PART I
Item 1. Business
Background
Benchmark Electronics, Inc.,
formerly named Electronics, Inc., began operations in 1979 and was
incorporated under Texas law in 1981 as a wholly owned subsidiary of
Intermedics, Inc., a medical implant manufacturer based in Angleton,
Texas. In 1986, Intermedics sold 90% of the outstanding shares of common stock
of the Company to Electronic Investors Corp., a corporation formed by Donald E.
Nigbor, Steven A. Barton and Cary T. Fu, three of our executive officers. In
1988, Electronic Investors Corp. was merged into Benchmark, and in 1990 we
completed the initial public offering of our common stock.
General
We are in the business of manufacturing electronics
and we provide our services to original equipment manufacturers (OEMs) of
computers and related products for business enterprises, medical devices,
industrial control equipment, testing and instrumentation products, and
telecommunication equipment. The services that we provide are commonly referred
to as electronics manufacturing services (EMS). We offer our customers
comprehensive and integrated design and manufacturing services, from initial
product design to volume production and direct order fulfillment. We also
provide specialized engineering services, including product design, printed
circuit board layout, prototyping and test development. We believe that we have
developed strengths in the manufacturing process for large, complex,
high-density printed circuit boards as well as the ability to manufacture high
and low volume products in lower cost regions such as Latin and South America
and Southeast Asia.
As our customers expand internationally, they
increasingly require their EMS partners to have strategic regional locations
and global procurement capabilities. We believe that our global manufacturing
presence of 17 facilities in eight countries increases our ability to be
responsive to our customers’ needs by providing accelerated time-to-market and
time-to-volume production of high quality products. These capabilities should
enable us to build stronger strategic relationships with our customers and to
become a more integral part of their operations. Our customers face challenges
in planning, procuring and managing their inventories efficiently due to
fluctuations in customer demand, product design changes, short product life
cycles and component price fluctuations. We employ production management
systems to manage their procurement and manufacturing processes in an efficient
and cost-effective manner so that, where possible, components arrive on a
just-in-time, as-and-when needed basis. We are a significant purchaser of
electronic components and other raw materials, and can capitalize on the
economies of scale associated with our relationships with suppliers to
negotiate price discounts, obtain components and other raw materials that are
in short supply, and return excess components. Our expertise in supply chain
management and our relationships with suppliers across the supply chain enables
us to reduce our customers’ cost of goods sold and inventory exposure.
We currently operate a total of 50 surface mount
production lines (where electrical components are soldered directly onto
printed circuit boards) at our domestic facilities and 60 surface mount
production lines at our international facilities. Our worldwide facilities
include 1.3 million square feet in our domestic facilities in Alabama,
Colorado, Minnesota, New Hampshire, Oregon, Texas and Washington; and 0.9
million square feet in our international facilities in Brazil, China, England,
Ireland, Mexico, Singapore and Thailand.
Our capabilities have continued to grow through
acquisitions and through internal expansion. Our most recent acquisition, the July 2002
acquisition of ACT Manufacturing (Thailand) Public Company Limited and ACT
Manufacturing Holdings UK Limited, provided us with additional manufacturing
capacity in Thailand and England. During 2004, we expanded our manufacturing
capacity in Thailand with
1
a PCBA facility in Korat
and a new systems integration facility in Ayudhaya. Additionally, we expanded
our relationships with certain customers during 2003 and added two new systems
integration facilities in Loveland, Colorado and Redmond, Washington. In 2002,
we opened a new printed circuit board assembly facility in Suzhou, China that
began production during 2003.
We believe our primary
competitive advantages are our design, manufacturing, testing and supply chain
management capabilities. We offer our customers flexible manufacturing
solutions throughout the life cycle of their products. These solutions provide
accelerated time-to-market, time-to-volume production, and reduced production
costs. As a result of working closely with our customers and responding
promptly to their needs, we have become an integral part of their operations.
In addition, our workforce is led by a management team that founded the Company
and has an average of 23 years of industry experience.
