively, consist primarily of money-market funds, certificates of deposit,
time deposits, commercial paper and U.S. Government backed Agency securities
with an initial term of less than three months.
(d)
Investments
Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. A three-tier fair value hierarchy
of inputs is employed to determine fair value measurements. Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets and
liabilities. Level 2 inputs are observable prices that are not quoted on active
exchanges, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; and model-derived valuations whose inputs
are observable or whose significant value drivers are observable. Level 3 inputs
are unobservable inputs employed for measuring the fair value of assets or
liabilities. This hierarchy required the Company to use observable market data,
when available, and to minimize the use of unobservable inputs when determining
fair value.
As of
December 31, 2009, $50.1 million (par value) of long-term investments were
recorded at fair value. The long-term investments consist of auction rate
securities, primarily secured by guaranteed student loans backed by a U.S.
government agency, and are classified as available-for-sale. 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. These securities are classified as long-term
investments due to the contractual maturity of the securities being over ten
years.
These
long-term investments were valued using Level 3 inputs as of December 31, 2009,
as the assets were subject to valuation using significant unobservable inputs.
The Company estimated the fair value of each security with the assistance of an
independent valuation firm using a discounted cash flow model to calculate the
present value of projected cash flows based on a number of inputs and
assumptions including the security structure and terms, the current market
conditions and the related impact on the expected weighted average life,
interest rate estimates and default risk of the securities.
44
As of
December 31, 2009, the Company has recorded an unrealized loss of $4.4
million on the long-term investments based upon this valuation. This unrealized
loss reduced the fair value of the Company’s auction rate securities as of
December 31, 2009 to $45.7 million. These investments have been in an unrealized
loss position for greater than 12 months. During the year ended
December 31, 2008, the Company recorded an unrealized loss of $5.3 million
on the long-term investments.
The
Company conducts periodic reviews to identify and evaluate each investment that
has an unrealized loss. An unrealized loss exists when the current fair value of
an individual security is less than its amortized cost basis. Due to the
unrealized losses on the auction rate securities held, the Company has assessed
whether the calculated impairment is other-than-temporary. In performing this
assessment, even though the Company has no intention to sell the securities
before the amortized cost basis is recovered and believes it is
more-likely-than-not it will not be required to sell the securities prior to
recovery, the Company has performed additional analyses to determine if a
portion of the unrealized loss is considered a credit loss. A credit loss would
be identified as the amount of the principal cash flows not expected to be
received over the remaining term of the security as projected using the
Company’s best estimates. The Company has assessed each security for credit
impairment, taking into account factors such as (i) the length of time and the
extent to which fair value has been below cost; (ii) activity in the market of
the issuer which may indicate adverse credit conditions; (iii) the payment
structure of the security; and (iv) the failure of the issuer of the security to
make scheduled payments. The Company used an independent valuation firm to
assist in making these assessments.
Based on
these assessments, the Company has determined that there is no credit loss
associated with its auction rate securities as of December 31, 2009, as shown by
the cash flows expected to be received over the remaining life of the
securities.
The
following table provides a reconciliation of the beginning and ending balance of
our auction rate securities classified as long-term investments measured at fair
value using significant unobservable inputs (Level 3 inputs):
|
2009
|
2008
|
|||||||
|
Balance
as of January 1
|
$ | 48,162 | $ | — | ||||
|
Transfers
into Level 3
|
— | 55,484 | ||||||
|
Net
unrealized gains (losses) included in other comprehensive income
(loss)
|
924 | (2,397 | ) | |||||
|
Redemptions
of investments
|
(3,400 | ) | (4,925 | ) | ||||
|
Balance
as of December 31
|
$ | 45,686 | $ | 48,162 | ||||
|
Unrealized
losses still held
|
$ | 4,389 | $ | 5,313 | ||||
The
cumulative unrealized loss is included as a component of accumulated other
comprehensive loss within shareholders’ equity in the accompanying consolidated
balance sheet. As of December 31, 2009, there were no long-term investments
measured at fair value using Level 1 or Level 2 inputs. The Company’s
investments had no impairments as of December 31, 2007. All income generated
from these investments is recorded as interest income.
(e)
Inventories
Inventories
include material, labor and overhead and are stated at the lower of cost
(principally first-in, first-out method) or market.
(f)
Property, Plant and Equipment
Property,
plant and equipment are stated at cost. Depreciation is calculated on the
straight-line method over the useful lives of the assets – 5 to 40 years for
buildings and building improvements, 2 to 10 years for machinery and equipment,
2 to 10 years for furniture and fixtures, 2 to 5 years for vehicles. Leasehold
improvements are amortized on the straight-line method over the shorter of the
useful life of the improvement or the remainder of the lease term.
45
(g)
Goodwill and Other Intangible Assets
Goodwill
represents the excess of purchase price over fair value of net assets acquired.
Goodwill and intangible assets acquired in a business combination and determined
to have an indefinite useful life are not amortized, but instead tested for
impairment at least annually. Intangible assets with estimable useful lives are
amortized over their respective estimated useful lives to their estimated
residual values.
(h)
Other Assets
Other
assets consist primarily of acquired identifiable intangible assets, capitalized
purchased software costs, and assets held for sale. Identifiable intangible
assets as of December 31, 2009 and 2008 were as follows:
|
Gross
|
Net
|
|||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
||||||||||
|
Amount
|
Amortization
|
Amount
|
||||||||||
|
Customer
relationships
|
$ | 17,944 | $ | (5,432 | ) | $ | 12,512 | |||||
|
Technology
licenses
|
11,300 | (1,698 | ) | 9,602 | ||||||||
|
Other
|
868 | (70 | ) | 798 | ||||||||
|
Other
intangible assets, December 31, 2009
|
$ | 30,112 | $ | (7,200 | ) | $ | 22,912 | |||||
|
Gross
|
Net
|
|||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
||||||||||
|
Amount
|
Amortization
|
Amount
|
||||||||||
|
Customer
relationships
|
$ | 17,933 | $ | (3,624 | ) | $ | 14,309 | |||||
|
Other
|
868 | (47 | ) | 821 | ||||||||
|
Other
intangible assets, December 31, 2008
|
$ | 18,801 | $ | (3,671 | ) | $ | 15,130 | |||||
Customer
relationships are being amortized on a straight-line basis over a period of ten
years. In March 2009, the Company acquired certain technology licenses for $11.3
million. Technology licenses are being amortized over their estimated useful
lives in proportion to the economic benefits consumed. Amortization of other
intangible assets for the years ended December 31, 2009, 2008 and 2007 was $3.5
million, $1.8 million and $1.8 million, respectively.
The
estimated future amortization expense of other intangible assets for each of the
next five years is as follows:
|
Year
ending December 31,
|
Amount
|
|||
|
2010
|
$ | 4,448 | ||
|
2011
|
4,391 | |||
|
2012
|
4,391 | |||
|
2013
|
3,618 | |||
|
2014
|
1,812 | |||
During
2009, 2008 and 2007, $0.1 million, $0.3 million and $3.6 million, respectively,
of purchased software costs were capitalized. As of December 31, 2009 and 2008,
purchase software, net of accumulated amortization totaled $4.0 million and $5.9
million, respectively. The accumulated amortization of purchased software costs
at December 31, 2009 and 2008 was $21.3 million and $19.4 million,
respectively. Capitalized purchase software costs are amortized
straight-line over the estimated useful life of the related software, which
ranges from 3 to 7 years.
46
As of
December 31, 2009 and 2008, the Company had an asset held for sale in other
assets with a net book value of $8.2 million. This asset is a manufacturing
facility in Tianjin, China acquired in an acquisition (see Note 2) and is
available for immediate sale. During 2008, the Company committed to a plan to
divest its Tianjin facility.
(i)
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. Recoverability of assets to be held and used is evaluated by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated undiscounted future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the estimated fair value of the asset. Assets to be disposed of would be
separately disclosed and reported at the lower of the carrying amount or
estimated fair value less costs to sell, and are no longer depreciated. The
assets and liabilities of a disposed group classified as held for sale would be
disclosed separately in the appropriate asset and liability sections of the
balance sheet.
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 is recognized to the extent that the carrying amount exceeds the
asset’s fair value. The impairment determination is made at the reporting unit
level and consists of two steps. First, the Company determines the fair value of
a reporting unit, which the Company has determined to be consistent with its
operating segments as defined in Note 13 – “Segment and Geographic Information,”
and compares it to its carrying amount. The fair value of our reporting units is
determined based on a weighting of both projected discounted future results and
comparative market multiples. The projected discounted future results
(discounted cash flow approach) is based on assumptions that are consistent with
the Company’s estimates of future growth and the strategic plan used to manage
the underlying business. Factors requiring significant judgment include
assumptions related to future growth rates, discount factors, and tax rates,
amongst other considerations. Second, if the carrying amount of a reporting unit
exceeds its estimated fair value, an impairment loss is recognized for any
excess of the carrying amount of the reporting unit’s goodwill over the implied
fair value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation. The residual fair value after this allocation is the
implied fair value of the reporting unit goodwill. This impairment analysis is
based on significant assumptions of future results made by management, including
revenue and cash flow projections. Circumstances that may lead to impairment of
goodwill include unforeseen decreases in future performance or industry demand
and the restructuring of our operations as a result of a change in our business
strategy.
The
Company completed the annual impairment test during the fourth quarter of 2009
and 2007 and determined that no goodwill impairment existed as of the date of
the impairment test. In the fourth quarter of 2008, the Company’s annual
goodwill impairment analysis indicated there was an impairment of goodwill in
two of its reporting units, the Americas and Europe, primarily due to a
decline in the Company’s market capitalization and market turmoil. Accordingly,
the Company recorded a non-cash impairment charge in the fourth quarter of 2008
totaling $247.5 million. See Note 5.
47
(j)
Earnings Per Share
Basic
earnings per share is computed using the weighted-average number of shares
outstanding. Diluted earnings per share is computed using the weighted-average
number of shares outstanding adjusted for the incremental shares attributed to
outstanding stock equivalents during the years ended December 31, 2009, 2008 and
2007. Stock equivalents include common shares issuable upon the exercise of
stock options and other equity instruments, and are computed using the treasury
stock method. Under the treasury stock method, the exercise price of a share,
the amount of compensation cost, if any, for future service that the Company has
not yet recognized, and the amount of estimated tax benefits that would be
recorded in paid-in-capital, if any, when the share is exercised are assumed to
be used to repurchase shares in the current period.
The
following table sets forth the calculation of basic and diluted earnings per
share.
