# Benchmark Electronics Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Benchmark Electronics Inc](/companies/bhe.md) (CIK 863436)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 1, 2023, 23:55 ET
- Period: 2023-09-30
- Accession: 0000950170-23-057674
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/863436/000095017023057674/bhe-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/863436/000095017023057674/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $745.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $2.25bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $650.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.95bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $69.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $200.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $35.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $111.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $30.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $77.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $8.5m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $23.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $5.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $12.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $20.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $46.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.57 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.30 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.57 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 35,876,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 35,879,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $37.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-07-01 to 2023-09-30 | $19.7m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $64.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $17.6m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $259.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $1.71bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $2.33bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $699.1m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2023-09-30 | $432.1m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-09-30 | $1.06bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,761 characters.

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 September 30, 2023 (this Report), consolidated financial statements appearing in the Company’s annual report on Form 10-K for the year ended December 31, 2022 (the 2022 10-K), and Part I, Item 1A, Risk Factors of the 2022 10-K. In this Report, references to Benchmark, the Company or use of the words “we”, “our” and “us” include Benchmark’s subsidiaries unless otherwise noted.

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 (the 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 Russia's invasion of Ukraine, U.S. tensions with China and the Israel-Hamas war), continuing inflationary pressures, the effects of foreign currency fluctuations and high interest rates, future operating results or margins, the ability to generate sales and income or cash flow, expected revenue mix, the Company’s business strategy and strategic initiatives, the Company’s repurchases of shares of its common stock and the Company’s intentions concerning the payment of dividends, among others, are forward-looking statements. Although the Company believes these statements are based on and derived from reasonable assumptions, they involve risks, uncertainties and assumptions that are beyond the Company’s ability to control or predict, relating to operations, markets and the business environment generally, including those discussed under Part I, Item 1A of the 2022 10-K and in any of the Company’s subsequent reports filed with the Securities and Exchange Commission (the SEC). Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes, including the future results of our operations, may vary materially from those indicated. Undue reliance should not be placed on any forward-looking statements. Forward-looking statements are not guarantees of performance. All forward-looking statements included in this Report are based upon information available to the Company as of the date of this Report, and the Company assumes no obligation to update this Report.

### OVERVIEW

We are a worldwide provider of advanced manufacturing services (both electronic manufacturing services 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 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, 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 other widespread contagious disease, or adverse effects therefrom, become more severe or prevalent in the future or are prolonged in the locations where we, our customers, suppliers or contract 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" under Part II, Item 7 of the 2022 10-K 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 the 2022 10-K for additional information.

### Third Quarter 2023 Highlights

Sales for the three months ended September 30, 2023 were $719.7 million, a 7% decrease from sales of $771.6 million during the three months ended September 30, 2022. During the third quarter of 2023, sales to customers in our various industry sectors fluctuated from the third quarter of 2022 as follows:

 Industrials decreased by 1%,

 A&D increased by 16%,

 Medical decreased by 10%,

 Semi-Cap decreased by 11%,

 Advanced Computing decreased by 30%, and

 Next Generation Communications increased by 3%.

The overall revenue decrease was primarily due to a decrease in Advanced Computing due to the completion of a high performance computing program, partially offset by an increase in A&D. See "Results of Operations — Sales" discussion below.

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 52% and 53% of our total sales during the nine months ended September 30, 2023 and 2022, respectively. Due to global labor and supply disruptions, we continue to see component supply chain constraints across commodity categories that are constraining our ability to produce the full demand forecasts we are receiving from customers. Lead times are improving from previous highs but continue to be elongated from historical levels and many suppliers continue to categorize some of their constrained components with non-cancelable and non-returnable business terms. Though we have seen the easing of certain material constraints, last-minute allocations created inefficiencies in our operations, as well as increased costs to us and our customers.

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 nine months ended September 30, 2023, we recognized $5.2 million of restructuring and other costs due to expenses associated with various site closures and restructuring activities. See "Restructuring Charges and Other Costs".

