Benchmark Electronics, Inc. Business Information, Profile, and History

Company Perspectives:

The mission of Benchmark Electronics, Inc. is to maintain a global leadership position in the high technology electronics manufacturing services industry. We will accomplish this through customer satisfaction as measured by our customers' expectations for the following: world class quality, flexible manufacturing, product diversity, leading edge technology, financial strength, managerial integrity.

History of Benchmark Electronics, Inc.

Benchmark Electronics, Inc., based in Angleton, Texas, provides electronic manufacturing services to original equipment manufacturers (OEMs) for a variety of products, including medical equipment, computers and peripherals, high-end audio and video equipment, and telecommunications products. As OEMs turned to contract manufacturers more and more during the 1990s, Benchmark expanded its operations, and the services it could offer, through a series of strategic acquisitions that made it one of the largest contract electronic manufacturers (CEMs) in a rapidly consolidating industry. With 14 manufacturing facilities in eight countries, and a vital presence in North America, South America, Europe, and Asia, Benchmark offers a full range of services to OEMs--from product design to post-production testing. In some cases Benchmark ships products directly into the client's distribution channels or directly to the end user. Its major customers are Lucent and EMC, which together account for a third of Benchmark's business.

Contract Manufacturing Gaining Momentum in the 1990s

Traditionally, technology companies developed products, then heavily invested in plant equipment in order to use manufacturing volume as a way to discourage rivals from entering the market. In the swiftly evolving world of electronics, however, the dynamics of the business changed significantly in the 1990s. If consumer demand shifted, companies could face massive retooling costs. Generally, OEMs had only contracted outside companies to manufacture their products when they were unable to keep up with orders. As CEMs proved they could produce quality products and deliver them in a timely fashion, the relationship between OEMs and CEMs underwent a fundamental change. Because of the volume of units a CEM manufactured for multiple customers, it became cheaper for a CEM to produce a product than for an OEM. Furthermore, if an OEM outsourced its manufacturing, it would no longer have to worry about the costs of retooling. Rather than a matter of necessity, OEMs now began to outsource manufacturing as a matter of policy. In fact, many companies began to question whether doing their own manufacturing provided any real competitive advantage. An increasing number of OEMs in the 1990s sold off their manufacturing facilities to CEMs, often with long-term manufacturing agreements. Not only did such divestitures save money, OEMs now were able to concentrate on what they viewed as their core strengths: product development and marketing. By the end of the decade, many CEMs became involved in the designing stage, working hand in hand with OEMs to gear up for cost-effective production. Of the $772 billion of electronic goods sold in 2000, 13 percent were outsourced, leaving plenty of room for growth in contracting. CEMs either looked to expand into global concerns, with manufacturing facilities located on the four major continents, or to find a niche with low-volume, high-quality products.

Benchmark Electronics evolved into a major CEM after it broke away from Intermedics, a pacemaker company that was run by a notorious chief executive named G. Russell Chambers. An engineer by training, Chambers ran a Louisiana television station before he became an investor in Intermedics through the advice of his son, a physician working in the medical equipment industry. Albert Beutel II created Intermedics in 1973. The company grew quickly after its 1976 introduction of the first small lithium battery-operated pacemaker, a major innovation that tripled the life of heart implants. When Beutel died in a helicopter crash in 1979, Chambers used the help of his son's employer, who was a member of Intermedics' board, to win control of the company.

Under Chambers, Intermedics branched out in a number of directions. It was in 1979 that the predecessor to Benchmark--Electronics, Inc.--was created by Intermedics to produce patient monitoring equipment, with production facilities in Texas. It would be incorporated in 1981 as a wholly owned subsidiary. For a time, Intermedics enjoyed tremendous success. Sales jumped from $79.6 million in 1979 to $164.2 million in 1981. Chambers hoped to reach $500 million in annual sales by 1985, with less than half coming from pacemakers. He went on a spending spree, running the company as if it were his own private enterprise. He invested in, or bought outright, companies that provided carbon coatings for artificial heart valves, materials for dental and oral surgery, orthopedic implants, nerve stimulators, implantable pumps for chemotherapy, as well as swimming pool filters and semiconductors. Chambers also liked to wine and dine potential customers. He spent freely on a hunting lodge and on a fishing boat (which he and his son owned and leased back to the company), in addition to three jets and two jet helicopters.

Aside from his extravagance, Chambers was reported to exhibit a secretive and abrasive management style. He insisted on making most of the decisions, was reluctant to delegate responsibility, yet would take off on personal business for weeks at a time without providing notice. To make up for rising costs, however, he could simply raise the price on pacemakers, which would be paid by Medicare's cost-plus reimbursement policy. When Medicare changed to a flat fee system as part of a cost containment effort, hospitals elected to purchase less expensive, less sophisticated pacemakers. Nevertheless, Chambers continued to overengineer his company's products, making them impossible to price competitively, no matter how superior they may have been. Compounding Chambers's problems was a 1982 congressional hearing on alleged bribes and kickbacks by pacemaker manufacturers that centered on Intermedics. Although five federal agencies would investigate the company, Intermedics was never found guilty of any charges. Nevertheless, Chambers's reputation was severely tarnished, while at the same time his company continued to hemorrhage money. Then in 1984 banks declared that Intermedics was in technical default on a $100 million loan. Chambers tried to renegotiate a new credit line, but was rebuffed. He was then forced to sell off assets, one of which was Electronics, Inc. Eventually, Chambers would be forced out at Intermedics, then turn his attention to the courts, suing the company over a severance agreement and holding up a possible merger deal through litigation. He also became involved in a bizarre legal skirmish over the sale of a television station, a case that would become a matter for the U.S. Supreme Court, which would render a major decision upholding the right of federal judges to punish litigants who abused the legal system.

