UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011.

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to________________.

Commission File Number: 1-10560
 
BENCHMARK ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)

Texas
74-2211011
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
   
3000 Technology Drive
77515
Angleton, Texas
(Zip Code)
(Address of principal executive offices)
 

(979) 849-6550
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b–2 of the Act.

Large accelerated filer þ
 
Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Act). Yes ¨ No þ

As of May 6, 2011 there were 60,715,730 Common Shares of Benchmark Electronics, Inc., par value $0.10 per share, outstanding.

 
 

 

TABLE OF CONTENTS

   
Page
     
 
     
3
 
3
 
4
 
5
 
6
 
7
 
8-21
22
32
32
     
 
     
33
33
34
35
 
35
36

 
2

 
 
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
   
March 31,
   
December 31,
 
(in thousands, except par value)
 
2011
   
2010
 
   
(unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 333,527     $ 346,345  
Accounts receivable, net of allowance for doubtful accounts of $593 and $586, respectively
    419,138       455,930  
Inventories, net
    395,729       362,234  
Prepaid expenses and other assets
    41,618       43,979  
Income taxes receivable
    2,418       2,437  
Deferred income taxes
    6,718       8,090  
Total current assets
    1,199,148       1,219,015  
Long-term investments
    33,776       35,297  
Property, plant and equipment, net of accumulated depreciation of $308,822 and $302,944 respectively
    147,962       127,442  
Goodwill, net
    37,912       37,912  
Deferred income taxes
    20,567       19,735  
Other, net
    38,466       38,331  
    $ 1,477,831     $ 1,477,732  
                 
Liabilities and Shareholders’ Equity
               
Current liabilities:
               
Current installments of capital lease obligations
  $ 377     $ 362  
Accounts payable
    245,492       257,295  
Income taxes payable
    1,643       4,846  
Accrued liabilities
    56,135       58,844  
Total current liabilities
    303,647       321,347  
Capital lease obligations, less current installments
    10,925       11,019  
Other long-term liabilities
    24,576       24,350  
Shareholders’ equity:
               
Preferred shares, $0.10 par value; 5,000 shares authorized, none issued
           
Common shares, $0.10 par value; 145,000 shares authorized; issued – 61,193 and 61,196, respectively; outstanding – 61,082 and 61,085, respectively
    6,108       6,109  
Additional paid-in capital
    706,393       707,138  
Retained earnings
    428,590       415,003  
Accumulated other comprehensive loss
    (2,136 )     (6,962 )
Less treasury shares, at cost; 111 shares
    (272 )     (272 )
Total shareholders’ equity
    1,138,683       1,121,016  
Commitments and contingencies
               
    $ 1,477,831     $ 1,477,732  

See accompanying notes to condensed consolidated financial statements.

 
3

 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(unaudited)

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
(in thousands, except per share data)
           
             
Sales
  $ 538,312     $ 571,905  
Cost of sales
    499,853       526,560  
Gross profit
    38,459       45,345  
Selling, general and administrative expenses
    21,843       22,516  
Restructuring charges
          1,697  
Income from operations
    16,616       21,132  
Interest expense
    (332 )     (339 )
Interest income
    404       367  
Other expense
    (435 )     (371 )
Income before income taxes
    16,253       20,789  
Income tax expense
    905       2,539  
Net income
  $ 15,348     $ 18,250  
                 
Earnings per share:
               
Basic
  $ 0.25     $ 0.29  
Diluted
  $ 0.25     $ 0.29  
                 
Weighted-average number of shares outstanding:
               
Basic
    60,919       63,403  
Diluted
    61,482       63,957  

See accompanying notes to condensed consolidated financial statements.

 
4

 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(unaudited)

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
(in thousands)
           
             
Net income
  $ 15,348     $ 18,250  
Other comprehensive income (loss):
               
Foreign currency translation adjustments
    4,584       (2,954 )
Unrealized gain (loss) on investments, net of tax
    229       (177 )
Other
    13       (10 )
Comprehensive income
  $ 20,174     $ 15,109  

The components of accumulated other comprehensive loss are as follows:

   
March 31,
   
December 31,
 
(in thousands)
 
2011
   
2010
 
Foreign currency translation adjustments
  $ 1,813     $ (2,771 )
Unrealized loss on investments, net of tax
    (3,624 )     (3,853 )
Other
    (325 )     (338 )
Accumulated other comprehensive loss
  $ (2,136 )   $ (6,962 )

See accompanying notes to condensed consolidated financial statements.

 
5

 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Shareholders’ Equity
(unaudited)

                           
Accumulated
             
               
Additional
         
other
         
Total
 
         
Common
   
paid-in
   
Retained
   
comprehensive
   
Treasury
   
shareholders’
 
(in thousands)
 
Shares
   
shares
   
capital
   
earnings
   
loss
   
shares
   
equity
 
Balances, December 31, 2010
    61,085     $ 6,109     $ 707,138     $ 415,003     $ (6,962 )   $ (272 )   $ 1,121,016  
Stock-based compensation expense
                1,124                         1,124  
Shares repurchased and retired
    (257 )     (26 )     (2,767 )     (1,761 )                 (4,554 )
Stock options exercised
    62       6       833                         839  
Issuance of restricted shares, net of forfeitures
    192       19       (19 )                        
Excess tax benefit of stock-based compensation
                84                         84  
Comprehensive income
                      15,348       4,826             20,174  
Balances, March 31, 2011
    61,082     $ 6,108     $ 706,393     $ 428,590     $ (2,136 )   $ (272 )   $ 1,138,683  

See accompanying notes to condensed consolidated financial statements.

 
6

 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
   
Three Months Ended
 
   
March 31,
 
(in thousands)
 
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 15,348     $ 18,250  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    8,429       10,291  
Deferred income taxes
    510       87  
Loss on the sale of property, plant and equipment
    2       33  
Asset impairment
    24       105  
Stock-based compensation expense
    1,124       1,300  
Excess tax benefits from stock-based compensation
    (15 )     (228 )
Changes in operating assets and liabilities:
               
Accounts receivable
    38,569       8,249  
Inventories
    (31,113 )     (47,367 )
Prepaid expenses and other assets
    288       (4,828 )
Accounts payable
    (12,611 )     21,308  
Accrued liabilities
    (3,348 )     (2,954 )
Income taxes
    (3,033 )     1,664  
Net cash provided by operations
    14,174       5,910  
Cash flows from investing activities:
               
Proceeds from sales and redemptions of investments
    1,750       300  
Additions to property, plant and equipment
    (25,609 )     (9,489 )
Proceeds from the sale of property, plant and equipment
    25       30  
Additions to purchased software
    (495 )     (70 )
Net cash used in investing activities
    (24,329 )     (9,229 )
Cash flows from financing activities:
               
Proceeds from stock options exercised
    839       1,158  
Excess tax benefits from stock-based compensation
    15       228  
Principal payments on capital lease obligations
    (80 )     (65 )
Share repurchases
    (4,554 )     (17,670 )
Net cash used in financing activities
    (3,780 )     (16,349 )
Effect of exchange rate changes
    1,117       (1,007 )
Net decrease in cash and cash equivalents
    (12,818 )     (20,675 )
Cash and cash equivalents at beginning of year
    346,345       421,243  
Cash and cash equivalents at March 31
  $ 333,527     $ 400,568  

See accompanying notes to condensed consolidated financial statements.