Inflation, disruption in the global economy and financial markets and geopolitical events 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 Report. 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.

### 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 September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of sales | 90.4 | 91.3 | 90.7 | 91.4 |
| Gross profit | 9.6 | 8.7 | 9.3 | 8.6 |
| Selling, general and administrative expenses | 4.9 | 5.0 | 5.2 | 5.2 |
| Amortization of intangible assets | 0.2 | 0.2 | 0.2 | 0.2 |
| Restructuring charges and other costs | 0.2 | 0.2 | 0.3 | 0.2 |
| Income from operations | 4.2 | 3.3 | 3.6 | 3.0 |
| Other expense, net | (0.7) | (0.3) | (0.9) | (0.3) |
| Income before income taxes | 3.6 | 3.0 | 2.7 | 2.7 |
| Income tax expense | 0.7 | 0.6 | 0.6 | 0.5 |
| Net income | 2.8% | 2.4% | 2.2% | 2.2% |

### Sales

As noted above, sales for the third quarter of 2023 decreased 7% 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:

*(in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Industrials | $153,641 | $155,278 | $464,004 | $451,260 |
| A&D | 99,687 | 86,238 | 259,266 | 257,322 |
| Medical | 149,130 | 165,546 | 431,115 | 448,653 |
| Semi-Cap | 165,254 | 186,325 | 477,830 | 544,661 |
| Advanced Computing | 65,724 | 94,562 | 243,103 | 218,254 |
| Next Generation Communications | 86,259 | 83,626 | 272,304 | 215,537 |
| Total | $719,695 | $771,575 | $2,147,622 | $2,135,687 |

**Industrials.** Third quarter of 2023 sales decreased 1% to $153.6 million from $155.3 million in the third quarter of 2022. Sales during the first nine months of 2023 increased 3% to $464.0 million from $451.3 million in the same period of 2022. The increase in the nine month period was primarily due to new customer ramps, specifically in energy efficiency devices.

**Aerospace and Defense.** Third quarter of 2023 sales increased 16% to $99.7 million from $86.2 million in the third quarter of 2022. Sales during the first nine months of 2023 increased 1% to $259.3 million from $257.3 million in the same period of 2022. The increases were due to strength in both Defense and Commercial Aerospace and improved supply availability.

**Medical.** Third quarter of 2023 sales decreased 10% to $149.1 million from $165.5 million in the third quarter of 2022. Sales during the first nine months of 2023 decreased to $431.1 million from $448.7 million in the same period of 2022. The decreases were primarily due to reductions in revenue from supply chain premiums partially offset by increases in existing programs and new programs ramping as supply availability has improved.

**Semiconductor Capital Equipment.** Third quarter of 2023 sales decreased 11% to $165.3 million from $186.3 million in the third quarter of 2022. Sales during the first nine months of 2023 decreased 12% to $477.8 million from $544.7 million in the same period of 2022. The decreases were primarily due to lower demand with existing customers.

**Advanced Computing.** Third quarter of 2023 sales decreased 30% to $65.7 million from $94.6 million in the third quarter of 2022. The decrease was primarily due to the completion of multiple high performance computing programs. Sales during the first nine months of 2023 increased 11% to $243.1 million from $218.3 million in the same period of 2022. The increase was primarily due to the contribution from multiple high performance computing programs completed during the period.

**Next Generation Communications.** Third quarter of 2023 sales increased 3% to $86.3 million from $83.6 million in the third quarter of 2022. Sales during the first nine months of 2023 increased 26% to $272.3 million from $215.5 million in the same period of 2022. The increases were primarily due to growth in broadband infrastructure programs.

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 third quarter of 2023 and 2022, 60% and 61%, respectively, of our sales were from international operations.