Our Industry
The EMS industry
experienced rapid change and growth over most of the past decade as an
increasing number of OEMs outsourced their manufacturing requirements. In mid-2001,
the industry’s revenue declined as a result of significant cut backs in its
customers’ production requirements, which was consistent with the overall
global economic downturn. Nonetheless, OEMs have continued to turn to
outsourcing in order to reduce product cost; achieve accelerated time-to-market
and time-to-volume production; access advanced design and manufacturing
technologies; improve inventory management and purchasing power; and reduce
their capital investment in manufacturing resources. This enables OEMs to
concentrate on what they believe to be their core strengths, such as new
product definition, marketing and sales. Industry revenues have slowly begun to
increase again over the last year as customer production requirements generally
began to stabilize. We believe further growth opportunities exist for EMS
providers to penetrate the worldwide electronics markets.
Our Strategy
Our goal is to be
the EMS outsourcing provider of choice to leading OEMs in the electronics
industry that we perceive from time to time to offer the greatest potential for
growth. To meet this goal, we have implemented the following strategies:
· Maintain and Develop Close, Long-Term Relationships with
Customers. Our core strategy is to maintain and establish
long-term relationships with leading OEMs in expanding industries by becoming
an integral part of our customers’ manufacturing operations. To accomplish
this, we work closely with our customers throughout the design, manufacturing
and distribution process, and we offer flexible and responsive services. We
believe that we develop stronger customer relationships by relying on our local
management teams that respond to frequently changing customer design specifications
and production requirements.
· Focus on High-End Products in Growth Industries. EMS
providers produce products for a wide range of OEMs in different industries
that offer the greatest potential for growth, such as consumer electronics,
Internet-focused businesses and information technology equipment. The product
scope ranges from easy to assemble, low-cost high-volume products targeted for
the consumer market to complicated state-of-the-art, mission critical
electronic hardware. Similarly, OEMs’ customers range from consumer-oriented
companies that compete primarily on price and redesign their products every
year to manufacturers of high-end telecommunications equipment and computer and
related products for business enterprises that compete on technology and
quality. We currently offer state-of-the-art products for industry leaders who
require specialized engineering design and production services, as well as high
volume manufacturing capabilities to our customer base. Our ability to offer
both of these types of services enables us to expand our business
relationships.
2
· Deliver Complete High and Low Volume Manufacturing Solutions Globally. We
believe OEMs are increasingly requiring a wide range of specialized engineering
and manufacturing services from EMS providers in order to reduce their costs
and accelerate their time-to-market and time-to-volume production. Building on
our integrated engineering and manufacturing capabilities, we offer services
from initial product design and test to final product assembly and distribution
to the OEMs’ customers. Our systems integration assembly and direct order
fulfillment services allow our customers to reduce product cost and risk of
product obsolescence by reducing their total work-in-process and finished goods
inventory. These services are available at many of our manufacturing locations.
We also offer our customers high volume production in low cost regions of the
world, such as Brazil, China, Mexico and Thailand. These full service
capabilities allow us to offer customers the flexibility to move quickly from
design and initial product introduction to production and distribution. We
offer our customers the opportunity to combine the benefits of low cost
manufacturing (for the portions of their products or systems that can benefit
from the use of these geographic areas) with the benefits and capabilities of
our higher complexity support of systems integration in either Asia, Europe or
the United States.
· Leverage Advanced Technological Capabilities. Our
traditional strengths in the manufacturing processes for assembling large,
complex high-density printed circuit boards enable us to offer customers advanced
design, technology and manufacturing solutions for their primary products. We
provide this engineering expertise through our design capabilities in each of
our facilities, and in our design centers. We believe our capabilities help our
customers improve product performance and reduce costs.
· Continuing to Seek Cost Savings and Efficiency Improvements. We
seek to optimize our facilities to provide cost-efficient services for our
customers. We provide operations in lower cost locations, including Latin and
South America, China and Southeast Asia, and we plan to expand our presence in
these lower cost locations, as appropriate to meet the needs of our customers.