 
7

 

BENCHMARK ELECTRONICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(amounts in thousands, except per share data, unless otherwise noted)
(unaudited)

Note 1 – Basis of Presentation
Benchmark Electronics, Inc. (the Company) is a Texas corporation that provides worldwide integrated electronic manufacturing services. The Company provides services to original equipment manufacturers (OEMs) of computers and related products for business enterprises, medical devices, industrial control equipment, which includes equipment for the aerospace and defense industry, testing and instrumentation products and telecommunication equipment. The Company has manufacturing operations located in the Americas, Asia and Europe.

The condensed consolidated financial statements included herein have been prepared by the Company without an audit pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). The financial statements reflect all normal and recurring adjustments which in the opinion of management are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in accordance with generally accepted accounting principles. Actual results could differ from those estimates.

Note 2 – Stock-Based Compensation
The Benchmark Electronics, Inc. 2000 Stock Awards Plan (the 2000 Plan) and the Benchmark Electronics, Inc. 2010 Omnibus Incentive Compensation Plan (the 2010 Plan) authorize the Company, upon recommendation of the compensation committee of the Board of Directors, to grant a variety of types of awards, including stock options, restricted share awards, restricted stock units, stock appreciation rights, performance compensation awards, phantom stock awards and deferred share units, or any combination thereof, to any director, officer, employee or consultant (including any prospective director, officer, employee or consultant) of the Company. Stock options are granted with an exercise price equal to the market price of the Company’s common shares on the date of grant, vest over a four-year period from the date of grant and have a term of ten years. Restricted shares, restricted stock units and phantom stock awards granted to employees vest over a four-year period from the date of grant, subject to the continued employment of the employee by the Company. The 2000 Plan expired on February 16, 2010 and no additional grants can be made under that plan. The 2010 Plan was approved by the Company’s shareholders on May 18, 2010 and replaced the 2000 Plan. Members of the Board of Directors of the Company who are not employees of the Company participate in the Benchmark Electronics, Inc. 2002 Stock Option Plan for Non-Employee Directors (the 2002 Plan) that provides for the granting of stock options upon the occurrence of the non-employee director’s election or re-election to the Board of Directors. All awards under the 2002 Plan are fully vested upon the date of grant and have a term of ten years. The 2002 Plan was approved by the Company’s shareholders on May 14, 2002. As of March 31, 2011, 4.1 million additional common shares are available for issuance under the Company’s existing plans.

 
8

 

All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their fair values. The total compensation cost recognized for stock-based awards was $1.1 million and $1.3 million for the three months ended March 31, 2011 and 2010, respectively. The compensation expense for stock-based awards includes an estimate for forfeitures and is recognized over the vesting period of the awards using the straight-line method. Cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) are classified as cash flows from financing activities. Awards of restricted shares, restricted stock units, performance restricted stock units and phantom stock are valued at the closing market price of the Company’s common shares on the date of grant. For restricted stock unit awards with performance conditions, compensation expense is initially based on the target number of shares that would vest if 100% of the target performance goal is achieved, which was considered the probable outcome at the grant date. Throughout the requisite service period, management monitors the probability of achievement of the performance conditions. If it becomes probable, based on the Company’s expectation of performance during the measurement period, that more or less than the current estimate of the awarded shares will vest, an adjustment to stock-based compensation expense will be recognized as a change in accounting estimate.

During the three months ended March 31, 2011, the Company issued 0.4 million stock options to employees. The Company did not issue any options during the three months ended March 31, 2010. The weighted-average assumptions used to value the options granted during the three months ended March 31, 2011 were as follows:

Expected term of options
 
6.4 years
 
Expected volatility
    41 %
Risk-free interest rate
    2.679 %
Dividend yield
 
zero
 

The expected term of the options represents the estimated period of time until exercise and is based on historical experience, giving consideration to the contractual terms, vesting schedules and expectations of future plan participant behavior. Separate groups of plan participants that have similar historical exercise behavior are considered separately for valuation purposes. Expected stock price volatility is based on the historical volatility of the Company’s common shares. The risk-free interest rate is based on the U.S. Treasury zero-coupon rates in effect at the time of grant with an equivalent remaining term. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.

The Company issued performance based restricted stock unit awards to employees during the three months ended March 31, 2011. The number of performance based restricted stock unit awards that will ultimately be earned will not be determined until the end of the performance period, which is December 31, 2014, and may vary from as low as zero to as high as three times the target number, 0.1 million shares, depending on the level of achievement of certain performance goals. The level of achievement of these goals is based upon the audited financial results for the last full calendar year within the performance period (the year ending December 31, 2014) as compared to the base year (the year ended December 31, 2010). The Company’s performance goals consist of certain levels of achievement in the following Company financial metrics: annual revenue growth, operating income margin expansion, and return on invested capital. If the Company’s performance goals are not met, the applicable performance based restricted stock unit awards will not vest and would be forfeited.

 
9

 

As of March 31, 2011, there was approximately $7.0 million of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 1.9 years. As of March 31, 2011, there was $5.2 million of total unrecognized compensation cost related to restricted share awards. That cost is expected to be recognized over a weighted-average period of 3.2 years. As of March 31, 2011, there was $1.4 million of total unrecognized compensation cost related to restricted stock units and phantom stock awards. That cost is expected to be recognized over a weighted-average period of 3.2 years. As of March 31, 2011, there was $1.7 million of total unrecognized compensation cost related to performance based restricted stock units. That cost is expected to be recognized over a weighted-average period of 3.9 years.

The weighted-average fair value per option granted during the three months ended March 31, 2011 was $8.15. The total cash received as a result of stock option exercises for the three months ended March 31, 2011 and 2010 was $0.8 million and $1.2 million, respectively. The excess tax benefit realized as a result of the stock option exercises during the three months ended March 31, 2011 and 2010, was $0.1 million and $1.1 million, respectively, which has been recorded as an increase to additional paid-in capital. For the three months ended March 31, 2011 and 2010, the total intrinsic value of stock options exercised was $0.4 million and $0.7 million, respectively. The Company realized an excess tax benefit (loss) of $(1) thousand and $24 thousand during the three months ended March 31, 2011 and 2010, respectively, related to the vesting of restricted shares, which has been recorded as an increase to additional paid-in capital.

The following table summarizes the activities relating to the Company’s stock options:

               
Weighted-
       
         
Weighted-
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
   
Number of
   
Exercise
   
Contractual
   
Intrinsic
 
   
Options
   
Price
   
Term (Years)
   
Value
 
Outstanding at December 31, 2010
    4,825     $ 19.18       5.58        
Granted
    396     $ 18.57                
Exercised
    (62 )   $ 13.49                
Forfeited or expired
    (39 )   $ 19.89                  
Outstanding at March 31, 2011
    5,120     $ 19.20       5.71     $ 10,453  
Exercisable at March 31, 2011
    3,488     $ 20.50       4.50     $ 6,246  

The aggregate intrinsic value in the table above is before income taxes and is calculated as the difference between the exercise price of the underlying options and the Company’s closing stock price of $18.97 as of the last business day of the period ended March 31, 2011 for options that had exercise prices that were below the closing price.

