UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _________
COMMISSION FILE NUMBER 1-10560
BENCHMARK ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2211011
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3000 TECHNOLOGY DRIVE 77515
ANGLETON, TEXAS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(409) 849-6550
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, par value $0.10 per share New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
---------------
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 [ ]
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. [ ]
As of March 27, 1998, the number of outstanding shares of Common Stock was
11,576,768. As of such date, the aggregate market value of the shares of Common
Stock held by non-affiliates, based on the closing price of the Common Stock on
the New York Stock Exchange on such date, was approximately $250.8 million.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Portions of the Company's Annual Report to Shareholders for the fiscal
year ended December 31, 1997 (Part II Items 5-8 and Part IV Item
14(a)(1)).
(2) Portions of the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders (Part III, Items 10-13).
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TABLE OF CONTENTS
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PAGE
PART I
<S> <C>
ITEM 1. Business .................................................................................... 1
ITEM 2. Properties .................................................................................. 7
ITEM 3. Legal Proceedings ........................................................................... 7
ITEM 4. Submission of Matters to a Vote of Security Holders ......................................... 7
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters ....................... 7
ITEM 6. Selected Financial Data ..................................................................... 7
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 7
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 7
ITEM 8. Financial Statements and Supplementary Data ................................................. 7
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ........................................................................ 7
PART III
ITEM 10. Directors and Executive Officers of the Registrant ......................................... 7
ITEM 11. Executive Compensation ..................................................................... 8
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 8
ITEM 13. Certain Relationships and Related Transactions ............................................. 8
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...................... 8
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PART I
ITEM 1. BUSINESS
GENERAL
Benchmark Electronics, Inc. (the "Company") provides contract electronics
manufacturing and design services to original equipment manufacturers ("OEMs")
in select industries, including medical devices, communications equipment,
industrial and business computers, testing instrumentation and industrial
controls. The Company specializes in manufacturing high quality, technologically
complex printed circuit board assemblies with computer-automated equipment using
surface mount and pin-through-hole interconnection technologies for customers
requiring low to medium volume production runs. The Company frequently works
with customers from product design and prototype stages through ongoing
production and, in some cases, final assembly of the customers' products and
provides manufacturing services for successive product generations. As a result,
the Company believes that it is often an integral part of its customers'
operations.
Substantially all of the Company's manufacturing services are provided on
a turnkey basis, whereby the Company purchases customer-specified components
from its extensive network of suppliers, assembles the components on finished
printed circuit boards, performs post-production testing and provides the
customer with production process and testing documentation. The Company offers
its customers flexible, "just-in-time" delivery programs allowing product
shipments to be closely coordinated with the customers' inventory requirements.
In certain instances, the Company completes the assembly of its customers'
products at the Company's facilities by integrating printed circuit board
assemblies into other elements of the customers' products. The Company also
provides manufacturing services on a consignment basis, whereby the Company,
utilizing components provided by the customer, provides only assembly and
post-production testing services. The Company operates a total of 29 surface
mount production lines at its facilities in Angleton, Texas, Beaverton, Oregon
and Winona, Minnesota.
The Company, formerly named Electronics, Inc., began operations in 1979
and was incorporated under Texas law in 1981 as a wholly owned subsidiary of
Intermedics, Inc. ("Intermedics"), a medical implant manufacturer based in
Angleton, Texas. In 1986, Intermedics sold 90% of the outstanding shares of
common stock of the Company to Electronic Investors Corp. ("EIC"), a corporation
formed by Donald E. Nigbor, Steven A. Barton and Cary T. Fu, the Company's three
executive officers. In 1988, EIC was merged into the Company, and in 1990 the
Company completed the initial public offering of its common stock.
In July, 1996, the Company acquired all of the outstanding common stock of
EMD Technologies, Inc. ("EMD"), an independent provider of contract
manufacturing and product design services for OEMs in industries comparable to
those targeted by the Company. EMD's manufacturing services focus on
manufacturing complex printed circuit board assemblies, operating 16 surface
mount production lines at its Winona, Minnesota facilities. EMD's product design
services include the complete design and development of electronics products and
mechanical packages, from conceptual design of circuit boards to configuring
subsystems and enclosures.
ACQUISITION OF LOCKHEED COMMERCIAL ELECTRONICS COMPANY
On February 23, 1998, the Company acquired all of the outstanding stock
of Lockheed Commercial Electronics Company ("LCEC") for $70 million in cash, The
Company financed $40 million of the purchase price through borrowings under a
five-year term loan with a commercial bank. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" for a description of
the term loan. The purchase price is subject to a post-closing adjustment based
on the net working capital of LCEC at the time of closing. LCEC is one of New
England's largest electronics manufacturing services companies, providing a
broad range of services including printed circuit board assembly and test,
system assembly and test, prototyping, depot repair, materials procurement, and
engineering support services. The addition of LCEC's manufacuring facility is
expected to improve the Company's ability to serve existing customer's in the
Northeast and Europe. Since there was no overlap in customers, the aquisition
has also broadened the Company's customer base.
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THE CONTRACT ELECTRONICS MANUFACTURING INDUSTRY
The basis for the development of the contract manufacturing industry in
recent years has been the increasing reliance by OEMs on contract manufacturing
specialists such as the Company for the manufacture of printed circuit board
assemblies. As a result of outsourcing manufacturing services, the contract
manufacturing industry in the United States grew at a compound annual rate of
20% from 1990 through 1997, according to the Institute for Interconnecting and
Packaging Electronic Circuits ("IPC"). The IPC estimated the size of the United
States contract manufacturing industry for 1996 in terms of sales to be $13.5
billion. The Company expects the trend toward outsourcing to continue and to
result in continued growth in the contract manufacturing industry. A 1995 IPC
study forecast that the contract manufacturing industry would grow at an
approximate compound annual rate of 20% through 2000 as OEMs continue to
outsource their manufacturing requirements and look to contract manufacturers to
provide additional services. Some of the advantages OEMs receive as a result of
outsourcing are:
ACCELERATION OF TIME TO MARKET. Rapid technological advances in the
Company's targeted industries require OEMs to make their products available to
their customers quickly to remain competitive. Delays in bringing a new product
to market can result in obsolescence of the product before it becomes available.
Contract manufacturers who specialize in printed circuit board assembly are
often able to provide manufacturing services in a more timely manner than OEMs,
thus allowing OEMs to reduce the time to market for their products.
REDUCTION OF PRODUCTION COSTS. Contract manufacturers generally are able
to manufacture printed circuit board assemblies at a lower cost than OEMs
because of the efficiencies associated with specialization and greater
production volumes. Additionally, the purchasing power of contract manufacturers
allows OEMs to save on costs of procurement of components. OEMs also benefit
from the inventory management services provided by contract manufacturers in
connection with turnkey manufacturing services.
ACCESS TO ADVANCED TECHNOLOGY. Using contract manufacturers affords OEMs
access to advanced technology in printed circuit board assembly equipment and
techniques that OEMs may consider too costly for in-house investment. The
increasing use of surface mount interconnection technology, which requires
significant investments in computer-automated equipment and the expertise to
operate such equipment, is an example. Many OEMs have been unwilling to make
such investments, relying instead on contract manufacturers for surface mount
assembly. More recent technological advancements that contract manufacturers are
now able to offer to OEMs include ball grid array and chip on board assembly
processes.
IMPROVED MANUFACTURING QUALITY. Because it is the focus of their
operations, contract manufacturers are consistently able to provide contract
manufacturing services of a higher quality than OEMs can provide in-house.
Printed circuit board assembly and other services provided by contract
manufacturers are typically a small part of the broader operations of the OEMs.
OPPORTUNITY TO FOCUS RESOURCES. By outsourcing printed circuit board
assembly and other manufacturing services, OEMs are able to focus their
resources on their primary activities, such as research and development of new
products and marketing.
Other factors in the contract manufacturing industry may have a positive
impact on established contract manufacturers such as the Company. The increasing
cost of automated equipment used in the industry, the working capital
requirements relating to inventory and the additional services that contract
manufacturers are providing make it more difficult for smaller manufacturers and
start-up companies to compete with the services that are provided by larger,
well-capitalized companies. Furthermore, the Company believes that these factors
are driving consolidation in the industry and may provide opportunities for
growth through acquisition.
BUSINESS STRATEGY
The Company's business strategy is to provide high quality contract
electronics manufacturing services to OEMs in targeted industries. The Company
seeks to provide services that reduce OEM costs and time to market and increase
OEM product quality. The Company's strategy to achieve these objectives includes
the following key elements:
ESTABLISH AND MAINTAIN LONG-TERM RELATIONSHIPS. The Company pursues
opportunities to provide turnkey manufacturing services whereby the Company
becomes an integral part of its customers' manufacturing operations. The Company
seeks to work closely with its customers in all phases of design
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and production. By aggressively marketing its services to its targeted customers
and involving design, marketing and senior management personnel in the pursuit
and maintenance of customer relationships, the Company attempts to establish
itself as the sole or primary source for its customers' manufacturing
requirements. The Company believes that working to develop close, long-term
relationships builds customer loyalty that is difficult for competitors to
overcome.
TARGET AND MAINTAIN BALANCE AMONG SELECT OEM INDUSTRIES AND CUSTOMERS. The
Company targets industries and customers that have strict quality control
standards for their products and that have service-intensive manufacturing
requirements. The Company focuses on complex assemblies in low to medium volumes
for commercial and industrial customers. The Company has not been, and does not
intend to become, a manufacturer of high volume printed circuit board assemblies
for personal computers or consumer-oriented products, which typically have
relatively low margins. The Company targets customers in the medical devices,
communications equipment, industrial and business computers, testing
instrumentation and industrial controls industries and seeks to maintain a
balance of customers among these industries and within each industry. By
balancing its operations among industries and customers, the Company seeks to
avoid becoming dependent on any one industry or customer. In addition, the
Company believes that the industries and customers that it targets produce
products that generally have longer life cycles, more stable demand and less
price pressure as compared to consumer-oriented products.
PROVIDE COMPREHENSIVE DESIGN AND MANUFACTURING SERVICES. The Company
believes that OEMs increasingly expect a broad range of services from contract
manufacturers and that attracting and retaining customers depends on the
Company's ability to provide such services. The Company provides its customers
with services ranging from initial product design and development and prototype
production to the manufacture of printed circuit board assemblies,
post-production testing and final assembly of customers' products.
PURSUE OPPORTUNITIES FOR GROWTH. The Company is committed to pursuing
opportunities to grow its operations through acquiring additional facilities or
businesses and achieving additional operating efficiencies in the Company's
existing operations.
MAINTAIN FLEXIBILITY. The Company believes that many of its customers are
leaders in their respective industries, and, as a result, routinely re-engineer
their products to incorporate new and more competitive product features.
Accordingly, the Company has organized its manufacturing operations into
flexible work centers, as opposed to dedicated production lines, which allow the
Company to incorporate complex design specifications and to respond rapidly to
design changes.
SERVICES PROVIDED BY THE COMPANY
The Company provides turnkey manufacturing services, including the
purchase of customer-specified components from its extensive network of
component suppliers, assembly of the components onto printed circuit boards and
performance of post-production testing. In certain instances, the Company
completes the assembly of its customers' products at the Company's facilities by
integrating printed circuit boards into other elements of the customers'
products.
The Company provides design-for-manufacturability engineering services for
products it manufactures. With respect to product design, the Company provides
the complete design and development of new electronic products and mechanical
packages, as well as the redesign, surface mount conversion and printed circuit
board layout of existing products. The Company also provides test process design
capabilities that include the design and development of test fixtures and
procedures and software for both in-circuit tests and functional tests of
circuit boards, components and products.
The Company's component procurement services for turnkey projects consist
of planning, purchasing, expediting, inspecting, warehousing and financing the
components required to manufacture printed circuit board assemblies. OEMs
increasingly have required manufacturers to purchase all or some components
directly from component manufacturers or distributors and to warehouse and
finance the components. See "--Suppliers."
