Benchmark Electronics, Inc. 1996 Annual Report
3000 Technology Drive
Angleton, Texas 77515
(409) 849-6550
www.bench.com
Table of Contents
The Company at a Glance 1
Financial Highlights 1
President's Letter 2
Outsourcing Solutions 5
Management's Discussion and Analysis 9
Financial Statements 15
Notes to Financial Statements 19
Independent Auditors' Report 27
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
Financial Highlights
Benchmark Electronics, Inc. and Subsidiaries
Year ended December 31,
(In thousands, except per-share data) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------
Sales $201,296 97,353 98,168 75,859 50,647
Income from operations $ 15,391 9,250 8,778 6,590 4,375
Net income $ 8,864 6,148 5,769 4,582 3,130
Earnings per common share $ 1.92 1.50 1.41 1.13 .83
Working capital $ 72,586 37,285 30,890 29,160 25,796
Total assets $168,174 57,037 48,333 47,425 34,380
Long-term debt $ 30,485 -- -- -- --
Shareholders' equity $104,999 46,624 40,131 34,213 29,573
Weighted average common and equivalent
shares outstanding 4,611 4,106 4,088 4,066 3,762
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.
President's letter
Dear Shareholder:
It is my pleasure to report to you once again record-breaking financial results
in calendar year 1996. As a result of the acquisition of EMD Technologies, Inc.
in July 1996 and the continued growth and expansion of our traditional business,
Benchmark Electronics, Inc. earned a record net income, $8,863,515, or $1.92 per
share. The company posted record sales of $201,296,320, approximately 107 %
greater than 1995. And once again, we showed a record year-end backlog, this
time reaching $230,000,000 as of December 31, 1996.
During 1996, our revenue growth rate was more than twice that of the
electronic contract manufacturing industry as compiled by the Institute for
Interconnecting and Packaging Electronic Circuits (IPC).
Our continued focus on strategic, high-growth markets--medical devices,
telecommunications, instrumentation, high-end computer systems and industrial
controls--produced revenue growth during 1996 both through the addition of new
outsourcing relationships and by the expansion of programs and product lines
with existing customers.
This year I am especially pleased to be able to report to you on our first
acquisition. In July of 1996, we acquired EMD Technologies, Inc. (EMD), a well
respected, privately held electronic contract manufacturing firm located in
Winona, Minnesota. This move significantly increased our sales revenues during
1996, and in fact has changed the overall stature of the company. Through the
acquisition, Benchmark became a top tier firm in our field, moving into the top
ten ranking by revenue among publicly traded firms in the contract manufacturing
industry.
(Caption for chart: The strongest basis for continued growth -- clear focus,
customer satisfaction and financial strength.)
A number of strong benefits to our customers accrue from Benchmark's
becoming a top tier firm, and we'll discuss these further on in the
Shareholder's Report. But I am especially excited about the synergies available
from the acquisition of EMD, and the result: an ability to provide our
customers with the leading edge assembly technologies, design and test
development capabilities, enhanced procurement leverage, and nationwide
geographic presence and service.
(Caption for chart: Benchmark's compound sales revenue growth, including the
EMD acquisition July 30, 1996, verses the IPC average for 1992-1996.)
During 1996, Benchmark, for the first time since our initial public
offering, elected to finance a portion of the acquisition of EMD. In keeping
with our conservative financial management posture, in November of 1996, we
completed a third stock offering of 1,016,500 shares. The proceeds to the
company from this equity financing were used primarily to pay down a portion of
the debt incurred for the acquisition and to provide a strong financial base for
the future growth of Benchmark. The company is now in a position to take
advantage of future acquisition opportunities that may possibly arise.
Currently our balance sheet is well positioned for future growth. The debt
to total capital ratio is quite conservative by industry standards. This allows
us to leverage our operations to continue to provide superior financial results
for our shareholders.
During 1996, we celebrated our tenth anniversary as an independent company.
My sincere thanks and appreciation to Benchmark employees--the driving force
behind our growth and success. I am especially pleased to welcome EMD employees
to the Benchmark family and to express our appreciation for their contributions
in 1996.
In summary, 1996 was a pivotal year for Benchmark as we became one of the
top tier firms in the electronic contract manufacturing industry. However, we
have not changed our overall business strategy. We strengthened our customer
service, and emphasized continuing development of our management team to provide
a solid foundation for future growth. Finally, as always, we retained our
conservative financial management philosophy.
Looking forward, I am enthused about our enhanced outsourcing capabilities,
which offer better ways to meet our customer's needs and which promise growth
for Benchmark for the long term.
Sincerely,
Donald E. Nigbor
President and Chief Executive Officer
March 20, 1997
(Caption for photo: Officers - seated left to right, Donald Nigbor and Cary Fu.
Standing left to right, Lenora Gurton, Christopher Nawrocki, Gayla Delly and
Steven Barton.)