 
10

 

The following table summarizes the activities related to the Company’s restricted shares:

         
Weighted-
 
         
Average
 
         
Grant Date
 
   
Shares
   
Fair Value
 
Non-vested shares outstanding at December 31, 2010
    178     $ 17.17  
Granted
    195     $ 18.57  
Vested
    (10 )   $ 17.54  
Forfeited
    (3 )   $ 18.15  
Non-vested shares outstanding at March 31, 2011
    360     $ 17.91  

The following table summarizes the activities related to the Company’s restricted stock units and phantom stock awards:

         
Weighted-
 
         
Average
 
         
Grant Date
 
   
Shares
   
Fair Value
 
Non-vested shares outstanding at December 31, 2010
    47     $ 17.05  
Granted
    50     $ 18.57  
Forfeited
    (1 )   $ 16.45  
Non-vested shares outstanding at March 31, 2011
    96     $ 17.86  

The following table summarizes the activities related to the Company’s performance based restricted stock unit awards:
         
Weighted-
 
         
Average
 
         
Grant Date
 
   
Shares
   
Fair Value
 
Non-vested shares outstanding at December 31, 2010
           
Granted(1)
    93     $ 18.57  
Forfeited
           
Non-vested shares outstanding at March 31, 2011
    93     $ 18.57  

(1) Represents target number of shares that can vest based on the achievement of certain performance criteria.

 
11

 

Note 3 – Earnings Per Share
Basic earnings per share is computed using the weighted-average number of shares outstanding. Diluted earnings per share is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding stock equivalents during the three months ended March 31, 2011 and 2010. Stock equivalents include common shares issuable upon the exercise of stock options and other equity instruments, and are computed using the treasury stock method. Under the treasury stock method, the exercise price of a share, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated tax benefits that would be recorded in paid-in-capital, if any, when the share is exercised are assumed to be used to repurchase shares in the current period.

The following table sets forth the calculation of basic and diluted earnings per share.
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Net income
  $ 15,348     $ 18,250  
                 
Denominator for basic earnings per share -
               
weighted-average number of common
               
shares outstanding during the period
    60,919       63,403  
Incremental common shares attributable to
               
exercise of outstanding dilutive options
    444       464  
Incremental common shares attributable to outstanding
               
restricted shares, restricted stock units and phantom stock
    119       90  
                 
Denominator for diluted earnings per share
    61,482       63,957  
                 
Basic earnings per share
  $ 0.25     $ 0.29  
Diluted earnings per share
  $ 0.25     $ 0.29  

Options to purchase 2.7 million and 2.5 million common shares for the three months ended March 31, 2011 and 2010, respectively, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares.

 
12

 

Note 4 – Goodwill and Other Intangible Assets
Goodwill associated with the Company’s Asia business segment totaled $37.9 million at March 31, 2011 and December 31, 2010.

Other intangible assets included in other long-term assets in the accompanying condensed consolidated balance sheet as of March 31, 2011 and December 31, 2010 were as follows:
   
Gross
         
Net
 
   
Carrying
   
Accumulated
   
Carrying
 
   
Amount
   
Amortization
   
Amount
 
Customer relationships
  $ 17,926     $ (7,658 )   $ 10,268  
Technology licenses
    11,300       (4,454 )     6,846  
Other
    868       (100 )     768  
Other intangible assets, March 31, 2011
  $ 30,094     $ (12,212 )   $ 17,882  
                         
   
Gross
           
Net
 
   
Carrying
   
Accumulated
   
Carrying
 
   
Amount
   
Amortization
   
Amount
 
Customer relationships
  $ 17,807     $ (7,165 )   $ 10,642  
Technology licenses
    11,300       (4,144 )     7,156  
Other
    868       (94 )     774  
Other intangible assets, December 31, 2010
  $ 29,975     $ (11,403 )   $ 18,572  

Customer relationships are being amortized on a straight-line basis over a period of ten years. Technology licenses are being amortized over their estimated useful lives in proportion to the economic benefits consumed. Amortization of other intangible assets for the three months ended March 31, 2011 and 2010 was $0.8 million and $1.2 million, respectively.

The estimated future amortization expense of other intangible assets for each of the next five years is as follows:

Year ending December 31,
 
Amount
 
2011 (remaining nine months)
  $ 3,587  
2012
    4,326  
2013
    3,915  
2014
    1,812  
2015
    1,812  

Note 5 – Borrowing Facilities
Under the terms of a credit agreement (the Credit Agreement), the Company has a $100 million five-year revolving credit facility for general corporate purposes with a maturity date of December 21, 2012. The Credit Agreement includes an accordion feature under which total commitments under the facility may be increased by an additional $100 million, subject to satisfaction of certain conditions and lender approval.

 
13

 

Interest on outstanding borrowings under the Credit Agreement is payable quarterly, at the Company’s option, at either LIBOR plus 0.75% to 1.75% or a prime rate plus 0.00% to 0.25%, based upon the Company’s debt ratio as specified in the Credit Agreement. A commitment fee of 0.15% to 0.35% per annum (based upon the Company’s debt ratio) on the unused portion of the revolving credit line is payable quarterly in arrears. As of March 31, 2011, the Company had no borrowings outstanding under the Credit Agreement and $100 million was available for future borrowings.

The Credit Agreement is secured by the Company’s domestic inventory and accounts receivable, 100% of the stock of the Company’s domestic subsidiaries, 65% of the voting capital stock of each direct foreign subsidiary and substantially all of the other tangible and intangible assets of the Company and its domestic subsidiaries. The Credit Agreement contains customary financial covenants as to working capital, debt leverage, fixed charges, and consolidated net worth, and restricts the ability of the Company to incur additional debt, pay dividends, repurchase shares, sell assets and to merge or consolidate with other persons. As of March 31, 2011, the Company was in compliance with all such covenants and restrictions.

The Company’s Thailand subsidiary has a multi-purpose credit facility with Kasikornbank Public Company Limited (the Thai Credit Facility) that provides for approximately $11.5 million (350 million Thai baht) in working capital availability. The Thai Credit Facility is secured by land and buildings in Thailand. Availability of funds under the Thai Credit Facility is reviewed annually and is currently accessible through October 2011. As of March 31, 2011, the Company’s Thailand subsidiary had no working capital borrowings outstanding.

Note 6 – Inventories
Inventory costs are summarized as follows:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
Raw materials
  $ 295,645     $ 274,909  
Work in process
    75,004       60,776  
Finished goods
    25,080       26,549  
    $ 395,729     $ 362,234  

Note 7 – Income Taxes
Income tax expense consists of the following:
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Federal – Current
  $ 338     $ 402  
Foreign – Current
    21       1,931  
State – Current
    36       119  
Deferred
    510       87  
    $ 905     $ 2,539  

In 2011, income tax expense differs from the amount computed by applying the U.S. federal statutory income tax rate to income before income tax primarily due to the impact of tax incentives and tax holidays in foreign locations, including a $0.6 million discrete tax benefit as a result of a 2010 tax rate incentive received by a subsidiary in China during the first quarter of 2011, state income taxes (net of federal benefit), and adjustments to valuation allowances on deferred tax assets in the U.S.

 
14

 

The Company considers earnings from foreign subsidiaries to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been made for these earnings. Upon distribution of foreign subsidiary earnings in the form of dividends or otherwise, such distributed earnings would be reportable for U.S. income tax purposes (subject to adjustment for foreign tax credits). Determination of the amount of any unrecognized deferred tax liability on these undistributed earnings is not practical.

The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in China, Malaysia and Thailand. These tax incentives, including tax holidays, expire on various dates through 2015, and are subject to certain conditions with which the Company expects to comply. The net impact of these tax incentives was to lower income tax expense for the three month periods ended March 31, 2011 and 2010 by approximately $2.6 million (approximately $0.04 per diluted share) and $2.2 million (approximately $0.03 per diluted share), respectively.

As of March 31, 2011, the total amount of the reserve for uncertain tax benefits including interest and penalties is $18.2 million. The reserve is classified as a long-term liability in the consolidated balance sheet unless cash settlement is expected in the next 12 months. The amount of accrued potential interest and penalties on unrecognized tax benefits included in the reserve as of March 31, 2011 is $1.8 million and $1.6 million, respectively. No material changes affected the reserve during the three months ended March 31, 2011.