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Numerator
for basic earnings per share – net income (loss)
|
$ | 53,895 | $ | (135,632 | ) | $ | 92,356 | |||||
|
Interest
expense on convertible debt, net of tax
|
— | — | 147 | |||||||||
|
Numerator
for diluted earnings per share
|
$ | 53,895 | $ | (135,632 | ) | $ | 92,503 | |||||
|
Denominator
for basic earnings per share – weighted-
|
||||||||||||
|
average number of common shares
outstanding
|
||||||||||||
|
during the
period
|
64,758 | 67,060 | 72,061 | |||||||||
|
Incremental
common shares attributable to exercise
|
||||||||||||
|
of outstanding dilutive
options
|
303 | — | 593 | |||||||||
|
Incremental
common shares attributable to outstanding
|
||||||||||||
|
restricted shares and phantom
stock
|
45 | — | — | |||||||||
|
Incremental
common shares attributable
|
||||||||||||
|
to exercise of
warrants
|
10 | — | 133 | |||||||||
|
Incremental
common shares attributable to
|
||||||||||||
|
conversion of 6.5% convertible
debt
|
— | — | 42 | |||||||||
|
Denominator
for diluted earnings per share
|
65,116 | 67,060 | 72,829 | |||||||||
|
Basic
earnings (loss) per share
|
$ | 0.83 | $ | (2.02 | ) | $ | 1.28 | |||||
|
Diluted
earnings (loss) per share
|
$ | 0.83 | $ | (2.02 | ) | $ | 1.27 | |||||
Options
to purchase 4.1 million and 3.0 million common shares in 2009 and 2007,
respectively, were not included in the computation of diluted earnings per share
because the option exercise price was greater than the average market price of
the common shares. In 2008, all outstanding options, warrants, restricted shares
and phantom stock awards are not included in the computation of diluted loss per
share because the Company was in a net loss position.
48
(k)
Revenue Recognition
Revenue
is primarily derived from the sale of circuit boards and systems. Revenue from
the sale of circuit board assemblies, systems and excess inventory is recognized
when title and risk of ownership have passed, the price to the buyer is fixed
and determinable and recoverability is reasonably assured, which generally is
when the goods are shipped. To a lesser extent, the Company also derives revenue
from non-manufacturing services, such as product design, circuit board layout,
and test development. 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. Costs related to these services
are expensed as incurred. The Company assumes no significant obligations
after shipment as the Company typically warrants workmanship only. Based on
historical experience, the warranty provision is immaterial.
(l)
Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred income
taxes are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company records
a valuation allowance to reduce its deferred tax assets to the amounts that is
more likely than not to be realized. The Company has considered the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in assessing the need for the valuation
allowance.
(m)
Stock-Based Compensation
The
Company’s stock awards plan permits the grant of a variety of types of awards,
including stock options, restricted stock awards, stock appreciation rights,
performance awards, and phantom stock awards, or any combination thereof, to key
employees of the Company. Stock options are granted to employees with an
exercise price equal to the market price of the Company’s stock on the date of
grant, vest over a four-year period from the date of grant and have a term of
ten years. Restricted shares and phantom stock awards granted to employees vest
over a four-year period from the date of grant, subject to the continued
employment of the employee by the Company. Members of the Board of
Directors of the Company who are not employees of the Company participate in a
separate stock option plan that provides for the granting of stock options upon
the occurrence of the non-employee director’s election or re-election to the
Board of Directors. All awards under the non-employee director stock option plan
are fully vested upon the date of grant and have a term of ten years. See Note
8.
All
share-based payments to employees, including grants of employee stock options,
are recognized in the financial statements based on their fair values. The total
compensation cost recognized for stock-based awards was $5.4 million, $4.7
million and $4.5 million for 2009, 2008 and 2007. The compensation expense for
stock-based awards includes an estimate for forfeitures and is recognized over
the vesting period of the options using the straight-line method. Cash flows
from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for stock-based awards (excess tax benefits) are
classified as cash flows from financing activities. Awards of restricted
shares and phantom stock are valued at the closing market price of the Company’s
stock on the date of grant.
As of
December 31, 2009, there was approximately $8.6 million of total
unrecognized compensation cost related to nonvested stock options. That cost is
expected to be recognized over a weighted-average period of
2.3 years. As of December 31, 2009, there was $4.1 million of total
unrecognized compensation cost related to restricted share awards. That cost is
expected to be recognized over a weighted-average period of 3.4 years. As
of December 31, 2009, there was $1.2 million of total unrecognized compensation
cost related to phantom stock awards. That cost is expected to be recognized
over a weighted-average period of 3.5 years.
49
During
the years ended December 31, 2009, 2008 and 2007, the Company issued 0.6
million, 0.8 million and 0.8 million options, respectively. In
connection with the Merger, all outstanding Pemstar options were converted into
369 thousand options of the Company at the 0.160 exchange ratio on January 8,
2007. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The weighted-average assumptions
used to value the option grants and the options converted from Pemstar
during the years ended December 31, 2009, 2008 and 2007 were as
follows:
| Year ended December 31, | |||
|
2009
|
2008
|
2007
|
|
|
Stock
Options
|
|||
|
Expected term of
options
|
5.7
years
|
4.8
years
|
3.8
years
|
|
Expected
volatility
|
41%
|
40%
|
32%
|
|
Risk-free interest
rate
|
2.51%
|
1.91%
|
3.82%
|
|
Dividend
yield
|
zero
|
zero
|
zero
|
The
expected term of the options represents the estimated period of time until
exercise and is based on historical experience, giving consideration to the
contractual terms, vesting schedules and expectations of future employee
behavior. Separate groups of employees that have similar historical exercise
behavior are considered separately for valuation purposes. Expected stock price
volatility is based on the historical volatility of the Company’s stock. The
risk-free interest rate is based on the U.S. Treasury zero-coupon rates in
effect at the time of grant with an equivalent remaining term. The dividend
yield reflects that the Company has not paid any cash dividends since
inception.
The
weighted-average fair value per option granted during the years ended
December 31, 2009, 2008 and 2007 was $7.58, $4.75 and $6.94, respectively.
The total cash received as a result of stock option exercises for year ended
December 31, 2009, 2008 and 2007 was approximately $3.6 million, $2.9
million and $9.2 million, respectively. The tax benefit realized as a result of
the stock option exercises during 2008 and 2007 was $0.8 million and $2.5
million, respectively. For the year ended December 31, 2009, 2008 and 2007, the
total intrinsic value of stock options exercised was $2.6 million, $2.4
million and $8.0 million, respectively.
(n)
Use of Estimates
Management
of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in accordance with generally
accepted accounting principles. Actual results could differ from those
estimates.
(o)
Fair Values of Financial Instruments
The
Company’s financial instruments consist of cash equivalents, accounts
receivable, accrued liabilities, accounts payable and capital lease obligations.
The Company believes that the carrying value of these instruments approximate
their fair value. As of December 31, 2009, the Company’s long-term investments
are recorded at fair value. See Note 11.
(p)
Foreign Currency
For
foreign subsidiaries using the local currency as their functional currency,
assets and liabilities are translated at exchange rates in effect at the balance
sheet date and income and expenses are translated at average exchange rates. The
effects of these translation adjustments are reported in other comprehensive
income. Exchange losses arising from transactions denominated in a currency
other than the functional currency of the entity involved are included in other
expense and totaled approximately $1.9 million, $1.9 million and $0.2 million in
2009, 2008 and 2007, respectively.
50
(q)
Recently Enacted Accounting Principles
In
October 2009, the Financial Accounting Standards Board (FASB) issued amendments
to the accounting and disclosure for revenue recognition. These amendments,
effective for fiscal years beginning on or after June 15, 2010 (early adoption
is permitted), modify the criteria for recognizing revenue in multiple element
arrangements. The Company is currently assessing the impact of these amendments
on its consolidated financial position and results of operations.
In
October 2009, the FASB issued guidance which amends the scope of existing
software revenue recognition accounting. Tangible products containing software
components and non-software components that function together to deliver the
product’s essential functionality would be scoped out of the accounting guidance
on software and accounted for based on other appropriate revenue recognition
guidance. This guidance is effective for all new or materially modified
arrangements entered into on or after June 15, 2010, with earlier application
permitted. Full retrospective application of the new guidance is optional. This
guidance must be adopted in the same period that the Company adopts the amended
accounting for arrangements with multiple deliverables described in the
preceding paragraph. The Company is currently assessing the impact of this new
guidance on its consolidated financial position and results of
operations.
In
August 2009, the FASB issued guidance on the measurement of liabilities at
fair value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The implementation of this guidance on October 1,
2009 did not have an impact on the Company’s consolidated financial
position and results of operations.
In June
2009, the FASB issued the FASB Accounting Standards Codification (the
Codification). The Codification became the single source of authoritative,
nongovernmental Generally Accepted Accounting Principles (GAAP), except for
rules and interpretive releases of the SEC, which are sources of authoritative
GAAP for SEC registrants. The Codification is effective for interim and annual
periods ending after September 15, 2009. The adoption of the Codification on
September 30, 2009 did not have an impact on the Company’s consolidated
financial statements.
The
Company has determined that all other recently issued accounting standards will
not have a material impact on its consolidated financial position, results of
operations and cash flows, or do not apply to its operations.
(r)
Correction of an Immaterial Error
The 2008
and 2007 consolidated financial statements presented herein reflect the
correction of an immaterial error related to income taxes. The correction is due
to a deferred income tax liability that originated prior to 2004. The 2008 and
2007 correction resulted in a $5.9 million decrease in current deferred income
taxes and an associated adjustment to decrease retained earnings by $5.9
million.
(s)
Reclassifications
Certain
reclassifications of prior period amounts have been made to conform to the
current year presentation.
51
Note
2—Business Acquisitions
Effective
January 8, 2007, the Company acquired Pemstar Inc. (Pemstar), a publicly traded
electronics manufacturing services (EMS) company headquartered in Rochester,
Minnesota (the Merger). Pursuant to the Agreement and Plan of Merger between the
Company and Pemstar dated October 16, 2006 (the Merger Agreement), each issued
and outstanding share of common stock, par value $0.01 per share, of Pemstar was
converted into the right to receive 0.160 of a common share, par value $0.10 per
share, of the Company. With the closing of the Merger, Pemstar became a wholly
owned subsidiary of the Company. This acquisition expanded the Company’s
customer base and deepened its engineering and systems integration
capabilities.
The
aggregate purchase price was $221.5 million, including common shares valued at
$202.5 million, stock options and warrants valued at $9.0 million,
conversion feature of debt valued at $4.8 million and acquisition costs of $5.2
million. The value of the 7.3 million common shares issued was based on the
average market price of the Company’s common shares over the 2-day period before
and after the terms of the acquisition were agreed to and
announced.