Sales by geographic segment were as follows:

*(in thousands)*

| Net sales: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Americas | $399,356 | $400,905 | $1,200,783 | $1,066,760 |
| Asia | 275,163 | 337,726 | 830,056 | 945,434 |
| Europe | 71,412 | 68,400 | 223,857 | 208,591 |
| Elimination of intersegment sales: | (26,236) | (35,456) | (107,074) | (85,098) |
| Total net sales | $719,695 | $771,575 | $2,147,622 | $2,135,687 |

**Americas.** Third quarter of 2023 sales were consistent with the third quarter of 2022. Sales during the first nine months of 2023 increased 13% to $1.2 billion from $1.1 billion in the same period of 2022. The increase in the nine month period was due to increased demand from existing customers and new customer ramps, offsetting decreased revenue from supply chain premiums.

**Asia.** Third quarter of 2023 sales decreased 19% to $275.2 million from $337.7 million in the same quarter in 2022. Sales during the first nine months of 2023 decreased 19% to $830.1 million from $945.4 million in the same period of 2022. The decreases were primarily due to reductions in revenue from supply chain premiums partially offset by increases in existing programs and new programs ramping.

**Europe.** Third quarter of 2023 sales increased 4% to $71.4 million from $68.4 million in the third quarter of 2022. Sales during the first nine months of 2023 increased 7% to $223.9 million from $208.6 million in the same period of 2022. The increases were primarily due to increasing demand with existing customers.

### Gross Profit

Gross profit increased 3% to $69.1 million in the third quarter of 2023 from $66.8 million in the same quarter in 2022. Gross profit increased 9% to $200.1 million in the first nine months of 2023 from $183.1 million in the same period of 2022. Gross profit increased primarily due to operational efficiencies.

### Operating Income

Third quarter of 2023 operating income increased 20% to $30.3 million from $25.3 million in the third quarter of 2022. Operating income increased 23% to $77.6 million in the first nine months of 2023 from $63.1 million in the same period of 2022. The increases were primarily due to an increase in gross profit offsetting an increase in SG&A and restructuring expense.

Operating income by reportable segment was as follows:

*(in thousands)*

| Operating income: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Americas | $18,278 | $14,608 | $45,524 | $41,094 |
| Asia | 37,526 | 33,662 | 91,908 | 91,320 |
| Europe | 3,945 | 4,880 | 13,991 | 10,526 |
| Corporate and other costs | (29,408) | (27,866) | (73,859) | (79,817) |
| Total operating income | $30,341 | $25,284 | $77,564 | $63,123 |

26

**Americas.** Third quarter of 2023 operating income increased 25% to $18.3 million from $14.6 million in the same quarter in 2022. Operating income during the first nine months of 2023 increased 11% to $45.5 million from $41.1 million in the same period of 2022. The increases were primarily due to higher revenue and improved gross profit.

**Asia.** Third quarter of 2023 operating income increased 11% to $37.5 million from $33.7 million in the third quarter of 2022. Operating income during the first nine months of 2023 increased 1% to $91.9 million from $91.3 million in the same period of 2022. The increases were primarily due to revenue mix.

**Europe.** Third quarter of 2023 operating income decreased 6% to $3.9 million from $4.9 million in the third quarter of 2022. The decrease was primarily due to operational inefficiencies, despite higher revenue. Operating income during the first nine months of 2023 increased 7% to $14.0 million from $10.5 million in the same period of 2022. The increase was primarily due to higher revenue and lower cost of material content.

### Selling, General and Administrative Expenses

SG&A decreased to $35.5 million in the third quarter of 2023 from $38.5 million in the third quarter of 2022. The decrease in the third quarter was primarily due to lower variable compensation. SG&A increased to $111.4 million in the first nine months of 2023 from $110.7 million in the same period of 2022. The increase in the nine month period was primarily due to a net increase in variable compensation.

### Amortization of Intangible Assets

Amortization of intangible assets was $1.6 million in both the third quarter of 2023 and 2022. Amortization of intangibles was $4.8 million in both of the first nine months of 2023 and 2022.

