The financial information and the discussion below should be read in conjunction
with other information, including the condensed consolidated financial
statements and Notes thereto in Part I, Item 1 of this quarterly report on Form
10-Q for the quarterly period ended
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended (Exchange Act). These forward-looking
statements are identified as any statement that does not relate strictly to
historical or current facts and may include words such as "anticipate,"
"believe," "intend," "plan," "project," "forecast," "strategy," "position,"
"continue," "estimate," "expect," "may," "will," "could," "predict," and similar
expressions or the negative or other variations thereof. In particular,
statements, express or implied, concerning the Company's expectations relating
to current supply chain and labor constraints, global geopolitical events (such
as
OVERVIEW
We are a worldwide provider of advanced manufacturing services (both electronic manufacturing services (EMS) and precision technology services), which include design and engineering services and technology solutions.
From initial product concept to volume production, including direct order fulfillment and aftermarket services, Benchmark has been providing integrated services and solutions to original equipment manufacturers (OEMs) since 1979. Today, Benchmark proudly serves the following industries: aerospace and defense (A&D), medical technologies, complex industrials, semiconductor capital equipment (Semi-Cap), next-generation communications and advanced computing.
Our customer engagement focuses on three principal areas:
•
Manufacturing Services, which include printed circuit board assemblies (PCBAs) using both traditional surface mount technologies (SMT) and microelectronics, subsystem assembly, system build and integration. System builds and integration often involve building a finished assembly that includes PCBAs, complex subsystem assemblies, mechatronics, displays, mechanicals, and other components. These final products may be configured to order and delivered directly to the end-customer across all the industries we serve. Manufacturing services also includes precision technology services comprised of precision machining, advanced metal joining and welding, cleaning, assembly and functional testing primarily for the Semi-Cap (serving semiconductor capital equipment customers) and A&D markets.
•
Design & Engineering Services, which include design for manufacturability, design optimization for our factory processes and supply chain, and test development, concurrent and sustaining engineering, turnkey product design and regulatory services. Our engineering services may be for systems, sub-systems, printed circuit boards and assemblies, and components. We have the flexibility and capability to engage anywhere in the customers design process flow. We provide these services across all the industries we serve.
•
Technology Solutions, which involve developing a library of building blocks or reference designs primarily in defense solutions, surveillance systems, radio frequency (RF) subsystems, and front-end managed connected data collection systems. We often partner with our customers to merge these solutions utilizing our engineering services to provide turnkey product development from requirements through the launch to volume production into our factories. Our building blocks can be utilized across a variety of industries, but we have significant focus and capabilities in the A&D, medical,
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next generation communications and the complex industrials markets. We have also developed differentiated capabilities in RF and high-speed design for both components and substrates. The need to improve size, weight, and power (SWaP) to accommodate high frequency electronics communications is important to customers in the A&D, medical and next generation communications markets.
Our core strength lies in our ability to partner with our customers to provide concept-to-production solutions through a tightly integrated and seamless set of design, test, manufacturing, supply chain and support services. The integration of these product realization services along with our global manufacturing presence increases our ability to respond to our customers' needs by providing accelerated time-to-market and time-to-volume production of high-quality products - especially for complex products with lower volume and higher mix in regulated markets with higher reliability requirements. These capabilities enable us to build strong strategic relationships with our customers and to become an integral part of their business.
We believe our primary competitive advantage is our ability to engage with our customers at any point in their product development to production process by providing our leading edge technical capabilities in engineering services (including full life cycle from product design in which we can take a product idea from concept to design to volume manufacturing), technology solutions (especially high frequency RF solutions, microelectronics, and miniaturization), and manufacturing services (including electronics and complex precision machining capabilities) provided by highly skilled personnel. We also have diversified end market and regulated market experience in our targeted sectors. To support customers across these sectors, we have strategically invested in global supply chain design and execution capabilities.
In addition, we believe that a strong focus on human capital through the talent we hire and retain is critical to maintaining our competitiveness. Our culture is customer-centric, centered on accountability and ownership of process improvement to exceed customer expectations and deliver financial performance aligned to our goals. Through our employee engagement and customer satisfaction feedback processes, we continuously solicit and act upon information to improve our Company and better support our customers and business processes. We have invested in attracting and developing leadership throughout the organization and are committed to diversity and inclusion in our efforts to develop an innovative and forward-thinking workforce.
Our customers often face challenges in designing supply chains, demand planning, procuring materials and managing their inventories efficiently due to fluctuations in their customer demand, product design changes, short product life cycles and component price fluctuations.
We employ enterprise resource planning (ERP) systems and lean manufacturing principles to manage procurement and manufacturing processes in an efficient and cost-effective manner so that, where possible, components arrive on a just-in-time, as-and-when-needed basis. Because we are a significant purchaser of electronic components and other raw materials, we are generally able to capitalize on the economies of scale associated with our relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. Utilizing our agility and expertise in supply chain management and our relationships with suppliers across the supply chain, we strive to help reduce our customers' cost of goods sold and inventory exposure. However, due to global labor and supply disruptions, we continue to see component supply chain constraints across all commodity categories that are constraining our ability to produce the full demand forecasts we are receiving from customers.
