Benchmark Electronics, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Benchmark provides advanced electronics and precision technology manufacturing, engineering, and related services across aerospace and defense, medical, industrial, semiconductor equipment, advanced computing, and communications markets. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $733.2 | $728.0 | $1,427.9 | $1,364.1 |
| Gross profit (margin) | $67.0 (9.1%) | $58.8 (8.1%) | $131.0 (9.2%) | $116.4 (8.5%) |
| Operating income (margin) | $24.5 (3.3%) | $22.4 (3.1%) | $47.2 (3.3%) | $37.8 (2.8%) |
| Net income | $14.0 | $17.2 | $26.4 | $28.2 |
| Diluted EPS | $0.39 | $0.49 | $0.74 | $0.79 |
| Interest expense | $8.3 | $2.2 | $14.7 | $3.9 |
Q2 sales rose 1% year over year; gross profit increased 14% and operating income increased 9%, reflecting higher revenue and operational efficiencies. Net income fell 19%, primarily as higher interest expense offset operating improvement. For the first half, sales rose 5%, operating income increased 25%, while net income declined 6%.
Cash flow: First-half operating cash flow was negative $0.4 million, versus negative $93.5 million a year earlier. Investing cash outflow was $46.5 million, including $44.7 million of property, plant and equipment additions. Financing provided $84.9 million, including $409.5 million of borrowings and $307.0 million of principal repayments. Cash and restricted cash totaled $245.3 million at June 30, 2023; cash and cash equivalents were $244.6 million. Capital expenditures were $47.0 million on the segment disclosure basis.
Balance sheet and liquidity: Current assets were $1,721.1 million and current liabilities $721.9 million, giving working capital of approximately $999 million. Inventories were $756.4 million, up from $727.7 million at year-end 2022. Debt carrying value was $427.4 million, compared with $324.4 million at December 31, 2022. The company had $245.6 million available on its $550 million revolving facility, subject to covenants, and was compliant with covenants at quarter-end. Management believes cash, operating cash generation, and borrowing availability will meet liquidity needs for the next 12 months.
Material changes and business drivers
- Q2 sector sales increased in next-generation communications (+38%), advanced computing (+19%), and industrials (+5%); they declined in medical (-13%), aerospace and defense (-11%), and semiconductor capital equipment (-6%).
- First-half growth was led by advanced computing (+43%) and next-generation communications (+41%). Semiconductor capital equipment fell 13% for the half, which management attributed mainly to lower existing-customer demand.
- Americas Q2 segment revenue rose 12%, Europe rose 7%, and Asia declined 10%. International operations represented 61% of Q2 sales.
- Operating results benefited from improved gross margin and operational efficiencies. However, increased borrowings and higher interest rates materially raised interest expense.
- Cash conversion remained weak despite the year-over-year improvement in operating cash flow; inventory investment and reductions in accrued liabilities and customer advances were significant uses of cash.
Outlook, risks, and unusual items
- Outlook: No specific revenue or earnings guidance is provided in the supplied filing text. Management expects capital expenditures of approximately $65–$75 million over the next 12 months, mainly for machinery and equipment to support capacity and anticipated growth.
- Demand and supply risks: Component shortages, allocation, long lead times, labor constraints, and non-cancelable/non-returnable supplier terms continue to constrain production against customer forecasts and can cause shipment delays, inefficiencies, and higher costs. Management said lead times were improving but remained above historical levels.
- Customer concentration: The ten largest customers accounted for 52% of first-half sales, leaving results exposed to major-customer demand, product changes, or nonpayment.
- Restructuring and impairment: First-half restructuring charges were $3.8 million, primarily related to site closures and workforce/capacity reductions. Moorpark, California operations ceased in March 2023, with restructuring expected to be substantially complete in 2023. A further $0.9 million impairment was recorded after the company decided to discontinue certain Americas manufacturing capabilities.
- Debt and interest-rate exposure: Revolver borrowing increased, and interest expense rose sharply. A July 20, 2023 post-quarter interest-rate swap fixed a $128.8 million notional amount at 4.039%.
- Tax and legal matters: China and Thailand tax incentives reduced first-half tax expense by approximately $2.8 million; the China incentive expires through 2023 unless extended, and future extensions are not assured. The company reported $9.5 million in reserves for uncertain tax benefits. Ordinary-course legal matters were not expected by management to have a material adverse effect.
- Capital returns: The quarterly dividend was $0.165 per share. No shares were repurchased in the first half; $154.6 million remained under the authorization. Future dividends are not guaranteed and are subject to financial and contractual constraints.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. ERP upgrades are continuing in phases.
Important facts for investors to verify
- Whether supply constraints ease further and how customer demand, program ramps, and sector mix affect revenue and gross margins.
- Whether inventory levels convert to cash and whether operating cash flow improves after substantial first-half capital spending.
- How higher debt and interest rates affect earnings, covenant headroom, and future borrowing availability.
- Progress and remaining costs for restructuring, including the discontinued manufacturing capabilities and expected 2023 completion.
- Renewal or expiry of foreign tax incentives, resolution of uncertain tax positions, and receipt of previously claimed employee retention credits (not received as of the filing).
- The company’s ability to fund projected capital expenditures and dividends while maintaining liquidity and complying with credit-agreement covenants.