· Continue Our Global Expansion. A network of
strategically positioned facilities can reduce costs, simplify and shorten an
OEM’s supply chain and reduce the time it takes to bring product to market. We
are committed to pursuing geographic expansion in order to support our global
customers with cost-effective and timely delivery of quality products and
services worldwide. Our acquisition of facilities in Thailand and England and
the opening of a facility in Suzhou, China have expanded our service scope to
provide a global manufacturing solution to our customers through our 17
facilities in eight countries located in Brazil, China, England, Ireland,
Mexico, Singapore, Thailand and the United States.
· Selectively Pursue Strategic Acquisitions. Our
capabilities have continued to grow through acquisitions and we will continue
to selectively seek acquisition opportunities. Our acquisitions have enhanced
our business in the following ways:
· expanded
geographic presence;
· enhanced
customer growth opportunities;
· developed
strategic relationships;
· broadened
service offerings;
· diversified
into new market sectors; and
· added
experienced management teams.
We believe that growth by
selective acquisitions is critical for achieving the scale, flexibility and
breadth of customer services required to remain competitive in the EMS
industry.
3
Services We Provide
Engineering. Our approach
is to coordinate and integrate our design, prototype and other engineering
capabilities. Through this approach, we provide a broad range of engineering
services and, in some cases, dedicated production lines for prototypes. These
services strengthen our relationships with manufacturing customers and attract
new customers requiring specialized engineering services.
To assist customers with initial design, we offer
computer assisted engineering, computer assisted design, engineering for
manufacturability, circuit board layout and test development. We also
coordinate industrial design and tooling for product manufacturing. After
product design, we offer quickturn prototyping, which means a rapid process of
prototyping. During this process, we assist with the transition to volume
production. By participating in product design and prototype development, we
can reduce manufacturing costs and accelerate the cycle from product
introduction to large-scale production.
Supply Chain Management. Supply
chain management consists of the planning, purchasing, expediting and
warehousing of components and materials. Our inventory management and volume
procurement capabilities contribute to cost reductions and reduce total cycle
time. Our materials strategy is focused on leveraging our procurement volume
company wide while providing local execution for maximum flexibility at the
division level. In addition, our systems integration facilities have developed
material processes required to support system integration operations.
Assembly and Manufacturing. Our
manufacturing and assembly operations include printed circuit boards and
subsystem assembly, box build and systems integration, the process of
integrating sub-systems and downloading software before producing a fully
configured product. We purchase the printed circuit boards used in our assembly
operations from third parties. A substantial portion of our sales is derived
from the manufacture and assembly of complete products. We employ various
inventory management techniques, such as just-in-time, ship-to-stock and
autoreplenish, which are programs designed to ensure timely, convenient and
efficient delivery of assembled products to our customers. As OEMs seek to
provide greater functionality in smaller products, they increasingly require
more sophisticated manufacturing technologies and processes. Our investment in
advanced manufacturing equipment and our experience in innovative packaging and
interconnect technologies enable us to offer a variety of advanced manufacturing
solutions. These packaging and interconnect technologies include:
· chip
scale packaging, the part of semiconductor manufacturing in which the
semiconductor die is bonded and sealed into a ceramic or plastic package which
physically protects the semiconductor device; and
· ball
grid array, a method of attaching components to a printed circuit board through
balls of solder that are arranged in a grid pattern.
Testing. We offer
computer-aided testing of assembled printed circuit boards, subsystems and systems,
which contributes significantly to our ability to deliver high-quality products
on a consistent basis. We work with our customers to develop product-specific
test strategies. Our test capabilities include manufacturing defect analysis,
in-circuit tests to test the circuitry of the board and functional tests to
confirm that the board or assembly operates in accordance with its final design
and manufacturing specifications. We either custom design test equipment and
software ourselves or use test equipment and software provided by our
customers. In addition, we provide environmental stress tests of assemblies of
boards or systems.
Final System Assembly and Test. We
provide final system assembly and test in which assemblies and modules are
combined to form complete, finished products. We often integrate printed
circuit board assemblies manufactured by us with enclosures, electronic and
mechanical subassemblies, cables and memory modules. We assemble systems to a
specific customer order and we also build to standard configurations. The
complex, finished products that we produce typically require extensive test
protocols.