As a
direct result of the Merger, the Company assumed approximately $89.4 million of
indebtedness, including $5.0 million in convertible senior subordinated
notes. The Company reduced the assumed debt by $72.2 million in 2007. The
convertible senior subordinated notes matured on May 1, 2007 and were converted
into 0.4 million common shares at the request of the noteholders. Prior to the
Merger, the Company had no outstanding debt.
The
Company accounted for the Merger utilizing the purchase method of accounting.
Therefore, the results of operations of the Pemstar operations since January 8,
2007 have been included in the accompanying consolidated statement of income.
The allocation of the net purchase price of the Merger resulted in goodwill of
$165.9 million.
The
purchase price paid in the Merger has been allocated as follows:
|
Acquisition
of the 45.6 million shares of outstanding common stock of
Pemstar
|
||||
|
at $4.44 per
share
|
$ | 202,475 | ||
|
Estimated
fair value of Pemstar stock options and warrants
|
9,028 | |||
|
Estimated
fair value of the conversion feature of debt
|
4,773 | |||
|
Acquisition
costs
|
5,179 | |||
|
Total
purchase price
|
$ | 221,455 | ||
|
Current
assets
|
$ | 241,539 | ||
|
Property,
plant and equipment
|
52,542 | |||
|
Deferred
taxes
|
14,256 | |||
|
Goodwill
|
165,878 | |||
|
Intangible
assets
|
18,277 | |||
|
Other
assets
|
4,386 | |||
|
Total
assets acquired
|
496,878 | |||
|
Current
liabilities
|
182,806 | |||
|
Long-term
debt, capital lease obligations and other long-term
liabilities
|
92,617 | |||
|
Total
liabilities assumed
|
275,423 | |||
|
Net
assets acquired
|
$ | 221,455 | ||
52
On March
1, 2007, we terminated a joint venture agreement and acquired for $5.3 million
the remaining 40% minority interest in the Company’s Romanian subsidiary. We
acquired the other 60% interest in the Merger discussed above. The purchase
price in excess of the 40% minority interest liability resulted in goodwill of
$4.7 million.
Pro forma
results of operations for the year ended December 31, 2007 related to the Merger
have not been presented since the operating results for Pemstar for the
period during 2007 up to the date of acquisition are immaterial.
During
the three months ended June 30, 2009, the Company completed an immaterial
business acquisition of certain precision machining assets and capabilities for
$10.6 million. The Company expensed $0.1 million in acquisition costs related to
this acquisition.
Note
3—Inventories
Inventory
costs are summarized as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 237,294 | $ | 254,170 | ||||
|
Work
in process
|
54,197 | 56,486 | ||||||
|
Finished
goods
|
24,252 | 32,507 | ||||||
| $ | 315,743 | $ | 343,163 | |||||
|
Note
4—Property, Plant and Equipment
|
||||||||
|
Property,
plant and equipment consists of the following:
|
||||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Land
|
$ | 6,172 | $ | 6,172 | ||||
|
Buildings
and building improvements
|
65,258 | 63,839 | ||||||
|
Machinery
and equipment
|
309,976 | 297,672 | ||||||
|
Furniture
and fixtures
|
7,082 | 6,684 | ||||||
|
Vehicles
|
668 | 802 | ||||||
|
Leasehold
improvements
|
17,059 | 15,328 | ||||||
|
Construction
in progress
|
142 | 1,620 | ||||||
| 406,357 | 392,117 | |||||||
|
Less
accumulated depreciation
|
(280,107 | ) | (257,499 | ) | ||||
| $ | 126,250 | $ | 134,618 | |||||
53
Note
5—Goodwill
Goodwill
associated with each of the Company’s business segments and changes in those
amounts in 2007, 2008 and 2009 were as follows:
|
Americas
|
Asia
|
Europe
|
Total
|
|||||||||||||
|
Goodwill,
December 31, 2006
|
$ | 106,931 | $ | 6,068 | $ | — | $ | 112,999 | ||||||||
|
Acquisitions
|
119,138 | 31,844 | 19,691 | 170,673 | ||||||||||||
|
Currency
translation adjustment
|
53 | — | — | 53 | ||||||||||||
|
Goodwill,
December 31, 2007
|
226,122 | 37,912 | 19,691 | 283,725 | ||||||||||||
|
Impairment
charge
|
(227,791 | ) | — | (19,691 | ) | (247,482 | ) | |||||||||
|
Currency
translation adjustment
|
1,669 | — | — | 1,669 | ||||||||||||
|
Goodwill,
December 31, 2008 and 2009
|
$ | — | $ | 37,912 | $ | — | $ | 37,912 | ||||||||
See Note
2 for a discussion of the acquisitions completed during 2007.
Note
6—Borrowing Facilities
Capital
lease obligations outstanding consist of the following:
|
December
31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Capital
lease obligations
|
$ | 11,681 | $ | 11,939 | ||||||||||||
|
Less
current installments
|
300 | 256 | ||||||||||||||
|
Capital
lease obligations, less current installments
|
$ | 11,381 | $ | 11,683 | ||||||||||||
Under the
terms of a Credit Agreement (the Credit Agreement), the Company has a $100
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 and
lender approval.
Interest
on outstanding borrowings under the Credit Agreement is payable quarterly, at
the Company’s option, at either LIBOR plus 0.75% to 1.75% or a prime rate plus
0.00% to 0.25%, based upon the Company’s debt ratio as specified in the Credit
Agreement. A commitment fee of 0.15% to 0.35% per annum (based upon the
Company’s debt ratio) on the unused portion of the revolving credit line is
payable quarterly in arrears. As of December 31, 2009, the Company 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 the Company’s domestic inventory and accounts
receivable, 100% of the stock of the Company’s domestic subsidiaries, 65% of the
voting capital stock of each direct foreign subsidiary and substantially all of
the other tangible and intangible assets of the Company and its domestic
subsidiaries. The Credit Agreement contains customary financial covenants as to
working capital, debt leverage, fixed charges, and consolidated net worth, and
restricts the ability of the Company to incur additional debt, pay dividends,
sell assets, and to merge or consolidate with other persons. As of December 31,
2009, the Company was in compliance with all such covenants and
restrictions.
54
The
Company’s 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, the Company’s Thailand subsidiary had no working capital borrowings
outstanding.
The
aggregate principal maturities of capital lease obligations for each of the five
years subsequent to December 31, 2009 are as follows: 2010, $0.3 million; 2011,
$0.4 million; 2012, $0.4 million; 2013, $0.5 million; and 2014,
$0.6 million.
Note
7—Commitments
The
Company leases certain manufacturing equipment, office equipment, vehicles and
office, warehouse and manufacturing facilities under operating leases. Some of
the leases provide for escalation of the lease payments as maintenance costs and
taxes increase. The leases expire at various times through 2016. Leases for
office space and manufacturing facilities generally contain renewal options.
Rental expense for the years ended December 31, 2009, 2008 and 2007 was $10.6
million, $10.9 million and $12.3 million, respectively.
The
Company is obligated under capital leases, assumed in the Merger, that expire on
various dates through 2023. As of December 31, 2009, property, plant and
equipment include the following amounts under capital leases:
|
Buildings
and building improvements
|
$ | 12,207 | ||
|
Vehicles
|
28 | |||
| 12,235 | ||||
|
Less
accumulated depreciation
|
(2,270 | ) | ||
| $ | 9,965 |
Future
minimum lease payments under noncancelable operating leases and future minimum
capital lease payments are as follows:
|
Capital
|
Operating
|
|||||||
|
Year
ending December 31,
|
Leases
|
Leases
|
||||||
|
2010
|
$ | 1,469 | $ | 12,210 | ||||
|
2011
|
1,499 | 9,757 | ||||||
|
2012
|
1,520 | 9,576 | ||||||
|
2013
|
1,550 | 4,624 | ||||||
|
2014
|
1,581 | 3,998 | ||||||
|
Thereafter
|
14,309 | 7,144 | ||||||
|
Total
minimum lease payments
|
$ | 21,928 | $ | 47,309 | ||||
|
Less:
amount representing interest
|
10,247 | |||||||
|
Present
value of minimum lease payments
|
11,681 | |||||||
|
Less:
current installments
|
300 | |||||||
|
Capital
lease obligations, less current installments
|
$ | 11,381 | ||||||
55
The
Company enters into contractual commitments to deliver products and services in
the ordinary course of business. The Company believes that all such contractual
commitments will be met or renegotiated such that no material adverse financial
impact on the Company’s financial position, results of operations or liquidity
will result from these commitments.
Note
8—Common Shares and Stock Option Plans
On July
24, 2008, the Company completed the repurchase of 6.8 million of its common
shares under the $125 million share repurchase program approved by the
Board of Directors on July 25, 2007. On July 24, 2008, the Board of Directors of
the Company approved the additional repurchase of up to $100 million of the
Company’s outstanding common shares. 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 2009, the Company repurchased a total of 1.7
million common shares for $27.9 million at an average price of $16.67 per share.
During 2008, the Company repurchased a total of 5.8 million common shares for
$93.8 million at an average price of $16.14 per share. During the period from
July 25, 2007 to December 31, 2007, the Company repurchased a total of 2.6
million common shares for $53.0 million at an average price of $20.33 per
share.
On
February 16, 2000, the Board of Directors of the Company adopted and
subsequently its shareholders approved the Benchmark Electronics, Inc. 2000
Stock Awards Plan (the 2000 Plan). The 2000 Plan authorizes the Company, upon
recommendation of the compensation committee of the Board of Directors, to grant
a variety of types of awards, including stock options, restricted stock awards,
stock appreciation rights, performance awards, and phantom stock awards, or any
combination thereof, to key employees of the Company. The maximum number of
common shares that may be subject to outstanding awards determined immediately
after the grant of any award, and the maximum number of shares which may be
issued under the 2000 Plan, as amended, pursuant to all awards, may not exceed
11.25 million shares (subject to antidilutive adjustment).
The 2000
Plan provides for the discretionary granting by the Company of incentive stock
options as well as non-qualified stock options. Incentive stock options may only
be granted to employees of the Company or its subsidiaries. The exercise price
of any incentive stock option must not be less than the fair market value of the
common shares on the date of grant. The exercise price of any incentive stock
option granted to 10% shareholders (employees who possess more than 10% of the
total combined voting power of all classes of shares of the Company) must be at
least 110% of the fair market value of the common shares at the time such option
is granted. The stock options will terminate 5 years after the grant date for
10% shareholders and 10 years after the date of grant for all other optionees.