In its manufacturing services, the Company offers both surface mount and
pin-through-hole interconnection technologies. Surface mount technology is a
computer-automated process that allows the placement of a higher density of
components directly on both sides of a printed circuit board. The surface mount
process is a more recent
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advancement over the mature pin-through-hole technology, which normally permits
electronic components to be attached to only one side of a printed circuit board
by inserting the components into holes drilled through the board. The surface
mount process allows OEMs to use advanced circuitry while permitting the
placement of a greater number of components on a printed circuit board without
having to increase the size of the board. By allowing increasingly complex
circuits to be packaged with the components placed in closer proximity to each
other, surface mount technology greatly enhances circuit processing speed and
thus board and system performance. The surface mount process allows a reduction
in the number of printed circuit boards required per system and allows the use
of more fully automated production processes. The Company performs
pin-through-hole assembly both manually and with computer-automated component
insertion and soldering equipment. Although surface mount technology is the
leading interconnection technology, the Company intends to continue providing
pin-through-hole assembly services for its customers. Pin-through-hole
technology is of continuing viability because most printed circuit boards
assembled using surface mount technology require some pin-through-hole assembly.
In addition, the Company believes that by continuing to provide pin-through-hole
assembly services, the Company appeals to current and prospective customers that
have not shifted, or do not wish to change, their manufacturing process to
utilize surface mount technology.
Because the Company may be the sole source or a major source of printed
circuit board assemblies for a customer, frequent communication between the
Company and the customer is necessary to ensure that the Company's manufacturing
services meet the customer's specifications. Accordingly, the Company maintains
a customer service department whose personnel work closely with the customer
throughout the manufacturing process. The Company's engineering and
manufacturing personnel coordinate the implementation of new and reengineered
products with the customer, thereby providing the customer with feedback on such
issues as the overall ease of manufacture of the printed circuit board assembly
and anticipated production lead times.
Component procurement begins after component specifications are verified
and approved sources are confirmed with the customer. Concurrently, the
Company's technical personnel establish complete documentation files on
components and the appropriate set-up, assembly and testing procedures. The
Company's personnel monitor all stages of the manufacturing process in order to
provide flexible and rapid responses to the customer's requirements, including
changes in design, order size and delivery schedules. In addition, the Company
utilizes an automated materials planning system which allows the customer to
monitor the status of an order on a real-time basis.
The Company also provides testing services for completed printed circuit
board assemblies in connection with the manufacturing process. In-circuit tests
verify that the components have been inserted properly and meet certain
functional standards and that the electrical circuits have been completed
properly. These tests are performed on industry standard testing equipment using
proprietary software developed either by the customer or test consultants on a
contractual basis. In-circuit tests normally are performed on all printed
circuit board assemblies for turnkey projects. In addition, using specialized
testing equipment designed and provided by the customer, the Company performs
customized functional tests designed to ensure that the printed circuit board
assembly will perform its intended functions. Because defective components
normally fail after a relatively short period of use, customers occasionally
request that certain printed circuit board assemblies be subjected by the
Company to controlled environmental stresses, typically thermal or electrical
stresses. These procedures accelerate the effects of operational use without
affecting the useful life of the component.
The Company also offers its customers flexible, just-in-time delivery
programs allowing product shipments to be closely coordinated with the
customers' inventory requirements. Several of the Company's larger customers
utilize a just-in-time inventory management system. The Company believes that
the attractiveness of just-in-time inventory management will lead other
customers to implement such systems and, accordingly, anticipates that a greater
percentage of the Company's business will be performed on this basis in the
future.
In establishing a turnkey relationship with a manufacturer, OEMs must
incur expense in qualifying the contract manufacturer and in some cases its
sources of component supply, refining product design and manufacturing
processes, and developing mutually compatible information and reporting systems.
The Company believes that once this relationship is established, OEMs typically
experience significant difficulty in expeditiously reassigning turnkey projects
to another manufacturer and, as a result, seek sources of turnkey manufacturing
services that they perceive will be able to meet their production requirements
over a long period of time and successive product generations. Accordingly, the
Company believes that its increasing turnkey business has resulted in greater
stability in its customer base.
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MARKETING AND CUSTOMERS
To better implement its service-intensive business strategy, the Company
markets its services to existing and potential customers through its direct
sales force, independent marketing representatives and its executive officers.
The Company's sales force consists of seven in-house salesmen and two
independent marketing representatives, through which the Company continues to
aggressively market the enhanced service capabilities of the Benchmark Design
Center located in Winona, Minnesota. Four of the seven in-house salesmen are
based at the Winona, Minnesota facility, with two based at the Angleton, Texas
facility and one based at the Beaverton, Oregon facility.
The Company seeks to serve a sufficiently large number of customers to
minimize dependence on any one customer or industry. Although historically a
substantial percentage of the Company's sales have been to a small number of
customers, by expanding and diversifying its customer base, the Company has been
able to reduce its dependence on certain significant customers and lessen the
impact of a substantial reduction in business from one such customer.
Nevertheless, during 1997, the Company's three largest customers accounted for
approximately 37%, 13% and 6%, respectively, of the Company's sales. Although
the loss of a major customer could have an adverse effect on the Company, the
Company does not believe that any such effect would be material unless the
Company were unable to replace such customer's business. See Note 9 of Notes
to Consolidated Financial Statements.
The Company targets customers in five industries and seeks to maintain a
balance in its sales to those industries. The following table sets forth the
percentages of the Company's sales to each of the five industries for 1995, 1996
and 1997.
1995 1996 1997
----------------------------
Medical Devices ...................... 14% 18% 17%
Telecommunications ................... 18 26 21
Computer Systems ..................... 29 25 39
Tests and Instrumentation ............ 22 15 11
Industrial Controls .................. 17 16 12
SUPPLIERS
The Company maintains an extensive network of suppliers of components and
other materials used in assembling printed circuit boards. The Company procures
components only when a purchase order or forecast is received from a customer
and occasionally utilizes components or other materials for which a supplier is
the single source of supply. Although the Company experiences component
shortages and longer lead times of various components from time to time, the
Company has 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. These procedures reduce, but do not eliminate, the
Company's inventory risk. In addition, by developing long-term relationships
with suppliers, the Company has been better able to minimize the effects of
component shortages than manufacturers without such relationships. Because of
the continued increase in demand for surface mount components, the Company
anticipates continued component shortages with respect to certain components and
longer lead times for various components from time to time.
BACKLOG
The Company's backlog was approximately $302 million at December 31, 1997,
compared to $230 million at December 31, 1996 and $117 million at December 31,
1995. Backlog consists of customer orders that are expected to be filled within
twelve months. Because orders generally may be rescheduled or cancelled by the
payment of cancellation charges and because the Company's customers update their
orders at different intervals and provide orders to be filled over different
periods, the Company's backlog does not necessarily provide an accurate measure
of the timing or amount of future sales.
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COMPETITION
The contract manufacturing services provided by the Company are available
from many independent sources as well as in-house manufacturing capabilities of
current and potential customers. The Company's competitors include Solectron
Corporation, SCI Systems, Inc., The DII Group, Inc., Avex Electronics, Inc.,
Jabil Circuit, Inc. and Plexus Corp., some of which are more established in the
industry and have substantially greater financial, manufacturing or marketing
resources than the Company. The Company believes that the principal competitive
factors in its targeted markets are product quality, flexibility and timeliness
in responding to design and schedule changes, reliability in meeting product
delivery schedules, pricing, technological sophistication and geographic
location. The Company believes that it competes favorably with respect to these
factors.
GOVERNMENTAL REGULATION
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters, and there can be no assurance that material costs and
liabilities will not be incurred or that past or future operations will not
result in exposure to injury or claims of injury by employees or the public.
Although some risk of costs and liabilities related to these matters is inherent
in the Company's business, as with many similar businesses, the Company believes
that its business is operated in substantial compliance with applicable
regulations. However, new, modified or more stringent requirements or
enforcement policies could be adopted, which could adversely affect the Company.
The Company periodically generates and temporarily handles limited amounts
of materials that are considered hazardous waste under applicable law. The
Company contracts for the off-site disposal of these materials and has
implemented a waste management program to address related regulatory issues.
EMPLOYEES
As of December 31, 1997, the Company had 1,644 employees, of whom 1,185
were engaged in manufacturing and operations, 241 in materials control and
procurement, 84 in design and development, 58 in marketing and sales, and 76 in
administration. None of the Company's employees is subject to a collective
bargaining agreement. Management believes that the Company's relationship with
its employees is satisfactory.
EXPORT SALES
In 1997 and 1996, the Company had export sales of approximately $86
million and $29 million, respectively, to Europe from the Company's United
States operations. There were no export sales in 1995.
YEAR 2000
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by Year 2000 software failures which
can arise in time-sensitive software applications which utilize a field of two
digits to define the applicable year. In such applications, a date using "00" as
the year may be recognized as the year 1900 rather than the year 2000. Many of
the Company's business and operating systems are currently Year 2000 compliant,
and therefore, the Company is undertaking additional research and development
efforts to address those systems, which are not currently Year 2000 compliant.
In addition, the Company is in the process of selecting and installing an
Enterprise Resource Planning System, which will be Year 2000, compliant. The
Company is planning to complete all necessary Year 2000 upgrades of its major
systems in 1999, and is currently identifying and developing conversion
strategies for its remaining systems that may be impacted by the Year 2000
issue. The Company currently does not have an overall estimate of the costs
associated with the purchase and implementation of the new Enterprise Resource
Planning System. The costs of this software will be capitalized and amortized
over the estimated useful life of the software, and costs associated with the
preliminary project stage and post-implementation stage will be expensed as
incurred. The Year 2000 component of this system can not be readily segregated
from the total cost of the company-wide Enterprise Resource Planning System
implementation.
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ITEM 2. PROPERTIES
The Company's executive offices and one of its manufacturing facilities
are located in an approximately 109,000 square foot facility on 18.9 acres of
land owned by the Company in Angleton, Texas, where the Company has 11 surface
mount manufacturing lines. The Company also leases an approximately 52,000
square foot facility in Beaverton, Oregon, where the Company has two surface
mount production lines. The Company's facilities in Winona, Minnesota comprise
five leased buildings with total square footage of approximately 137,000 and a
64,000 square foot building that the Company owns. For the primary leased
facilities in Winona, the Company has long-term leases with three-year purchase
options. The Winona facilities include manufacturing facilities with 16 surface
mount production lines and warehouse facilities. The Company's Angleton and
Beaverton facilities are certified under ISO-9002, and the Winona facilities are
certified under ISO-9001. The Company believes that its properties are and will
be sufficient to conduct the Company's operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information on page 30 of the Company's Annual Report to Stockholders
for the fiscal year ended December 31, 1997 (the "1997 Annual Report") is
incorporated herein by reference in response to this item.
ITEM 6. SELECTED FINANCIAL DATA
The information on page 31 of the 1997 Annual Report is incorporated
herein by reference in response to this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information on pages 9 to 14 of the 1997 Annual Report is incorporated
herein by reference in response to this item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to the Company's 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages 15 to 29 of the 1997 Annual Report is
incorporated herein by reference in response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 1998 Annual Meeting of Shareholders (the "1998
Proxy Statement") is incorporated herein by reference in response to this item.
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ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Matters" in the 1998 Proxy Statement is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Common Stock Ownership of Certain
Beneficial Owners and Management" in the 1998 Proxy Statement is incorporated
herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" in the 1998 Proxy
Statement is incorporated herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules, and
Exhibits
1. FINANCIAL STATEMENTS OF THE COMPANY
Reference is made to the Financial Statements, the reports thereon, the
notes thereto and supplementary data commencing at page 15 of the 1997 Annual
Report, which financial statements, reports, notes and data are incorporated
herein by reference in response to this item. Set forth below is a list of such
Financial Statements:
Consolidated Financial Statements of the Company
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
3. EXHIBITS
Each exhibit marked with an asterisk is filed with this Annual Report on
Form 10-K.
EXHIBIT
NUMBER DESCRIPTION
2.1 -- Purchase Agreement dated as of January 22, 1998 by and between the
Company and Lockheed Martin Corporation (incorporated herein by
reference to Exhibit 2 to the Company's Current Report on Form 8-K
dated February 23, 1998).
2.2 -- Agreement and Plan of Merger dated as of March 27, 1996 by and
among the Company, Electronics Acquisition, Inc., EMD Technologies,
Inc., David H. Arnold and Daniel M. Rukavina (incorporated herein by
reference to Exhibit 2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
2.3 -- Amendment No. 1 to Agreement and Plan of Merger dated as of April
5, 1996 by and among the Company, Electronics Acquisition, Inc., EMD
Technologies, Inc., David H. Arnold and Daniel M. Rukavina
(incorporated herein by reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-4 (Registration No. 333-4230)).