We recognize manufacturing services revenue as the customer takes control of the manufactured products built to customer specifications. We also generate revenue from our design, development and engineering services, in addition to the sale of other inventory.
Revenue is measured based on the consideration specified in a contract with a customer. Under the majority of our manufacturing contracts with customers, the customer controls all of the work-in-progress as products are being built. Revenues under these contracts are recognized progressively based on the cost-to-cost method. For other manufacturing contracts, the customer does not take control of the product until it is completed. Under these contracts, we recognize revenue upon transfer of control of the product to the customer, which is generally when the goods are shipped. Revenue from design, development and engineering services is recognized over time as the services are performed. As a general matter, we assume no significant obligations after shipment as we typically warrant workmanship only. Therefore, the warranty provisions are generally not significant.
COVID Pandemic Update The COVID pandemic affected the Company's operations in 2022. We continue to monitor the COVID-19 pandemic and actively assess potential implications to our business, supply chain, customer fulfillment sites, support operations and customer demand. We are also continuing to take appropriate measures to protect the health and safety of our employees and to create and maintain a safe working environment. While the effects of the COVID-19 pandemic have been decreasing, if the COVID-19 pandemic or its adverse effects become more severe or prevalent in the future or are prolonged in the locations where we, our customers, suppliers or contract
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manufacturers conduct business, or we experience more pronounced disruptions in our operations, or in economic activity and demand generally, our business and results of operations in future periods could be materially adversely affected.
See "2022 Overview" and "Risk Factors-Shortages or price increases of components specified by our customers have delayed and are expected to continue delaying shipments and may adversely affect our profitability" in Part I, Item 1A of our 2022 10-K for additional information.
First Quarter 2023 Highlights
Sales for the three months ended
? Industrials increased by 5%, ? A&D decreased by 2%, ? Medical increased by 17%, and ? Semi-Cap decreased by 19%. ? Advanced Computing increased by 74%, and ?Next Generation Communications increased by 45%.
The overall revenue increase was due primarily to strength in the Advanced
Computing,
Our sales depend on the success of our customers, some of which operate in
businesses associated with rapid technological change and consequent product
obsolescence. Developments adverse to our major customers or their products, the
availability of electronic component supply, or the failure of a major customer
to pay for components or services, have adversely affected us. A substantial
percentage of our sales are made to a small number of customers, and the loss of
a major customer, if not replaced, would adversely affect us. Sales to our ten
largest customers represented 51% of our total sales during the three months
ended
We experience fluctuations in gross profit from period to period. Different programs contribute different gross profits depending on the type of services involved, location of production, size of the program, complexity of the product and level of material costs associated with the various products. Moreover, new programs can contribute relatively less to our gross profit in their early stages when manufacturing volumes are usually lower, resulting in inefficiencies and unabsorbed manufacturing overhead costs. During periods of low production volume, we generally have unabsorbed manufacturing overhead costs and reduced gross profit. Gross profit can also be impacted by higher costs associated with other situations, such as supply chain constraints. This includes supply chain premiums for excess component costs paid to secure available supply resulting in revenue with cost recovery only with no margin. In addition, a number of our new program ramps require incremental investment during the launch and ramp phase which can exert downward pressure on our gross profit.
We have undertaken initiatives to restructure our business operations with the
intention of improving utilization and reducing costs. During the first three
months of 2023, we recognized
Inflation, disruption in the global economy and financial markets, and the ongoing effects of the COVID-19 pandemic, continue to create uncertainty. However, we are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date we filed this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ from these estimates under different assumptions or conditions.
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RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain items in our condensed consolidated statements of income bear on sales for the periods indicated. Three Months Ended March 31, 2023 2022 Sales 100.0 % 100.0 % Cost of sales 90.8 90.9 Gross profit 9.2 9.1
Selling, general and administrative expenses 5.5 5.7 Amortization of intangible assets
0.2 0.3 Restructuring charges and other costs 0.2 0.7 Income from operations 3.3 2.4 Other expense, net (1.1 ) (0.3 ) Income before income taxes 2.2 2.1 Income tax expense 0.4 0.4 Net income 1.8 % 1.7 % Sales
As noted above, sales for the first quarter of 2023 increased 9% from the same quarter in 2022.
Sales are analyzed by management by industry sector and by geographic segment, which reflects our reportable segments. Our global business development strategy is based on our targeted industry sectors. Management measures operational performance and allocates resources on a geographic segment basis.