Options granted under the 2000 Plan vest over 4 years, subject to the
continued employment of the employee by the Company. Restricted shares and
phantom stock awards granted to employees vest over a four-year period from the
date of grant, subject to the continued employment of the employee by the
Company. As of December 31, 2009, the Company has 5.5 million equity awards
outstanding with respect to common shares under the 2000 Plan. The 2000 Plan
expired on February 16, 2010 and no additional grants may be made under that
plan.
In
December of 1994, the Board of Directors of the Company adopted the Benchmark
Electronics, Inc. 1994 Stock Option Plan for Non-Employee Directors (the 1994
Plan) for the benefit of members of the Board of Directors of the Company or its
affiliates who were not employees of the Company or its affiliates (as defined
in the 1994 Plan). The aggregate number of common shares for which options may
be granted under the 1994 Plan was 450 thousand. Under the terms of the 1994
Plan, as amended, each member of the Board of Directors of the Company or its
affiliates who was not an employee of the Company or any of its affiliates on
the date of the grant (a Non-Employee Director) received a grant of an option to
purchase 13.5 thousand common shares of the Company upon the date of his
election or re-election to the Board of Directors. The 1994 Plan was replaced in
2002, and no additional grants may be made under that plan. As of December 31,
2009, the Company has outstanding options with respect to 27.0 thousand common
shares under the 1994 Plan.
56
In May
2002, the shareholders of the Company adopted the Benchmark Electronics, Inc.
2002 Stock Option Plan for Non-Employee Directors (the 2002 Plan). The 2002 Plan
replaced the 1994 Plan. The 2002 Plan, as amended, provides for the granting of
a stock option to purchase up to 15.75 thousand common shares upon the
occurrence of the non-employee director’s election or re-election to the Board.
The maximum number of common shares for which options may be granted under the
2002 Plan is 675 thousand. No awards may be granted under the 2002 Plan after
the expiration of ten years from February 26, 2002, the date of its adoption by
the Board of Directors. The 2002 Plan remains in effect as to awards made prior
to the expiration of ten years until such awards have been satisfied or have
expired. All awards under the 2002 Plan are fully vested upon the date of grant.
The exercise price per common share of options granted under the 2002 Plan will
be the fair market value of a common share on the date such option is granted.
In 2009, 2008 and 2007, pursuant to the 2002 Plan, 60.5 thousand, 60.5
thousand and 50.5 thousand options, respectively, were granted to Non-Employee
Directors to purchase common shares at a weighted-average exercise price of
$12.18, $16.25 and $21.35 per share, respectively. As of December 31, 2009, the
Company has outstanding options with respect to 324.8 thousand common shares and
220.5 thousand additional options may be granted under the 2002
Plan.
The
following table summarizes the activities relating to the Company’s stock
option:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Number
of
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Options
|
Price
|
Term
(Years)
|
Value
|
|||||||||||||
|
Outstanding
at December 31, 2006
|
5,716 | $ | 18.54 | |||||||||||||
|
Granted
|
846 | $ | 17.47 | |||||||||||||
|
Converted
from Merger
|
369 | $ | 25.47 | |||||||||||||
|
Exercised
|
(774 | ) | $ | 11.89 | ||||||||||||
|
Forfeited
or expired
|
(282 | ) | $ | 30.08 | ||||||||||||
|
Outstanding
at December 31, 2007
|
5,875 | $ | 19.15 | |||||||||||||
|
Granted
|
817 | $ | 12.91 | |||||||||||||
|
Exercised
|
(313 | ) | $ | 9.38 | ||||||||||||
|
Forfeited
or expired
|
(541 | ) | $ | 23.04 | ||||||||||||
|
Outstanding
at December 31, 2008
|
5,838 | $ | 18.43 | |||||||||||||
|
Granted
|
584 | $ | 18.39 | |||||||||||||
|
Exercised
|
(366 | ) | $ | 9.85 | ||||||||||||
|
Forfeited
or expired
|
(525 | ) | $ | 16.26 | ||||||||||||
|
Outstanding
at December 31, 2009
|
5,531 | $ | 19.20 | 6.18 | $ | 13,080 | ||||||||||
|
Exercisable
at December 31, 2009
|
3,128 | $ | 19.97 | 4.56 | $ | 7,580 | ||||||||||
The
aggregate intrinsic value in the table above is before income taxes and
is calculated as the difference between the exercise price of the
underlying options and the Company’s closing stock price of $18.91 as of the
last business day of the year ended December 31, 2009 for options that
had exercise prices that were below the closing price.
57
At
December 31, 2009, 2008 and 2007, the number of options exercisable was 3.1
million, 3.4 million and 3.6 million, respectively, and the
weighted-average exercise price of those options was $19.97, $18.02 and $17.11,
respectively.
The
following table summarizes the activities relating to the Company’s restricted
shares:
|
Weighted-
|
||||||||
|
Average
|
||||||||
|
Grant
Date
|
||||||||
|
Shares
|
Fair
Value
|
|||||||
|
Outstanding
at December 31, 2007
|
— | — | ||||||
|
Granted
|
140 | $ | 13.99 | |||||
|
Outstanding
at December 31, 2008
|
140 | $ | 13.99 | |||||
|
Granted
|
151 | $ | 19.11 | |||||
|
Forfeited
|
(1 | ) | $ | 12.64 | ||||
|
Outstanding
at December 31, 2009
|
290 | $ | 16.67 | |||||
As of
December 31, 2009, there were no vested restricted shares.
The
following table summarizes the activities relating to the Company’s phantom
stock awards:
|
Average
|
||||||||
|
Grant
Date
|
||||||||
|
Shares
|
Fair
Value
|
|||||||
|
Outstanding
at December 31, 2007
|
— | — | ||||||
|
Granted
|
34 | $ | 12.64 | |||||
|
Outstanding
at December 31, 2008
|
34 | $ | 12.64 | |||||
|
Granted
|
49 | $ | 19.11 | |||||
|
Forfeited
|
(2 | ) | $ | 14.07 | ||||
|
Outstanding
at December 31, 2009
|
81 | $ | 16.50 | |||||
As of
December 31, 2009, there were no vested phantom stock awards.
58
Note
9—Income Taxes
Income
tax expense (benefit) based on income (loss) before income taxes consists
of:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Current:
|
||||||||||||
|
U.S. Federal
|
$ | (4,521 | ) | $ | (1,922 | ) | $ | (3,361 | ) | |||
|
State
and local
|
294 | 226 | 1,253 | |||||||||
|
Foreign
|
3,326 | 6,342 | 3,624 | |||||||||
| (901 | ) | 4,646 | 1,516 | |||||||||
|
Deferred:
|
||||||||||||
|
U.S. Federal
|
1,789 | (22,598 | ) | 6,350 | ||||||||
|
State
and local
|
355 | (2,751 | ) | (321 | ) | |||||||
|
Foreign
|
(3,217 | ) | (1,153 | ) | 125 | |||||||
| (1,073 | ) | (26,502 | ) | 6,154 | ||||||||
| $ | (1,974 | ) | $ | (21,856 | ) | $ | 7,670 | |||||
Worldwide
income (loss) before income taxes consisted of the following:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
United
States
|
$ | 4,012 | $ | (238,750 | ) | $ | 27,529 | |||||
|
Foreign
|
47,909 | 81,262 | 72,497 | |||||||||
| $ | 51,921 | $ | (157,488 | ) | $ | 100,026 | ||||||
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are presented
below:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Tax
at statutory rate
|
$ | 18,172 | $ | (55,121 | ) | $ | 35,009 | |||||
|
State
taxes, net of federal tax effect
|
422 | (1,641 | ) | 605 | ||||||||
|
Tax
exempt interest
|
(162 | ) | (1,354 | ) | (2,147 | ) | ||||||
|
Effect
of foreign operations and tax incentives
|
(13,998 | ) | (21,358 | ) | (22,200 | ) | ||||||
|
Valuation
allowance
|
(486 | ) | (1,493 | ) | (434 | ) | ||||||
|
Write-off
of investment in inactive foreign owned subsidiary
|
(2,668 | ) | (3,440 | ) | (6,481 | ) | ||||||
|
Revaluation
loss
|
(2,429 | ) | — | — | ||||||||
|
Intercompany
pricing adjustments
|
(1,293 | ) | — | — | ||||||||
|
Non
deductible goodwill impairment
|
— | 61,289 | — | |||||||||
|
Losses
in foreign jurisdictions for which no benefit has
|
||||||||||||
|
been
provided
|
894 | 758 | 382 | |||||||||
|
Other
|
(426 | ) | 504 | 2,936 | ||||||||
|
Total
income tax expense (benefit)
|
$ | (1,974 | ) | $ | (21,856 | ) | $ | 7,670 | ||||
59
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are presented below:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Carrying
value of inventories
|
$ | 1,888 | $ | — | ||||
|
Accrued
liabilities and allowances deductible for tax purposes
|
||||||||
|
on a cash
basis
|
4,508 | 5,149 | ||||||
|
Goodwill
|
22,049 | 26,376 | ||||||
|
Stock-based
compensation
|
5,985 | 4,186 | ||||||
|
Net
operating loss carryforwards
|
58,566 | 60,681 | ||||||
|
Tax
credit carryforwards
|
3,957 | 3,621 | ||||||
|
Other
|
7,484 | 6,985 | ||||||
| 104,437 | 106,998 | |||||||
|
Less:
valuation allowance
|
(72,926 | ) | (75,843 | ) | ||||
|
Net
deferred tax assets
|
31,511 | 31,155 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Plant
and equipment, due to differences in depreciation
|
(2,133 | ) | (2,930 | ) | ||||
|
Carrying
value of inventories
|
— | (223 | ) | |||||
|
Other
|
(1,804 | ) | (1,501 | ) | ||||
|
Gross
deferred tax liability
|
(3,937 | ) | (4,654 | ) | ||||
|
Net
deferred tax asset
|
$ | 27,574 | $ | 26,501 | ||||
|
Recorded
as:
|
||||||||
|
Current
deferred tax assets
|
$ | 9,861 | $ | 2,184 | ||||
|
Non-current
deferred tax assets
|
17,713 | 24,317 | ||||||
|
Net
deferred tax asset
|
$ | 27,574 | $ | 26,501 | ||||
60
The net
change in the total valuation allowance for the years ended December 31, 2009,
2008 and 2007 was an increase (decrease) of $(2.9) million, $0.5 million and
$71.2 million, respectively. The increase in the valuation allowance for the
year ended December 31, 2007 was primarily a result of $71.4 million that was
recorded in connection with the Merger. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowances as of December 31, 2009.