Outsourcing Solutions
During 1996, Benchmark made very significant improvements in our ability to
offer leading edge design-through-delivery outsourcing solutions to our
customers.
Design Engineering
The design engineering capabilities of EMD have long been respected in the
electronic contract manufacturing industry. The acquisition of that firm allows
our company to offer product software and circuit design, bare printed circuit
board layout (PCB), mechanical product design, and test fixture/software
development, all under one roof. That means "one-stop shopping" to our customers
from an outsourcing standpoint, not just for design and test fixturing, but
right through prototype stage and production runs including the "box build" or
final system-level assembly phase.
(Captions for photos:
Benchmark provides electronic circuit and PCB design expertise to speed
customers' products to the market place.
Customers' engineers work closely with Benchmark mechanical designers to produce
cost effective and reliable mechanical packaging designs.
The box build area exemplifies one-stop shopping: Benchmark designs,
manufacturers and ships finished products.)
Advanced Technologies
Benchmark is now able to offer customers the most advanced leading edge
manufacturing processes--ball grid arrays (BGA), chip on board (COB), and multi
chip modules (MCM) technologies--with production experience for new generations
of products. These technologies allow significant increases in electronic
packaging density and circuit performance as compared to surface mount (SMT) or
thru-hole interconnect technologies.
We are also able to offer customers the services of the EMD advanced
technology development laboratory, which contains such world class process
analysis equipment as scanning electron microscopes. The lab provides initial
process development, on-going failure analysis, and corrective action
capabilities that are as good as any firm's in the electronic contract
manufacturing industry.
(Captions for photos:
Advanced robotics places ball grid arrays with extreme accuracy in production
volumes. Automatic test development lab provides in-circuit and functional test
software/hardware to verify customer's product functionality.
Micrograph illustrating the capabilities of die attach technology.
Scanning electron microscopy is utilized to provide failure analysis and process
qualification as a key element in our continuous improvement program.)
Expanded Service Locations
Benchmark's acquisition of EMD enhanced our marketing abilities, enabling the
company to provide improved service to outsourcing clients nationwide. We can
now offer outsourcing
solutions from our sites in the Pacific Northwest, the Midwest and Southwest.
One of the hallmarks of Benchmark's
(Map of USA showing 3 locations)
customer satisfaction--and consequent continued growth--is flexible service
stemming from our proximity to our customers. Those customers tell us that one
of the competitive marketing advantages Benchmark offers them is our
strategically located multiple manufacturing facilities. To them, that means
flexibility in engineering changes or improvements to their products, quick
response to their changes in delivery schedules, and more responsive
coordination of those product deliveries on a just-in-time basis.
Not to be overlooked in Benchmark's success is the fact that our multiple
facility locations can "second-source". Resources can be leveraged from any
location to meet changing customer needs, including product engineering
manufacturing techniques, analysis tools, and manufacturing capacity.
(Captions for photos:
Synthetic vision system provides continuous monitoring of critical manufacturing
process by utilizing advanced laser and computer/vision algorithms. Real time
x-ray analysis/inspection is utilized as a process development tool or ongoing
quality assurance methodology.)
Material Procurement
In an outsourcing relationship, material procurement leverage is of extreme
importance to the customer since the electronic components make up the larger
part of the cost of a product. Today's engineering design functions are so
sophisticated that the direct labor costs of products are typically quite low
because most components are designed to be placed on the circuit boards by
high-speed and high-accuracy robotics. In many instances, a relationship with a
turnkey contract manufacturer is economically beneficial for a customer, since
the quantity of electronic components that the customer would buy on their own
is quite small compared to that of their contract manufacturing source, which
multiplies or leverages its purchasing power by procuring materials for all of
its customers combined. The material procurement leverage of Benchmark more than
doubled during 1996, allowing us to provide very cost effective and advantageous
electronic component pricing to our outsourcing customers. Too, we gained much
higher visibility to many of the electronic component manufacturers.
Financial Strength
In the typical outsourcing relationship, Benchmark's customers seek a
specialized niche: medium to high volume production of a broad mix of products.
Benchmark is frequently the sole source, or a very significant source, of the
customer's production. Understandably, then, Benchmark's financial stability is
of extreme concern to our customers. Our balance sheet outlines the financial
resources so crucial for supporting our existing customers' growth and for
adding additional outsourcing relationships in the future.
(Caption for pie chart: Sales by market segments which represent the marketing
focus of Benchmark's outsourcing relationships across a diversified industry
base.)
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.
ACQUISITION
On July 30, 1996, the Company completed its acquisition of EMD Technologies,
Inc. (EMD). This business, headquartered in Winona, Minnesota, was acquired for
674,964 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 and "Liquidity and Capital Resources".