### Restructuring Charges and Other Costs

During the third quarter and first nine months of 2023, we recognized $1.4 million and $5.2 million of restructuring charges, respectively, primarily due to expenses associated with announced site closures or exits, reductions in work force and other restructuring activities primarily in the Americas. Additionally, during the second quarter of 2023, the Company made the decision to no longer continue certain manufacturing capabilities in the Americas. In connection with that decision, the Company assessed the facility and equipment assets used in those manufacturing capabilities using valuation information from third parties and recorded $1.1 million of impairment charges as a result of that assessment during the first nine months of 2023. The asset impairment charges are included in the restructuring charges and other costs line item on the condensed consolidated statements of income.

During the third quarter and first nine months of 2022, we recognized $1.3 million and $4.9 million of restructuring charges, respectively, primarily due to expenses associated with announced site closures or exits, reductions in workforce and other restructuring activities primarily in the Americas. During the first nine months of 2022, we also incurred a $2.0 million loss on assets held for sale related to certain manufacturing capabilities in the Americas that the Company made the decision in 2021 to no longer continue and a gain on assets held for sale of $2.4 million related to the sale of the Angleton, Texas facility.

See Note 12 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Report for additional information on our restructuring charges.

### Interest Expense

Interest expense increased to $8.5 million in the third quarter of 2023 from $3.5 million in the third quarter of 2022. Interest expense increased to $23.2 million in the first nine months of 2023 from $7.4 million in the same period of 2022. The increases were primarily due to higher interest rates and increased borrowings under our revolving credit facility to support investment in working capital.

### Interest Income

Interest income increased to $1.3 million in the third quarter of 2023 from $0.5 million in the third quarter of 2022. Interest income increased to $4.2 million in the first nine months of 2023 from $0.8 million in the same period of 2022. The increases were primarily due to higher interest rates.

### Income Tax Expense

Income tax expense of $5.2 million represented a 20.2% effective tax rate for the third quarter of 2023, compared with $4.5 million in the third quarter of 2022 representing an effective tax rate of 19.3%. The differences between the effective tax rates for the third quarter of 2023 compared to the third quarter of 2022 is related to the mix of profits in our various jurisdictions. Income tax expense of $12.1 million represented a 20.6% effective tax rate for the first nine months of 2023, compared with $11.1 million in the same period of 2022 representing an effective tax rate of 19.1%. The differences between the effective tax rates for first nine months of 2023 compared to 2022 is related to the mix of profits in our various jurisdictions.

We have been granted certain tax incentives, including tax holidays, for our subsidiaries in China and Thailand that will expire at various dates, unless extended or otherwise renegotiated, through 2023 in China and 2030 in Thailand. See Note 8 to the condensed consolidated financial statements in Part I, Item 1 of this Report.

### Net Income

We reported a net income of $20.4 million, or $0.57 per diluted share, for the third quarter of 2023, compared with a net income of $18.8 million, or $0.53 per diluted share, for the third quarter of 2022. We reported a net income of $46.8 million, or $1.30 per diluted share, for the first nine months of 2023, compared with a net income of $47.0 million, or $1.32 per diluted share, for the same period of 2022. The changes were primarily the result of the items discussed above.

### 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 $260.8 million at September 30, 2023 and $207.4 million at December 31, 2022, of which $238.0 million and $167.7 million, respectively, was held outside the U.S. in various foreign subsidiaries.

Cash provided from operating activities was $37.2 million during the first nine months of 2023. This increase in cash from operations primarily consisted of net income of $46.8 million adjusted for $34.1 million of depreciation and amortization, $12.3 million of stock-based compensation expense and a $12.9 million decrease in accounts receivable, partially offset by a $6.5 million increase in contract assets, a $14.4 million increase in prepaid expenses and other current assets, a $24.4 million decrease in accounts payable, an $8.9 million decrease in advanced payments from customers and a $14.2 million decrease in accrued liabilities. Working capital was $1.0 billion at September 30, 2023 and $0.9 billion at December 31, 2022.

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 $66.1 million during the first nine months of 2023 primarily due to purchases of additional property, plant and equipment totaling $64.0 million and purchased software of $2.7 million. The purchases of property, plant and equipment were primarily for machinery and equipment in the Americas.