The Company and its subsidiaries in Brazil, China, Ireland, Luxembourg, Malaysia, Mexico, the Netherlands, Romania, Singapore, Thailand and the United States remain open to examination by the various local taxing authorities, in total or in part, for fiscal years 2004 to 2010. The Company’s subsidiary in Thailand has filed for a refund of $7.8 million of previously paid income taxes which is included in prepaid expenses and other assets. The Thailand tax authorities are currently conducting an examination of the applicable filings.

The Company is subject to examination by tax authorities for varying periods in various U.S. and foreign tax jurisdictions. During the course of such examinations disputes occur as to matters of fact and/or law. In most tax jurisdictions the passage of time without examination will result in the expiration of applicable statutes of limitations, thereby precluding the taxing authority from conducting an examination of the tax period(s) for which such statute of limitation has expired. The Company believes that it has adequately provided for its tax liabilities.

 
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Note 8 – Segment and Geographic Information
The Company has manufacturing facilities in the Americas, Asia and Europe to serve its customers. The Company is operated and managed geographically. The Company’s management evaluates performance and allocates the Company’s resources on a geographic basis. Intersegment sales are generally recorded at prices that approximate arm’s length transactions. Operating segments’ measure of profitability is based on income from operations. The accounting policies for the reportable operating segments are the same as for the Company taken as a whole. The Company has three reportable operating segments: the Americas, Asia, and Europe. Information about operating segments was as follows:
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Net sales:
           
Americas
  $ 320,471     $ 362,155  
Asia
    205,624       207,174  
Europe
    42,809       46,261  
Elimination of intersegment sales
    (30,592 )     (43,685 )
    $ 538,312     $ 571,905  
                 
Depreciation and amortization:
               
Americas
  $ 3,854     $ 5,278  
Asia
    3,094       3,393  
Europe
    655       733  
Corporate
    826       887  
    $ 8,429     $ 10,291  
                 
Income from operations:
               
Americas
  $ 12,592     $ 13,888  
Asia
    11,593       14,504  
Europe
    842       1,733  
Corporate and intersegment eliminations
    (8,411 )     (8,993 )
    $ 16,616     $ 21,132  
                 
Capital expenditures:
               
Americas
  $ 3,165     $ 5,496  
Asia
    22,245       3,321  
Europe
    191       446  
Corporate
    503       296  
    $ 26,104     $ 9,559  
                 
   
March 31,
   
December 31,
 
    2011     2010  
Total assets:
               
Americas
  $ 575,199     $ 583,724  
Asia
    559,176       516,078  
Europe
    228,394       243,872  
Corporate and other
    115,062       134,058  
    $ 1,477,831     $ 1,477,732  

 
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Geographic net sales information reflects the destination of the product shipped. Long-lived assets information is based on the physical location of the asset.
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Geographic net sales:
           
United States
  $ 358,816     $ 426,673  
Asia
    71,397       42,217  
Europe
    95,394       90,204  
Other Foreign
    12,705       12,811  
    $ 538,312     $ 571,905  
                 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Long-lived assets:
               
United States
  $ 72,078     $ 72,386  
Asia
    88,370       67,365  
Europe
    10,297       9,785  
Other
    15,683       16,237  
    $ 186,428     $ 165,773  

Note 9 – Supplemental Cash Flow Information
The following is additional information concerning supplemental disclosures of cash payments.

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
Income taxes paid, net
  $ 3,359     $ 752  
Interest paid
    330       336  

Note 10 – Contingencies
On June 3, 2007, Power Paper, Ltd. (Power Paper), a limited liability company from Israel filed suit against Pemstar Inc. (Pemstar) in U.S. District Court in Minnesota. Pemstar was a Minnesota public company that was acquired by the Company in January 2007. Power Paper’s claim seeks damages of up to $22.8 million based on an alleged breach of contract. On behalf of Pemstar, the Company filed an answer and counterclaim. Discovery is complete, and the Company filed a comprehensive summary judgment motion in May 2010, which motion was denied by the Court in December 2010. The trial date, originally set for May 2011, has been rescheduled by the Court to begin on September 12, 2011. The Company expects this case to go to trial and intends to vigorously defend against Power Paper’s allegations. Management believes that an occurrence of Power Paper prevailing on the merits is not probable; therefore, no accrual has been made. Further, the amount of the liability, if any, from this claim cannot currently be reasonably estimated.

In addition to the matter described above, 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 other matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 
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Note 11 – Impact of Recently Enacted Accounting Standards
In October 2009, the Financial Accounting Standards Board (FASB) issued amendments to the accounting and disclosure for revenue recognition. These amendments modify the criteria for recognizing revenue in multiple element arrangements. The Company adopted the provisions of this guidance prospectively to new or materially modified arrangements beginning January 1, 2011. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial position and results of operations.

In October 2009, the FASB issued guidance which amends the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product’s essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. The Company adopted the provisions of this guidance prospectively to new or materially modified arrangements beginning January 1, 2011. The adoption of this new guidance did not have a material impact on the Company’s consolidated financial position and results of operations.

In January 2010, the FASB issued guidance that requires a roll forward of activities on purchases, sales, issuances and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements) effective January 1, 2011 for the Company. Adoption of this new guidance is for disclosure purposes only and did not have any impact on the Company’s consolidated financial position or results of operations.

The Company has determined that all other recently issued accounting standards will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.

 
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Note 12 – Restructuring Charges
The Company has undertaken initiatives to restructure its business operations with the intention of improving utilization and realizing cost savings in the future. These initiatives have included changing the number and location of production facilities, largely to align capacity and infrastructure with current and anticipated customer demand. This alignment includes transferring programs from higher cost geographies to lower cost geographies. The process of restructuring entails, among other activities, moving production between facilities, reducing staff levels, realigning our business processes and reorganizing our management.

The Company recognized restructuring charges during 2010 and 2009 primarily related to capacity reduction and reductions in workforce in certain facilities worldwide. These charges were recorded pursuant to plans developed and approved by management.

The following table summarizes the 2011 activity in the accrued restructuring balances related to the various restructuring activities described above:
   
Balance as of
                     
Foreign
   
Balance as of
 
   
December 31,
   
Restructuring
   
Cash
   
Non-Cash
   
Exchange
   
March 31,
 
   
2010
   
Charges
   
Payment
   
Activity
   
Adjustments
   
2011
 
                                     
2010 Restructuring:
                                   
Severance
  $ 1,767     $ (20 )   $ (318 )   $     $ 88     $ 1,517  
Other exit costs
    709       20       (545 )           5       189  
      2,476             (863 )           93       1,706  
2009 Restructuring:
                                               
Lease facility costs
    1,506             (172 )           93       1,427  
Other exit costs
    27             (5 )                 22  
      1,533             (177 )           93       1,449  
Total
  $ 4,009     $     $ (1,040 )   $     $ 186     $ 3,155  

 
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Note 13 – Fair Value
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A three-tier fair value hierarchy of inputs is employed to determine fair value measurements. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets and liabilities. Level 2 inputs are observable prices that are not quoted on active exchanges, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 inputs are unobservable inputs employed for measuring the fair value of assets or liabilities. This hierarchy required the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

The carrying amounts of cash equivalents, accounts receivable, accrued liabilities, accounts payable and capital lease obligations approximate fair value. As of March 31, 2011, $37.4 million (par value) of long-term investments were recorded at fair value. The long-term investments consist of auction rate securities, primarily secured by guaranteed student loans backed by a U.S. government agency, and are classified as available-for-sale. These investments are of a high credit quality with a majority having AAA type credit ratings because of the government agency guarantee and other insurance. Auction rate securities are adjustable rate debt instruments whose interest rates were intended to reset every 7 to 35 days through an auction process. Overall changes in the global credit and capital markets led to failed auctions for these securities beginning in early 2008. These failed auctions, in addition to overall global economic conditions, impacted the liquidity of these investments and resulted in the Company continuing to hold these securities beyond their typical auction reset dates. The market for these types of securities remains illiquid as of March 31, 2011. These securities are classified as long-term investments and the contractual maturity of these securities is over ten years.