As of
December 31, 2009, the Company had $130.0 million in U.S. Federal operating loss
carryforwards which will expire from 2022 to 2029, state operating loss
carryforwards of approximately $115.0 million which will expire from 2017 to
2029, foreign operating loss carryforwards of approximately $26.8 million with
indefinite carryforward periods, and foreign operating loss carryforwards of
approximately $5.6 million which will expire at varying dates through 2017. The
utilization of these net operating loss carryforwards is limited to the future
operations of the Company in the tax jurisdictions in which such carryforwards
arose. The Company has U.S. federal tax credit carryforwards of $2.3
million which will expire at varying dates through 2029. The Company has
state tax credit carryforwards of $1.7 million which will expire at varying
dates through 2027.
Cumulative
undistributed earnings of certain foreign subsidiaries amounted to approximately
$388 million as of December 31, 2009. The Company considers earnings from
foreign subsidiaries to be indefinitely reinvested and, accordingly, no
provision for U.S. federal and state income taxes has been made for these
earnings. Upon distribution of foreign subsidiary earnings in the form of
dividends or otherwise, such distributed earnings would be reportable for U.S.
income tax purposes (subject to adjustment for foreign tax credits).
Determination of the amount of any unrecognized deferred tax liability on these
undistributed earnings is not practical.
The
Company has been granted certain tax incentives, including tax holidays, for its
subsidiaries in China, Ireland, Malaysia and Thailand. These tax incentives,
including tax holidays, expire on various dates through 2012, and are
subject to certain conditions with which the Company expects to comply. The net
impact of these tax incentives was to lower income tax expense for the years
ended December 31, 2009, 2008, and 2007 by approximately $9.9 million
(approximately $0.15 per diluted share), $15.9 million (approximately $0.24 per
diluted share) and $15.7 million (approximately $0.22 per diluted share),
respectively.
61
On
January 1, 2007, the Company adopted a new income tax accounting standard that
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken in a tax return.
The Company must determine whether it is “more-likely-than-not” that a tax
position will be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position.
Once it is determined that a position meets the more-likely-than-not recognition
threshold, the position is measured to determine the amount of benefit to
recognize in the financial statements. The cumulative effect of adopting this
new income tax accounting standard was a $19.3 million decrease to income taxes
payable with a corresponding increase to the January 1, 2007 balance of retained
earnings for tax benefits not previously recognized. As of December 31, 2009,
the total amount of the reserve for uncertain tax benefits including interest
and penalties is $19.7 million. A reconciliation of the beginning and
ending amount of unrecognized tax benefits, excluding interest and penalties, is
as follows:
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
as of January 1
|
$ | 23,121 | $ | 27,478 | $ | 16,510 | ||||||
|
Additions
related to prior year tax positions
|
135 | 182 | 600 | |||||||||
|
Decreases
related to prior year tax positions
|
(2,800 | ) | (800 | ) | (200 | ) | ||||||
|
Increase
from entities acquired in the current year
|
— | — | 16,224 | |||||||||
|
Additions
related to current period tax positions
|
— | — | 825 | |||||||||
|
Decreases
as a result of a lapse of the applicable statute
|
||||||||||||
|
of limitations in
current year
|
(4,420 | ) | (3,739 | ) | (6,481 | ) | ||||||
|
Balance
as of December 31
|
$ | 16,036 | $ | 23,121 | $ | 27,478 | ||||||
The
decrease in the total amount of unrecognized tax benefits reserve during 2009
and 2008 is primarily the result of the expiration of the statute of limitations
for a worthless stock deduction. The increase in the total amount of
unrecognized tax benefits reserve from the date of adoption to December 31, 2007
is primarily the result of the addition of $16.2 million of uncertain tax
benefits acquired in the Merger. The analysis of the uncertain tax
positions related to an acquisition in 2007 for both U.S. and foreign
jurisdictions was performed as of the acquisition date.
The
reserve is classified as a current or long-term liability in the consolidated
balance sheet based on the Company’s expectation of when the items will be
settled. The Company records interest expense and penalties accrued in relation
to uncertain income tax benefits as a component of current income tax expense.
The total amount of interest and penalties included in income tax expense during
the year ended December 31, 2009, 2008 and 2007 was $0.07 million, $0.04 million
and $0.3 million, respectively. The total amount of accrued potential interest
and penalties on unrecognized tax benefits as of December 31, 2009 is $2.1
million and $1.6 million, respectively.
During
the next twelve months, it is reasonably possible that the reserve for uncertain
tax benefits will decrease by approximately $1.3 million primarily due to the
expiration of the statute of limitations for various prior year unrecognized tax
benefits. The Company’s business locations in Brazil, China, Ireland,
Luxembourg, Malaysia, Mexico, the Netherlands, Romania, Singapore,
Thailand and the United States remain open to examination by the various local
taxing authorities, in total or in part, for fiscal years 2001 to
2009.
The
Company is 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 limitation has expired. The Company believes that it has adequately
provided for its tax liabilities.
62
Note
10—Major Customers
The
Company’s customers operate in industries that are, to a varying extent, subject
to rapid technological change, vigorous competition and short product life
cycles. Developments adverse to the electronics industry, the Company’s
customers or their products could impact the Company’s overall credit
risk.
The
Company extends credit based on evaluation of its customers’ financial condition
and generally does not require collateral or other security from its customers
and would incur a loss equal to the carrying value of the accounts receivable if
its customer failed to perform according to the terms of the credit
arrangement.
Sales to
major customers were as follows for the indicated periods:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Customer
A
|
$ | 290,236 | $ | * | $ | * | ||||||
|
Customer
B
|
$ | * | $ | 643,868 | $ | 1,118,790 | ||||||
|
*
amount is less than 10% of total
|
||||||||||||
Note
11—Financial Instruments and Concentration of Credit Risk
The
carrying amounts of cash equivalents, accounts receivable, accrued liabilities,
accounts payable and capital lease obligations approximate fair value. As of
December 31, 2009, the Company’s investments are recorded at fair value. See
Note 1 (d). As of December 31, 2009, the Company had no significant off-balance
sheet concentrations of credit risk such as foreign currency exchange contracts
or other hedging arrangements. Financial instruments that subject the Company to
credit risk consist of cash and cash equivalents, investments and trade accounts
receivable. Management maintains the majority of the Company’s cash and cash
equivalents with financial institutions. One of the most significant credit
risks is the ultimate realization of accounts receivable. This risk is mitigated
by (i) sales to well established companies, (ii) ongoing credit evaluation of
customers, and (iii) frequent contact with customers, thus enabling management
to monitor current changes in business operations and to respond accordingly.
Management considers these concentrations of credit risks in establishing our
allowance for doubtful accounts and believes these allowances are adequate. The
Company’s largest customer represented approximately 21% and 16% of its gross
accounts receivable as of December 31, 2009 and 2008, respectively.
Note
12—Concentrations of Business Risk
Substantially
all of the Company’s sales are derived from electronics manufacturing services
in which the Company purchases components specified by its customers. The
Company uses numerous suppliers of electronic components and other materials for
its operations. Some components used by the Company have been subject to
industry-wide shortages, and suppliers have been forced to allocate available
quantities among their customers. The Company’s inability to obtain any needed
components during periods of allocation could cause delays in manufacturing and
could adversely affect results of operations.
63
Note
13—Segment and Geographic Information
The
Company has manufacturing facilities in the Americas, Asia and Europe to serve
its customers. The Company is operated and managed geographically. The Company’s
management evaluates performance and allocates the Company’s resources on a
geographic basis. Intersegment sales are generally recorded at prices that
approximate arm’s length transactions. Operating segments’ measure of
profitability is based on income (loss) from operations, except for a non-cash
goodwill impairment charge totaling $247.5 million in 2008. These non-cash
impairment charges are recorded in the Corporate and intersegment eliminations
below. See Note 1(i). The accounting policies for the reportable operating
segments are the same as for the Company taken as a whole. The Company has three
reportable operating segments: the Americas, Asia, and Europe. Information about
operating segments was as follows:
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
sales:
|
||||||||||||
|
Americas
|
$ | 1,279,632 | $ | 1,689,146 | $ | 2,100,431 | ||||||
|
Asia
|
724,541 | 908,539 | 965,268 | |||||||||
|
Europe
|
182,031 | 257,235 | 354,489 | |||||||||
|
Elimination of intersegment
sales
|
(96,951 | ) | (264,753 | ) | (504,269 | ) | ||||||
| $ | 2,089,253 | $ | 2,590,167 | $ | 2,915,919 | |||||||
|
Depreciation
and amortization:
|
||||||||||||
|
Americas
|
$ | 19,376 | $ | 17,361 | $ | 21,306 | ||||||
|
Asia
|
13,873 | 16,892 | 16,791 | |||||||||
|
Europe
|
2,778 | 2,834 | 2,598 | |||||||||
|
Corporate
|
3,780 | 3,581 | 2,437 | |||||||||
| $ | 39,807 | $ | 40,668 | $ | 43,132 | |||||||
|
Income
(loss) from operations:
|
||||||||||||
|
Americas
|
$ | 36,211 | $ | 42,816 | $ | 47,296 | ||||||
|
Asia
|
52,969 | 68,726 | 64,536 | |||||||||
|
Europe
|
(1,376 | ) | 2,383 | 3,888 | ||||||||
|
Corporate and intersegment
eliminations
|
(34,989 | ) | (280,405 | ) | (25,421 | ) | ||||||
| $ | 52,815 | $ | (166,480 | ) | $ | 90,299 | ||||||
|
Capital
expenditures:
|
||||||||||||
|
Americas
|
$ | 10,298 | $ | 13,937 | $ | 5,509 | ||||||
|
Asia
|
8,519 | 19,113 | 9,600 | |||||||||
|
Europe
|
3,281 | 2,301 | 1,221 | |||||||||
|
Corporate
|
298 | 793 | 4,242 | |||||||||
| $ | 22,396 | $ | 36,144 | $ | 20,572 | |||||||
|
Total
assets:
|
||||||||||||
|
Americas
|
$ | 567,494 | $ | 532,415 | $ | 843,759 | ||||||
|
Asia
|
418,208 | 477,500 | 514,078 | |||||||||
|
Europe
|
263,025 | 182,603 | 140,948 | |||||||||
|
Corporate and
other
|
216,993 | 240,522 | 258,182 | |||||||||
| $ | 1,465,720 | $ | 1,433,040 | $ | 1,756,967 | |||||||
64
Geographic
net sales information provided below reflects the destination of the product
shipped. Long-lived assets information is based on the physical location of the
asset.