Sales by industry sector were as follows:
Three Months Ended March 31, (in thousands) 2023 2022 Industrials$ 143,526 $ 137,146 A&D 79,415 81,187 Medical 137,049 116,873 Semi-Cap 148,469 183,437 Advanced Computing 95,998 55,056
$ 694,695 $ 636,083
Industrials. First quarter 2023 sales increased 5% to
Aerospace and Defense. First quarter 2023 sales decreased 2% to
Medical. First quarter 2023 sales increased 17% to
Semiconductor Capital Equipment. First quarter 2023 sales decreased 19% to
Advanced Computing. First quarter 2023 sales increased 74% to
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Our international operations are subject to the risks of doing business abroad. See Part I, Item 1A of our 2022 10-K for factors pertaining to our international sales, fluctuations in foreign currency exchange rates and a discussion of potential adverse effects in operating results associated with the risks of doing business abroad. During the first quarter of 2023 and 2022, 59% and 61%, respectively, of our sales were from international operations.
Sales by geographic segment were as follows:
Three Months Ended March 31, (in thousands) 2023 2022 Net sales: Americas$ 397,208 $ 305,580 Asia 268,043 287,246 Europe 77,855 70,341
Elimination of intersegment sales: (48,411 ) (27,084 ) Total net sales
$ 694,695 $ 636,083
Gross Profit
Gross profit increased 11% to
Operating Income
First quarter 2023 operating income increased 48% to
Operating income by reportable segment was as follows:
Three Months Ended March 31, (in thousands) 2023 2022 Operating income: Americas$ 13,331 $ 10,365 Asia 28,784 27,806 Europe 6,686 4,638 Corporate and other costs (26,059 ) (27,402 ) Total operating income$ 22,742 $ 15,407
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Selling, General and Administrative Expenses
SG&A increased to
Amortization of Intangible Assets
Amortization of intangible assets was
Restructuring Charges and Other Costs
During the first quarter of 2023, we recognized
Interest Expense
Interest expense increased to
Interest Income
Interest income increased to
Income Tax Expense
Income tax expense of
We have been granted certain tax incentives, including tax holidays, for our
subsidiaries in
Net Income
We reported a net income of
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LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our organic growth and operations through funds
generated from operations and borrowings under our Credit Agreement (as defined
below). Cash and cash equivalents and restricted cash totaled
Cash used in operating activities was
We primarily purchase components only after customer orders or forecasts are received, which mitigates, but does not eliminate, the risk of loss on inventories. Supplies of electronic components and other materials used in operations are subject to industry-wide shortages. In certain instances, suppliers may allocate available quantities to us. When shortages of these components and other material supplies used in operations have occurred, vendors have at times been unable to ship the quantities we need for production, forcing us to delay shipments, which can increase backorders and impact cash flows. Vendors also may increase the costs of components based on the market conditions including these shortages. In certain instances, we request and receive advance payments from customers as prepayments of inventory to meet working capital demands of a contract, offset inventory risks such as inventory purchased in advance of current needs and protect the Company from the failure of other parties to fulfill obligations under a contract. For example, we have been impacted by supply chain constraints, including shortages, longer lead times and increased transit times.
Cash used in investing activities was
Cash provided by financing activities was
On
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The Credit Agreement contains certain financial covenants related to interest
coverage and debt leverage, and certain customary affirmative and negative
covenants, including restrictions on our ability to incur additional debt and
liens, pay dividends, repurchase shares, sell assets and merge or consolidate
with other persons. Amounts due under the Credit Agreement could be accelerated
upon specified events of default, including a failure to pay amounts due, breach
of a covenant, material inaccuracy of a representation, or occurrence of
bankruptcy or insolvency, subject, in some cases, to cure periods. As of
Our operations, and the operations of businesses we acquire, are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. We believe we operate in substantial compliance with all applicable requirements and we seek to ensure that newly acquired businesses comply or will comply substantially with applicable requirements. To date, the costs of compliance and workplace and environmental remediation have not been material to us. However, material costs and liabilities may arise from these requirements or from new, modified or more stringent requirements in the future. In addition, our past, current and future operations, and the operations of businesses we have or may acquire, may give rise to claims of exposure by employees or the public, or to other claims or liabilities relating to environmental, waste management or health and safety concerns.
As of
During the next 12 months, we believe our capital expenditures will approximate
On
The Company began declaring and paying quarterly dividends during the first
quarter of 2018. In
Management believes that our existing cash balances, funds generated from operations, and borrowing availability under our revolving credit facility will be sufficient to permit us to meet our liquidity requirements over the next 12 months. Management further believes that our ongoing cash flows from operations and any borrowings we may incur under our revolving credit facility will enable us to meet operating cash requirements in future years. If we consummated significant acquisitions in the future, our capital needs would increase and could possibly result in our need to increase available borrowings under our Credit Agreement or access public or private debt and equity markets. There can be no assurance, however, that we would be successful in raising additional debt or equity on acceptable terms.
CONTRACTUAL OBLIGATIONS
We have certain contractual obligations for operating and capital leases that
were summarized in Contractual Obligations in our 2022 10-K. Other than items
discussed in Note 6 to the unaudited condensed consolidated financial statements
in Part I, Item 1 of this Report, there have been no material changes to our
contractual obligations, outside of the ordinary course of our business, since
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND RECENTLY ENACTED ACCOUNTING PRINCIPLES
Management's discussion and analysis is based upon our condensed consolidated
financial statements, which have been prepared in accordance with
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