3.1 -- Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-46316) (the "Registration
Statement")).
8
<PAGE>
3.2 -- Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 ("1992 Form 10-K")).
4.1 -- Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Registration Statement).
4.2 -- Amended and Restated Bylaws of the Company (incorporated herein by
reference to Exhibit 3.2 to the 1992 Form 10-K).
4.3 -- Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4.3 to the Registration
Statement).
10.1 -- Form of Indemnity Agreement between the Company and each of its
directors and officers (incorporated herein by reference to Exhibit
10.11 to the Registration Statement).
10.2 -- Benchmark Electronics, Inc. Stock Option Plan dated May 11, 1990
(incorporated herein by reference to Exhibit 10.12 to the Registration
Statement).
10.3 -- Form of Benchmark Electronics, Inc. Incentive Stock Option
Agreement between the Company and the optionee (incorporated herein by
reference to Exhibit 10.13 to the Registration Statement).
10.4 -- Form of Benchmark Electronics, Inc. Nonqualified Stock Option
Agreement between the Company and the optionee (incorporated herein by
reference to Exhibit 10.14 to the Registration Statement).
10.5 -- Lease Agreement dated October 12, 1990, between Tektronics, Inc.
and the Company, as amended by Lease Amendment No. 1 dated as of
August 19, 1991, Lease Amendment No. 2 dated January 31, 1992, Lease
Amendment No. 3 dated January 11, 1993, Lease Amendment No. 4 dated
May 19, 1993 and Lease Amendment No. 5 dated September 13, 1993
(incorporated herein by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993).
10.6 -- Registration Rights Agreement dated March 30, 1992 between Mason &
Hanger Corporation and the Company (incorporated herein by reference
to Exhibit 10.17 to the Registration Statement).
10.7 -- Benchmark Electronics, Inc. 1992 Incentive Bonus Plan (incorporated
herein by reference to Exhibit 10.20 to the 1992 Form 10-K).
10.8 -- Benchmark Electronics, Inc. 1994 Stock Option Plan for Non-Employee
Directors (incorporated herein by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
10.9 -- Credit Agreement dated as of February 23, 1998 by and between the
Company and Chase Bank of Texas, N.A. (incorporated herein by
reference to Exhibit 99 to the Company's Current Report on Form 8-K
dated March 10, 1998).
10.10 -- Lease Agreement dated July 30, 1996 by and among David H. Arnold,
Muriel M. Arnold, Daniel M. Rukavina, Patricia A. Rukavina and EMD
Associates, Inc., as amended by Amendment to Lease dated July 30, 1996
(incorporated herein by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996).
10.11 -- Lease Agreement dated December 15, 1992 by and among David H.
Arnold, Muriel M. Arnold, Daniel M. Rukavina, Patricia A. Rukavina and
EMD Associates, Inc., as amended by Amendment to Lease dated January
1, 1994, Amendment to Lease dated December 15, 1995, and Amendment to
Lease dated July 30, 1996 (incorporated herein by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
13* -- Benchmark Electronics, Inc. Annual Report to Shareholders for the
fiscal year ended December 31, 1997.
9
<PAGE>
21* -- Subsidiaries of Benchmark Electronics, Inc.
23* -- Consent of Independent Auditors concerning incorporation by
reference in the Company's Registration Statement on Form S-8
(Registration No. 33-61660, No. 333-26805 and No. 333-28997).
27.1* -- Financial Data Schedule.
27.2* -- Financial Data Schedule
27.3* -- Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of 1997.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BENCHMARK ELECTRONICS, INC.
By: /S/ DONALD E. NIGBOR
Donald E. Nigbor
PRESIDENT
Date: March 31, 1998
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 of Directors __________________
John C. Custer
Director and President
/s/ Donald E. Nigbor (principal executive officer) March 31, 1998
Donald E. Nigbor
__________________________ Director and Executive __________________
Stephen A. Barton Vice President
Director and Executive
/s/ Cary T. Fu Vice President (principal March 31, 1998
Cary T. Fu financial and accounting
officer)
/s/Peter G. Dorflinger Director March 31, 1998
Peter G. Dorflinger
/s/ Gerald W. Bodzy Director March 31, 1998
Gerald W. Bodzy
_______________________ Director ___________________
David H. Arnold
11
<PAGE>
EXHIBIT INDEX
Each exhibit marked with an asterisk is filed with this Annual Report on
Form 10-K.
EXHIBIT
NUMBER DESCRIPTION
2.1 -- Purchase Agreement dated as of January 22, 1998 by and between the
Company and Lockheed Martin Corporation (incorporated herein by
reference to Exhibit 2 to the Company's Current Report on Form 8-K
dated February 23, 1998).
2.2 -- Agreement and Plan of Merger dated as of March 27, 1996 by and
among the Company, Electronics Acquisition, Inc., EMD Technologies,
Inc., David H. Arnold and Daniel M. Rukavina (incorporated herein by
reference to Exhibit 2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
2.3 -- Amendment No. 1 to Agreement and Plan of Merger dated as of April
5, 1996 by and among the Company, Electronics Acquisition, Inc., EMD
Technologies, Inc., David H. Arnold and Daniel M. Rukavina
(incorporated herein by reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-4 (Registration No. 333-4230)).
3.1 -- Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-46316) (the "Registration
Statement")).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 ("1992 Form 10-K")).
4.1 -- Restated Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Registration Statement).
4.2 -- Amended and Restated Bylaws of the Company (incorporated herein by
reference to Exhibit 3.2 to the 1992 Form 10-K).
4.3 -- Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4.3 to the Registration
Statement).
10.1 -- Form of Indemnity Agreement between the Company and each of its
directors and officers (incorporated herein by reference to Exhibit
10.11 to the Registration Statement).
10.2 -- Benchmark Electronics, Inc. Stock Option Plan dated May 11, 1990
(incorporated herein by reference to Exhibit 10.12 to the Registration
Statement).
10.3 -- Form of Benchmark Electronics, Inc. Incentive Stock Option
Agreement between the Company and the optionee (incorporated herein by
reference to Exhibit 10.13 to the Registration Statement).
10.4 -- Form of Benchmark Electronics, Inc. Nonqualified Stock Option
Agreement between the Company and the optionee (incorporated herein by
reference to Exhibit 10.14 to the Registration Statement).
10.5 -- Lease Agreement dated October 12, 1990, between Tektronics, Inc.
and the Company, as amended by Lease Amendment No. 1 dated as of
August 19, 1991, Lease Amendment No. 2 dated January 31, 1992, Lease
Amendment No. 3 dated January 11, 1993, Lease Amendment No. 4 dated
May 19, 1993 and Lease Amendment No. 5 dated September 13, 1993
(incorporated herein by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993).
10.6 -- Registration Rights Agreement dated March 30, 1992 between Mason &
Hanger Corporation and the Company (incorporated herein by reference
to Exhibit 10.17 to the Registration Statement).
12
<PAGE>
10.7 -- Benchmark Electronics, Inc. 1992 Incentive Bonus Plan (incorporated
herein by reference to Exhibit 10.20 to the 1992 Form 10-K).
10.8 -- Benchmark Electronics, Inc. 1994 Stock Option Plan for Non-Employee
Directors (incorporated herein by reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
10.9 -- Credit Agreement dated as of February 23, 1998 by and between the
Company and Chase Bank of Texas, N.A. (incorporated herein by
reference to Exhibit 99 to the Company's Current Report on Form 8-K
dated March 10, 1998).
10.10 -- Lease Agreement dated July 30, 1996 by and among David H. Arnold,
Muriel M. Arnold, Daniel M. Rukavina, Patricia A. Rukavina and EMD
Associates, Inc., as amended by Amendment to Lease dated July 30, 1996
(incorporated herein by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996).
10.11 -- Lease Agreement dated December 15, 1992 by and among David H.
Arnold, Muriel M. Arnold, Daniel M. Rukavina, Patricia A. Rukavina and
EMD Associates, Inc., as amended by Amendment to Lease dated January
1, 1994, Amendment to Lease dated December 15, 1995, and Amendment to
Lease dated July 30, 1996 (incorporated herein by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
13* -- Benchmark Electronics, Inc. Annual Report to Shareholders for the
fiscal year ended December 31, 1997.
21* -- Subsidiaries of Benchmark Electronics, Inc.
23* -- Consent of Independent Auditors concerning incorporation by
reference in the Company's Registration Statement on Form S-8
(Registration No. 33-61660).
27.1* -- Financial Data Schedule.
27.2* -- Financial Data Schedule.
27.3* -- Financial Data Schedule.
13
EXHIBIT 13
Strategic Growth
(Illustration of map showing locations with beginning year)
Benchmark Electronics
1997 Annual Report
Financial Highlights
Benchmark Electronics, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
(IN THOUSANDS, EXCEPT PER-SHARE DATA) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales ............................. $325,229 201,296 97,353 98,168 75,859
Income from operations ............ $ 25,112 15,391 9,250 8,778 6,590
Net income ........................ $ 15,090 8,864 6,148 5,769 4,582
Earnings per common share (diluted) $ 1.25 0.96 0.75 0.71 0.56
Working capital ................... $ 87,879 72,586 37,285 30,890 29,160
Total assets ...................... $190,322 168,174 57,037 48,333 47,425
Long-term debt .................... $ 30,330 30,485 -- -- --
Shareholders' equity .............. $120,872 104,999 46,624 40,131 34,213
Weighted average common and
equivalent shares outstanding . 12,049 9,222 8,213 8,176 8,132
</TABLE>
The Company at a Glance
Benchmark Electronics, Inc., provides contract manufacturing and design services
to original equipment manufacturers (OEMs) in the electronics industry,
including manufacturers of medical devices, communications equipment, industrial
and business computers, and testing and industrial instruments. The company
specializes in assembling high quality, technologically complex printed circuit
boards with computer-automated equipment using surface mount and pin-thru-hole
interconnection technology for customers requiring low-to-medium volume
assembly. The company frequently works with customers from product design stages
through ongoing production and provides manufacturing services for successive
product generations.
About the Cover
The map shows Benchmark's growth beginning in Texas in 1986, expanding to Oregon
in 1991, to Minnesota in 1996, and to New Hampshire in 1998. Benchmark expects
to open a greenfield office in Europe later in 1998.
Table of Contents
The Company at a Glance 1
Financial Highlights 1
President's Letter 2
Strategic Growth Programs 6
Management's Discussion and Analysis 9
Financial Statements 15
Notes to Financial Statements 19
Independent Auditors' Report 28
Management's Report 28
Quarterly Financial Data 29
Market for the Registrant's Common Equity
and Related Shareholder Matters 30
Selected Financial Data 31
Corporate and Shareholder Data 32
President's letter
Dear Shareholder:
It is my pleasure to report to you once again our company's outstanding
financial results in calendar year 1997. The acquisition of EMD Technologies,
Inc. in 1996, and the continued growth and expansion of our traditional
business, meant that Benchmark Electronics, Inc. generated record net income of
$15,089,663, or diluted earnings per share of $1.25. The company posted record
sales of $325,229,015--approximately 62% greater than 1996. And once again we
showed a record year-end backlog, reaching $302,000,000 as of December 31, 1997.
<PAGE>
(Charts of Sales ($ millions), Income ($ millions), Diluted EPS ($) for the last
5 years. Caption: Benchmark achieved record-breaking financial results for
calendar year 1997.)
Our revenue growth during 1997 was once again more than twice that of the
electronic contract manufacturing industry's average, as compiled by the
Institute for Interconnecting and Packaging Electronic Circuits (IPC).
(Chart of Compound Average Growth Rate Comparison of IPC of 20% and Benchmark*
of 40% *includes the effect of merger and acquisition activities. Caption:
Benchmark's compound sales revenue growth versus the IPC average for 1993-1997.)
One of our more important objectives during this past year was the
integration of EMD into the Benchmark family. We expanded and focused the
marketing and sales activities of that operation and increased significantly the
business attributed to existing customers, at the same time adding a number of
promising new customers. Rather than shrinking, or downsizing, as workers so
often fear following the change of corporate ownership, the number of employees
at EMD actually grew by approximately 20% during the year following its
acquisition by Benchmark.