These long-term investments were valued using Level 3 inputs as of March 31, 2011, as the assets were subject to valuation using significant unobservable inputs. The Company estimated the fair value of each security with the assistance of an independent valuation firm using a discounted cash flow model to calculate the present value of projected cash flows based on a number of inputs and assumptions including the security structure and terms, the current market conditions and the related impact on the expected weighted average life, interest rate estimates and default risk of the securities.

As of March 31, 2011, the Company has recorded an unrealized loss of $3.6 million on the long-term investments based upon this valuation. This unrealized loss reduced the fair value of the Company’s auction rate securities as of March 31, 2011 to $33.8 million. These investments have been in an unrealized loss position for greater than 12 months. During the three months ended March 31, 2011 and 2010, the Company recorded unrealized gains (losses) of $0.2 million and $(0.2) million, respectively, on the long-term investments.

 
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The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Due to the unrealized losses on the auction rate securities held, the Company has assessed whether the calculated impairment is other-than-temporary. In performing this assessment, even though the Company has no intention to sell the securities before the amortized cost basis is recovered and believes it is more-likely-than-not it will not be required to sell the securities prior to recovery, the Company has performed additional analyses to determine if a portion of the unrealized loss is considered a credit loss. A credit loss would be identified as the amount of the principal cash flows not expected to be received over the remaining term of the security as projected using the Company’s best estimates. The Company has assessed each security for credit impairment, taking into account factors such as (i) the length of time and the extent to which fair value has been below cost; (ii) activity in the market of the issuer which may indicate adverse credit conditions; (iii) the payment structure of the security; and (iv) the failure of the issuer of the security to make scheduled payments. The Company used an independent valuation firm to assist in making these assessments.

Based on these assessments, the Company has determined that there is no credit loss associated with its auction rate securities as of March 31, 2011, as shown by the cash flows expected to be received over the remaining life of the securities.

The following table provides a reconciliation of the beginning and ending balance of our auction rate securities classified as long-term investments measured at fair value using significant unobservable inputs (Level 3 inputs):

   
2011
   
2010
 
Balance as of January 1
  $ 35,297     $ 45,686  
Net unrealized gains (losses) included in other comprehensive loss
    229       (177 )
Sales of investments at par value
    (1,750 )     (300 )
Balance as of March 31
  $ 33,776     $ 45,209  
                 
Unrealized losses still held as of March 31
  $ 3,624     $ 4,566  

The cumulative unrealized loss is included as a component of accumulated other comprehensive loss within shareholders’ equity in the accompanying consolidated balance sheet. As of March 31, 2011, there were no long-term investments measured at fair value using Level 1 or Level 2 inputs. All income generated from these investments is recorded as interest income.

 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

References in this report to “the Company,” “Benchmark,” “we,” or “us” mean Benchmark Electronics, Inc. together with its subsidiaries. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. They use words such as “anticipate,” “believe,” “intend,” “plan,” “projection,” “forecast,” “strategy,” “position,” “continue,” “estimate,” “expect,” “may,” “will,” or the negative of those terms or other variations of them or comparable terminology. In particular, statements, express or implied, concerning future operating results or the ability to generate sales, income or cash flow are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions, including those discussed under Part II, Item 1A of this report. The future results of our operations may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results are beyond our ability to control or predict. Undue reliance should not be placed on any forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto.
 
OVERVIEW
We are a worldwide provider of integrated electronic manufacturing services. We provide our services to original equipment manufacturers (OEMs) of computers and related products for business enterprises, medical devices, industrial control equipment, which includes equipment for the aerospace and defense industry, 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 including direct order fulfillment and post deployment services. Our manufacturing and assembly operations include printed circuit boards and subsystem assembly, box build and systems integration, the process of integrating subsystems and, often, downloading and integrating software, to produce a fully configured product. Our recently added precision technology manufacturing capabilities complement our proven electronic manufacturing expertise by providing further vertical integration of critical mechanical components. These capabilities include precision machining, advanced metal joining, and functional testing for multiple industries including medical, instrumentation, aerospace and semiconductor capital equipment. We also are able to provide specialized engineering services, including product design, printed circuit board layout, prototyping, and test development. We believe that we have developed strengths in the manufacturing process for large, complex, high-density printed circuit boards as well as the ability to manufacture high and low volume products in lower cost regions such as Brazil, China, Malaysia, Mexico, Romania and Thailand.

 
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We believe that our global manufacturing presence increases our ability to be responsive to our customers’ needs by providing accelerated time-to-market and time-to-volume production of high quality products. These capabilities enable us to build stronger strategic relationships with our customers and to become a more integral part of their operations. Our customers face challenges in planning, procuring and managing their inventories efficiently due to customer demand fluctuations, product design changes, short product life cycles and component price fluctuations. We employ production management systems to manage their procurement and manufacturing processes in an efficient and cost-effective manner so that, where possible, components arrive on a just-in-time, as-and-when-needed basis. We are a significant purchaser of electronic components and other raw materials, and can capitalize on the economies of scale associated with our relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. Our expertise in supply chain management and our relationships with suppliers across the supply chain enables us to reduce our customers’ cost of goods sold and inventory exposure.

We recognize revenue from the sale of manufactured products built to customer specifications and excess inventory when title and risk of ownership have passed, the price to the buyer is fixed and determinable and collectibility is reasonably assured, which generally is when the goods are shipped. Revenue from design, development and engineering services is recognized when the services are performed and collectibility is reasonably certain. Such services provided under fixed price contracts are accounted for using the percentage of completion method. We assume no significant obligations after product shipment as we typically warrant workmanship only. Therefore, our warranty provisions are not significant.

Our cost of sales includes the cost of materials, electronic components and other materials that comprise the products we manufacture, the cost of labor and manufacturing overhead, and adjustments for excess and obsolete inventory. Our procurement of materials for production requires us to commit significant working capital to our operations and to manage the purchasing, receiving, inspection and stocking of materials. Although we bear the risk of fluctuations in the cost of materials and excess scrap, we periodically negotiate cost of materials adjustments with our customers. Our gross margin for any product depends on the sales price, the proportionate mix of the cost of materials in the product and the cost of labor and manufacturing overhead allocated to the product. We typically have the potential to realize higher gross margins on products where the proportionate level of labor and manufacturing overhead is greater than that of materials. As we gain experience in manufacturing a product, we usually achieve increased efficiencies, which result in lower labor and manufacturing overhead costs for that product and higher gross margins. Our operating results are impacted by the level of capacity utilization of manufacturing facilities. Operating income margins have generally improved during periods of high production volume and high capacity utilization. During periods of low production volume, we generally have idle capacity and reduced operating income margins.