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Geographic
net sales:
|
||||||||||||
|
United
States
|
$ | 1,549,272 | $ | 1,953,537 | $ | 2,241,403 | ||||||
|
Asia
|
171,355 | 207,172 | 178,888 | |||||||||
|
Europe
|
331,830 | 390,632 | 462,693 | |||||||||
|
Other
|
36,796 | 38,826 | 32,935 | |||||||||
| $ | 2,089,253 | $ | 2,590,167 | $ | 2,915,919 | |||||||
|
Long-lived
assets:
|
||||||||||||
|
United
States
|
$ | 77,675 | $ | 74,993 | $ | 86,602 | ||||||
|
Asia
|
65,555 | 70,916 | 69,062 | |||||||||
|
Europe
|
9,344 | 8,432 | 10,147 | |||||||||
|
Other
|
13,160 | 12,901 | 8,021 | |||||||||
| $ | 165,734 | $ | 167,242 | $ | 173,832 | |||||||
Note
14—Employee Benefit Plans
The
Company has defined contribution plans qualified under Section 401(k) of the
Internal Revenue Code for the benefit of its U.S. employees. The plans cover all
U.S. employees with at least one year of service. Under the provisions of the
plans, the Company will match a portion of each participant’s contribution. The
Company may also make discretionary contributions to the plans. During 2009,
2008 and 2007, the Company made contributions to the plans of approximately $3.2
million, $3.4 million and $3.5 million, respectively. The Company also has
defined contribution benefit plans for certain of its international employees
primarily dictated by the custom of the regions in which it operates. During
2009, 2008 and 2007, the Company made contributions to the international plans
of approximately $0.2 million, $0.5 million and $0.5 million,
respectively.
Note
15—Contingencies
The
Company is involved in various legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company’s consolidated
financial position or results of operations.
65
Note
16—Restructuring Charges and Integration Costs
The
Company has undertaken initiatives to restructure its business operations with
the intention of improving utilization and realizing cost savings in the future.
These initiatives have included changing the number and location of production
facilities, largely to align capacity and infrastructure with current and
anticipated customer demand. This alignment includes transferring programs from
higher cost geographies to lower cost geographies. The process of restructuring
entails, among other activities, moving production between facilities, reducing
staff levels, realigning our business processes and reorganizing our
management.
The
Company recognized restructuring charges during 2009 primarily related to
capacity reduction in Europe and reductions in workforce in certain facilities
worldwide. In 2008, the Company recognized restructuring charges primarily
related to reductions in workforce in certain facilities. The Company recognized
restructuring charges during 2007 related to reductions in workforce and the
re-sizing of certain facilities. The Company also recorded an assumed liability
for expected involuntary employee termination costs and facility closures in
connection with the Merger during 2007. These charges were recorded
pursuant to plans developed and approved by management.
The
components of the restructuring charges during 2009 were as
follows:
|
Americas
|
Europe
|
Asia
|
Total
|
|||||||||||||
|
Severance
costs
|
$ | 1,262 | $ | 2,100 | $ | 939 | $ | 4,301 | ||||||||
|
Facility
lease costs
|
139 | 2,704 | — | 2,843 | ||||||||||||
|
Other
exit costs
|
920 | 144 | 30 | 1,094 | ||||||||||||
| $ | 2,321 | $ | 4,948 | $ | 969 | $ | 8,238 | |||||||||
During
2009, the Company recognized $4.3 million of employee termination costs
associated with the involuntary terminations of 655 employees in connection with
reductions in workforce of certain facilities. The identified involuntary
employee terminations by reportable geographic region amounted to approximately
327, 270 and 58 for the Americas, Asia and Europe, respectively. The
Company also recorded approximately $2.8 million for facility lease
obligations and approximately $1.1 million for other exit costs,
including $0.2 million of asset impairments associated with the closure of
certain leased facilities.
The
components of the restructuring charges during 2008 were as
follows:
|
Americas
|
Europe
|
Asia
|
Total
|
|||||||||||||
|
Severance
costs
|
$ | 628 | $ | 1,181 | $ | 1,396 | $ | 3,205 | ||||||||
|
Other
exit costs
|
— | — | 270 | 270 | ||||||||||||
| $ | 628 | $ | 1,181 | $ | 1,666 | $ | 3,475 | |||||||||
During
2008, the Company recognized $3.2 million of employee termination costs
associated with the involuntary terminations of 377 employees in connection with
reductions in workforce of certain facilities. The identified involuntary
employee terminations by reportable geographic region amounted to approximately
149, 201 and 27 for the Americas, Asia and Europe, respectively.
66
The
components of the restructuring charges during 2007 were as
follows:
|
Americas
|
Europe
|
Asia
|
Total
|
|||||||||||||
|
Severance
costs
|
$ | 759 | $ | 427 | $ | 189 | $ | 1,375 | ||||||||
|
Facility
lease costs
|
1,211 | — | — | 1,211 | ||||||||||||
|
Other
exit costs
|
1,846 | 245 | — | 2,091 | ||||||||||||
| $ | 3,816 | $ | 672 | $ | 189 | $ | 4,677 | |||||||||
During
2007, the Company recorded $1.4 million for severance costs associated with the
involuntary terminations of 192 identified employees in connection with various
facility closures, consolidations and resizing of certain facilities. The
identified involuntary employee terminations by reportable geographic region
amounted to approximately 138, 16 and 38 for the Americas, Asia and Europe,
respectively. The Company also recorded approximately $1.2 million for
facility lease obligations and approximately $2.1 million for other
exit costs, including $1.5 million of asset impairments associated with the
closure of certain leased facilities.
In
connection with the Merger in 2007, a total of $7.0 million in integration costs
were incurred during the year ended December 31, 2007. These costs included
redundant operating costs that have been eliminated.
The
following table summarizes the 2009 activity in the accrued restructuring
balances related to the various restructuring activities described
above:
|
Balance
as of December 31,
2008 |
Restructuring
Charges
|
Cash
Payment
|
Non-Cash
Activity
|
Foreign ExchangeAdjustments
|
Balance
as of December
31,2009 |
|||||||||||||||||||
|
2009
Restructuring:
|
||||||||||||||||||||||||
|
Severance
|
$ | — | $ | 4,301 | $ | (3,143 | ) | $ | — | $ | (59 | ) | $ | 1,099 | ||||||||||
|
Lease facility
costs
|
— | 2,843 | (371 | ) | — | — | 2,472 | |||||||||||||||||
|
Other exit
costs
|
— | 1,094 | (745 | ) | (236 | ) | — | 113 | ||||||||||||||||
| — | 8,238 | (4,259 | ) | (236 | ) | (59 | ) | 3,684 | ||||||||||||||||
|
2008
Restructuring:
|
||||||||||||||||||||||||
|
Severance
|
414 | (67 | ) | (344 | ) | — | (3 | ) | — | |||||||||||||||
|
Other exit
costs
|
228 | — | (224 | ) | — | (3 | ) | 1 | ||||||||||||||||
| 642 | (67 | ) | (568 | ) | — | (6 | ) | 1 | ||||||||||||||||
|
2007
Restructuring:
|
||||||||||||||||||||||||
|
Lease facility
costs
|
745 | — | (283 | ) | (89 | ) | — | 373 | ||||||||||||||||
|
Other exit
costs
|
447 | — | — | (39 | ) | 7 | 415 | |||||||||||||||||
| 1,192 | — | (283 | ) | (128 | ) | 7 | 788 | |||||||||||||||||
|
Total
|
$ | 1,834 | $ | 8,171 | $ | (5,110 | ) | $ | (364 | ) | $ | (58 | ) | $ | 4,473 | |||||||||
67
The
following table summarizes the 2008 activity in the accrued restructuring
balances related to the various restructuring activities described
above:
|
Balance
as of December 31,2007
|
Restructuring
Charges |
Cash Payment |
Non-Cash Activity |
Foreign Exchange Adjustments |
Balance
as of December
31, |
|||||||||||||||||||
|
2008
Restructuring:
|
||||||||||||||||||||||||
|
Severance
|
$ | — | $ | 3,205 | $ | (2,791 | ) | $ | — | $ | — | $ | 414 | |||||||||||
|
Other exit
costs
|
— | 270 | (42 | ) | — | — | 228 | |||||||||||||||||
| — | 3,475 | (2,833 | ) | — | — | 642 | ||||||||||||||||||
|
2007
Restructuring:
|
||||||||||||||||||||||||
|
Severance
|
171 | — | (171 | ) | — | — | — | |||||||||||||||||
|
Lease facility
costs
|
1,819 | (144 | ) | (806 | ) | — | (124 | ) | 745 | |||||||||||||||
|
Other exit
costs
|
2,158 | (568 | ) | (817 | ) | (452 | ) | 126 | 447 | |||||||||||||||
| 4,148 | (712 | ) | (1,794 | ) | (452 | ) | 2 | 1,192 | ||||||||||||||||
|
Total
|
$ | 4,148 | $ | 2,763 | $ | (4,627 | ) | $ | (452 | ) | $ | 2 | $ | 1,834 | ||||||||||
68
Note
17—Quarterly Financial Data (Unaudited)
The
following table sets forth certain unaudited quarterly information with respect
to the Company’s results of operations for the years 2009, 2008 and 2007.
Earnings (loss) per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings (loss) per share may not
equal the total earnings (loss) per share amounts for the fiscal
year.
|
2009
Quarter
|
||||||||||||||||
| 1st | 2nd | 3rd | 4th | |||||||||||||
|
Sales
|
$ | 496,767 | $ | 481,802 | $ | 510,461 | $ | 600,223 | ||||||||
|
Gross
profit
|
31,636 | 34,554 | 36,813 | 43,576 | ||||||||||||
|
Net
income
|
9,238 | 11,555 | 16,416 | 16,686 | ||||||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic
|
0.14 | 0.18 | 0.25 | 0.26 | ||||||||||||
|
Diluted
|
0.14 | 0.18 | 0.25 | 0.26 | ||||||||||||
|
2008
Quarter
|
||||||||||||||||
| 1st | 2nd | 3rd | 4th | |||||||||||||
|
Sales
|
$ | 684,309 | $ | 682,416 | $ | 641,672 | $ | 581,770 | ||||||||
|
Gross
profit
|
45,088 | 45,900 | 44,169 | 40,781 | ||||||||||||
|
Net
income (loss)
|
22,329 | 22,142 | 23,635 | (203,738 | ) | |||||||||||
|
Earnings
(loss) per common share:
|
||||||||||||||||
|
Basic
|
0.32 | 0.33 | 0.36 | (3.13 | ) | |||||||||||
|
Diluted
|
0.32 | 0.33 | 0.35 | (3.13 | ) | |||||||||||
|
2007
Quarter
|
||||||||||||||||
| 1st | 2nd | 3rd | 4th | |||||||||||||
|
Sales
|
$ | 752,482 | $ | 756,295 | $ | 672,595 | $ | 734,547 | ||||||||
|
Gross
profit
|
54,380 | 54,387 | 38,669 | 51,057 | ||||||||||||
|
Net
income
|
24,249 | 25,694 | 21,783 | 20,630 | ||||||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic
|
0.34 | 0.35 | 0.30 | 0.29 | ||||||||||||
|
Diluted
|
0.34 | 0.35 | 0.30 | 0.29 | ||||||||||||
Note
18—Supplemental Cash Flow Information
The
following is additional information concerning supplemental disclosures of cash
payments.