(Pie chart of Market Segments of Telecommunications 21%, Test & Instruments 11%,
Medical Devices 17%, Computer Systems 39%, Industrial Controls 12%. Caption:
Benchmark's 1997 sales by market segment)
Looking to the future, we formed a company-wide team which last year began to
concentrate on the selection and installation of an extensive Enterprise
Resource Planning System to allow all of our existing operations to function on
the same business system, and, more importantly perhaps, enable additional
domestic and international acquisitions or start-up facilities to tie in to this
state-of-the-art management information system. This new Enterprise Resource
Planning System will be initially implemented during 1998 and is designed to
accommodate the projected growth of our management information system needs into
the foreseeable future.
This year I am especially pleased to report to you that, as of May 15, 1997,
the common stock of Benchmark Electronics, Inc. trades on the New York Stock
Exchange. Effective July 28, 1997, to further our efforts to increase the
trading volume of Benchmark shares, we completed a 2 for 1 stock split.
These three factors--the excellent operating results produced during 1997,
the listing on the New York Stock Exchange, and the stock split--combined with a
positive stock market climate boosted the shareholder value of Benchmark common
stock dramatically.
Another key area of management emphasis during 1997 was our merger and
acquisition activity. As the contract manufacturing industry has matured, the
rate of mergers and acquisitions has increased quite rapidly. During the latter
part of 1997 we began evaluating the business prospects, negotiating the
purchase terms and performing due diligence on the contract electronics
manufacturing subsidiary of the Lockheed Martin Corporation, which is located in
Hudson, New Hampshire. We formally announced the acquisition in January of 1998
and closed the transaction with Lockheed on February 23, 1998. The acquisition
of this Lockheed subsidiary is expected to play a significant role in
Benchmark's continued growth.
Finally, we figuratively broke new ground during 1997, beginning to plan for
our global expansion initially to serve our customers' outsourcing needs in
Europe. International expansion is an important step in Benchmark's future,
enabling us to increase our business with those existing customers which have
European sales and support operations and require an outsourcing capability.
Beyond that, though, we expect to garner new international customers, thus
diversifying the overall revenue base at Benchmark. Growth opportunities from
international expansion are especially promising since outsourcing and
electronic contract manufacturing are not quite as widespread in Europe as it is
domestically.
Once again, my sincere thanks and appreciation to all the Benchmark
Electronics employees who worked so hard to make 1997 a very successful year for
our company.
You'll find more details about your company's strategic growth programs in
the following pages of this shareholder report.
Sincerely,
Donald E. Nigbor
President and Chief Executive Officer
February 28, 1998
(Photo of management. Caption: The officers responsible for Benchmark's previous
growth continued to serve the company in the same capacities during 1997. Seated
left to right: Donald Nigbor and Cary Fu. Standing left to right: Lenora Gurton,
Christopher Nawrocki, Gayla Delly, Steven Barton.)
<PAGE>
Strategic Growth Programs
Acquisition of Lockheed Martin Subsidiary
Thanks to a combination of Benchmark's strategic focus on serving high-end
industrial electronics original equipment manufacturers (OEM), and to our close
business fit with Lockheed Martin Corporation's commercial electronics
subsidiary, plus the geographic location of Lockheed's facility, that
organization became a favorable acquisition candidate for our company.
The Hudson, New Hampshire, location of the Lockheed Martin commercial
electronics subsidiary is ideally positioned to serve the Boston Metro
electronics market, which is one of the fastest growing markets for electronic
manufacturing services in the United States. Our new subsidiary operates from
250,000 square-foot facility on a 40-acre campus that we are currently leasing
from Lockheed.
The largest customer served by this affiliate is engaged in manufacturing
mass storage for high-end computers. It is also important to note that there is
no overlap with existing Benchmark customers. The acquisition directly and
immediately diversifies our existing revenue base and should provide us access
to both other markets and other geographical regions where we can expand our
customer base.
The manufacturing capabilities in Hudson are quite similar to other Benchmark
facilities; the facility does not service high volume consumer products such as
personal computers or automotive electronics.
(Photo of New Hampshire facility. Caption: The Hudson, New Hampshire facility
leased by Benchmark from the Lockheed Martin Corporation is located near the
Boston Metro electronics market.)
Our new subsidiary has advanced manufacturing and test technologies but lacks
the corporate engineering resources available within the Benchmark family. Those
Benchmark resources will expand the New Hampshire operation's design and test
capabilities. That should be a strong competitive factor helping this business
unit achieve its full potential within its marketing territory.
At the same time, our acquisition is expected to enhance the company's
existing marketing abilities, enabling us to provide improved service to
outsourcing clients nationwide.
(Illustration of map of USA with locations with beginning years. Caption:
Benchmark is moving more quickly to expand its manufacturing and marketing
capabilities to customers across the country and overseas.)
Another opportunity arising from the acquisition of the New Hampshire
operation is the improvement of our corporation's procurement leverage, allowing
each of our facilities to offer more cost effective material solutions to our
outsourcing clients. Since material content is the most significant cost factor
in our clients' products, our additional strength in this area is crucial.
Moreover, we've found that customers now tend to outsource their engineering
requirements as well as their manufacturing. As the contract electronics
manufacturing industry matures, it will be even more critical to offer strong
engineering and design capabilities and to provide state-of-the-art
manufacturing services in order to maintain our status as a top tier supplier.
European Greenfield Operation
Last year a Benchmark work group researched the most likely merger or
acquisition candidates from among electronic manufacturing firms and original
equipment manufacturers across Europe. Reviewing their findings, we decided at
the present time to initiate a Greenfield (start-up) operation there.
The key strategic reason for locating in Europe is to serve our existing
customer base of European clients. A start-up operation is attractive because of
the favorable climate for government support and the readily available base of
trained engineers and technicians to support manufacturing and design
engineering requirements.
(Illustration of map of Europe, no caption)
Our European operation will initially perform test, repair and upgrade
services for our existing customer base requiring European outsourcing. We
believe this operation will be of great benefit to those customers, since
overseas repairs or upgrades allow them a faster turnaround for their products,
guaranteeing greater goodwill from their customers.
Within a year or two, we intend to add state-of-the-art thru-hole and surface
mount manufacturing capabilities to our European operation. Eventually we expect
to provide engineering and design services for European clients, either by
acquisition of an engineering firm or expansion of our own corporate engineering
resources.
The overall use of electronic contract manufacturing services by European
OEMs is somewhat further behind in Europe than in the United States indicating
to us a positive environment for growth.
Our initial personnel level will be quite modest at our new European
facility, but by providing leading edge outsourcing solutions to European
customers we expect that the new operation will continually grow and improve.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
"Selected Financial Data" and the Consolidated Financial Statements of the
Company and the notes thereto appearing elsewhere herein. The following
discussion and analysis contains certain forward-looking statements regarding
future financial condition and results of operations and the Company's business
operations. The words "expect," "estimate," "anticipate," "predict," and similar
expressions are intended to identify forward looking statements. Such statements
involve risks, uncertainties, and assumptions, including but not limited to,
industry and economic conditions and customer actions and other factors
discussed in the Company's Form 10-K and in the Company's other filings with the
Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
Acquisition
On July 30, 1996, the Company completed its acquisition of EMD Technologies,
Inc. (EMD). This business, headquartered in Winona, Minnesota, was acquired for
1,349,928 shares of common stock, $30.5 million in cash, and the Company paid
$2.2 million in acquisition costs. The transaction was accounted for under the
purchase method of accounting, and, accordingly, the results of operations of
EMD since July 30, 1996 have been included in the accompanying consolidated
statements of income. The acquisition resulted in goodwill of approximately
$25.0 million which is being amortized on a straight line basis over 15 years.
See Note 2 of Notes to Consolidated Financial Statements.
In order to finance a portion of the cash consideration for the
acquisition of EMD, the Company issued a $30 million, 8.02% Senior Note due 2006
(Senior Note) to Northwestern Mutual Life Insurance Company and obtained a
four-year, $15 million revolving line of credit with a commercial bank which
replaced the Company's prior revolving line of credit. See Note 5 of Notes to
Consolidated Financial Statements. This revolving line of credit was replaced in
February 1998. See "Liquidity and Capital Resources".
Results of Operations
The following table presents the percentage relationship that certain items in
the Company's Consolidated Statements of Income bear to sales for the periods
indicated.
Percentage of Sales
Year ended December 31,
1997 1996 1995
--------------------------
Sales ............................................. 100.0% 100.0% 100.0%
Cost of sales ..................................... 87.8 88.4 87.5
--------------------------
Gross profit .................................. 12.2 11.6 12.5
Selling, general and administrative expenses ...... 3.9 3.6 3.0
Amortization of goodwill .......................... .5 .3 --
--------------------------
Income from operations ........................ 7.8 7.7 9.5
--------------------------
Other income (expense) ............................ (.5) (.5) .3
--------------------------
Income before income taxes .................... 7.4 7.2 9.8
Income tax expense ................................ 2.7 2.8 3.5
--------------------------
Net Income .................................... 4.6% 4.4% 6.3%
--------------------------
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996 Sales in
1997 increased $123.9 million, or 61.6% over 1996 sales. The increase in sales
resulted primarily from increased sales volume from existing customers, the
addition of new customers and the acquisition of EMD on July 30, 1996.
A substantial percentage of the Company's sales have been to a small
number of customers, and the loss of a major customer, if not replaced, would
adversely affect the Company. During 1997, the Company's three largest customers
accounted for approximately 55.8% of the Company's sales, and the Company's
largest customer accounted for approximately 37% of sales. The Company's future
sales are dependent on the success of its customers, some of which operate in
businesses associated with rapid technological change and consequent product
obsolescence. Developments adverse to the Company's major customers or their
products, or the failure of a major customer to pay for components or services,
could have an adverse effect on the Company.
The Company had a record year-end backlog of $302 million at December 31,
1997, as compared to the 1996 year-end backlog of $230 million. Although the
Company expects to fill substantially all of this backlog in 1998, the Company
has no long-term contract agreements from its customers and customer orders can
be canceled, changed or delayed by customers. The timely replacement of
canceled, changed or delayed orders with new customers cannot be assured, nor
can there be any assurance that any of the Company's current customers will
continue to utilize the Company's services.
<PAGE>
Gross profit increased $16.3 million, or 69.8% over 1996. Gross profit as
a percentage of sales increased from 11.6% for 1996 to 12.2% for 1997. The
increase in gross profit was due primarily to higher sales volumes and normal
changes in product mix and customer mix. The Company's gross profit reflects a
number of factors, including product mix, the level of start up costs and
efficiencies associated with new programs, capacity utilization of surface mount
and other equipment, and pricing with the electronics industry. All of these
factors are continually changing and are interrelated, making it impracticable
to determine separately the effect of each factor. The increase in gross profit
as a percentage of sales during 1997 was due primarily to the product mix and
the initiation of new programs during 1996.
Selling, general and administrative expenses increased $5.6 million, or
77.3%, from 1996 to $12.8 million. In order to satisfy the increased level of
business activity and to continue the development and improvement of the systems
and processes necessary to accommodate future growth, the Company has continued
to add personnel. The increase in selling, general and administrative expenses
reflects these additional personnel and related departmental expense, as well as
the additional administrative expenses resulting from the inclusion of EMD in
the full year of 1997. The Company anticipates selling, general and
administrative expenses will continue to increase in nominal terms as the
Company continues to build the internal management and support systems necessary
to support higher revenue levels.
The amortization of goodwill associated with the acquisition of EMD for
the years ended December 31, 1997 and 1996 was $1.7 million and $0.7 million,
respectively. Interest expense incurred by the Company on the debt incurred in
connection with the acquisition of EMD was approximately $2.5 million and $1.4
million, respectively, in 1997 and 1996. The increased amortization and interest
expense in 1997 reflected the effect of including EMD's operations for a full
year.
Interest income was approximately $1.2 million in 1997 compared to $0.4
million in 1996. The increase was due to the investment by the Company of
available cash in interest bearing marketable securities and cash equivalents.
Income tax expense of $8.9 million represented an effective tax rate of
37% for the year ended December 31, 1997, compared with an effective tax rate of
38.8% for the year ended December 31, 1996. The decrease was due to the benefit
from the use of a foreign sales corporation and non-taxable interest earned on
municipal investments partially offset by nondeductible amortization of
goodwill.