Summary of Results
Sales for the three months ended March 31, 2011 decreased 6% to $538.3 million compared to $571.9 million for the same period of 2010. During the first quarter of 2011, we saw weaker demand levels from our customers. During the three months ended March 31, 2011, sales to customers in the computers and related products for business enterprises industry, telecommunication equipment industry, and medical devices industry decreased 18%, 32% and 3%, respectively, from 2010. In the first three months of 2011, these decreases were partially offset by a 26% and 9% increase in sales to customers in the testing and instrumentation products industry and industrial control equipment industry, respectively.

 
23

 

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. A substantial percentage of our sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us. Sales to our ten largest customers represented 53% and 52% of our sales in the three months ended March 31, 2011 and 2010, respectively. Our largest customer, International Business Machines Corporation, represented 13% of our sales during the three months ended March 31, 2011.

Our gross profit as a percentage of sales decreased to 7.1% for the three months ended March 31, 2011 from 7.9% in the same period of 2010 primarily due to lower sales volume which resulted in under absorbed manufacturing overhead costs. We experience fluctuations in gross profit from period to period. Different programs contribute different gross profits depending on factors such as the types of services involved, location of production, size of the program, complexity of the product, and level of material costs associated with the various products. Moreover, new programs can contribute relatively less to our gross profit in their early stages when manufacturing volumes are usually lower, resulting in inefficiencies and unabsorbed manufacturing overhead costs. In addition, a number of our new and higher volume programs remain subject to competitive constraints that could exert downward pressure on our margins. During periods of low production volume, we generally have idle capacity and reduced gross profit.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories, income taxes, long-lived assets, stock-based compensation and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Accounts Receivable
Our accounts receivable balance is recorded net of allowances for amounts not expected to be collected from our customers. Because our accounts receivable are typically unsecured, we periodically evaluate the collectibility of our accounts based on a combination of factors, including a particular customer’s ability to pay as well as the age of the receivables. To evaluate a specific customer’s ability to pay, we analyze financial statements, payment history, third-party credit analysis reports and various information or disclosures by the customer or other publicly available information. In cases where the evidence suggests a customer may not be able to satisfy its obligation to us, we set up a specific allowance in an amount we determine appropriate for the perceived risk. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
 
 
24

 

Inventories
We purchase inventory based on forecasted demand and record inventory at the lower of cost or market. We reserve for estimated obsolescence as necessary in an amount equal to the difference between the cost of inventory and estimated market value based on assumptions of future demands and market conditions. We evaluate our inventory valuation on a quarterly basis based on current and forecasted usage and the latest forecasts of product demand and production requirements from our customers. Customers frequently make changes to their forecasts, requiring us to make changes to our inventory purchases, commitments, and production scheduling and may require us to cancel open purchase commitments with our vendors. This process may lead to on-hand inventory quantities and on-order purchase commitments that are in excess of our customers’ revised needs, or parts that become obsolete before use in production. We record inventory reserves on excess and obsolete inventory. These reserves are established on inventory which we have determined that our customers are not responsible for or on inventory which we believe our customers will be unable to fulfill their obligation to ultimately purchase. If actual market conditions are less favorable than those we projected, additional inventory write-downs may be required.

Income Taxes
We estimate our income tax provision in each of the jurisdictions in which we operate, including estimating exposures related to uncertain tax positions. We must also make judgments regarding the ability to realize the deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to subsequently determine that we would be able to realize our deferred tax assets in excess of our net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Similarly, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance would reduce income in the period such determination was made.

We are subject to examination by tax authorities for varying periods in various U.S. and foreign tax jurisdictions. During the course of such examinations disputes occur as to matters of fact and/or law. In most tax jurisdictions the passage of time without examination will result in the expiration of applicable statutes of limitations, thereby precluding the taxing authority from conducting an examination of the tax period(s) for which such statute of limitations has expired. We believe that we have adequately provided for our tax liabilities.

Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge would be recognized by the amount that the carrying amount of the asset exceeds the fair value of the asset.
 
 
25

 

Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss would be recognized to the extent that the carrying amount exceeds the asset’s fair value. Goodwill is measured at the reporting unit level, which we have determined to be consistent with our operating segments as defined in Note 8 to the Condensed Consolidated Financial Statements in Item 1 of this report by determining the fair values of the reporting units and comparing those fair values to the carrying values, including goodwill, of the reporting unit. We completed the annual impairment test during the fourth quarter of 2010 and determined that no impairment existed as of December 31, 2010. We estimated that the fair value of our Asia business segment exceeded its carrying amount by approximately 117% at the time our 2010 impairment test was performed. As of March 31, 2011, we had goodwill associated with our Asia business segment of approximately $37.9 million. Circumstances that may lead to future impairment of goodwill include unforeseen decreases in future performance or industry demand and the restructuring of our operations as a result of a change in our business strategy or other factors.

Stock-Based Compensation
We recognize stock-based compensation expense in our consolidated statements of income. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Option-pricing models require the input of subjective assumptions, including the expected life of the option and the expected stock price volatility. Judgment is also required in estimating the number of stock-based awards that are expected to vest as a result of satisfaction of time-based vesting schedules. If actual results or future changes in estimates differ significantly from our current estimates, stock-based compensation could increase or decrease. For restricted stock unit awards with performance conditions, compensation expense is initially based on the target number of shares that would vest if 100% of the target performance goal is achieved, which was considered the probable outcome on the grant date. Throughout the service period, management monitors the probability of achievement of the performance condition. If it becomes probable, based on our expectation of performance during the measurement period, that more or less than the current estimate of the awarded shares will vest, an adjustment to stock-based compensation expense will be recognized as a change in accounting estimate. See Note 2 to the Condensed Consolidated Financial Statements in Item 1 of this report.

Recently Enacted Accounting Principles
See Note 11 to the Condensed Consolidated Financial Statements for a discussion of recently enacted accounting principles.
 
 
26

 
 
RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain items in our Condensed Consolidated Statements of Income bear to sales for the periods indicated. The financial information and the discussion below should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto in Item 1 of this report.

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Sales
    100.0 %     100.0 %
Cost of sales
    92.9       92.1  
Gross profit
    7.1       7.9  
Selling, general and administrative expenses
    4.1       3.9  
Restructuring charges
          0.3  
Income from operations
    3.1       3.7  
Other income, net
    (0.1 )     (0.1 )
Income before income taxes
    3.0       3.6  
Income tax expense
    0.1       0.4  
Net income
    2.9 %     3.2 %

Sales


 
Sales for the first quarter of 2011 were $538.3 million, a 6% decrease from sales of $571.9 million for the same quarter in 2010. The following table sets forth, for the periods indicated, the percentages of our sales by industry sector.

   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
Industrial control equipment
    28 %     24 %
Computers and related products for business enterprises
    27       32  
Telecommunication equipment
    23       23  
Testing and instrumentation products
    13       9  
Medical devices
    9       12  
      100 %     100 %

During the first quarter of 2011, we saw weaker demand levels from our customers. During the three months ended March 31, 2011, sales to customers in the computers and related products for business enterprises industry, telecommunication equipment industry, and medical devices industry decreased 18%, 32% and 3%, respectively, from 2010. In the first three months of 2011, these decreases were partially offset by a 26% and 9% increase in sales to customers in the testing and instrumentation products industry and industrial control equipment industry, respectively.
 
 
27

 

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. A substantial percentage of our sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us. Sales to our ten largest customers represented 53% and 52% of our sales in the three months ended March 31, 2011 and 2010, respectively. Our largest customer represented 13% of our sales during the three months ended March 31, 2011.

