Business context and reporting period
Benchmark Electronics, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2023. The company provides electronics and precision-technology manufacturing, design and engineering, and technology solutions to aerospace and defense, medical, industrial, semiconductor capital equipment, advanced computing, and communications customers. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $719.7m | $771.6m | $2,147.6m | $2,135.7m |
| Gross profit / margin | $69.1m / 9.6% | $66.8m / 8.7% | $200.1m / 9.3% | $183.1m / 8.6% |
| Operating income / margin | $30.3m / 4.2% | $25.3m / 3.3% | $77.6m / 3.6% | $63.1m / 3.0% |
| Net income | $20.4m | $18.8m | $46.8m | $47.0m |
| Diluted EPS | $0.57 | $0.53 | $1.30 | $1.32 |
| Interest expense | $8.5m | $3.5m | $23.2m | $7.4m |
- Cash flow: Nine-month operating cash flow was $37.2m, versus cash used of $124.7m in 2022. Investing activities used $66.1m, including $64.0m of property, plant and equipment additions and $2.7m of capitalized software. Financing activities provided $83.9m.
- Cash and working capital: Cash and restricted cash totaled $260.8m at quarter-end, up from $207.4m at December 31, 2022. Working capital was $1.0bn. Cash held outside the U.S. was $238.0m.
- Debt and availability: Credit-agreement borrowings were $433.8m ($305.0m revolving and $128.8m term loan); $240.6m remained available under the $550m revolver, subject to covenants. The company was covenant-compliant. A $128.0m interest-rate swap fixed a portion of borrowing exposure at 4.039%.
- Capital returns: Nine-month dividends paid were $17.6m; the quarterly dividend was $0.165 per share. No shares were repurchased in the first nine months; $154.6m remained authorized.
Material changes versus comparable periods
- Q3 sales fell 7%, while nine-month sales increased 0.6%. Nine-month operating income rose 23% and gross profit rose 9%, but net income was nearly flat year over year.
- Q3 sales changes by market included Advanced Computing down 30%, Medical down 10%, and Semi-Cap down 11%; A&D increased 16% and Next Generation Communications increased 3%. Management attributed the overall quarterly decline mainly to completion of a high-performance-computing program.
- For the first nine months, sales increased in Americas (13%), Europe (7%), and in Next Generation Communications (26%), while Asia segment sales declined 12% and Semi-Cap declined 12%. Segment and market comparisons reflect the filing’s reported figures.
- Gross and operating margins improved, which management primarily attributed to operational efficiencies. Higher interest rates and increased revolving borrowings drove the sharp increase in interest expense.
- Capital expenditures were $66.7m for the first nine months, versus $33.6m in 2022. The company also expanded revolving commitments from $450m to $550m in May 2023.
Outlook, management commentary, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management expects capital expenditures of approximately $65m–$75m over the next 12 months, principally for machinery and equipment to support capacity and anticipated growth. Management believes cash, operating cash flow, and revolver availability should meet liquidity needs over the next 12 months.
- Management cited continuing component-supply constraints and elongated lead times, as well as inefficiencies and costs from last-minute allocations. Supply availability has improved in some areas. Inflation, high interest rates, foreign-exchange movements, geopolitical events, and customer demand remain uncertainties.
- Customer concentration is significant: the ten largest customers accounted for 52% of nine-month sales. International operations represented 60% of Q3 sales. Management notes that loss of a major customer, customer demand changes, component shortages, and international risks could adversely affect results.
- The company recorded $5.2m of restructuring charges during the first nine months, primarily associated with the Moorpark, California site closure and other capacity and workforce actions; the site ceased operations March 31, 2023. It also recorded $1.1m of asset impairment charges related to discontinued manufacturing capabilities. Restructuring activity was expected to be substantially complete in 2023.
- Tax incentives reduced nine-month foreign income tax expense by approximately $4.7m. China incentives were due to expire through 2023 unless extended; Thailand incentives run through 2030. The company plans to apply for a future China tax holiday and a Malaysia extension, neither guaranteed. The uncertain-tax-benefit reserve, including interest and penalties, was $9.5m.
- Management considers ordinary-course legal matters not likely to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective; ERP upgrades are continuing in phases.
Important facts for investors to verify
- Whether the sales decline in Q3 and the completion of high-performance-computing programs are offset by ramps in growth markets and improved supply availability.
- How sustained operating-margin improvement compares with the substantial increase in interest expense and the company’s debt and refinancing exposure.
- Whether operating cash generation remains adequate given working-capital movements, capital spending, customer advances, and the use of receivables-sale programs.
- Whether customer concentration, component shortages, international exposure, and changing tax incentives affect future revenue, margins, or cash flows.
- Whether planned capital expenditures, restructuring completion, and the dividend remain consistent with liquidity, debt covenants, and management’s stated outlook.