The Company reported net income of approximately $15.1 million, or diluted
earnings of $1.25 per share, for 1997 compared with net income of approximately
$8.9 million, or diluted earnings of $0.96 per share for 1996. The approximately
$6.2 million increase in net income during 1997 was a result of the combined
effects of the acquisition of EMD and the overall increase in income from
operations resulting from the factors discussed above.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995 Sales in
1996 increased $103.9 million, or 106.8% over 1995 sales. Approximately 65% of
this increase in sales was due to the acquisition of EMD during the third
quarter of 1996 and the remainder of the sales increase resulted from increased
production volumes made possible by the expansion of the surface mount assembly
capacity at the Company's Angleton, Texas facility, which was completed during
the second quarter of 1996. In addition, the increase in production volumes
during 1996 was attributable in part to the fulfillment during the first quarter
of 1996 of orders that were subject to customers' changes in production
schedules and product mix experienced by the Company in the last quarter of 1995
and to the absence of component shortages during 1996 which had caused delays
during 1995.
A substantial percentage of the Company's sales have been to a small
number of customers, and the loss of a major customer, if not replaced, would
adversely affect the Company. During 1996, the Company's three largest customers
accounted for approximately 42% of the Company's sales, and the Company's
largest customer accounted for approximately 17% of sales.
The Company had a then record year-end backlog of $230 million at December
31, 1996, as compared to the 1995 year-end backlog of $117 million.
Gross profit increased $11.1 million, or 90.5% over 1995. Gross profit as
a percentage of sales decreased from 12.5% for 1995 to 11.6% for 1996. The
increase in gross profit was due primarily to higher sales volumes and normal
changes in product mix and customer mix. The Company's gross profit reflects a
number of factors, including product mix, the level of start up costs and
efficiencies associated with new programs, capacity utilization of surface mount
and other equipment, and pricing with the electronics industry. All of these
factors are continually changing and are interrelated, making it impracticable
to determine separately the effect of each factor. The decrease in gross profit
as a percentage of sales during 1996 was due primarily to the product mix and
the initiation of new programs.
Selling, general and administrative expenses increased $4.2 million, or
141.8%, from 1995 to $7.2 million. The acquisition of EMD resulted in additional
personnel and related expenses supporting the subsidiary operations.
Additionally in order to satisfy the increased level of business activity and to
continue the development and improvement of the systems and processes necessary
to accommodate future growth, the Company has added management personnel. The
increase in selling, general and administrative expenses reflects these
additional personnel and related departmental expenses, as well as the
additional administrative expenses, such
<PAGE>
as travel and communication costs incurred in connection with the acquisition of
EMD.
The amortization of goodwill associated with the acquisition of EMD for
the year ended December 31, 1996 was $0.7 million. Interest expense incurred by
the Company on the debt incurred in connection with the acquisition of EMD was
approximately $1.4 million in 1996. Neither of these costs were present in 1995.
Interest income was approximately $0.4 million in 1996 compared to $0.2
million in 1995. The increase was due to the investment by the Company of excess
cash in interest bearing marketable securities.
Income tax expense of $5.6 million represented an effective tax rate of
38.8% for the year ended December 31, 1996, compared with an effective tax rate
of 35.5% for the year ended December 31, 1995. The increase is due to
nondeductible amortization of goodwill partially offset by the benefit from the
use of a foreign sales corporation.
The Company reported net income of approximately $8.9 million, or diluted
earnings of $0.96 per share, for 1996 compared with net income of approximately
$6.1 million, or diluted earnings of $0.75 per share for 1995. The approximately
$2.7 million increase in net income during 1996 was a result of the combined
effects of the acquisition of EMD and the overall increase in income from
operations resulting from the factors discussed above.
Liquidity and Capital Resources
The Company has financed its growth and operations through funds generated from
operations, proceeds from the sale of its common stock and, during 1996, funds
borrowed under its credit facilities. Prior to the second quarter of 1996, the
Company had never borrowed any amounts under its available line of credit.
Cash provided by (used in) operating activities was $19.3 million, $12.3
million and ($3.4 million) in 1997, 1996 and 1995, respectively. In 1997,
substantial increases in inventory were offset by net income, depreciation and
amortization, and increases in accounts payable. The Company's inventories have
increased from $48.1 million at December 31, 1996 to $61.1 million at December
31, 1997, reflecting the Company's increased sales and backlog during this
period. In 1996, substantial increases in accounts receivable were offset by net
income, depreciation and amortization, and increases in accounts payable and
accrued liabilities and decreases in inventory, net of effects from the
acquisition of EMD. The Company's accounts receivable and inventories increased
from $20.2 million and $23.0 million, respectively, at December 31 1995 to $39.2
million and $48.1 million, respectively at December 31, 1996, reflecting the
Company's increased sales during this period. In 1995, increases in accounts
receivables and inventories were offset by net income, depreciation and
increases in accounts payable. The Company's accounts receivable and inventories
increased from $16.3 million and $13.2 million, respectively, at December 31
1994 to $20.2 million and $23.0 million, respectively at December 31, 1995,
reflecting the Company's increased backlog during this period. The Company
expects continued increases in inventories to support the anticipated growth in
sales. The Company continued and is continuing the practice of purchasing
components only after customer orders 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
the Company. The Company has not experienced significant supply constraints in
the past year nor does it expect to in the near future.
Cash used in investing activities was $12.4 million, $49.0 million and
$0.7 million, respectively, for the years ended December 31, 1997, 1996 and
1995. Capital expenditures of $10.4 million during 1997 were primarily
concentrated in surface mount assembly, test and manufacturing production
equipment. The Company completed the planned expansion of its production
capacity at the Angleton plant during 1996, after which the Company had 12
surface mount assembly lines in operation at the Angleton plant. Capital
expenditures of $8.6 million during 1996 and $2.3 million during 1995 were
primarily concentrated in the expansion of the Angleton facility and surface
mount assembly equipment associated with this expansion. On July 30, 1996, the
Company completed its acquisition of EMD for approximately $30.5 million in
cash. See Note 2 of Notes to Consolidated Financial Statements. The Company
invested $2.3 million and $9.5 million, respectively, during 1997 and 1996, of
available cash in interest bearing marketable securities.
Cash provided by financing activities was $0.4 million, $47.7 million and
$0.2 million, respectively, for the years ended December 31, 1997, 1996 and
1995. During 1997, cash provided by financing activities consisted primarily of
$0.7 million of proceeds from stock options exercised, offset by $0.2 million of
principal payments on long-term debt. During 1996, cash provided by financing
activities consisted primarily of $30 million of proceeds from the issuance of
long-term debt, $28.5 million of net proceeds from the public offering of common
shares, offset by $10.9 million of principal payments on long-term debt. During
1995, cash provided by financing activities consisted of $0.2 million of
proceeds from stock options exercised.
On February 23, 1998, the Company acquired Lockheed Commercial Electronics
Company (LCEC) for $70 million in cash, $40 million of which was obtained
through borrowings under a five-year term loan (the Term Loan) with a commercial
bank. LCEC, situated in Hudson, New Hampshire, is one of New England's largest
electronics manufacturing services companies, providing a broad range of
services including printed circuit board assembly and test, system assembly and
test, prototyping, depot repair, materials procurement, and engineering support
services. Principal on the Term Loan is payable in quarterly installments of
$2,000,000 beginning June 30, 1998 with a final installment of the unpaid
principal amount due March 31, 2003. The Term Loan
<PAGE>
bears interest, at the Company's option, at either the bank's Eurodollar rate
plus .625% to 1.375% or its prime rate, and interest is payable quarterly. The
margin on the Eurodollar rate fluctuates with the Company's ratio of debt to
earnings before interest, taxes, depreciation and amortization (EBITDA). The
Term Loan includes customary affirmative and negative covenants requiring the
Company to maintain a minimum tangible net worth, minimum current, fixed charge
coverage and interest coverage ratios and a maximum ratio of debt to EBITDA. The
Term Loan also restricts the Company's ability to incur additional indebtedness
and to pay dividends. In conjunction with the acquisition of LCEC, the Company
obtained a five-year, $25 million revolving line of credit which replaced the
Company's prior revolving credit facility. The Company is entitled to borrow
under the line of credit up to the lessor of $25 million or the sum of 75% of
its eligible accounts receivable plus 25% of its eligible inventory. As of
December 31, 1997, the Company had no outstanding debt under its line of credit.
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Some risk of costs and liabilities related to these matters is
inherent in the Company's business as with many similar businesses. Management
believes that the Company's business is operated in substantial compliance with
applicable environmental, waste management, health and safety regulations.
The Company may require additional capital to finance further enhancements
to or acquisitions or expansions of its manufacturing capacity. Management
believes that the level of working capital will continue to grow at a rate
generally consistent with the growth of the Company's operations. Although no
assurance can be given that future financing will be available on terms
acceptable to the Company, the Company may seek additional funds from time to
time through public or private debt or equity offerings or through bank
borrowings to the extent permitted by its existing debt agreements. Management
believes that the existing cash balances, funds generated from operations, and
borrowings under Company's credit facility will be sufficient to permit the
Company to meet its liquidity requirements in 1998 and for the foreseeable
future.
The Company does not hold or issue derivative financial instruments in the
normal course of business. Inflation and changing prices have not significantly
affected the Company's operating results or the markets in which the Company
performs services during recent years.
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by Year 2000 software failures which
can arise in time-sensitive software applications which utilize a field of two
digits to define the applicable year. In such applications, a date using "00" as
the year may be recognized as the year 1900 rather than the year 2000. Many of
the Company's business and operating systems are currently Year 2000 compliant,
and the Company is undertaking additional research and development efforts to
address those systems which are not currently Year 2000 compliant. In addition,
the Company is in the process of selecting and installing an Enterprise Resource
Planning System which will be Year 2000 compliant. The Company is planning to
complete all necessary Year 2000 upgrades of its major systems in 1999, and is
currently identifying and developing conversion strategies for any and all
remaining systems that may be impacted by the Year 2000 issue.
The Company currently does not have an overall estimate of the costs
associated with the purchase and implementation of the new Enterprise Resource
Planning System. The costs of this software will be capitalized and amortized
over the estimated useful life of the software, and costs associated with the
preliminary project stage and post-implementation stage will be expensed as
incurred. The year 2000 component of this system can not be readily segregated
from the total cost of the company-wide Enterprise Resource Planning System
implementation.