Completion of the acquisition of EMD on July 30, 1996 and the inclusion
of EMD's operations in the Company's accounts subsequent to that date is
responsible for a substantial portion of the variation in the results of the
Company's operations (including the components thereof) for the year ended
December 31, 1996, as compared to 1995, and the increase in long term debt in
1996 as compared to 1995. The effects of the acquisition of EMD on the Company's
financial condition as of December 31, 1996 and its reported results of
operations and earnings per share for the period since the acquisition should be
considered when reviewing the financial information contained 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, the effective integration of EMD into the Company,
industry and economic conditions and customer actions and other factors
discussed in this 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.
RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain items in
the Company's Statements of Income bear to sales for the periods indicated.
Percentage of sales
Year ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
Sales ........................................... 100.0% 100.0% 100.0%
Cost of sales ................................... 88.4 87.5 87.8
-----------------------------
Gross profit ............................... 11.6 12.5 12.2
Selling expenses ................................ .9 1.4 1.4
General and administrative expenses ............. 2.7 1.6 1.8
Amortization of goodwill ........................ .3 -- --
-----------------------------
Income from operations ..................... 7.7 9.5 8.9
-----------------------------
Other income (expense) .......................... (.5) .3 .3
-----------------------------
Income before income taxes ................. 7.2 9.8 9.2
Income tax expense .............................. 2.8 3.5 3.3
-----------------------------
Net Income ..................................... 4.4% 6.3% 5.9%
=============================
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Sales in 1996 increased $103.94 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 16% 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 $230 million at December
31, 1996, as compared to the 1995 year-end backlog of $117 million. Although the
Company expects to fill substantially all of this backlog in 1997, 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.
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 expenses increased by $0.4 million, or 30.6%, from 1995 to $1.8
million. The increase in selling expenses was due primarily to an increase in
support expenses, including travel expenses and commissions, and additional
personnel associated with the acquisition of EMD.
General and administrative expenses increased $3.8 million, or 238.3%,
from 1995 to $5.4 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 general and administrative expenses reflects these additional
personnel and related departmental expenses, as well as the additional
administrative expenses, such 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 the higher
pre-tax income and nondeductible amortization of goodwill offset by the benefit
from the use of a foreign sales corporation.
The Company reported net income of approximately $8.9 million, or $1.92
per share, for 1996 compared with net income of approximately $6.1 million, or
$1.50 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 revenues resulting from the factors discussed above.
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994
Sales in 1995 decreased $0.82 million, or .8% below 1994 sales. The decrease in
sales was due primarily to the slow start-up of several new programs caused by
the long lead times of certain components such as capacitors, crystals, diodes
and transistors, coupled with the changes in production schedules and mix
experienced in the last quarter of 1995. Because of the continued increase in
demand for surface mount components and the inability of most
manufacturers to meet that demand, the Company anticipates continued component
shortages with respect to capacitors, crystals, diodes and transistors and
longer lead times of these components from time to time. Although Sequent
Computer Systems Inc., which accounted for approximately 49.1% of 1994 sales,
second-sourced some of its products during 1995, the Company successfully
undertook the transition to serving a much larger and more diversified customer
base. Sequent accounted for approximately 27.6% of sales during 1995.
Gross profit increased $0.31 million, or 2.6% over 1994. Gross profit as
a percentage of sales increased from 12.2% for 1994 to 12.5% for 1995. The
slight improvement in gross profit reflects continuing productivity improvements
in operations and a more profitable product mix. Also contributing to the
increase was a reduction in cost of sales due to the increased availability, and
consequent decline in the price, of the semiconductor components subject to
allocation from the second quarter of 1992 through the second quarter of 1994.
The shortage of certain components discussed above did not materially impact
gross profits because the components involved are lower cost components than
those which were subject to the allocation procedures implemented through the
second quarter of 1994.
Selling expenses decreased by $23,000, or 1.6%, from 1994 to $1.4
million. The decrease in selling expenses was generally consistent with the
decline in sales.
General and administrative expenses decreased $142,000, or 8.1% from
1994 to $1.6 million in 1995. The decrease was generally consistent with the
decline in sales.
Interest income was $268,000 in 1995 compared to $252,000 in 1994. The
increase was due to the temporary investment by the Company of cash in interest
bearing marketable securities.
Income tax expense of $3.4 million represented an effective tax rate of
35.5% for the year ended December 31, 1995, compared with an effective tax rate
of 36.2% for the year ended December 31, 1994.
The Company reported net income of approximately $6.1 million, or $1.50
per share, for 1995 compared with net income of approximately $5.8 million, or
$1.41 per share for 1994. The approximately $0.4 million increase in net income
during 1995 was primarily a result of higher gross margins in 1995.