4
Our test services include
both functional and environmental tests. We also test products for conformity
to applicable industry, product integrity and regulatory standards. Our test
engineering expertise enables us to design functional test processes that
assess critical performance elements, including hardware, software and
reliability. By incorporating rigorous test processes into the manufacturing
process, we can help to assure customers that their products will function as
designed. We provide direct order fulfillment services shipping completed
systems directly to the end consumer.
Distribution. We offer our
customers flexible, just-in-time delivery programs allowing product shipments
to be closely coordinated with customers’ inventory requirements. Increasingly,
we ship products directly into customers’ distribution channels or directly to
the end-user. We believe that this service can provide our customers with a
more comprehensive solution and enable them to be more responsive to market
demands.
Direct Order Fulfillment. We
provide direct order fulfillment for certain of our OEM customers. Direct order
fulfillment involves receiving customer orders, configuring products to quickly
fill the orders and delivering the products either to the OEM, a distribution
channel or directly to the end customer. We manage our direct order fulfillment
processes using a core set of common systems and processes that receive order
information from the customer and provide comprehensive supply chain
management, including procurement and production planning. These systems and
processes enable us to process orders for multiple system configurations, and
varying production quantities, including single units. Our direct order
fulfillment services include build-to-order (BTO) and configure-to-order (CTO)
capabilities. BTO involves building a system having the particular configuration
ordered by the OEM customer. CTO involves configuring systems to an end
customer’s order. The end customer typically places this order by choosing from
a variety of possible system configurations and options. We are capable of
meeting a 20 to 48 hour turn-around-time for BTO and CTO by using advanced
manufacturing processes. We support our direct order fulfillment services with
logistics that include delivery of parts and assemblies to the final assembly
site, distribution and shipment of finished systems, and processing of customer
returns.
Marketing and Customers
We market our services through a direct sales force
and independent marketing representatives. In addition, our divisional and
executive management teams are an integral part of our sales and marketing
teams. We generally enter into supply arrangements with our customers. These
arrangements, similar to purchase orders, generally govern the conduct of
business between our customer and ourselves relating to, among other things,
the manufacture of products which in many cases were previously produced by the
customer itself. Such arrangements generally identify the specific products to
be manufactured, quality and production requirements, product pricing and
materials management. There can be no assurance that at any time these
arrangements will remain in effect or be renewed.
Our key customer accounts are managed by a dedicated
account team, including a global account manager directly responsible for
account management. Global account managers coordinate activities across
divisions to effectively satisfy customer requirements and have direct access
to our executive management to quickly address customer concerns. Local
customer account teams further support the global teams and are linked by a
comprehensive communications and information management infrastructure. In
addition, our executive management, including our president and chief executive
officer, Cary Fu, and our chief financial officer, Gayla Delly, are heavily
involved in customer relations and devote significant attention to broadening
existing, and developing new, customer relationships.
5
The
following table sets forth the percentages of our sales by industry for 2004,
2003 and 2002.
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Computers &
related products for business enterprises
|
|
|
58
|
%
|
|
|
62
|
%
|
|
|
64
|
%
|
|
|
Telecommunication
equipment
|
|
|
13
|
|
|
|
12
|
|
|
|
13
|
|
|
|
Industrial
control equipment
|
|
|
12
|
|
|
|
12
|
|
|
|
8
|
|
|
|
Medical devices
|
|
|
9
|
|
|
|
8
|
|
|
|
11
|
|
|
|
Testing &
instrumentation products
|
|
|
8
|
|
|
|
6
|
|
|
|
2
|
|
|
|
Video/Audio/Entertainment
products
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
A substantial percentage
of our sales have been made to a small number of customers, and the loss of a
major customer, if not replaced, would adversely affect us. During 2004, our
two largest customers, Sun Microsystems, Inc. and EMC Corporation, each
represented in excess of 10% of our total sales and, in the aggregate,
represented 47.0% of our total sales. Sales to our largest customer, Sun
Microsystems, Inc., decreased to 30.8% of our sales in 2004 from 44.0% of
our sales in 2003. During 2004, the level of concentration among our top
customers decreased as revenues from our remaining customer base expanded.