Consolidated Balance Sheets
Benchmark Electronics, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................................ $ 21,029,347 $ 13,800,013
Accounts receivable, net ................................................. 39,772,435 39,182,629
Income taxes receivable .................................................. 313,594 387,864
Inventories .............................................................. 61,133,963 48,100,338
Prepaid expenses and other assets ........................................ 1,545,110 819,806
Deferred tax asset ....................................................... 1,359,205 1,091,170
------------------------------
Total current assets ............................................... 125,153,654 103,381,820
Property, plant and equipment ............................................... 54,061,241 44,468,964
Accumulated depreciation .................................................... (23,245,264) (13,834,261)
------------------------------
Net property, plant and equipment .................................. 30,815,977 30,634,703
Goodwill, net ............................................................... 22,680,551 24,350,291
<PAGE>
Marketable securities ....................................................... 11,430,757 9,508,234
Other ....................................................................... 240,859 298,483
------------------------------
$ 190,321,798 $ 168,173,531
------------------------------
Liabilities and Shareholders' Equity Current liabilities:
Current installments of long-term debt ................................... $ 155,505 $ 239,165
Accounts payable ......................................................... 31,694,123 24,352,472
Accrued liabilities ...................................................... 5,424,939 6,204,535
------------------------------
Total current liabilities .......................................... 37,274,567 30,796,172
------------------------------
Long-term debt, excluding current installments .............................. 30,329,828 30,485,333
Deferred tax liability ...................................................... 1,845,846 1,892,612
Shareholders' equity:
Preferred shares, $.10 par value; 5,000,000 shares authorized, none issued -- --
Common shares, $.10 par value; 30,000,000 shares authorized: issued
11,623,252 and 11,526,552, respectively; outstanding 11,573,768 and
11,477,068, respectively .............................................. 1,157,376 1,147,706
Additional paid-in capital ............................................... 69,407,600 68,634,790
Retained earnings ........................................................ 50,427,531 35,337,868
Less treasury shares, at cost, 49,484 shares ............................. (120,950) (120,950)
------------------------------
Total shareholders' equity ......................................... 120,871,557 104,999,414
Commitments and contingencies
- --------------------------------------------------------------------------------------------------------------
$ 190,321,798 $ 168,173,531
------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
Consolidated Statements of Income
Benchmark Electronics, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Sales ........................................ $ 325,229,015 $ 201,296,320 $ 97,352,935
Cost of sales ................................ 285,630,163 177,981,328 85,113,385
----------------------------------------------
Gross profit ........................... 39,598,852 23,314,992 12,239,550
Selling, general and administrative expenses . 12,817,317 7,227,833 2,989,498
Amortization of goodwill ..................... 1,669,740 695,722 --
----------------------------------------------
Income from operations ................. 25,111,795 15,391,437 9,250,052
Interest expense ............................. (2,472,183) (1,441,834) --
Interest income .............................. 1,162,958 442,384 268,029
Other income ................................. 149,276 90,880 12,601
----------------------------------------------
Income before income taxes ............. 23,951,846 14,482,867 9,530,682
Income tax expense ........................... (8,862,183) (5,619,352) (3,382,727)
----------------------------------------------
Net income .......................... $ 15,089,663 $ 8,863,515 $ 6,147,955
----------------------------------------------
Earnings per share:
Basic ..................................... $ 1.31 $ 0.99 $ 0.77
Diluted ................................... $ 1.25 $ 0.96 $ 0.75
----------------------------------------------
Weighted average number of shares outstanding:
Basic ..................................... 11,508,407 8,976,192 8,030,992
Diluted ................................... 12,048,710 9,222,076 8,212,952
----------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Benchmark Electronics, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
Additional Total
Common paid-in Retained Treasury shareholders'
Shares shares capital earnings shares equity
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 ............ 8,015,400 $ 801,540 $ 19,124,306 $20,326,398 $(120,950) $ 40,131,294
Stock options exercised ................ 27,400 2,740 197,515 -- -- 200,255
Federal tax benefit of
stock options exercised ............. -- -- 144,564 -- -- 144,564
Net income ............................. -- -- -- 6,147,955 -- 6,147,955
---------------------------------------------------------------------------------------
Balances, December 31, 1995 ............ 8,042,800 804,280 19,466,385 26,474,353 (120,950) 46,624,068
Common shares issued in public
offering, net of expenses ........... 2,033,000 203,300 28,287,841 -- -- 28,491,141
Stock options exercised ................ 51,340 5,134 402,310 -- -- 407,444
Federal tax benefit of stock
options exercised ................... -- -- 88,536 -- -- 88,536
Acquisition of
EMD Technologies, Inc. .............. 1,349,928 134,992 20,375,814 -- -- 20,510,806
Net income ............................. -- -- -- 8,863,515 -- 8,863,515
Effect of difference between
fair value and cost of shares
released from collateral ............ -- -- 13,904 -- -- 13,904
---------------------------------------------------------------------------------------
Balances, December 31, 1996 ............ 11,477,068 1,147,706 68,634,790 35,337,868 (120,950) 104,999,414
Stock options exercised ................ 96,700 9,670 669,927 -- -- 679,597
Federal tax benefit of stock
options exercised ................... -- -- 154,820 -- -- 154,820
Net income ............................. -- -- -- 15,089,663 -- 15,089,663
Other .................................. -- -- (51,937) -- -- (51,937)
---------------------------------------------------------------------------------------
Balances, December 31, 1997 ............ 11,573,768 $1,157,376 $ 69,407,600 $50,427,531 $(120,950) $ 120,871,557
---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Benchmark Electronics, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
-------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income .............................................................. $ 15,089,663 $ 8,863,515 $ 6,147,955
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Depreciation and amortization ........................................ 10,150,586 5,723,922 2,059,262
Amortization of premiums on marketable securities .................... 342,193 25,940 66,718
Deferred income taxes ................................................ (314,801) 408,346 132,963
Federal tax benefit of stock options exercised ....................... 154,820 88,536 144,564
Amortization of goodwill ............................................. 1,669,740 695,722 --
Gain on the sale of property, plant and equipment .................... (86,973) (42,878) --
ESOP shares contribution ............................................. -- 13,904 --
Changes in operating assets and liabilities, net of effects
from acquisition of business:
Accounts receivable ............................................... (589,806) (10,119,586) (3,820,096)
Income taxes receivable ........................................... 74,270 994,179 (537,170)
Inventories ....................................................... (13,033,625) 3,131,340 (9,794,358)
Prepaid expenses and other assets ................................. (729,367) (124,259) (52,133)
Accounts payable .................................................. 7,341,651 1,782,239 2,679,659
Accrued liabilities ............................................... (779,596) 895,208 (502,300)
Current income taxes payable ...................................... -- -- 45,701
-------------------------------------------------
Net cash (used in) provided by operations ...................... 19,288,755 12,336,128 (3,429,235)
<PAGE>
Cash flows from investing activities:
Additions to property, plant and equipment .............................. (10,352,112) (8,684,400) (2,290,160)
Proceeds from the sale of property, plant and equipment ................. 168,912 75,281 --
Acquisition, net of cash acquired ....................................... -- (30,833,300) --
Proceeds from the sale or maturity of short-term investments ............ -- -- 1,542,000
Purchase of marketable securities ....................................... (2,264,716) (9,534,174) --
-------------------------------------------------
Net cash used in investing activities ............................. (12,447,916) (48,976,593) (748,160)
Cash flows from financing activities:
Net proceeds from public offering of common shares ...................... (51,937) 28,491,141 --
Proceeds from issuance of long-term debt ................................ -- 30,000,000 --
Principal payments on long-term debt .................................... (239,165) (10,928,329) --
Debt issuance costs ..................................................... -- (315,114) --
Proceeds from stock options exercised ................................... 679,597 407,444 200,255
-------------------------------------------------
Net cash provided by financing activities ......................... 388,495 47,655,142 200,255
-------------------------------------------------
Net (decrease) increase in cash and cash equivalents ....................... 7,229,334 11,014,677 (3,977,140)
-------------------------------------------------
Cash and cash equivalents at beginning of year ............................. 13,800,013 2,785,336 6,762,476
-------------------------------------------------
Cash and cash equivalents at end of year ................................... $ 21,029,347 $ 13,800,013 $ 2,785,336
-------------------------------------------------
Supplemental disclosures of cash flow information:
Income taxes paid ....................................................... $ 8,491,894 $ 4,171,224 $ 3,391,495
-------------------------------------------------
Interest paid ........................................................... $ 2,537,089 $ 369,021 --
-------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1 -- Summary of Significant Accounting Policies
(a) Business
Benchmark Electronics, Inc. (the Company) is a Texas corporation which provides
contract manufacturing and design services to original equipment manufacturers
(OEMs) in select industries, including medical devices, communications
equipment, industrial and business computers, testing instruments, and
industrial controls.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
Benchmark Electronics, Inc. and its wholly 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 of three months or less to be cash equivalents.
(d) Marketable Securities
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale.
Securities available for sale are carried at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of shareholders'
equity. Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts to maturity.
Such amortization and interest are included in interest income. Realized
gains and losses from the sale of available for sale securities are included in
other income or expense and are determined on a specific identification method.
At December 31, 1997, the Company's investments in held-to-maturity
marketable securities consist of Texas state guaranteed obligation bonds with an
amortized cost of $4,831,833, fair value of $4,851,000 and unrealized gain of
$19,167; Lynnwood, Washington guaranteed obligation bonds with an amortized cost
of $4,359,096, fair value of $4,362,000 and unrealized gain of $2,904; Austin,
Texas guaranteed obligation bonds with an amortized cost of $1,213,257, fair
value of $1,212,000, and unrealized loss of $1,257; and Maryland state
guaranteed obligation bonds with an amortized cost of $1,026,571, fair value of
$1,032,000, and unrealized gain of $5,429. These investments are classified as
long-term as the scheduled maturities range from October 1998 to December 1999.
At December 31, 1996, the Company's investments in marketable securities consist
of Texas state guaranteed obligation bonds with an amortized cost of $4,996,276,
fair value of $4,985,000 and unrealized loss of $11,276; and Lynnwood,
Washington guaranteed obligation bonds with an amortized cost of $4,511,958,
fair value of $4,509,000 and unrealized loss of $2,958. At such dates, the
Company had no marketable securities classified as available for sale.
<PAGE>
(e) Inventories
Inventories include material, labor and overhead and are stated at the lower of
cost (first-in, first-out) 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, which range from
three to thirty years. 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.
The Company adopted the provisions of Statement of Financial Accounting
Standard (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to
Be Disposed Of" on January 1, 1996. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Adoption of this Statement did not have a material
impact of the Company's financial position, results of operations, or liquidity.
(g) Goodwill and Other Assets
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the period of
expected benefit of 15 years. The accumulated amortization of goodwill at
December 31, 1997 and 1996 was $2,365,462 and $695,722, respectively. The
Company periodically reviews goodwill to assess recoverability based on the
undiscounted cash flows of the entity acquired over the remaining amortization
period. Other assets consist principally of deferred financing costs, which are
amortized over the life of the related debt. The accumulated amortization of
deferred financing costs at December 31, 1997 and 1996 was $85,521 and $25,082,
respectively.
(h) Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share", in the fourth quarter of
1997. All prior period earnings per share data have been restated to conform to
the provisions of SFAS No. 128. 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 options to purchase
common stock. Incremental shares of 540,303, 245, 884, and 181,960 in 1997, 1996
and 1995, respectively, were used in the calculation of diluted earnings per
share. Options to purchase 124,000 shares of common stock in 1997 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 stock.
The adoption of SFAS No. 128 had no effect on the calculation of diluted
earnings per share for prior periods.
(i) Revenue Recognition
Revenues are recognized at the time the circuit boards are shipped to the
customer, for both turnkey and consignment method sales. Under the consignment
method, OEMs provide the Company with the electronic components to be assembled,
and the Company recognizes revenue only on the labor used to assemble the
product.
(j) 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. De-ferred 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.
(k) Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations. As
such, compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. On January 1,
1996, the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternately, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(l) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(m) Fair Values of Financial Instruments
The fair values of the Company's cash equivalents, accounts receivable, accrued
liabilities, and accounts payable approximated their carrying values due to the
short-term maturities of these instruments. The estimated fair value of
long-term debt is equivalent to its carrying value based on the Company's
current incremental borrowing rates for similar types of borrowing agreements.
(n) Recently Enacted Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
<PAGE>
Information." The Company currently does not have any items that would require
additional presentation of Comprehensive Income and operates in a single
business segment. Accordingly, adoption of these standards in 1998 is not
expected to affect the Company's consolidated financial statements.
Note 2 -- Acquisition
On July 30, 1996, the Company completed its acquisition of EMD Technologies,
Inc. (EMD). This business, headquartered in Winona, Minnesota, was acquired for
1,349,928 shares of common stock, $30,447,033 in cash, and the Company paid
$2,208,136 in acquisition costs. The transaction was accounted for under the
purchase method of accounting, and accordingly, the results of operations of EMD
since July 30, 1996 have been included in the consolidated statements of income.
The acquisition resulted in goodwill of $25,046,013 which will be amortized on a
straight line basis over 15 years.
The net purchase price was allocated as follows:
Working capital, other than cash ......................... $ 10,638,671
Property, plant and equipment ............................ 17,598,785
Other assets ............................................. 12,379
Goodwill ................................................. 25,046,013
Other liabilities ........................................ (1,951,742)
--------------
Purchase price, net of cash received ................... $ 51,344,106
--------------
Net cash portion of purchase price ....................... $ 30,833,300
Common stock issued ...................................... 20,510,806
--------------
Purchase price, net of cash received ..................... $ 51,344,106
--------------
The following unaudited summary pro forma condensed financial information
reflects the acquisition as if it had occurred on January 1, 1995 for purposes
of the consolidated statements of income. The summary pro forma information is
not necessarily representative of what the Company's results of operations would
have been had the acquisition in fact occurred on January 1, 1995 and is not
intended to project the Company's results of operations for any future period or
date.