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 operating activities was $12.3 million in 1996 compared
to cash used in operating activities of $3.4 million in 1995. 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 have 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. The Company expects continued increases in
accounts receivable and 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 $49.0 million for the year ended
December 31, 1996. The Company completed the planned expansion of its production
capacity at the Angleton plant during the second quarter of 1996, after which
the Company had 12 surface mount assembly lines in operation at the Angleton
plant. Capital expenditures of $8.6 million during the year were primarily
concentrated in the expansion of the facility and surface mount assembly
equipment associated with this expansion. On July 30, 1996, the Company
completed its acquisition of EMD. Approximately $30.8 million in cash was used
to complete the acquisition. See Note 2 of Notes to Consolidated Financial
Statements.
Cash provided by financing activities was $47.7 million for the year
ended December 31, 1996. During 1996 the Company obtained a four-year, $15
million revolving line of credit which replaced the Company's prior revolving
credit facility, financed a portion of the cash consideration of the acquisition
of EMD, refinanced the revolving line of credit at EMD and provided for future
working capital needs. This line of credit is unsecured and is guaranteed by
each of the Company's United States subsidiaries. The credit agreement related
to this line of credit contains certain financial covenants and restricts the
ability of the Company (i) to incur additional debt without the consent of the
bank and (ii) to pay dividends. The Company is entitled to borrow under the line
of credit up to the lesser of $15 million or the sum of 80% of its eligible
accounts receivable and 25% of its eligible inventories. The Company is entitled
to prepay the line of credit without penalty at any time upon proper notice to
the bank. The Company currently has no outstanding debt under its line of
credit.
Interest on the revolving credit facility accrues, at the Company's
option, at either the bank's Fixed Eurodollar Rate plus from .625% to 1.75% per
annum or its prime rate. The margin on the Fixed Eurodollar Rate fluctuates with
the Company's ratio of Funded Debt to EBITDA. Interest is payable quarterly. A
commitment fee of 0.17% per annum on the unused portion of the revolving credit
facility is payable quarterly in arrears.
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 million
beginning July 31, 2001 with a final installment of the unpaid principal amount
due July 31, 2006.
The purchase agreement relating to the Senior Note (the Purchase
Agreement) includes customary affirmative and negative covenants and requires
that the Company maintain (i) a tangible net worth of not less that the sum of
(a) $39.0 million, (b) 50% of the Company's net income after June 30, 1996 and
(c) the aggregate amount of net cash proceeds from the sale of Common Stock
after June 30, 1996; (ii) minimum fixed charge and interest coverage ratios; and
(iii) a ratio of consolidated indebtedness to earnings before interest, taxes,
depreciation and amortization of not greater than 3.25 to 1.00 at any time prior
to March 31, 1997 and not greater than 3.00 to 1.00 at any time on or after
March 31, 1997. 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 or 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 Purchase
Agreement also prohibits the payment of cash dividends by the Company at any
time when an event of default has occurred and is continuing under the
agreement, and otherwise limits the funds the Company may use for the payment of
dividends to the sum of (i) 50% of cumulative net income subsequent to July
30,1996, (ii) $10 million, and (iii) the net proceeds of the sale of equity.
During November, 1996, the Company issued 1,016,500 shares of common
stock in a public offering for net proceeds of approximately $28.5 million. The
net proceeds to the Company from the offering were used to repay all amounts
outstanding under the Company's revolving line of credit. The balance of the
offering proceeds will be used for working capital and other general corporate
purposes. See Note 7 of the Notes to the Consolidated Financial Statements.
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 1997 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.
CONSOLIDATED BALANCE SHEETS
Benchmark Electronics, Inc. and Subsidiaries
December 31,
l996 l995
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents .................. $ 13,800,013 $ 2,785,336
Accounts receivable, net ................... 39,182,629 20,166,697
Income taxes receivable .................... 387,864 392,606
Inventories ................................ 48,100,338 22,983,155
Prepaid expenses and other assets .......... 819,806 255,141
Deferred tax asset ......................... 1,091,170 372,271
-----------------------------
Total current assets ................ 103,381,820 46,955,206
Property, plant and equipment .................. 44,468,964 17,956,102
Accumulated depreciation ....................... (13,834,261) (7,873,860)
-----------------------------
Net property, plant and equipment ... 30,634,703 10,082,242
Goodwill, net .................................. 24,350,291 --
Marketable securities .......................... 9,508,234 --
Other .......................................... 298,483 --
-----------------------------
$ 168,173,531 $ 57,037,448
=============================
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt ..... $ 239,165 $ --
Accounts payable ........................... 24,352,472 9,116,298
Accrued liabilities ........................ 6,204,535 553,939
-----------------------------
Total current liabilities ........... 30,796,172 9,670,237
-----------------------------
Long-term debt, excluding current installments . 30,485,333 --
Deferred tax liability ......................... 1,892,612 743,143
Shareholders' equity:
Preferred shares, $.10 par value;
5,000,000 shares authorized, none
issued ................................. -- --
Common shares, $.10 par value;
10,000,000 shares authorized:
issued 5,763,276 and 4,046,142,
respectively; outstanding
5,738,534 and 4,021,400, respectively .. 573,853 402,140
Additional paid-in capital ................. 69,148,168 19,808,050
Retained earnings .......................... 35,337,868 26,474,353
Less treasury shares, at cost, 24,742 shares (60,475) (60,475)
-----------------------------
Total shareholders' equity .......... $ 104,999,414 $ 46,624,068
Commitments and contingencies
-----------------------------
$ 168,173,531 $ 57,037,448