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income
taxes paid, net
|
$ | 6,170 | $ | 4,573 | $ | 1,414 | ||||||
|
Interest
paid
|
$ | 1,354 | $ | 1,420 | $ | 1,744 | ||||||
69
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Benchmark
Electronics, Inc.:
We have
audited the accompanying consolidated balance sheets of Benchmark Electronics,
Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008, and the
related consolidated statements of income (loss), comprehensive income (loss),
shareholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2009. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Benchmark Electronics, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Benchmark Electronics, Inc.’s internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 1, 2010 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial
reporting.
(signed)
KPMG LLP
Houston,
Texas
March 1,
2010
70
Management’s
Report
The
management of Benchmark Electronics, Inc. has prepared and is responsible for
the consolidated financial statements and related financial data contained in
this report. The consolidated financial statements were prepared in accordance
with U.S. generally accepted accounting principles and necessarily include
certain amounts based upon management’s best estimates and judgments. The
financial information contained elsewhere in this annual report is consistent
with that in the consolidated financial statements.
The
Company maintains internal accounting control systems that are adequate to
prepare financial records and to provide reasonable assurance that the assets
are safe-guarded from loss or unauthorized use. We believe these systems are
effective, and the cost of the systems does not exceed the benefits
obtained.
The Audit
Committee, composed exclusively of independent, outside directors, has reviewed
all financial data included in this report. The committee meets periodically
with the Company’s management and independent registered public accountants on
financial reporting matters. The independent registered public accountants have
complete access to the Audit Committee and may meet with the committee, without
management present, to discuss their audit results and opinions on the quality
of financial reporting.
The role
of independent registered public accountants is to render a professional,
independent opinion on management’s financial statements to the extent required
by the standards of the Public Company Accounting Oversight Board (United
States). Benchmark’s responsibility is to conduct its affairs according to the
highest standards of personal and corporate conduct.
71
None.
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
As of the
end of the period covered by this report, the Company’s management (with the
participation of its chief executive officer and chief financial officer),
conducted an evaluation pursuant to Rule 13a-15 promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act), of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures. Based
on this evaluation, the Company’s chief executive officer and chief financial
officer concluded that as of the end of the period covered by this report such
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by the Company in reports it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and include controls and procedures designed
to ensure that information required to be disclosed by the Company in such
reports is accumulated and communicated to the Company’s management, including
the Company’s chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
There has
been no change in our internal control over financial reporting that occurred
during the period covered by this Annual Report on Form 10-K that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Our
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls and internal controls will prevent
all errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, a control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
72
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on our evaluation under the framework in Internal Control—Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2009.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009 has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report which is included below.
Report
of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting
The Board
of Directors and Shareholders
Benchmark
Electronics, Inc.:
We have
audited Benchmark Electronics, Inc.’s (the Company’s) internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Benchmark Electronics, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
73
In our
opinion, Benchmark Electronics, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal
Control—Integrated Framework issued by the COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Benchmark
Electronics, Inc. and subsidiaries as of December 31, 2009 and 2008, and
the related consolidated statements of income (loss), comprehensive income
(loss), shareholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2009, and our report dated March 1, 2010,
expressed an unqualified opinion on those consolidated financial
statements.
(signed)
KPMG LLP
Houston,
Texas
March 1,
2010
Not
applicable.
The
information under the captions “Election of Directors,” “Executive Officers” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy
Statement for the 2010 Annual Meeting of Shareholders (the 2010 Proxy
Statement), to be filed not later than 120 days after the close of the Company’s
fiscal year, is incorporated herein by reference in response to this
item.
The
information under the captions “Compensation Discussion and Analysis” and
“Report of Compensation Committee” in the 2010 Proxy Statement, to be filed not
later than 120 days after the close of the Company’s fiscal year, is
incorporated herein by reference in response to this item.
74
The
information under the caption “Common Share Ownership of Certain Beneficial
Owners and Management” in the 2010 Proxy Statement, to be filed not later than
120 days after the close of the Company’s fiscal year, is incorporated herein by
reference in response to this item.
The
following table sets forth certain information relating to our equity
compensation plans as of December 31, 2009.
|
Number
of
|
||||||||||||
|
securities
to be
|
Weighted-
|
Number
of
|
||||||||||
|
issued
upon
|
average
exercise
|
securities
|
||||||||||
|
exercise
of
|
price
of
|
remaining
|
||||||||||
|
outstanding
|
outstanding
|
available
|
||||||||||
|
options,
warrants
|
options,
warrants
|
for
future
|
||||||||||
|
Plan
Category
|
and
rights
|
and
rights
|
issuance
|
|||||||||
|
Equity
compensation plans approved by security holders
|
5,584,328 | (1) | $ | 19.23 | (1) | 3,879,770 | (2) | |||||
|
Equity
compensation plans not approved by security holders (3)
|
27,000 | $ | 13.75 | — | ||||||||
|
Total
|
5,611,328 | 3,879,770 | ||||||||||
(1) Includes 80,481 phantom
stock awards. The weighted-average exercise price does not take these awards
into account.
(2) Includes 3,659,270 equity
awards under the 2000 Plan. The 2000 Plan expired February 16, 2010, and as of
February 16, 2010 no addition grants under such plan can be made. See Note 8 of
Notes to Consolidated Financial Statements in Item 8 of this
report.
(3) In
December of 1994, the Board of Directors adopted the Benchmark Electronics, Inc.
1994 Stock Option Plan for Non-Employee Directors (the 1994 Plan) for the
benefit of members of the Board of Directors of Benchmark or its affiliates who
are not employees of Benchmark or its affiliates (as defined in the 1994 Plan).
The 1994 Plan was not required to be approved by our shareholders. All awards
under the 1994 Plan were fully vested upon the date of grant. The exercise price
per common share of options granted under the 1994 Plan was the fair market
value of a Common Share on the date such option was granted. As of December 31,
2009, the Company has outstanding options with respect to 27,000 Common Shares
under the 1994 Plan. The 1994 Plan was replaced in 2002, and no additional
grants may be made under that plan.
The
information under the caption “Election of Directors” in the 2010 Proxy
Statement, to be filed not later than 120 days after the close of the Company’s
fiscal year, is incorporated herein by reference in response to this
item.
The
information under the caption “Audit Committee Report to Shareholders” in the
2010 Proxy Statement, to be filed not later than 120 days after the close of the
Company’s fiscal year, is incorporated herein by reference in response to this
item.
75
(a)
(1) Financial statements of the Company filed as part of this
report:
See Item
8 - Financial Statements and Supplementary Data.
(2) Financial
statement schedule filed as part of this report:
Schedule
II - Valuation Accounts
|
Additions
|
||||||||||||||||||||
|
Balance
at
|
Balance
at
|
|||||||||||||||||||
|
Beginning
|
Charges
to
|
End
of
|
||||||||||||||||||
|
(in
thousands)
|
of
Period
|
Operations
|
Other
|
Deductions
|
Period
|
|||||||||||||||
|
Year
ended December 31, 2009:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts (1)
|
$ | 1,072 | (51 | ) | (6 | ) | 598 | 417 | ||||||||||||
|
Year
ended December 31, 2008:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts (1)
|
$ | 1,406 | 405 | (10 | ) | 729 | 1,072 | |||||||||||||
|
Year
ended December 31, 2007:
|
||||||||||||||||||||
|
Allowance
for doubtful accounts (1)
|
$ | 1,430 | 91 | 5 | 120 | 1,406 | ||||||||||||||
|
(1)
|
Deductions
in the allowance for doubtful accounts represent write-offs, net of
recoveries, of amounts determined to be
uncollectible.
|
Report
of Independent Registered Public Accounting Firm on Schedule
The Board
of Directors and Shareholders
Benchmark
Electronics, Inc.:
Under
date of March 1, 2010, we reported on the consolidated balance sheets of
Benchmark Electronics, Inc. and subsidiaries (the Company) as of December 31,
2009 and 2008, and the related consolidated statements of income (loss),
comprehensive income (loss), shareholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2009, in this annual
report on Form 10-K for the year 2009. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule included in Item 15(a)2. This
financial statement schedule is the responsibility of the Company’s management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
(signed)
KPMG LLP
Houston,
Texas
March 1,
2010
76
(3) Exhibits
Each exhibit marked with an asterisk
is filed with this Annual Report on Form 10-K.
|
Exhibit
Number
|
Description
|
|
|
2.1
|
--
|
Agreement and Plan of Merger
dated October 16, 2006 among the Company, Autobahn Acquisition Corp. and Pemstar
Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K dated October
16, 2006 and filed on October 18, 2006 (Commission file number
1-10560)).
|
|
|
||
|
3.1
|
--
|
Restated Articles of
Incorporation of the Company dated May 10, 1990 (incorporated by reference to Exhibit 3.1 to the
Company’s Registration Statement on Form S-1 (Registration Number 33-46316) (the
“Registration
Statement”)).
|
|
3.2
|
--
|
Amendment to the Restated
Articles of Incorporation of the Company adopted by the shareholders of the Company on
May 20, 1997 (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1998 (Commission file number
1-10560)).
|
|
3.3
|
--
|
Amendment to the Restated
Articles of Incorporation of the Company approved by the shareholders of the Company on
August 13, 2002 (incorporated by reference to Exhibit 4.7 to the Company’s Form S-8
(Registration Number
333-103183)).
|
|
3.4
|
--
|
Amended and Restated Bylaws of
the Company dated May 18, 2006 (incorporated by reference to Exhibit 99.2 to the
Company’s Form 8-K dated May 18, 2006 and filed on May 19, 2006 (Commission file number
1-10560)).
|
|
3.5
|
--
|
Amendment to the Restated
Articles of Incorporation of the Company approved by the shareholders of the Company on
May 10, 2006 (incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K dated
October 16, 2006 and filed on October 16, 2006 (Commission file number
1-10560)).
|
|
4.1
|
--
|
Restated Articles of
Incorporation of the Company (incorporated by reference to Exhibit 3.1
to the Registration
Statement).