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995
- --------------------------------------------------------------------------------
Net sales ....................................... $292,298 258,107
Gross profit .................................... 30,320 29,836
Income from operations .......................... 17,131 15,913
Income from continuing operations ............... 8,572 7,667
Earnings per share:
Basic ......................................... $ 0.88 0.82
Diluted ......................................... $ 0.86 0.80
Weighted average number of
shares outstanding:
Basic ......................................... 9,758 9,381
Diluted ....................................... 10,004 9,562
Note 3 -- Inventories
Inventory costs are summarized as follows:
December 31,
1997 1996
--------------------------------
Raw materials ....................... $41,837,205 31,670,562
Work in process ..................... 19,296,758 16,429,776
--------------------------------
$61,133,963 48,100,338
- --------------------------------------------------------------------------------
Note 4 -- Property, Plant and Equipment Property, plant and equipment consists
of the following:
December 31,
1997 1996
------------------------------
Land .................................... $ 391,969 391,969
Buildings ............................... 8,417,497 8,361,254
Machinery and equipment ................. 38,025,436 29,499,683
Furniture and fixtures .................. 6,480,183 5,373,335
Vehicles ................................ 14,383 51,087
Leasehold improvements .................. 731,773 491,578
Construction in progress ................ -- 300,058
------------------------------
$54,061,241 44,468,964
- --------------------------------------------------------------------------------
<PAGE>
Note 5 -- Borrowing Facilities Long-term debt consists of the following:
December 31,
1997 1996
------------------------------
Senior note ............................. $30,000,000 30,000,000
Other ................................... 485,333 724,498
------------------------------
Total long-term debt .................. 30,485,333 30,724,498
Less current installments ............... 155,505 239,165
------------------------------
Long-term debt .......................... $30,329,828 30,485,333
------------------------------
In order to finance a portion of the cash consideration for the
acquisition of EMD, the Company issued a $30 million, 8.02% Senior Note due 2006
("Senior Note") to Northwestern Mutual Life Insurance Company. The Senior Note
is unsecured and guaranteed by each of the Company's United States subsidiaries.
Principal on the Senior Note is payable in annual installments of $5.0 million
beginning July 31, 2001 with a final installment on the unpaid principal amount
due July 31, 2006. Interest on the Senior Note is payable semi-annually on
January 31st and July 31st.
The purchase agreement relating to the Senior Note (the "Purchase
Agreement") includes customary affirmative and negative convenants and restricts
the ability of the Company to incur additional debt and to pay dividends. Upon
any prepayment of all or a portion of the Senior Note, the Company is obligated
to pay the holder a premium on the amount prepaid. The Purchase Agreement
contains a provision that in the event of a change of control (defined generally
to mean the acquisition by a person or group (as defined in the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder) of
beneficial ownership of more than 50% of the total voting power of the
outstanding voting stock of the Company), the Company must offer to repurchase
the Senior Note at par plus any prepayment penalty.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1997 are as follows: 1998, $155,505; 1999, $212,004;
2000, $20,224; 2001, $5,021,771; 2002, $5,023,437 and thereafter $20,052,392.
The Company has a $15,000,000, four-year revolving line of credit with a
commercial bank which is available primarily to finance accounts receivable and
inventory requirements. The Company is entitled to borrow under the line of
credit up to the lesser of $15,000,000 or the sum of 80% of its eligible
accounts receivable and 25% of its eligible inventories. As of December 31, 1997
and 1996, the Company had no borrowings outstanding under this line of credit.
Interest on the line of credit is payable quarterly and accrues, at the
Company's option, at either the bank's prime rate or its Fixed Eurodollar Rate
plus 0.625% to 1.75% per annum. A commitment fee of 0.17% per annum on the
unused portion of the line of credit is payable quarterly in arrears. The line
of credit agreement contains certain financial covenants and restricts the
ability of the Company to incur additional debt without the consent of the bank
and to pay dividends.
The line of credit matures on July 31, 2000.
Note 6 -- Commitments
The Company has several noncancelable operating leases for office space and
manufacturing facilities that expire through 2006. Rental expense under the
leases for each of the years in the three-year period ended December 31, 1997
was $1,354,607, $921,526, and $213,765, respectively.
The Company leases manufacturing and office facilities in Minnesota from a
partnership whose partners include stockholders and a director of the Company.
These operating leases have initial terms of eight to ten years, expiring
through December 2006 with annual renewals thereafter. Total rent expense
associated with these leases for the years ended December 31, 1997 and 1996 was
$828,900 and $413,784, respectively.
Aggregate annual rental payments on future lease commitments at December
31, 1997 were as follows:
1998 $1,251,905
1999 1,115,287
2000 1,119,900
2001 1,128,900
2002 828,900
Thereafter 2,978,750
----------
$8,423,642
- ---------------------------------
<PAGE>
Note 7 -- Common Stock and Stock Option Plans
During 1996, the Company issued 2,033,000 shares of common stock in a public
offering for net proceeds of $28,491,141.
In July 1997, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend effective for shareholders
of record as of August 7, 1997. Shareholders' equity has been restated to give
retroactive recognition to the stock split in prior periods by reclassifying
from additional paid-in-capital to common stock the par value of the additional
shares arising from the split. All share and per share data have been
retroactively adjusted for the stock split.
The Company's stock option plan authorizes the Company, upon
recommendation of the compensation committee of the Board of Directors, to grant
options to purchase a total of 2,200,000 shares of the Company's common stock to
key employees of the Company.
The stock option plan provides for the discretionary granting by the
Company of "incentive stock options" within the meaning of Section 422A of the
Internal Revenue Code of 1986, as amended, as well as non qualified stock
options. The exercise price of any incentive stock option must not be less than
the fair market value of the common stock on the date of grant. The stock
options will terminate no later than 10 years after the date of grant. Although
options may vest in increments over time, they historically have become 20%
vested two years after the options are granted and 100% vested after 5 years.
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 "Plan") for the benefit of members of the Board of Directors of the Company
or its Affiliates who are not employees of the Company or its Affiliates (as
defined in the Plan). The aggregate number of shares of Common Stock for which
options may be granted under the Plan is 200,000.
Under the terms of the Plan, 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") will receive a
grant of an option to purchase 6,000 shares of the Company's Common Stock upon
the date of his election or re-election to the Board of Directors. Additionally,
any Non-Employee Director who was a director on the date the Board of Directors
adopted the Plan received (a) an option to purchase 6,000 shares of Common Stock
for the fiscal year in which the Plan was adopted by the Board of Directors and
(b) an option to purchase shares of Common Stock in amount equal to (i) 6,000,
multiplied by (ii) the number of consecutive fiscal years (immediately preceding
the fiscal year during which the Plan was adopted) that the individual served as
a director of the Company, provided that the number under clause (ii) shall not
exceed three (3). During 1997, 1996 and 1995, pursuant to the Plan, 24,000,
30,000 and 24,000 options, respectively, were granted to Directors to purchase
shares of Common Stock at an exercise price of $16.32, $14.69 and $10.75 per
share, respectively.
The following table summarizes the activities relating to the Company's
stock option plans:
Weighted
Number of Average
Shares Exercise Price
---------------------------
Balance at December 31, 1994 ................... 704,200 $ 9.30
Granted ...................................... 216,000 $11.76
Exercised .................................... (27,400) $ 7.16
Canceled ..................................... (91,600) $10.88
------------------------
Balance at December 31, 1995 ................... 801,200 $ 9.85
Granted ...................................... 653,000 $14.43
Exercised .................................... (51,340) $ 8.13
Canceled ..................................... (45,200) $13.80
------------------------
Balance at December 31, 1996 ................... 1,357,660 $12.00
Granted ...................................... 426,000 $19.27
Exercised .................................... (96,700) $ 7.03
Canceled ..................................... (96,800) $15.95
------------------------
Balance at December 31, 1997 ................... 1,590,160 $14.11
---------
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Outstanding Average Average
Exercise Number Contractual Exercise Number Exercise
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -----------------------------------------------------------------------
$4.38-$10 197,200 4.98 $ 7.12 197,200 $ 7.12
$10-$15 937,960 7.63 $ 13.20 265,720 $ 12.00
$15-$20 305,000 8.37 $ 15.52 30,000 $ 16.13
$20-$25 26,000 9.67 $ 23.90 -- --
$25-$30 124,000 9.50 $ 26.51 -- --
------- --
1,590,160 492,920
-----------------------------------------------
<PAGE>
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $4.38 - $26.88 and 8.01
years, respectively.
At December 31, 1997, 1996 and 1995, the number of options exercisable was
492,920, 500,340 and 345,280, respectively, and the weighted average exercise
price of those options was $10.30, $9.20 and $7.90, respectively.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been approximately $13,396,245, or
$1.11 per share diluted during 1997, $7,851,515, or $0.85 per share diluted
during 1996, and $5,856,955, or $0.71 per share diluted during 1995. Pro forma
net income reflects only options granted in 1997, 1996 and 1995. The weighted
average fair value of the options granted during 1997, 1996 and 1995 is
estimated as $8.55, $5.23 and $4.93, respectively, on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: no
dividend yield, volatility of 30%, risk-free interest rate of 6%, assumed annual
forfeiture rate of 5%, and an expected life of 5 years.
Note 8 -- Income Taxes Income tax expense consists of:
Year ended December 31,
1997 1996 1995
------------------------------------------
Federal - current .............. $ 8,178,203 4,322,471 2,913,464
State - current ................ 998,781 888,535 336,300
Federal/State - deferred ....... (314,801) 408,346 132,963
------------------------------------------
$ 8,862,183 5,619,352 3,382,727
- --------------------------------------------------------------------------------
Income tax expense differed from the amounts computed by applying the U.S.
federal statutory income tax rate to pretax income as a result of the following:
Year ended December 31,
1997 1996 1995
----------------------------------------
Tax at statutory rate ............... $ 8,383,146 4,924,175 3,240,432
State taxes, net of federal benefit . 649,208 586,433 221,958
Tax exempt interest ................. (386,658) (49,882) (84,492)
Tax benefit from use of
foreign sales corporation ........ (393,839) (139,218) --
Amortization of goodwill ............ 562,413 236,545 --
Other ............................... 47,913 61,299 4,829
----------------------------------------
Total income tax expense ............ $ 8,862,183 5,619,352 3,382,727
----------------------------------------
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,
1997 1996
----------------------------
Deferred tax assets:
Carrying values of inventories ............. $ 710,124 647,075
Accrued liabilities deductible
for tax purposes on a cash basis ...... 649,081 444,095
----------------------------
1,359,205 1,091,170
Less valuation allowance .................... -- --
----------------------------
Net deferred tax assets ................... $ 1,359,205 1,091,170
----------------------------
Deferred tax liabilities:
Plant and equipment, due to
differences in depreciation ............... $(1,797,228) (1,892,612)
Other ....................................... (48,618) --
----------------------------
Gross deferred tax liability ................ (1,845,846) (1,892,612)
----------------------------
Net deferred tax liability ................ $ (486,641) (801,442)
----------------------------
<PAGE>
Note 9 -- Major Customers
The Company's customers operate in businesses associated with rapid
technological change and consequent product obsolescence. 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 an accounting 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,
(IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------
Customer A $120,500 33,680 --
Customer B 42,983 28,638 9,718
Customer C 18,101 22,160 16,666
Customer D 13,892 6,536 --
Customer E 13,381 8,938 114
In 1997 and 1996, the Company had export sales of approximately $86
million and $29 million, respectively, to Europe from the Company's United
States operations. There were no export sales in 1995.
Note 10 -- Employee Benefit Plans
The Company has a defined contribution plan qualified under Section 401(k) of
the Internal Revenue Code for the benefit of its employees. The Plan covers all
employees with at least one year of service. The Company has agreed to
contribute an amount equal to 50% of each participant's contributions to the
extent such participant's contribution does not exceed 4% of their compensation
for the year and 1% of each participant's compensation. A participant's
contribution may not exceed 20% of annual compensation, or the maximum amount
allowed as determined by the Internal Revenue Code. The Company may also make
discretionary contributions to the plan. During 1997, 1996 and 1995 the Company
made contributions to the plan of approximately $689,000, $430,000 and $185,000,
respectively.
Effective May 6, 1992, the Company adopted an Incentive Bonus Plan ("Bonus
Plan") for the benefit of its employees, including executive officers. The Bonus
Plan replaced the Com-pany's Incentive Bonus Plan which was adopted in 1990. The
Bonus Plan is administered by the Compensation Committee. The total amount of
cash bonus awards to be made under the Bonus Plan for any plan year depends
primarily on the Company's sales and net income for such year.