=============================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Benchmark Electronics, Inc. and Subsidiaries
Year ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------
Sales ............................. $ 201,296,320 $ 97,352,935 $ 98,168,531
Cost of sales ..................... 177,981,328 85,113,385 86,236,300
--------------------------------------------
Gross profit .............. 23,314,992 12,239,550 11,932,231
Selling expenses .................. 1,814,793 1,389,978 1,412,720
General and administrative expenses 5,413,040 1,599,520 1,741,274
Amortization of goodwill .......... 695,722 -- --
--------------------------------------------
Income from operations .... 15,391,437 9,250,052 8,778,237
Interest expense .................. (1,441,834) -- --
Interest income ................... 442,384 268,029 252,302
Other income ...................... 90,880 12,601 11,228
--------------------------------------------
Income before income taxes 14,482,867 9,530,682 9,041,767
Income tax expense ................ (5,619,352) (3,382,727) (3,272,215)
--------------------------------------------
Net income ............. $ 8,863,515 $ 6,147,955 $ 5,769,552
============================================
Earnings per common share ......... $ 1.92 $ 1.50 $ 1.41
============================================
Weighted average common and
equivalent shares outstanding . 4,611,038 4,106,476 4,087,601
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Benchmark Electronics, Inc. and Subsidiaries
Additional Total
Common paid-in Retained Treasury shareholders'
Shares shares capital earnings shares equity
- -------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1993 ......... 3,991,900 $399,190 $19,317,747 $14,556,846 $(60,475) $ 34,213,308
Stock options exercised ............. 15,800 1,580 146,854 -- -- 148,434
Net income .......................... -- -- -- 5,769,552 -- 5,769,552
----------------------------------------------------------------------------
Balances, December 31, 1994 ......... 4,007,700 400,770 19,464,601 20,326,398 (60,475) 40,131,294
Stock options exercised ............. 13,700 1,370 198,885 -- -- 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 ......... 4,021,400 402,140 19,808,050 26,474,353 (60,475) 46,624,068
Common shares issued in public
offering, net of expenses ........ 1,016,500 101,650 28,389,491 -- -- 28,491,141
Stock options exercised ............. 25,670 2,567 404,877 -- -- 407,444
Federal tax benefit of stock
options exercised ................ -- -- 88,536 -- -- 88,536
Acquisition of EMD Technologies, Inc. 674,964 67,496 20,443,310 -- -- 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 ......... 5,738,534 $573,853 $69,148,168 $35,337,868 $(60,475) $104,999,414
============================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Benchmark Electronics, Inc. and Subsidiaries
Year ended December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income ......................................................... $ 8,863,515 $ 6,147,955 $ 5,769,552
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Depreciation ................................................... 5,723,922 2,059,262 1,888,224
Amortization of premiums on marketable securities .............. 25,940 66,718 133,323
Deferred income taxes .......................................... 408,346 132,963 72,215
Amortization of goodwill ....................................... 695,722 -- --
Gain on the sale of property, plant and equipment .............. (42,878) -- (20,006)
ESOP shares contribution ....................................... 13,904 -- --
Changes in operating assets and liabilities, net of effects from
acquisition of business:
Accounts receivable ......................................... (10,119,586) (3,820,096) (3,816,549)
Income taxes receivable ..................................... 1,082,715 (392,606) --
Inventories ................................................. 3,131,340 (9,794,358) 5,698,526
Prepaid expenses and other assets ........................... (124,259) (52,133) 152,609
Accounts payable ............................................ 1,782,239 2,679,659 (5,342,738)
Accrued liabilities ......................................... 895,208 (502,300) 185,888
Current income taxes payable ................................ -- 45,701 (118,056)
------------------------------------------
Net cash (used in) provided by operations ................ 12,336,128 (3,429,235) 4,602,988
Cash flows from investing activities:
Additions to property, plant and equipment ......................... (8,684,400) (2,290,160) (6,321,347)
Proceeds from the sale of property, plant and equipment ............ 75,281 -- --
Acquisition, net of cash acquired .................................. (30,833,300) -- --
Proceeds from the sale or maturity of short-term investments ....... -- 1,542,000 2,735,641
Purchase of marketable securities .................................. (9,534,174) -- --
------------------------------------------
Net cash used in investing activities ....................... (48,976,593) (748,160) (3,585,706)
Cash flows from financing activities:
Net proceeds from public offering of common shares ................. 28,491,141 -- --
Proceeds from issuance of long-term debt ........................... 30,000,000 -- --
Principal payments on revolving line of credit ..................... (10,928,329) -- --
Debt issuance costs ................................................ (315,114) -- --
Proceeds from stock options exercised .............................. 407,444 200,255 148,434
------------------------------------------
Net cash provided by financing activities ................... 47,655,142 200,255 148,434
------------------------------------------
Net (decrease) increase in cash and cash equivalents ................... 11,014,677 (3,977,140) 1,165,716
Cash and cash equivalents at beginning of year ......................... 2,785,336 6,762,476 5,596,760
------------------------------------------
Cash and cash equivalents at end of year ............................... $ 13,800,013 $ 2,785,336 $ 6,762,476
==========================================
Supplemental disclosures of cash flow information:
Income taxes paid .................................................. $ 4,171,224 $ 3,391,495 $ 3,318,056
==========================================
Interest paid ...................................................... $ 369,021 -- --
==========================================
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, 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. These
investments are classified as long-term as the scheduled maturities range from
December 1998 to December 1999. At December 31, 1995, the Company had no
investments in marketable securities.