Sales to our customers other than our two largest customers increased to $1.1
billion in 2004 from $792.4 million in 2003, an increase of $267.5 million. Our
future sales are dependent on the success of our customers, some of which
operate in businesses associated with rapid technological change and consequent
product obsolescence. Developments adverse to our major customers or their
products, or the failure of a major customer to pay for components or services,
could have an adverse effect on us. Consolidation among our customers may
further reduce the number of customers that generate a substantial percentage
of our sales and exposes us to increased risks related to dependence on a small
number of customers.
Suppliers
We maintain a network of
suppliers of components and other materials used in our operations. We procure
components when a purchase order or forecast is received from a customer and
occasionally utilize components or other materials for which a supplier is the
single source of supply. If any of these
single source suppliers were to be unable to provide these materials, a
shortage of these components could temporarily interrupt our operations and
temporarily lower our profits until such time as an alternate component could
be identified and qualified for use in production. Although we experience
component shortages and longer lead times of various components from time to
time, we have generally been able to reduce the impact of the component
shortages by working with customers to reschedule deliveries, by working with
suppliers to provide the needed components using just-in-time inventory
programs, or by purchasing components at somewhat higher prices from
distributors, rather than directly from manufacturers. In addition, by
developing long-term relationships with suppliers, we have been better able to
minimize the effects of component shortages than manufacturers without such
relationships. These procedures reduce, but do not eliminate, our inventory
risk.
Backlog
We had a backlog of
approximately $1.6 billion at December 31, 2004, as compared to the
2003 year-end backlog of $1.1 billion. Backlog consists of purchase
orders received, including, in some instances, forecast requirements released
for production under customer contracts. We believe the increase in backlog is
attributable to the organic growth of our business. Although we expect to fill
substantially all of our year-end backlog during 2005, we currently do not have
long-term agreements with all of our customers and customer orders can be
canceled, changed or delayed by customers. The timely replacement of canceled,
changed or delayed orders with orders from new customers cannot be assured, nor
can there be any assurance that any of our current customers will continue to
utilize our services. Because of these factors, backlog is not a meaningful
indicator of future financial results.
6
Competition
The electronics manufacturing services we provide are
available from many independent sources as well as from the in-house
manufacturing capabilities of current and potential customers. Our competitors
include Celestica, Inc., Flextronics International Ltd., Jabil Circuit, Inc.,
Sanmina-SCI Corporation and Solectron Corporation, who may be more established
in the industry and have substantially greater financial, manufacturing or
marketing resources than we do. We believe that the principal competitive
factors in our targeted markets are engineering capabilities, product quality,
flexibility, cost and timeliness in responding to design and schedule changes,
reliability in meeting product delivery schedules, pricing, technological
sophistication and geographic location.
In addition, in recent
years, original design manufacturers (ODMs) that provide design and
manufacturing services to OEMs, have significantly increased their share of
outsourced manufacturing services provided to OEMs in markets such as notebook
and desktop computers, personal computer motherboards, and consumer electronic
products. Competition from ODMs may increase if our business in these markets
grows or if ODMs expand further into or beyond these markets.
Governmental Regulation
Our operations, and the operations of businesses that
we acquire, are subject to certain foreign, federal, state and local regulatory
requirements relating to environmental, waste management, and health and safety
matters. We believe we operate in substantial compliance with all applicable
requirements. However, material costs and liabilities may arise from these
requirements or from new, modified or more stringent requirements. In addition,
our past, current and future operations, and those of businesses we acquire,
may give rise to claims of exposure by employees or the public or to other
claims or liabilities relating to environmental, waste management or health and
safety concerns.
We periodically generate
and temporarily handle limited amounts of materials that are considered
hazardous waste under applicable law. We contract for the off-site
disposal of these materials and have implemented a waste management program to
address related regulatory issues.
Employees
As of December 31,
2004, we employed 7,393 people, of whom 5,362 were engaged in manufacturing and
operations, 872 in materials control and procurement, 593 in design and
development, 167 in marketing and sales, and 399 in administration. None of our
domestic employees are represented by a labor union. In certain international
locations, our employees are represented by labor unions and by works councils.
We have never experienced a strike or similar work stoppage and we believe
that our employee relations are satisfactory.