For any plan year, the Company's sales and net income must meet or exceed,
or in combination with other factors satisfy, levels targeted by the Company in
its business plan, as established at the beginning of each fiscal year, for any
bonus awards to be made. Aggregate bonus awards to all participants under the
Bonus Plan may not exceed 7% of the Company's net income. The Compensation
Committee has the authority to determine the total amount of bonus awards, if
any, to be made to the eligible employees for any plan year based on its
evaluation of the Company's financial condition and results of operations, the
Company's business and prospects, and such other criteria as it may determine to
be relevant or appropriate. The Company expensed $738,000 in 1997 and $320,000
in 1996 in conjunction with the bonus plans. No bonus amounts were accrued or
expensed in 1995.
Note 11 -- Concentrations of Business Risk
The Company uses numerous suppliers of electronic components and other materials
for its operations. Some components used by the Company have been subject to
industry-wide shortages, and suppliers have been forced to allocate available
quantities among their customers. The Company's inability to obtain any needed
components during periods of allocation could cause delays in manufacturing and
could adversely affect results of operations.
Note 12 -- 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.
<PAGE>
Note 13 -- Year 2000
The Company recognizes that it must ensure that its products and operations will
not be adversely impacted by Year 2000 software failures which can arise in
time-sensitive software applications which utilize two digits rather than four
to define the applicable year. Many of the Company's business and operating
systems are currently Year 2000 compliant, and the Company is undertaking
additional research and development efforts to address those systems which are
not currently Year 2000 compliant. In addition, the Company is in the process of
selecting and installing an Enterprise Resource Planning System which will be
Year 2000 compliant. The Company is planning to complete all necessary Year 2000
upgrades of its major systems in 1999, and is currently identifying and
developing conversion strategies for any and all remaining systems that may be
impacted by the Year 2000 issue.
Note 14 -- Event Subsequent to Date of Auditors' Report
On February 23, 1998, The Company completed the acquisition of Lockheed
Commercial Electronics Company (LCEC) for $70 million in cash, $40 million of
which was obtained through borrowings under a five year term loan with a
commercial bank. LCEC, situated in Hudson, New Hampshire, is one of New
England's largest electronics manufacturing services companies, providing a
broad range of services including printed circuit board assembly and test,
system assembly and test, prototyping, depot repair, materials procurement, and
engineering support services. The acquisition will be accounted for under the
purchase method of accounting.
The following unaudited summary pro forma condensed financial information
reflects the acquisition of LCEC as if it had occurred on January 1, 1996 for
purposes of the consolidated statements of income. The summary pro forma
information is not necessarily representative of what the Company's results of
operations would have been had the acquisition in fact occurred on January 1,
1996 and is not intended to project the Company's results of operations for any
future period or date.
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
- --------------------------------------------------------------
Net sales ............................ $607,439 566,802
Gross profit ......................... 52,069 43,510
Income from operations ............... 25,615 22,683
Earnings per share:
Basic .............................. $ 0.98 1.20
Diluted ............................ $ 0.94 1.16
Weighted average number of
shares outstanding:
Basic .............................. 11,508 8,976
Diluted ............................ 12,049 9,222
Independent Auditors' Report
The Board of Directors and Shareholders
Benchmark Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Benchmark
Electronics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
January 19, 1998
<PAGE>
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 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 safeguarded from loss or unauthorized use. We believe these
systems are effective, and the cost of the systems does not exceed the benefits
obtained.
The Audit Committee, composed exclusively of outside directors, has
reviewed all financial data included in this report. The committee meets
periodically with the Company's management and independent public accountants on
financial reporting matters. The independent 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 public accountants is to render a professional,
independent opinion on management's financial statements to the extent required
by generally accepted auditing standards. Benchmark's responsibility is to
conduct its affairs according to the highest standards of personal and corporate
conduct.
Donald E. Nigbor Cary T. Fu
President & Chief Executive Officer Executive Vice President
Corporate Information
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 1997, 1996 and
1995. Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not equal
the total earnings per share amounts for the fiscal year.
1997 Quarter
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH
- ------------------------------------------------------------------------------
Sales $75,724 78,156 83,183 88,166
Gross profit 9,242 9,466 10,157 10,734
Net income 3,291 3,557 4,013 4,229
Earnings per common share:
Basic .29 .31 .35 .37
Diluted .28 .30 .33 .35
1996 Quarter
1ST 2ND 3RD 4Th
------------------------------------
Sales $30,383 33,500 62,304 75,109
Gross profit 3,825 4,484 6,550 8,456
Net income 1,839 2,025 2,365 2,635
Earnings per common share:
Basic .23 .25 .26 .24
Diluted .22 .24 .26 .24
1995 Quarter
1ST 2ND 3RD 4TH
------------------------------------
Sales $ 23,115 23,646 24,393 26,199
Gross profit 3,089 3,125 3,108 2,918
Net income 1,569 1,588 1,561 1,430
Earnings per common share:
Basic .20 .20 .19 .18
Diluted .19 .19 .19 .18
Market for the Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock is listed on the New York Stock Exchange under the
symbol "BHE." The following table shows the high and low sales prices for the
Common Stock as reported on the New York Stock Exchange (American Stock Exchange
prior to May 1997) for the fiscal quarters (or portions thereof) indicated, as
adjusted for the July 1997 stock split.
<PAGE>
1 2 3 4
-----------------------------------------
1996
High $14 15/16 16 17 1/8 15 7/8
Low $12 1/16 14 14 5/16 12 1/4
1997
High $16 5/16 20 1/4 28 3/16 29 15/16
Low $14 1/4 13 3/16 20 22
1998 (through March 19, 1998)
High $27 7/8
Low $21 1/8
The last reported sale price of Common Stock on March 19, 1998, as
reported by the New York Stock Exchange, was $23 5/8. There were approximately
124 record holders of Common Stock as of
March 19, 1998.
The Company has not paid any cash dividends on the Common Stock in the
past and anticipates that, for the foreseeable future, it will retain any
earnings available for dividends for use in its business.
Selected Financial Data
Benchmark Electronics, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31,
(IN THOUSANDS, EXCEPT PER-SHARE DATA) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Statements of Income Data
Sales .......................................... $ 325,229 $ 201,296 $ 97,353 $ 98,168 $ 75,859
Cost of sales .................................. 285,630 177,981 85,113 86,236 66,462
----------------------------------------------------------
Gross profit ............................... 39,599 23,315 12,240 11,932 9,397
----------------------------------------------------------
Selling, general and administrative expenses ... 12,817 7,228 2,990 3,154 2,870
Amortization of goodwill ....................... (1,670) (696) -- -- 63
----------------------------------------------------------
Income from operations ..................... 25,112 15,391 9,250 8,778 6,590
Interest expense ............................... (2,472) (1,442) -- -- --
Interest income ................................ 1,163 442 268 252 384
Other income (expense) ......................... 149 92 13 11 (30)
Income tax expense ............................. (8,862) (5,619) (3,383) (3,272) (2,478)
----------------------------------------------------------
Income before cumulative effect of
change in accounting principle .......... 15,090 8,864 6,148 5,769 4,466
Cumulative effect at January 1, 1993
of change in accounting for income taxes .... -- -- -- -- 116
Net income ................................. $ 15,090 $ 8,864 $ 6,148 $ 5,769 $ 4,582
----------------------------------------------------------
Basic earnings per common share (1)
Earnings before cummulative effect of change
in accounting principle .................. $ 1.31 $ 0.99 $ 0.77 $ 0.72 $ 0.56
Cumulative effect at January 1, 1993
of change in accounting for income taxes . -- -- -- -- .02
----------------------------------------------------------
Earnings per common share (1) .............. $ 1.31 $ 0.99 $ 0.77 $ 0.72 $ 0.58
----------------------------------------------------------
Weighted average number of
shares outstanding ....................... 11,508 8,976 8,031 7,998 7,948
Diluted earnings per common share (1)
Earnings before cummulative effect of change
in accounting principle .................. $ 1.25 $ 0.96 $ 0.75 $ 0.71 $ 0.55
Cumulative effect at January 1, 1993
of change in accounting for income taxes . -- -- -- -- .01
----------------------------------------------------------
Earnings per common share (1) .............. $ 1.25 $ 0.96 $ 0.75 $ 0.71 $ 0.56
----------------------------------------------------------
Weighted average number of
shares outstanding ....................... 12,049 9,222 8,213 8,176 8,132
----------------------------------------------------------
</TABLE>
<PAGE>
December 31,
(IN THOUSANDS) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Selected Balance Sheet Data
Working capital ............ $ 87,879 $ 72,586 $37,285 $30,890 $29,160
Total assets ............... 190,322 168,174 57,037 48,333 47,425
Long-term debt ............. 30,330 30,485 -- -- --
Shareholders' equity ....... $120,872 $104,999 $46,624 $40,131 $34,213
(1) See Note 1 of Notes to Consolidated Financial Statements for the basis of
computing earnings per common share.
Corporate and Shareholder Data
Officers
Donald E. Nigbor (3)
President and
Chief Executive Officer
Steven A. Barton (1), (3)
Executive Vice President
Cary T. Fu (3)
Executive Vice President
Lenora A. Gurton
Secretary
Gayla J. Delly
Treasurer
Christopher Nawrocki
Vice President;
President of
Benchmark Electronics, Inc. -
Winona Division
(1) Part-time since June 1993
General Counsel
Bracewell & Patterson, L.L.P.
Houston, Texas
Independent Auditors
KPMG Peat Marwick LLP
Houston, Texas
Directors
David H. Arnold
President and Chairman of the Board
DCM Technology, Inc.
Winona, Minnesota
(Machine Tool Manufacturing)
Benchmark Electronics, Inc.
Donald E. Nigbor
President and Chief Executive Officer
Benchmark Electronics, Inc.
<PAGE>
John C. Custer (1)
Retired - Former Chairman of the Board
Mason & Hanger-Silas Mason Co., Inc.
Lexington, Kentucky
(Technical services contracting and engineering firm)
Steven A. Barton
Executive Vice President
Benchmark Electronics, Inc.
Gerald W. Bodzy (2)
Senior Vice President and Managing Director
Stephens Inc.
Houston, Texas
(Investment banking)
Peter G. Dorflinger (1) (2)
President and Chief Operating Officer
Physicians Resource Group, Inc.
Dallas, Texas
(Physicians practice management)
Cary T. Fu
Executive Vice President
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Executive Officer
Notices
Stock Transfer Agent and Registrar
Communications concerning stock transfer requirements, lost certificates or
changes of address should be directed to: Harris Trust and Savings Bank, c/o
Harris Trust Company of New York, 77 Water Street, 4th floor, New York, NY
10005, 800/926-1269.
Stock Trading
The common stock of Benchmark Electronics, Inc. trades on the New York Stock
Exchange under the symbol BHE.
SEC Form 10-K
A copy of the company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, filed with the Securities and Exchange Commission, is
available without charge upon written request to: Gayla J. Delly, Treasurer,
Benchmark Electronics, Inc., 3000 Technology Drive, Angleton, TX 77515.
Financial Mailing List
Shareholders whose stock is held in trust or by a brokerage firm may receive
timely financial mailings directly from Benchmark by writing to Ms. Gayla J.
Delly at the above address.
Annual Meeting
Interested shareholders are invited to attend the Benchmark Electronics, Inc.
annual meeting, which will be held at 10:00 a.m. on Tuesday, May 19, 1998, at
the Doubletree Hotel at Allen Center, 400 Dallas Street, Houston, Texas.
This annual report is printed on recycled paper.
Benchmark logo
3000 Technology Drive
Angleton, Texas 77515
(409) 849-6550
www.bench.com
EXHIBIT 21
SUBSIDIARIES OF BENCHMARK ELECTRONICS, INC.
Benchmark Electronics FSC, Inc., a Barbados corporation
Lockheed Commercial Electronics Company, a Delaware corporation
All subsidiaries are wholly owned, directly or indirectly, by Benchmark
Electronics, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Benchmark Electronics, Inc.:
We consent to incorporation by reference in the registration statements on
Form S-8 (No. 33-61660, No. 333-26805 and No. 333-28997) of Benchmark
Electronics, Inc. of our report dated January 19, 1998, related to the
consolidated balance sheets of Benchmark Electronics, Inc. and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in the December
31, 1997 annual report on Form 10-K of Benchmark Electronics, Inc.
KPMG PEAT MARWICK LLP
Houston, Texas
March 27, 1998
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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