(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, 1996 was $695,722. The Company
periodically reviews goodwill to assess recoverability. 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, 1996 was $25,082.
(h) Earnings Per Share
Earnings per common and common equivalent share are computed by dividing net
income by the weighted average number of common and common equivalent shares
outstanding. For the purposes of this calculation, outstanding employee stock
options are considered common stock equivalents. Fully diluted earnings per
share are materially equal to primary earnings per share for all periods
presented.
(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. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
(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 would be recorded on the date of grant only if the
current market price of the underlying stock exceeded 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) Reclassifications
Certain amounts previously reported in the 1995 and 1994 financial statements
have been reclassified to conform to the 1996 presentation.
(n) 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.
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
674,964 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 common share:
Continuing operations ......................... $ 1.71 1.60
Weighted average common and
equivalent shares outstanding .............. 5,002 4,781
Note 3 -- Inventories
Inventory costs are summarized as follows:
December 31,
1996 1995
- --------------------------------------------------------------------------------
Raw materials ....................... $31,670,562 16,365,280
Work in process ..................... 16,429,776 6,617,875
-----------------------------------
$48,100,338 22,983,155
===================================
Note 4 -- Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
1996 1995
- --------------------------------------------------------------------------------
Land .................................... $ 391,969 305,914
Buildings ............................... 8,361,254 3,266,169
Machinery and equipment ................. 29,499,683 12,881,836
Furniture and fixtures .................. 5,373,335 894,770
Vehicles ................................ 51,087 --
Leasehold improvements .................. 491,578 396,232
Construction in progress ................ 300,058 211,181
------------------------------
$44,468,964 17,956,102
==============================
Note 5 -- Borrowing Facilities
Long-term debt at December 31, 1996 consists of:
Senior note ............................................ $30,000,000
Other .................................................. 724,498
------------
Total long-term debt ................................ 30,724,498
Less current installments .............................. 239,165
------------
Long-term debt ......................................... $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, 1996 are as follows: 1997, $239,165; 1998, $167,549;
1999, $199,960; 2000, $20,224; 2001, $5,021,771 and thereafter $25,075,829.
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, 1996
and 1995, 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 2002. Rental expense under the
leases for each of the years in the three-year period ended December 31, 1996
was $921,526, $213,765 and $330,007, respectively.
The Company leases EMD's 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 three to ten years,
expiring through December 2005 with annual renewals thereafter. Total rent
expense associated with these leases for the year ended December 31, 1996 was
$413,784
Aggregate annual rental payments on future lease commitments at
December 31, 1996 were as follows:
1997 $1,085,418
1998 1,096,908
1999 1,103,904
2000 1,119,900
2001 1,128,400
Thereafter 3,584,295
----------
$9,118,825
==========
Note 7 -- Common Stock and Stock Option Plans
During 1996, the Company issued 1,016,500 shares of common stock in a public
offering for net proceeds of $28,491,141.
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 1,100,000 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 100,000.
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 3,000 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 3,000 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) 3,000,
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 1996, 1995 and 1994, pursuant to the Plan, 15,000,
12,000 and 27,000 options, respectively, were granted to Directors to purchase
shares of Common Stock at an exercise price of $29.38, $21.50 and $25.88 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, 1993 ............... 254,100 $15.10
Granted ................................. 122,000 $24.46
Exercised ............................... (15,800) $ 9.39
Canceled ................................ (8,200) $15.53
---------
Balance at December 31, 1994 ............... 352,100 $18.59
Granted ................................. 108,000 $23.52
Exercised ............................... (13,700) $14.32
Canceled ................................ (45,800) $21.75
---------
Balance at December 31, 1995 ............... 400,600 $19.70
Granted ................................. 326,500 $28.86
Exercised ............................... (25,670) $16.26
Canceled ................................ (22,600) $27.61
---------
Balance at December 31, 1996 ............... 678,830 $23.99
=========
The following table summarizes information concerning currently
outstanding and exercisable options:
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
- ---------------------------------------------------------------------
$8.75-$15 79,950 5.28 $10.37 79,950 $10.37
$15-$20 52,700 6.37 $17.58 52,700 $17.58
$20-$25 193,380 9.11 $23.20 74,520 $22.49
$25-$30 324,300 8.48 $28.31 40,000 $26.92
$30-$35 28,500 9.96 $30.20 3,000 $30.75
------- -------
678,830 250,170
------- -------
At December 31, 1996, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $8.75 - $30.75 and 8.39
years, respectively.