Segments
and International Operations
Benchmark has 17
manufacturing facilities in the Americas, Europe, and Asia regions to serve its
customers. Benchmark is operated and managed geographically and management
evaluates performance and allocates Benchmark’s resources on a geographic
basis. We currently operate outside the United States in Brazil, China,
England, Ireland, Mexico, Singapore and Thailand. During 2004 and 2003, 30.2%
and 27.0%, respectively, of our sales were from our international operations.
The increase in the percentage of international sales for 2004 as compared to 2003 primarily reflects the additional
sales resulting from the operation of the facilities in Thailand, including the
Korat facility which began operations in September 2004. As a result of
continuous customer demand overseas, we expect foreign sales to increase. Our
foreign sales and operations are subject to risk of doing business abroad,
including fluctuations in the value of currency, export duties, import controls
and trade barriers, including stoppages, longer payment cycles, greater
difficulty in accounts receivable collection, burdens of complying with a
7
wide
variety of foreign laws and, in certain parts of the world, political
instability. While, to date, these factors have not had a material adverse
effect on Benchmark’s results of operations, we cannot assure that there will
not be an adverse impact in the future. See Note 12 of Notes to Consolidated
Financial Statements for segment and geographical information.
Available Information
Our internet address is www.bench.com. We make available free of charge through our
internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
as soon as reasonably practicable after electronically filing such material with,
or furnishing it to, the Securities and Exchange Commission. All reports we
file with the SEC are also available free of charge via EDGAR through the SEC’s
website at www.sec.gov.
Item 2. Properties
Benchmark currently has 17 manufacturing facilities worldwide.
Our customers market numerous products throughout the
world and therefore need to access manufacturing services on a global basis. To
enhance our EMS offerings, we seek to locate our facilities either near our
customers and our customers’ end markets in major centers for the electronics
industry or, where appropriate, in lower cost locations. Many of our plants
located near customers and their end markets are focused primarily on final
system assembly and test, while plants located in lower cost areas are engaged
primarily in less complex component and subsystem manufacturing and assembly.
8
The
following chart summarizes our principal manufacturing facilities owned or
leased by Benchmark and its subsidiaries:
|
Location
|
|
|
|
Sq. Ft.
|
|
Ownership
|
|
|
Angleton, Texas
|
|
109,000
|
|
Owned
|
|
|
Ayudhaya,
Thailand
|
|
243,000
|
|
Owned
|
|
|
Ayudhaya,
Thailand Systems Integration
|
|
65,000
|
|
Leased
|
|
|
Beaverton, Oregon
|
|
77,000
|
|
Leased
|
|
|
Campinas, Brazil
|
|
40,000
|
|
Leased
|
|
|
Dublin, Ireland
|
|
104,000
|
|
Leased
|
|
|
Guadalajara,
Mexico
|
|
150,000
|
|
Leased
|
|
|
Hudson, New
Hampshire
|
|
262,000
|
|
Leased
|
|
|
Huntsville,
Alabama
|
|
276,000
|
|
Owned
|
|
|
Huntsville,
Alabama Systems Integration
|
|
144,000
|
|
Leased
|
|
|
Korat, Thailand
|
|
126,000
|
|
Owned
|
|
|
Leicester,
England
|
|
55,000
|
|
Leased
|
|
|
Loveland,
Colorado
|
|
139,000
|
|
Leased
|
|
|
Redmond,
Washington
|
|
79,000
|
|
Leased
|
|
|
Suzhou, China
|
|
115,000
|
|
Leased
|
|
|
Singapore
|
|
53,000
|
|
Leased
|
|
|
Winona, Minnesota
|
|
208,000
|
|
Leased,
Owned
|
|
|
Total
|
|
2,245,000
|
|
|
|
We also own a facility in
Rangsit, Thailand with a total of 90,000 sq. ft. and lease a facility in
Mountain View, California with a total of 21,000 sq. ft. that are currently not
in operation. Our leased facility in Manassas, Virginia with a total of 44,000
sq. ft. is scheduled to close by the end of the first quarter of 2005.