Intermedics' Subsidiary Becoming Benchmark in 1986

It was in 1986 that Intermedics sold 90 percent of Electronics, Inc. to Electronic Investors Corp. (EIC), which was created by former Intermedics executives Donald Nigbor, Steven Barton, and Cary Fu. Nigbor would serve as president and chief executive officer, Fu as executive vice-president and the company's principal financial and accounting officer, and Barton as executive vice-president of marketing and sales. In 1988 Electronics, Inc. and EIC would merge to become Benchmark Electronics. Recognizing that many electronics manufacturers were increasingly outsourcing assembly work, Benchmark transformed itself into a CEM, catching the wave early. In July 1990 the company made an initial public offering of its stock, raising approximately $9 million, of which $2 million paid off long-term debt and the rest contributed to working capital. Benchmark upgraded its Houston manufacturing facility and purchased new equipment for a Beaverton, Oregon plant that it opened in 1991. In 1990 Benchmark generated $21.3 million in sales, earning $2 million, up from $1.4 million the year before. Rather than paying a dividend on its stock, Benchmark opted to invest its profits into research and development.

As early as 1992 Benchmark began to shop for possible acquisitions to grow the company. In the meantime it moved its headquarters from Clute, Texas, to a larger facility in nearby Angleton. Sales rose steadily until they reached $98.2 million in 1994 before sagging to $97.4 million in 1995, although profits increased from $5.8 million in 1994 to $6.1 million in 1995. The number of employees grew from 205 in 1990 to 568 in 1995.

In March 1996 Benchmark made an acquisition that would accelerate its growth. For $51 million in cash and stock, Benchmark purchased privately held EMD Technologies of Winona, Minnesota. EMD was established in 1974 and in addition to manufacturing facilities offered product design services, with sales and engineering offices in Madison, Wisconsin; St. Paul, Minnesota; and Cupertino, California. Rather than taking EMD public, its cofounders elected to join forces with Benchmark, which also found the deal highly advantageous on a number of levels. EMD, with sales of $160 million in 1995, would more than double Benchmark's volume and add 19 new customers. It also gave Benchmark a midwestern manufacturing presence. In addition, EMD's design, engineering, and testing services opened new markets for Benchmark.

As it absorbed EMD, Benchmark saw its sales top $200 million in 1996 while posting a net income of $8.9 million. The number of employees almost tripled, reaching 1,445. The following year, Benchmark would generate $325 million in sales with more than $15 million in net income. By 1998 Benchmark was utilizing most of its manufacturing capacity and was ready to make another acquisition to continue its growth. In January of that year it acquired the electronics manufacturing arm of Lockheed Martin Corporation, with its plant located in Hudson, New Hampshire, for $70 million in cash. A major defense contractor, Lockheed Martin elected to get out of electronics manufacturing to focus on its core business.

Not only did the Lockheed purchase provide Benchmark with another plant, capable management, and new customers, it also lent the company a presence in the Northeast, thus giving Benchmark coast-to-coast coverage in the United States. Nigbor indicated at the time of the purchase that Benchmark would now look to expand to Europe, followed by Asia, and possibly Mexico or South America after that. The company's goal was to reach $1 billion in sales before the new millennium. By the end of 1998 Benchmark would be halfway toward reaching the mark, generating $524 million in sales.

In September 1998 Benchmark gained a toehold in Europe when it agreed to lease a 45,000-square-foot manufacturing plant in Dublin, Ireland. Shortly after the facility was opened in 1999, Benchmark acquired certain assets from the Dublin plant owned by Stratus Computer Holdings of Marlboro, Massachusetts. Test and integration equipment, along with 200 employees, would be transferred to Benchmark's Dublin plant. As part of the transaction, Benchmark signed a three-year agreement to manufacture and test Stratus' fault-tolerant systems that served the banking, gaming, and telecommunications industries. Stratus recently had been purchased by Ascend Communications Inc. of Alameda, California, which elected to outsource the assembly of Stratus systems. Ascend was purchased subsequently by Lucent Technologies, a deal that would take several months to finalize. Nevertheless, Nigbor did not expect the Lucent transaction to affect the Stratus agreement. In fact, Lucent would become one of Benchmark's major customers. Aside from bolstering its European presence, Stratus helped Benchmark to expand into manufacturing complete systems, so-called box-build. Only 10 percent of its business to that time was box-build contracts.