At December 31, 1996, 1995 and 1994, the number of options exercisable
was 250,170, 172,640 and 90,760, respectively, and the weighted average exercise
price of those options was $18.39, $15.79 and $14.70, 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 $7,851,515, or $1.70 per share during 1996, or $5,856,955, or
$1.43 per share during 1995. Pro forma net income reflects only options granted
in 1996 and 1995. The fair value of the options granted during 1996 and 1995 is
estimated as $3,416,000 and $1,065,000, 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,
1996 1995 1994
- -----------------------------------------------------------------
Federal - Current $4,322,471 2,913,464 2,794,636
State - Current 888,535 336,300 405,364
Federal/State - Deferred 408,346 132,963 72,215
-------------------------------------
$5,619,352 3,382,727 3,272,215
=====================================
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,
1996 1995 1994
- --------------------------------------------------------------------------------
Tax at statutory rate ............... $ 4,924,175 3,240,432 3,074,201
State taxes, net of federal benefit . 586,433 221,958 267,540
Tax exempt interest ................. (49,882) (84,492) (81,929)
Tax benefit from use of
foreign sales corporation ........ (139,218) -- --
Amortization of goodwill ............ 236,545 -- --
Other ............................... 61,299 4,829 12,403
-----------------------------------------
Total income tax expense ............ $ 5,619,352 3,382,727 3,272,215
=========================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Carrying values of inventories ................... $ 647,075 269,607
Accrued liabilities deductible for tax purposes
on a cash basis ............................... 444,095 102,664
-------------------------
1,091,170 372,271
Less valuation allowance ......................... -- --
-------------------------
Net deferred tax assets ........................ $ 1,091,170 372,271
=========================
Deferred tax liabilities:
Plant and equipment, due to differences
in depreciation ............................... $(1,892,612) (695,979)
Other ............................................ -- (47,164)
-------------------------
Gross deferred tax liability ..................... (1,892,612) (743,143)
-------------------------
Net deferred tax liability ..................... $ (801,442) (370,872)
=========================
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) 1996 1995 1994
- ----------------------------------------------------------------
Customer A $33,680 -- --
Customer B 28,638 9,718 6,186
Customer C 22,160 16,666 2,922
Customer D 8,938 114 --
Customer E 8,003 26,903 48,184
In 1994, Customer E in the table above notified the Company that it
intended to second source some of its products beginning in 1995. The Company
believes that its ongoing aggressive sales efforts, combined with the continuing
trend toward the use of surface-mount technology by OEMs for the Company's
turnkey manufacturing services reduced the overall impact of the customer's
decision.
In 1996, the Company had export sales of approximately $29 million to
Europe from the Company's United States operations. There were no export sales
in 1995 or 1994.
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 1996, 1995 and 1994 the Company
made contributions to the plan of approximately $430,000, $185,000 and $155,000,
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 Company'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 $320,000 in
1996 and $350,000 in 1994 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.
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, 1996 and 1995,
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,
1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
January 24, 1997
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 1996, 1995 and
1994. 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.
1996 Quarter
(In thousands, except per share data) 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 ......... .45 .49 .51 .48
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 ......... .38 .39 .38 .35
1994 Quarter
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
Sales ............................. $24,275 25,045 25,099 23,750
Gross profit ...................... 2,767 2,857 3,055 3,253
Net income ........................ 1,335 1,375 1,473 1,587
Earnings per common share ......... .33 .34 .36 .39
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is listed on the American Stock Exchange under the
symbol "BHE." The following table shows the high and low sales prices for the
Common Stock as reported on the American Stock Exchange for the fiscal quarters
(or portions thereof) indicated.
1 2 3 4
- --------------------------------------------------------------------------------
1995
High $27 1/4 26 3/8 31 7/8 29 1/4
Low $22 3/4 20 1/4 24 7/8 23 1/2
1996
High $29 7/8 32 34 1/4 31 3/4
Low $24 1/8 28 28 5/8 24 1/2
1997 (through March 20, 1997)
High $32 3/4
Low $28 5/8
The last reported sale price of Common Stock on March 20, 1997, as
reported by the American Stock Exchange, was $28 5/8. There were approximately
102 record holders of Common Stock as of March 20, 1997.