Item 3. Legal Proceedings
Benchmark filed a lawsuit against J.M. Huber
Corporation (the Seller) in the United States District Court for the Southern
District of Texas for breach of contract, fraud and negligent misrepresentation
on December 14, 1999 seeking an unspecified amount of damages in
connection with the Amended and Restated Stock Purchase Agreement dated August 12,
1999 between the parties whereby we acquired all of the stock of AVEX
Electronics, Inc. from Seller. On January 5, 2000, Seller filed suit
in the United States District Court for the Southern District of New York
alleging that Benchmark failed to comply with certain obligations under the
contract requiring us to register shares of our common stock issued to Seller
as partial consideration for the acquisition. Seller’s suit was consolidated
with Benchmark’s suit in the United States District Court for the Southern
District of Texas (the Court). In September 2004, the parties began
negotiation of a release and settlement disposing of all claims between the
parties. On November 2, 2004, having been advised that a settlement had
been reached in principle between the parties, the Court dismissed the case
with prejudice, except that the parties were allowed to move for reinstatement
by December 29, 2004, only if the approval of the settlement was not
obtained by the principals. The parties executed a settlement agreement
effective November 15, 2004, pursuant to which each party released all
claims arising out of the purchase of AVEX; no money was paid as part of the
settlement. The Court entered the final order of dismissal, dismissing the suit
with prejudice, on December 10, 2004.
On April 14, 2000, Benchmark, along with numerous
other companies, was named as a defendant in a lawsuit filed in the United
States District Court for the District of Arizona by the Lemelson Medical,
Education & Research Foundation (Lemelson). The lawsuit alleges that
we have infringed certain of Lemelson’s patents relating to machine vision and
bar code technology utilized in machines Benchmark has purchased. On November 2,
2000, we filed an Answer, Affirmative Defenses, and a Motion to Stay
9
based upon Declaratory
Judgment Actions filed by Cognex and Symbol, manufacturers of the equipment at
issue. On March 29, 2001, the Court granted the defendants’ Motion to Stay
and ordered that the lawsuit be stayed pending the entry of a final
non-appealable judgement in the cases filed by Cognex and Symbol (the Symbol/Cognex
case). On January 24, 2004, the trial court in the Symbol/Cognex case held
that the Lemelson patents are invalid, unenforceable and were not infringed.
Lemelson has announced that it intends to appeal the trial court’s ruling in
the Symbol/Cognex case. Resolution of the appeal in the Symbol/Cognex case is
estimated to take one to three years. Lemelson’s lawsuit against Benchmark is
stayed pending the final non-appealable judgement in the Symbol/Cognex case. We
intend to vigorously defend against such claims and pursue all rights we have
against third parties. At the present time, we are unable to reasonably
estimate the possible loss, if any, associated with these matters.
Benchmark is also involved
in various other 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 Benchmark’s consolidated financial position
or results of operations.
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 2004.
10
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and
Issuer Purchases of Equity Securities
The information on page 63
of the Company’s printed Annual Report to Shareholders for the fiscal year
ended December 31, 2004 (the 2004 Annual Report) is incorporated herein by
reference in response to this item.
Item 6. Selected Financial Data
The information on page 64
of the 2004 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
through 30 of the 2004 Annual Report is incorporated herein by reference in
response to this item.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information on pages 24
through 30 of the 2004 Annual Report is incorporated herein by reference in
response to this item.
Item 8. Financial Statements and Supplementary Data
The information on pages 31
through 63 of the 2004 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
Not applicable.
Item 9a. Controls And Procedures
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this report,
the Company’s management (with the participation of its chief executive officer
and chief financial officer), conducted an evaluation pursuant to Rule 13a-15
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange
Act), of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures. Based on this evaluation, the Company’s
chief executive officer and chief financial officer concluded that as of the
end of the period covered by this report such disclosure controls and
procedures were effective to provide reasonable assurance that information
required to be disclosed by the Company in reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and
Exchange Commission, and include controls
and procedures designed to ensure that information required to be disclosed by
the Company in such reports is accumulated and communicated to the Company’s
management, including the Company’s chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required
disclosure.