|
|
4.2
|
--
|
Amendment to the Restated
Articles of Incorporation of the Company adopted by the shareholders of the Company on
May 20, 1997 (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 1998 (Commission file number
1-10560)).
|
|
4.3
|
--
|
Specimen form of certificate
evidencing the Common Share (incorporated by reference to Exhibit 4.3 to the Registration
Statement).
|
|
4.4
|
--
|
Rights Agreement dated December
11, 1998 between the Company and Harris Trust Savings Bank, as Rights Agent, together
with the following exhibits thereto: Exhibit A -- Form of Statement of Resolution
Establishing Series A Cumulative Junior Participating Preferred Stock of Benchmark Electronics,
Inc.; Exhibit B -- Form of Right Certificate; and Exhibit C -- Summary of Rights to Purchase
Preferred Stock of Benchmark Electronics, Inc. (incorporated by reference to
Exhibit 1 to the Company’s Form 8A12B filed December 11, 1998 (Commission file number
1-10560)).
|
77
|
4.5
|
--
|
Statement
of Resolution Establishing Series A Cumulative Junior Participating
Preferred Stock of the Company (incorporated by reference to Exhibit B of
the Rights Agreement dated December 11, 1998 between the Company and
Harris Trust Savings Bank, as Rights Agent, included as Exhibit 1 to the
Company’s Form 8A12B filed December 11, 1998 (Commission file number
1-10560)).
|
|
4.6
|
--
|
Summary
of Rights to Purchase Preferred Stock of the Company (incorporated by
reference to
Exhibit 3 to the Company’s Form 8A12B/A filed December 22, 1998
(Commission file number
1-10560)).
|
|
4.7
|
--
|
Amendment to the Restated
Articles of Incorporation of the Company approved by the shareholders
of the Company on August 13, 2002 (incorporated by reference to Exhibit
4.7 to the Company’s Form S-8
(Registration Number
333-103183)).
|
|
4.8
|
--
|
Amended
and Restated Bylaws of the Company (incorporated by reference to Exhibit
99.2 to the
Company’s Form 8-K dated May 18, 2006 and filed on May 19, 2006
(Commission file number 1-10560)).
|
|
|
||
|
4.9
|
--
|
Amendment to the Restated
Articles of Incorporation of the Company approved by the shareholders
of the Company on May 10, 2006 (incorporated by reference to Exhibit 99.1
to the Company’s Form 8-K dated October 16, 2006 and filed on October 16,
2006 (Commission file number 1-10560)).
|
|
|
||
|
4.10
|
--
|
Amendment No. 1 dated as of
December 10, 2008, to the Rights Agreement dated as of December
11, 1998 (incorporated by reference to Exhibit 4.1 to the Company’s Form
8-K dated December 10, 2008 and filed on December 11, 2008 (Commission
file number 1-10560))
|
|
|
|
|
|
10.1
|
--
|
Form
of Indemnity Agreement between the Company and its directors and executive
officers (incorporated
by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K
for the year ended December 31,
2003 (Commission file number
1-10560)).
|
|
|
||
|
10.2
|
--
|
Benchmark Electronics, Inc. 1994
Stock Option Plan for Non-Employee Directors (incorporated
by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K
for the year ended December 31, 1994 (Commission file number
1-10560)).
|
|
|
||
|
10.3
|
--
|
First Amendment to the Benchmark
Electronics, Inc. 1994 Stock Option Plan for Non-Employee
Directors (incorporated by reference to Exhibit 99.2 to the Company’s Form
S-8 (Registration Number
333-103183)).
|
|
10.4
|
--
|
Benchmark Electronics, Inc. 2000 Stock Awards Plan (incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement on Form S-8 (Registration Number 333-54186)). |
|
10.5
|
--
|
Form of incentive stock option
agreement for use under the 2000 Stock Awards Plan (incorporated by reference to
Exhibit 4.8 to the Company’s Registration Statement on Form S-8
(Registration Number 333-54186)).
|
|
10.6
|
--
|
Form of phantom stock agreement for use under the 2000 Stock Awards Plan. |
|
10.7
|
--
|
Form of nonqualified stock option agreement for use under the 2000 Stock Awards Plan. |
78
|
10.8
|
--
|
Form
of restricted stock agreement for use under the 2000 Stock Awards Plan
(incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K dated March 17, 2008
(Commission file number 1-10560)).
|
|
10.9
|
--
|
Benchmark
Electronics, Inc. Deferred Compensation Plan dated as of December 16, 2008
(incorporated
by reference to Exhibit 99.1 to the Company’s Form S-8 (Registration
Number 333-156202)).
|
|
10.10
|
--
|
Lease
Agreement dated June 1, 2000 between Industrial Properties of the South
and the Company
(incorporated by reference to Exhibit 10.12 to the Company’s Annual Report
on Form
10-K for the year ended December 31, 2000 (Commission file number
1-10560)).
|
|
10.11
|
--
|
Guarantee
dated September 10, 1998 by the Company in favor of Kilmore Developments
Limited
(incorporated by reference to Exhibit 10.14 to the Company’s Annual Report
on Form
10-K for the year ended December 31, 1998 (Commission file number
1-10560)).
|
|
10.12
|
--
|
Lease
Agreement dated March 9, 2001 by and between BEI Electronics Ireland
Limited and Canada
Life Assurance (Ireland) Limited (incorporated by reference to Exhibit
10.24 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2000 (Commission
file number 1-10560)).
|
|
10.13
|
--
|
Third
Amended and Restated Credit Agreement dated as of December 21, 2007 among
the Company;
the borrowing subsidiaries; the lenders party thereto; JPMorgan Chase
Bank, N.A. as
administrative agent, collateral agent and issuing lender; Bank of
America, N.A., Wells Fargo
Bank, N.A. and Comerica Bank as co-documentation agents; and J.P. Morgan
Securities
Inc. as lead arranger (incorporated by reference from Exhibit 10.1 to the
Company’s
Form 8-K dated December 21, 2007 and filed on December 27, 2007 (Commission
file number
1-10560)).
|
|
10.14
|
--
|
Employment
Agreement between the Company and Cary T. Fu effective December 1, 2005
(incorporated
by reference to Exhibit 10.1 to the Company’s Form 8-K dated November 11,
2005
and filed on November 15, 2005 (Commission file number
1-10560)).
|
|
|
||
|
10.15
|
--
|
Employment
Agreement between the Company and Gayla J. Delly effective December 1,
2005 (incorporated
by reference to Exhibit 10.1 to the Company’s Form 8-K dated November 11,
2005
and filed on November 15, 2005 (Commission file number
1-10560)).
|
|
10.16
|
--
|
Employment
Agreement between the Company and Donald F. Adam dated as of March 10,
2009
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated
March 10, 2009
(Commission file number 1-10560)).
|
|
10.17
|
--
|
Benchmark
Electronics, Inc. 2002 Stock Option Plan for Non-Employee Directors (incorporated
by reference to Appendix A to the Company’s Definitive Proxy Statement on
Schedule
14A filed April 15, 2002 (Commission file number
1-10560)).
|
|
10.18
|
--
|
Employment
Agreement between the Company and Donald E. Nigbor effective January 1,
2006
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated
November 30,
2005 and filed on December 2, 2005 (Commission file number
1-10560)).
|
|
10.19
|
--
|
Employment
Agreement between the Company and Steven A. Barton effective December 1,
2005
(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated
December 1,
2005 and filed on December 2, 2005 (Commission file number
1-10560)).
|
79
|
10.20*
|
--
|
Code
of Conduct.
|
|
10.21
|
--
|
Amendment
No. 1 to the Benchmark Electronics, Inc. 2002 Stock Option Plan for
Non-Employee
Directors (incorporated by reference to Exhibit 99.3 to the Company’s Form
8-K dated
May 18, 2006 filed on May 19, 2006 (Commission file number
1-10560)).
|
|
10.22
|
--
|
Form of Termination Agreements dated November 4, 2008 between the Company and Steven A. Barton and Donald E. Nigbor (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated November 4, 2008 (Commission file number 1-10560)). |
|
10.23
|
--
|
Form of Consulting Agreements dated November 4, 2008 between the Company and Steven A. Barton and Donald E. Nigbor (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K dated November 4, 2008 (Commission file number 1-10560)). |
|
11
|
--
|
Statement
regarding Computation of Per-Share Earnings (incorporated by reference to
“Notes to
Consolidated Financial Statements, Note 1(j) – Earnings Per Share” in Item
8 of this report).
|
|
21*
|
--
|
Subsidiaries
of Benchmark Electronics, Inc.
|
|
23*
|
--
|
Consent
of Independent Registered Public Accounting Firm concerning incorporation
by reference
in the Company’s Registration Statements on Form S-8 (Registration No.
333-28997,
No. 333-54186, No. 333-103183, No. 333-101744, No. 333-136798 and No.
333-156202).
|
|
31.1*
|
--
|
Section
302 Certification of Chief Executive Officer
|
|
31.2*
|
--
|
Section
302 Certification of Chief Financial Officer
|
|
32.1*
|
--
|
Section
1350 Certification of Chief Executive Officer
|
|
32.2*
|
--
|
Section
1350 Certification of Chief Financial
Officer
|
80
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
| BENCHMARK ELECTRONICS, INC. | |||
|
|
By:
|
/s/ Cary T. Fu | |
|
Cary
T. Fu
|
|||
| Chief Executive Officer | |||
| Date: February 26, 2010 | |||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated and on the dates indicated.
|
Name
|
Position
|
Date
|
|
Chairman
of the Board and
|
||
|
/s/ Cary T. Fu
|
Chief
Executive Officer
|
February
26, 2010
|
|
Cary T. Fu
|
(principal
executive officer)
|
|
|
/s/ Donald F. Adam
|
Chief
Financial Officer
|
February
26, 2010
|
|
Donald F. Adam
|
(principal
financial and accounting officer)
|
|
|
/s/ Michael R.
Dawson
|
Director
|
February
26, 2010
|
|
Michael R. Dawson
|
||
|
/s/ Peter G.
Dorflinger
|
Director
|
February
26, 2010
|
|
Peter G.
Dorflinger
|
||
|
/s/ Douglas G.
Duncan
|
Director
|
February
26, 2010
|
|
Douglas G. Duncan
|
||
|
/s/ Laura W. Lang
|
Director
|
February
26, 2010
|
|
Laura W. Lang
|
||
|
/s/ Bernee D.L.
Strom
|
Director
|
February
26, 2010
|
|
Bernee D.L. Strom
|
||
|
/s/ Clay C.
Williams
|
Director
|
February
26, 2010
|
|
Clay C. Williams
|
81