Our international operations are subject to the risks of doing business abroad. These risks have not had a material adverse effect on our results of operations through March 31, 2011. However, we can make no assurances that there will not be an adverse impact in the future. See Part II, Item 1A for factors pertaining to our international sales and fluctuations in the exchange rates of foreign currency and for further discussion of potential adverse effects in operating results associated with the risks of doing business abroad. During the first three months of 2011 and 2010, 51% and 49%, respectively, of our sales were from our international operations.

Gross Profit


 
Gross profit decreased 15% to $38.5 million for the three months ended March 31, 2011 from $45.3 million in the same period of 2010 due primarily to a decrease in sales. Gross profit as a percentage of sales decreased to 7.1% during the first quarter of 2011 from 7.9% in 2010 primarily due to lower sales volume which resulted in underabsorbed manufacturing overhead costs. We experience fluctuations in gross profit from period to period. Different programs contribute different gross profits depending on factors such as the types of services involved, location of production, size of the program, complexity of the product, and level of material costs associated with the various products. Moreover, new programs can contribute relatively less to our gross profit in their early stages when manufacturing volumes are usually lower, resulting in inefficiencies and unabsorbed manufacturing overhead costs. In addition, a number of our new and higher volume programs remain subject to competitive constraints that could exert downward pressure on our margins. During periods of low production volume, we generally have idle capacity and reduced gross profit.

Selling, General and Administrative Expenses


 
Selling, general and administrative expenses decreased 3% to $21.8 million in the first quarter of 2011 from $22.5 million in the first quarter of 2010. The decrease in selling, general and administrative expenses is primarily due to reduced overhead resulting from cost controls and lower variable compensation and employee related expenses. Selling, general and administrative expenses, as a percentage of sales, were 4.1% and 3.9%, respectively, for the first quarter of 2011 and 2010. The increase in selling, general and administrative expenses as a percentage of sales is primarily associated with the impact of lower sales volumes in the first quarter of 2011.
 
 
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Restructuring Charges


We recognized $1.7 million in restructuring charges during the first quarter of 2010 related to capacity reduction and reductions in workforce in certain facilities primarily in the Americas. The Company did not report any restructuring charges during the first quarter of 2011. The recognition of the restructuring charges requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with planned exit activities. To the extent our actual results in exiting these facilities differ from our estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring the recognition of additional restructuring charges or the reduction of liabilities already recognized. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed exit plans. See Note 12 to the Condensed Consolidated Financial Statements in Item 1 of this report.

Income Tax Expense


Income tax expense of $0.9 million represented an effective tax rate of 5.6% for the three months ended March 31, 2011, compared with $2.5 million representing an effective tax rate of 12.2% for the same period in 2010. In the first quarter of 2011, we recorded a $0.6 million discrete tax benefit as a result of a 2010 tax rate incentive received by one of our China subsidiaries during the first quarter of 2011. Excluding this one-time tax benefit, the effective tax rate would have been 9.4% in 2011 compared to 12.2% in 2010. This decrease in the effective tax rate is primarily due to an increase in overall foreign income as compared to U.S. income and the reduced tax rate in China for one of our subsidiaries during 2011. See Note 7 to the Condensed Consolidated Financial Statements in Item 1 of this report.

Net Income


 
We reported net income of $15.3 million, or diluted earnings per share of $0.25 for the first three months of 2011, compared with net income of $18.3 million, or diluted earnings per share of $0.29 for the same period of 2010. The net decrease of $2.9 million from 2010 was primarily due to the factors discussed above.
 
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our growth and operations through funds generated from operations, proceeds from the sale and maturity of our investments and funds borrowed under our credit facilities. Cash and cash equivalents decreased to $333.5 million at March 31, 2011 from $346.3 million at December 31, 2010.

Cash provided by operating activities was $14.2 million for the three months ended March 31, 2011. The cash provided by operations during 2011 consisted primarily of $15.3 million of net income adjusted for $8.4 million of depreciation and amortization, and a $38.6 million decrease in accounts receivable, offset by a $31.1 million increase in inventories, a $12.6 million decrease in accounts payable and a $3.3 million decrease in accrued liabilities. Working capital was $895.5 million at March 31, 2011 and $897.7 million at December 31, 2010.
 
 
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We are continuing the practice of purchasing components only after customer orders or forecasts are received, which mitigates, but does not eliminate, the risk of loss on inventories. Supplies of electronic components and other materials used in operations are subject to industry-wide shortages. In certain instances, suppliers may allocate available quantities to us. If shortages of these components and other material supplies used in operations occur, vendors may not ship the quantities we need for production and we may be forced to delay shipments, which would increase backorders and therefore impact cash flows.

Cash used in investing activities was $24.3 million for the three months ended March 31, 2011 primarily due to the purchases of additional property, plant and equipment totaling $25.6 million, offset by redemptions of investments totaling $1.8 million. Purchases of additional property, plant and equipment were primarily of facilities and certain other assets to expand our precision technologies capabilities in Penang, Malaysia.

Cash used in financing activities was $3.8 million for the three months ended March 31, 2011. Share repurchases totaled $4.6 million and we received $0.8 million from the exercise of stock options.

Under the terms of a credit agreement (the Credit Agreement), we have a $100.0 million five-year revolving credit facility for general corporate purposes with a maturity date of December 21, 2012. The Credit Agreement includes an accordion feature under which total commitments under the facility may be increased by an additional $100 million, subject to satisfaction of certain conditions and lender approval. Interest on outstanding borrowings under the Credit Agreement is payable quarterly, at our option, at LIBOR plus 0.75% to 1.75% or a prime rate plus 0.00% to 0.25%, based upon our debt ratio as specified in the Credit Agreement. A commitment fee of 0.15% to 0.35% per annum (based upon our debt ratio) on the unused portion of the revolving credit line is payable quarterly in arrears. As of March 31, 2011 and December 31, 2010, we had no borrowings outstanding under the Credit Agreement and $100.0 million was available for future borrowings.

The Credit Agreement is secured by our domestic inventory and accounts receivable, 100% of the stock of our domestic subsidiaries, and 65% of the voting capital stock of each direct foreign subsidiary and substantially all of our and our domestic subsidiaries’ other tangible and intangible assets. The Credit Agreement contains customary financial covenants as to working capital, debt leverage, fixed charges, and consolidated net worth, and restricts our ability to incur additional debt, pay dividends, repurchase shares, sell assets and to merge or consolidate with other persons. As of March 31, 2011, we were in compliance with all such covenants and restrictions.

Our Thailand subsidiary has a multi-purpose credit facility with Kasikornbank Public Company Limited (the Thai Credit Facility) that provides for approximately $11.5 million (350 million Thai baht) in working capital availability. The Thai Credit Facility is secured by land and buildings in Thailand. Availability of funds under the Thai Credit Facility is reviewed annually and is currently accessible through October 2011. As of March 31, 2011, our Thailand subsidiary had no working capital borrowings outstanding.

Our operations, and the operations of businesses we acquire, are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. We believe we operate in substantial compliance with all applicable requirements and we seek to ensure that newly acquired businesses comply or will comply substantially with applicable requirements. To date, the costs of compliance and workplace and environmental remediation have not been material to us. However, material costs and liabilities may arise from these requirements or from new, modified or more stringent requirements in the future. In addition, our past, current and future operations, and the operations of businesses we have or may acquire, may give rise to claims of exposure by employees or the public, or to other claims or liabilities relating to environmental, waste management or health and safety concerns.
 
