Benchmark Electronics, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Benchmark provides electronics manufacturing, precision technology, design and engineering, and technology services to aerospace and defense, medical, industrial, semiconductor capital equipment, advanced computing, and communications customers. Financial amounts below are in U.S. dollars; millions unless otherwise stated.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Sales | $694.7 million | $636.1 million; up 9% |
| Gross profit / margin | $64.0 million / 9.2% | $57.6 million / 9.1% |
| Operating income / margin | $22.7 million / 3.3% | $15.4 million / 2.4% |
| Net income / diluted EPS | $12.4 million / $0.35 | $11.0 million / $0.31 |
| Cash from operations | $(24.9) million | $(68.0) million |
| Cash used in investing | $(38.7) million | $(16.6) million |
| Cash from financing | $67.0 million | $59.1 million |
- Gross margin improved slightly; operating margin rose primarily with higher revenue, improved gross profit, and lower restructuring costs. Net margin was 1.8%, versus 1.7%.
- Interest expense increased to $6.5 million from $1.8 million, reflecting higher borrowings and interest rates. Other expense was $2.2 million, versus $0.3 million. The effective tax rate was 19.7%, compared with 18.8%.
- At March 31, cash and restricted cash totaled $211.7 million. Working capital was approximately $1.0 billion. Inventory was $778.1 million, up from $727.7 million at year-end; contract assets were $194.1 million.
- Debt was $402.9 million, including $275.0 million drawn on the revolver and $129.6 million on the term loan. An additional $171.1 million was available under the revolver, subject to covenants; $3.9 million of letters of credit were outstanding. The company reported covenant compliance.
- Capital expenditures were $35.9 million and purchased software additions were $2.8 million. Dividends paid were $5.8 million; no shares were repurchased during the quarter.
Material changes versus Q1 2022
- Sales growth was led by Advanced Computing (+74%), Next Generation Communications (+45%), and Medical (+17%). Industrials rose 5%; Aerospace and Defense declined 2%, and Semiconductor Capital Equipment declined 19%.
- By geographic segment, Americas sales rose 30% and Europe rose 11%; Asia declined 7%. International operations represented 59% of sales, versus 61%.
- Operating income rose 48% to $22.7 million. Restructuring charges and other costs fell to $1.4 million from $4.3 million, including a $2.0 million loss on assets held for sale in Q1 2022.
- Cash used in operations narrowed, but remained negative. Inventory investment and other working-capital movements were significant; capital spending more than doubled year over year.
Outlook, management commentary, risks and contingencies
- Management expects capital expenditures of approximately $50–$60 million over the next 12 months, principally for machinery and equipment to support capacity and anticipated revenue growth. Management believes existing cash, operating cash flows, and borrowing availability will meet liquidity needs over the next 12 months. The filing provides no specific revenue or earnings guidance.
- Supply constraints and extended component lead times continued to limit production against customer forecasts. Management reported some easing, but supplier allocations and delayed shipments still cause operational inefficiencies, higher costs, and increased inventory. Inflation, labor constraints, geopolitical events, and COVID-related disruptions remain uncertainties.
- Inventory rose as the company invested to support growth; customer demand, component availability, and product/program mix can affect shipments, margins, and cash flows. The ten largest customers accounted for 51% of sales in both periods.
- The company recorded $1.4 million in restructuring charges, primarily for site closures and workforce/capacity reductions. Operations at the Moorpark, California site had ceased by March 31; restructuring activity was expected to be complete in 2023.
- On May 1, 2023, after quarter-end, the company increased revolving-credit commitments from $450 million to $550 million and updated borrowing-rate terms to include SOFR-based pricing.
- Tax incentives reduced Q1 2023 foreign income tax expense by approximately $1.9 million. Certain China incentives expire through 2023 and the company plans to apply for an extension; a Malaysia incentive extension is uncertain. Reserves for uncertain tax benefits, including interest and penalties, totaled $9.5 million.
- Management said ordinary-course legal matters were not expected to materially affect financial position or results. The filing identifies environmental, regulatory, currency, interest-rate, customer-concentration, supply-chain, and international-operating risks. The company uses currency hedges and a $120 million interest-rate swap; the swap fixes that portion of exposure at 2.928%.
Important facts for investors to verify
- Whether component availability and customer demand translate into shipments, and whether elevated inventory and contract assets convert to cash.
- How the higher debt balance, interest rates, and Q1 interest expense affect future earnings and covenant headroom; confirm the effect of the May 1 revolver expansion and SOFR terms.
- Whether planned capital spending supports growth while operating cash flow improves, and whether the stated $50–$60 million capex outlook changes.
- Trends in sector and regional sales, especially the Semiconductor Capital Equipment decline and growth in Advanced Computing, Communications, and Medical.
- Progress and remaining costs for restructuring, tax-incentive renewals, and resolution of the $9.5 million uncertain-tax-benefit reserve and pending tax-credit refund application.
- Dividend and repurchase capacity under debt restrictions: the quarterly dividend was $0.165 per share, and $154.6 million remained authorized for repurchases at March 31, 2023.