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
Year ended December 31,
(In thousands, except per-share data) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
Selected Statements of Income Data
Sales .......................................... $ 201,296 $ 97,353 $ 98,168 $ 75,859 $ 50,647
Cost of sales .................................. 177,981 85,113 86,236 66,462 43,683
----------------------------------------------------------
Gross profit .............................. 23,315 12,240 11,932 9,397 6,964
----------------------------------------------------------
Selling expenses ............................... 1,815 1,390 1,413 1,328 1,386
----------------------------------------------------------
General and administrative expenses ............ 5,413 1,600 1,741 1,542 1,311
Amortization of goodwill ....................... (696) -- -- 63 108
----------------------------------------------------------
Income from operations .................... 15,391 9,250 8,778 6,590 4,375
Interest expense ............................... (1,442) -- -- -- --
Interest income ................................ 442 268 252 384 358
Other income (expense) ......................... 92 13 11 (30) 26
Income tax expense ............................. (5,619) (3,383) (3,272) (2,478) (1,629)
----------------------------------------------------------
Income before cumulative effect of
change in accounting principle ......... 8,864 6,148 5,769 4,466 3,130
Cumulative effect at January 1, 1993
of change in accounting for income taxes -- -- -- 116 --
----------------------------------------------------------
Net income ................................ $ 8,864 $ 6,148 $ 5,769 $ 4,582 $ 3,130
==========================================================
Earnings per common share before cumulative
effect of change in accounting principle (1) $ 1.92 $ 1.50 $ 1.41 $ 1.10 $ .83
Cumulative effect at January 1, 1993
of change in accounting for income taxes .... -- -- -- .03 --
----------------------------------------------------------
Earnings per common share (1) .................. $ 1.92 $ 1.50 $ 1.41 $ 1.13 $ .83
Weighted average common and
equivalent shares outstanding ............... 4,611 4,106 4,088 4,066 3,762
==========================================================
December 31,
(In thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Selected Balance Sheet Data
Working capital ............. $ 72,586 $37,285 $30,890 $29,160 $25,796
Total assets ................ 168,174 57,037 48,333 47,425 34,380
Long-term debt .............. 30,485 -- -- -- --
Shareholders' equity ........ $104,999 $46,624 $40,131 $34,213 $29,573
=================================================
(1) See Note 1 of Notes to Consolidated Financial Statements for the basis of
computing earnings per common share.
CORPORATE AND SHAREHOLDER DATA
Officers Directors Notices
Donald E. Nigbor(3) David H. Arnold STOCK TRANSFER AGENT AND REGISTRAR
President and President and Chairman of the Board
Chief Executive Officer DCM Technology, Inc. Communications concerning stock transfer
Winona, Minnesota requirements, lost certificates or changes of
Steven A. Barton (1), (3) (Machine Tool Manufacturing) address should be directed to:
Executive Vice President Harris Trust and Savings Bank
John C. Custer (1) c/o Harris Trust Company of New York
Cary T. Fu (3) Retired - Former Chairman of the Board 77 Water Street, 4th floor
Executive Vice President Mason & Hanger-Silas Mason Co., Inc. New York, NY 10005
Lexington, Kentucky 800/926-1269.
(Technical services contracting and
Lenora A. Gurton engineering firm)
Secretary STOCK TRADING
Steven A. Barton The common stock of Benchmark
Gayla J. Delly Executive Vice President Electronics, Inc. trades on the
Treasurer Benchmark Electronics, Inc. American Stock Exchange under the
symbol BHE.
Christopher Nawrocki Gerald W. Bodzy (2)
Vice President; Senior Vice President and Managing Director SEC FORM 10-K
President of Stephens Inc.
EMD Associates, Inc. Houston, Texas A copy of the company's Annual Report
(Investment banking) on Form 10-K for the fiscal year ended
(1) Part-time since June 1993 December 31, 1996, filed with the
Peter G. Dorflinger (1) (2) Securities and Exchange Commission,
Vice President and General Counsel is available without charge upon written
General Counsel Advanced Medical Instruments request to:
Houston, Texas Gayla J. Delly
(Medical instruments manufacturer) Treasurer
Bracewell & Patterson, L.L.P. Benchmark Electronics, Inc.
Houston, Texas Cary T. Fu 3000 Technology Drive
Executive Vice President Angleton, TX 77515
Benchmark Electronics, Inc.
Independent Auditors FINANCIAL MAILING LIST
Donald E. Nigbor
KPMG Peat Marwick LLP President and Chief Executive Officer Shareholders whose stock is held in
Houston, Texas Benchmark Electronics, Inc. trust or by a brokerage firm may receive
timely financial mailings directly from
(1) Member of Compensation Committee Benchmark by writing to Ms. Gayla J.
(2) Member of Audit Committee Delly at the above address.
(3) Executive Officer
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 20, 1997,
at the Doubletree Hotel at Allen Center,
400 Dallas Street, Houston, Texas.
This annual report is printed on recycled paper.