 
30

 

As of March 31, 2011, we had cash and cash equivalents totaling $333.5 million and $100.0 million available for borrowings under our revolving credit line. We believe that during the next twelve months, our capital expenditures will be approximately $40 to $50 million, principally for machinery and equipment to support our ongoing business around the globe. On March 3, 2010, our Board of Directors approved the repurchase of up to $100 million of our outstanding common shares (the 2010 Repurchase Program). As of March 31, 2011, we have $86.9 million remaining under the 2010 Repurchase Program to repurchase additional shares. We are under no commitment or obligation to repurchase any particular amount of common shares. Management believes that our existing cash balances and funds generated from operations will be sufficient to permit us to meet our liquidity requirements over the next twelve months. Management further believes that our ongoing cash flows from operations and any borrowings we may incur under our credit facilities will enable us to meet operating cash requirements in future years. Should we desire to consummate significant acquisition opportunities, our capital needs would increase and could possibly result in our need to increase available borrowings under our revolving credit facility or access public or private debt and equity markets. There can be no assurance, however, that we would be successful in raising additional debt or equity on terms that we would consider acceptable.
 
CONTRACTUAL OBLIGATIONS

We have certain contractual obligations for operating leases that were summarized in a table of Contractual Obligations in our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no material changes to our contractual obligations, outside of the ordinary course of our business, since December 31, 2010.
 
OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2011, we did not have any significant off-balance sheet arrangements.
 
 
31

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Our international sales are a significant portion of our net sales. We are exposed to risks associated with operating internationally, including the following:

 
·
Foreign currency exchange risk;
 
·
Import and export duties, taxes and regulatory changes;
 
·
Inflationary economies or currencies; and
 
·
Economic and political instability.

We do not use derivative financial instruments for speculative purposes. As of March 31, 2011, we did not have any foreign currency hedges. In the future, significant transactions involving our international operations may cause us to consider engaging in hedging transactions to attempt to mitigate our exposure to fluctuations in foreign exchange rates. These exposures are primarily, but not limited to, vendor payments and intercompany balances in currencies other than the currency in which our foreign operations primarily generate and expend cash. Our international operations in some instances operate in a natural hedge because both operating expenses and a portion of sales are denominated in local currency. Our sales are substantially denominated in U.S. dollars. Our foreign currency cash flows are generated in certain Asian and European countries, Mexico and Brazil.

We are also exposed to market risk in connection with changes in interest rates, a portion of which relates to our invested cash balances. We do not use derivative financial instruments in our investing activities. We place cash and cash equivalents and investments with various major financial institutions. We protect our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by generally investing in investment grade securities. As of March 31, 2011, the outstanding amount in the long-term investment portfolio included $37.4 million (par value) of auction rate securities with an average annual return of approximately .46%.

Item 4 – Controls and Procedures
 
Our management has evaluated, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our CEO and CFO have concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting that occurred during the fiscal period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
32

 

Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our 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 errors or mistakes. 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.

Exhibits 31.1 and 31.2 are the Certifications of the CEO and the CFO, respectively. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This Item is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

PART II—OTHER INFORMATION

Item 1.                 Legal Proceedings
 
On June 3, 2007, Power Paper, Ltd. (Power Paper), a limited liability company from Israel filed suit against Pemstar Inc. (Pemstar) in U.S. District Court in Minnesota. Pemstar was a Minnesota public company that was acquired by us in January 2007. Power Paper’s claim seeks damages of up to $22.8 million based on an alleged breach of contract. On behalf of Pemstar, we filed an answer and counterclaim. Discovery is complete, and we filed a comprehensive summary judgment motion in May 2010, which motion was denied by the Court in December 2010. The trial date, originally set to for May 2011, has been rescheduled by the Court to begin on September 12, 2011. We expect this case to go to trial and we intend to vigorously defend against Power Paper’s allegations. We believe that an occurrence of Power Paper prevailing on the merits is not probable; therefore, no accrual has been made. Further, the amount of the liability, if any, from this claim cannot currently be reasonably estimated.

In addition to the matter described above, we are involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these other matters will not have a material adverse effect on our consolidated financial position or results of operations.

Item 1A.              Risk Factors.
 
There are no material changes to the risk factors set forth in Part I, Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
 
 
33

 

Item 2.                 Unregistered Sales Of Equity Securities And Use Of Proceeds.
 
(c)  The following table provides information about the Company repurchases of its equity securities that are registered pursuant to Section 12 of the Exchange Act during the quarter ended March 31, 2011, at a total cost of $4.6 million:

ISSUER PURCHASES OF EQUITY SECURITIES
 
                     
(d) Maximum
 
               
(c) Total
   
Number (or
 
               
Number of
   
Approximate
 
               
Shares (or
   
Dollar Value)
 
               
Units)
   
of Shares (or
 
               
Purchased as
   
Units) that
 
   
(a) Total
         
Part of
   
May Yet Be
 
   
Number of
   
(b) Average
   
Publicly
   
Purchased
 
   
Shares (or
   
Price Paid per
   
Announced
   
Under the
 
   
Units)
   
Share (or
   
Plans or
   
Plans or
 
Period
 
Purchased (1)
   
Unit) (2)
   
Programs
   
Programs (3)
 
January 1 to 31, 2011
                    $ 91.4 million  
February 1 to 28, 2011
                    $ 91.4 million  
March 1 to 31, 2011
    257,500     $ 17.67       257,500     $ 86.9 million  
                                 
Total
    257,500     $ 17.67       257,500          

(1) All share repurchases were made on the open market.
(2) Average price paid per share is calculated on a settlement basis and excludes commission.
(3) On March 3, 2010, the Board of Directors of the Company approved the repurchase of up to $100 million of the Company’s outstanding common shares. Share purchases may be made in the open market, in privately negotiated transactions or block transactions, at the discretion of the Company’s management and as market conditions warrant. Purchases will be funded from available cash and may be commenced, suspended or discontinued at any time without prior notice. All shares repurchased through March 31, 2011 were retired.
 
 
34

 

Item 6.                 Exhibits.
 
10.1
 
Form of Performance Based Restricted Stock Unit Agreement for use under the 2010 Omnibus Incentive Compensation Plan (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K dated March 2, 2011 filed on March 4, 2011 (Commission file number 1-10560))
31.1
 
Section 302 Certification of Chief Executive Officer
31.2
 
Section 302 Certification of Chief Financial Officer
32.1
 
Section 1350 Certification of Chief Executive Officer
32.2
 
Section 1350 Certification of Chief Financial Officer
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
  
XBRL Taxonomy Extension Definition Linkbase Document

*  XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 6, 2011.

 
BENCHMARK ELECTRONICS, INC.
 
(Registrant)
     
 
By:
/s/ Cary T. Fu
 
Cary T. Fu
 
Chief Executive Officer
 
(Principal Executive Officer)
     
 
By:
/s/ Donald F. Adam
 
Donald F. Adam
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
35

 

EXHIBIT INDEX

Exhibit
   
Number
 
Description of Exhibit
     
10.1
 
Form of Performance Based Restricted Stock Unit Agreement for use under the 2010 Omnibus Incentive Compensation Plan (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K dated March 2, 2011 filed on March 4, 2011 (Commission file number 1-10560))
     
31.1
 
Section 302 Certification of Chief Executive Officer
     
31.2
 
Section 302 Certification of Chief Financial Officer
     
32.1
 
Section 1350 Certification of Chief Executive Officer
     
32.2
 
Section 1350 Certification of Chief Financial Officer
     
101.INS*
 
XBRL Instance Document
     
101.SCH*
 
XBRL Taxonomy Extension Schema Document
     
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
     
101.DEF*
  
XBRL Taxonomy Extension Definition Linkbase Document

*  XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
 
 
36