There has been no change in our internal control over
financial reporting that occurred during the fiscal period covered by this
Annual Report on Form 10-K that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Our management, including
our chief executive officer and chief financial officer, does not expect that
our disclosure controls and internal controls will prevent all errors and all
fraud. A control system, no
11
matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, a control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
Management’s
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2004.
Our management’s
assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2004 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.
Item 9b. Other Information
Not applicable.
12
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 2005
Annual Meeting of Shareholders (the 2005 Proxy Statement), to be filed not
later than 120 days after the close of the Company’s fiscal year, is
incorporated herein by reference in response to this item.
Item 11. Executive Compensation
The information under the
caption “Executive Compensation and Other Matters” in the 2005 Proxy Statement,
to be filed not later than 120 days after the close of the Company’s fiscal
year, is incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
The information under the
caption “Common Stock Ownership of Certain Beneficial Owners and Management” in
the 2005 Proxy Statement, to be filed not later than 120 days after the close
of the Company’s fiscal year, is incorporated herein by reference in response to
this item. The information on page 63 of the 2004 Annual Report 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 2005 Proxy Statement, to be filed not
later than 120 days after the close of the Company’s fiscal year, is
incorporated herein by reference in response to this item.
Item 14. Principal Accountant Fees and Services
The information under the
caption “Audit Committee Report to Shareholders” in the 2005 Proxy Statement,
to be filed not later than 120 days after the close of the Company’s fiscal
year, is incorporated herein by reference in response to this item.
13
PART IV
Item 15. 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 report thereon, the notes thereto and
supplementary data commencing at page 31 of the 2004 Annual Report, which
financial statements, report, notes and data are incorporated by reference in
response to Item 8 of this report. Set forth below is a list of such Financial
Statements:
|
Report of Independent
Registered Public Accounting Firm
|
|
Consolidated
Balance Sheets as of December 31, 2004 and 2003
|
|
Consolidated
Statements of Income for the years ended December 31, 2004, 2003 and
2002
|
|
Consolidated Statements
of Shareholders’ Equity and Comprehensive Income for the years ended
December 31, 2004, 2003 and 2002
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2004, 2003 and
2002
|
|
Notes to
Consolidated Financial Statements
|
2. Financial Statement Schedule
Benchmark
Electronics, Inc.
Schedule II—Valuation
Accounts
(in thousands)
|
|
|
Balance at
|
|
Additions
|
|
|
|
Balance at
|
|
|
|
|
Beginning
|
|
Charges to
|
|
|
|
|
|
End of
|
|
|
|
|
of Period
|
|
Operations
|
|
Other
|
|
Deductions
|
|
Period
|
|
|
Year ended December 31,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts(1)
|
|
|
$
|
6,475
|
|
|
|
1,789
|
|
|
|
172
|
|
|
|
1,451
|
|
|
|
6,985
|
|
|
|
Inventory obsolescence reserve(2)
|
|
|
$
|
18,267
|
|
|
|
(1,572
|
)
|
|
|
12
|
|
|
|
3,390
|
|
|
|
13,317
|
|
|
|
Year
ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts(1)
|
|
|
$
|
5,764
|
|
|
|
6,589
|
|
|
|
(175
|
)
|
|
|
5,703
|
|
|
|
6,475
|
|
|
|
Inventory obsolescence reserve(2)
|
|
|
$
|
17,181
|
|
|
|
6,281
|
|
|
|
378
|
|
|
|
5,573
|
|
|
|
18,267
|
|
|
|
Year
ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts(1)
|
|
|
$
|
2,211
|
|
|
|
6,605
|
|
|
|
—
|
|
|
|
3,052
|
|
|
|
5,764
|
|
|
|
Inventory
obsolescence reserve(2)
|
|
|
$
|
9,024
|
|
|
|
13,779
|
|
|
|
—
|
|
|
|
5,622
|
|
|
|
17,181
|
|
|
(1) Deductions in the
allowance for doubtful accounts represent write-offs, net of recoveries, of
amounts determined to be uncollectible.
(2) Deductions in the
inventory obsolescence reserve represent disposals of inventory determined to
be obsolete.
14
