Benchmark Electronics, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in millions of U.S. dollars unless stated otherwise. Benchmark provides advanced manufacturing, engineering and technology services to OEMs across aerospace and defense, medical, industrial, semiconductor capital equipment, computing and telecommunications markets.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $771.6 | $571.9 | $2,135.7 | $1,622.3 |
| Gross profit | $66.8 | $53.7 | $183.1 | $143.8 |
| Gross margin | 8.7% | 9.4% | 8.6% | 8.9% |
| Operating income | $25.3 | $11.8 | $63.1 | $34.4 |
| Operating margin | 3.3% | 2.1% | 3.0% | 2.1% |
| Net income | $18.8 | $8.1 | $47.0 | $23.4 |
| Diluted EPS | $0.53 | $0.23 | $1.32 | $0.64 |
- Q3 sales rose 35%; nine-month sales increased 32%. Q3 net income more than doubled year over year.
- Q3 sales grew in Industrials (+44%), Medical (+41%), Semi-Cap (+39%), Computing (+67%) and Telecommunications (+52%); A&D declined 14%. Management attributed A&D weakness primarily to supply constraints in certain programs.
- Gross margin fell year over year in both periods despite higher gross profit. Management cited revenue mix, supply-chain-related operating inefficiencies and sales carrying supply-chain premiums with no margin.
- Interest expense was $3.5 million in Q3 and $7.4 million year to date, up from $2.0 million and $6.2 million, respectively, primarily reflecting increased revolving-credit borrowings.
Cash flow, liquidity and capital
- Operating cash flow was negative $124.7 million for the first nine months, compared with negative $1.3 million in 2021. Working-capital investment was the main use: inventory increased $228.5 million, receivables $123.6 million and contract assets $32.5 million; increases in customer advances and accounts payable partly offset these uses.
- Investing cash flow was negative $27.9 million, including $30.2 million of property, plant and equipment purchases and $3.4 million of software additions. Management expects capital expenditures of approximately $50–$60 million over the next 12 months, principally for machinery and equipment.
- Financing cash flow was positive $139.8 million, including $593.0 million of credit-agreement borrowings and $423.0 million of repayments. Cash, cash equivalents and restricted cash totaled $249.3 million at September 30, down from $271.7 million at year-end 2021.
- Current assets were $1,708.2 million and current liabilities $848.9 million, with reported working capital of approximately $0.9 billion. Inventory was $746.9 million, up from $523.2 million at year-end; customer advances were $211.6 million, up from $118.1 million.
- Outstanding borrowings were $170.0 million on the revolving facility and $131.3 million on the term loan. The company reported $276.1 million of additional revolver availability, subject to covenants, and said it was in compliance with its covenants. A $123.8 million interest-rate swap fixed a portion of term-loan exposure at 2.928%.
- Nine-month dividends paid were $17.4 million. The quarterly dividend was $0.165 per share; $154.6 million remained under the share-repurchase authorization at quarter-end. Management said existing cash, operating cash flows and borrowing availability should meet liquidity needs for the next 12 months.
Material changes, outlook and risks
- Revenue growth was broad across most sectors and regions, while A&D declined. The ten largest customers accounted for 53% of nine-month sales, up from 47% a year earlier.
- Management said component shortages, longer lead times, supplier allocations and labor disruptions continued to limit the company’s ability to meet customer forecasts. These conditions contributed to operating inefficiencies, higher costs and increased inventory, although some material constraints had begun to ease.
- Restructuring charges and other costs were $4.9 million for the first nine months of 2022. Activities included site closures and workforce reductions; the Moorpark, California closure was expected to cease operations by March 31, 2023. The period also included a $2.0 million loss on equipment held for sale and a $2.4 million gain on the Angleton facility sale. Q3 2022 had $1.3 million of restructuring and other costs.
- The filing discusses fourth-quarter 2022 outlook and guidance as forward-looking subjects, but the supplied filing text does not provide a clear numerical guidance range.
- Other identified uncertainties include COVID-19 impacts, inflation, foreign exchange movements, international operating risks, dependence on major customers and potential production underutilization. Management reported no material changes to previously disclosed risk factors and no material adverse effect expected from ordinary-course legal proceedings.
- Tax incentives reduced nine-month tax expense by approximately $4.5 million, or $0.13 per diluted share; China and Thailand incentives have stated expiry dates, and an extension of Malaysia’s expired incentive was not assured. The company also reported $9.6 million of reserves for uncertain tax benefits, including interest and penalties.
- The 2019 ransomware incident had no further insurance recoveries expected as of September 30, 2022. Management reported no evidence that customer or employee data had been exfiltrated. Disclosure controls were assessed as effective at a reasonable-assurance level; ERP upgrades continue in phases.
Important facts for investors to verify
- Whether supply availability, labor conditions and inventory conversion improve, and how that affects margins and operating cash flow.
- Whether Q4 guidance was disclosed elsewhere in the complete filing or accompanying earnings materials, and how actual results compare with it.
- Customer concentration and the durability of demand growth, particularly the A&D decline and rapid growth in other markets.
- Revolver borrowing levels, interest costs, covenant headroom and the ability to fund planned capital expenditures, dividends and any share repurchases.
- The realization and timing of tax incentives, the Malaysia incentive application and the outstanding employee-retention tax-credit refund.