The 1999 Acquisition of Avex: Largest-Ever CEM Deal

As the contract electronics manufacturing sector continued to expand in 1999, with an increasing number of OEMs electing to divest themselves of their manufacturing units, the pace of CEM mergers and acquisitions picked up dramatically. In June, Benchmark made another offering of stock, raising a net total of $93.6 million with the purpose of paying down debt as well as financing further acquisitions. Less than a month later, after just two weeks of negotiations, Benchmark announced the largest-ever CEM acquisition, one that had the potential of making the company one of the top five contract manufacturers in the world. For $289.1 million in cash and stock Benchmark acquired Avex Electronics Inc. from the privately held J.M. Huber Corporation, a conglomerate with a stronger interest in oil and gas, chemicals, and timber than in contract manufacturing. Avex had been a top three CEM in 1994, but because it was controlled by a private company without access to the markets to raise the level of funding required in the heated environment of the CEM industry of the late 1990s, it sank to seventh in size by 1998.

While Huber gained capital with which it could grow its other businesses, in one stroke Benchmark accomplished a number of goals, not least of which was boosting annual sales well beyond the $1 billion target for 2000. With the addition of 4,440 Avex employees, Benchmark's workforce nearly tripled. The acquisition also gave Benchmark a global footprint, adding nine manufacturing plants in Alabama, Tennessee, Hungary, Mexico, Brazil, Ireland, Scotland, Singapore, and Sweden. Other than Ireland, the foreign facilities did not overlap, and Benchmark was able to gain much needed presence in the Far East, South America, and Europe. Furthermore, the Avex deal provided access to new customers. With its roots in the medical equipment business, Benchmark had mostly worked on high-cost, low-volume products, whereas Avex focused on low-cost, high-volume products, such as circuit board assemblies for personal computers.

The reaction on Wall Street to the Avex deal was generally positive. Benchmark already had experience in digesting large acquisitions that greatly increased its size, but there were still some reservations about how management would assimilate a multisite, international acquisition. Although analysts predicted continued strong growth for the CEM industry as a whole, many investors began to question whether the desire of CEMs to expand might lead to overpaying for assets and whether intense competition might lead to even thinner margins than were already common in the industry.

In October 1999, when Benchmark reported disappointing third quarter earnings, after delaying the announcement for a week, the acquisition of Avex would come under severe criticism. Nigbor blamed the poor financial results on defective components, the failure of suppliers to deliver on time, and lower than expected contributions from Avex. Analysts generally concluded that Benchmark had bitten off more than it could chew with Avex. Investor reaction was swift and harsh. The delay in reporting had itself caused a 22 percent drop in the price of Benchmark stock. The results themselves precipitated another 48 percent drop. In short order, the price tumbled from $35 per share to just $15.

Benchmark also found itself involved in litigation on two fronts. It was sued by shareholders who contended that the company's delay in releasing third quarter results had violated federal securities laws. At the same time, Benchmark sued Huber for breach of contract and fraud over the Avex transaction. In essence, Benchmark charged that the Avex financial statements were false, that Huber had failed to disclose that key customers had decided to either cut back on their contracts or discontinue them entirely, and that Huber had exaggerated the true value of Avex by tens of millions of dollars. Subsequently, Huber would countersue Benchmark.

As the various suits made their torturous journey through the legal system, Benchmark carried on with the job of absorbing Avex into its operations. Results for 1999 were less than anticipated, falling well short of the $1 billion mark in sales, coming in at $877.8 million. Benchmark's fortunes, however, would improve in 2000, as the company began to take advantage of underutilized Avex facilities and sign up new customers. Sales for 2000 would almost double, reaching more than $1.7 billion by the end of the year. The company's stock also rebounded and reached new heights, as did the stock of other contract manufacturers in general. As soon as one of the major CEMs announced that it would miss its quarterly earnings estimate, however, all of the stocks in the sector would tumble. Benchmark and the other large CEMs found themselves incurring debt through further stock offerings or loans in order to keep growing, lest they fall by the wayside. Everyone in 2000 was scrambling to bolster their performance in China and the Far East.

When judged in terms of operating margins and return on equity, CEMs were panned by critics, who contended that no matter how big these companies became, they were actually not very profitable. Yet, the continued move of OEMs to outsource manufacturing and unload facilities was indisputable. How Benchmark responded to the uncertainties of its volatile industry, and how financially sound it would be when everything settled, remained to be seen.

Principal Subsidiaries: AVEX Holdings; Benchmark Electronics AB (Sweden); Benchmark Electronics FSC; Benchmark Electronics UK; Benchmark BV Holdings.

Principal Competitors: ACT Manufacturing; Celestica; Flextronics Inc.; Jabil Circuit, Inc.; SCI Systems, Inc.; Solectron Corporation.

Chronology

• Key Dates:

• 1979: Company is created as Electronics, Inc., a subsidiary of Intermedics.
• 1981: Electronics, Inc. is incorporated in Texas in 1981.
• 1986: Electronics, Inc. is sold to investor group.
• 1988: Company is renamed Benchmark Electronics, Inc.
• 1990: Company makes initial public offering of stock.
• 1999: Company acquires Avex.
• 2000: Annual sales top $1 billion.