Cash provided by financing activities was $83.9 million during the first nine months of 2023. Borrowings under the Credit Agreement were $614.5 million. Principal payments under the Credit Agreement totaled $507.0 million, dividends paid totaled $17.6 million and employee taxes paid for with shares withheld totaled $5.8 million.

On December 21, 2021, the Company amended and restated the Company’s prior $650 million credit agreement by entering into a $381 million amended and restated credit agreement (the Amended and Restated Credit Agreement). Under the terms of the Amended and Restated Credit Agreement, in addition to the $131.3 million term loan facility, we have a $250.0 million five-year revolving credit facility to be used for general corporate purposes, both with a maturity date of December 21, 2026. On May 20, 2022, the Company entered into Amendment No. 1 (the Amendment) to the Amended and Restated Credit Agreement (as amended, the Credit Agreement). The Amendment, among other things, increased the revolving credit facility commitments from $250 million to $450 million. On February 3, 2023, the Company entered into Amendment No. 2 to the Credit Agreement which increases the maximum amount of trade accounts that the Company may elect to sell at any one time to $200.0 million. On May 1, 2023, the Company entered into Amendment No. 3 to the Credit Agreement (Amendment No. 3). Amendment No. 3 increased the revolving credit facility commitments from $450 million to $550 million. Amendment No. 3 also established that the interest on outstanding borrowings starting on the next reset date and any new borrowings under Amendment No. 3 (other than swingline loans) will accrue, at the Company’s option, at (a) Term Secured Overnight Financing Rate (SOFR) plus 0.10% plus the Applicable Rate (as defined in the Credit Agreement, approximately 1.00% to 2.00% per annum depending on various factors) or (b) for U.S. Dollar denominated loans, the base rate (which is the highest of (i) the federal funds rate plus 0.50%, (ii) the Bank of America, N.A. prime rate, (iii) Term SOFR plus 1.00% and (iv) 1.00%). The Credit Agreement includes an accordion feature pursuant to which the Company is permitted to add one or more incremental term loans and/or increase commitments under the revolving credit facility in an aggregate amount of $100 million or a higher amount, subject to the satisfaction of certain conditions and exceptions. As of September 30, 2023, we had $128.8 million in borrowings outstanding under the term loan facility, $305.0 million in borrowings outstanding under the revolving credit facility, and $4.4 million in letters of credit outstanding under our revolving credit facility. Under the revolving credit facility, $240.6 million remains available for future borrowings, subject to compliance with financial covenants as to interest coverage and debt leverage, in addition to other debt covenant restrictions. See Note 5 to the condensed consolidated financial statements in Part I, Item 1 of this Report for more information regarding the terms of the Credit Agreement.

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 September 30, 2023, we were in compliance with all of these covenants and restrictions.

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 September 30, 2023, we had cash and cash equivalents, including restricted cash, totaling $260.8 million and $240.6 million available for borrowings under the Credit Agreement, subject to compliance with financial covenants as to interest coverage and debt leverage, in addition to other debt covenant restrictions.

During the next 12 months, we believe our capital expenditures will approximate $65 million to $75 million, principally for machinery and equipment to help increase our production capacity to support anticipated revenue growth and our ongoing business around the globe.

On March 6, 2018, our Board of Directors approved an expanded stock repurchase program granting us the authority to repurchase up to $250 million in shares of the Company’s common stock in addition to the $100 million approved on December 7, 2015. On February 19, 2020 and October 26, 2021, the Board of Directors authorized the repurchase of an additional $150 million and $100 million, respectively, of shares of the Company’s common stock. During the nine months ended September 30, 2023, we had no share repurchases. As of September 30, 2023, we had $154.6 million remaining under our share repurchase program. We are under no commitment or obligation to repurchase any particular amount of shares of the Company’s common stock.

The Company began declaring and paying quarterly dividends during the first quarter of 2018. In February 2020, the Board of Directors approved a quarterly dividend increase, raising the quarterly dividend from $0.15 to $0.16 per common share. In May 2021, the Board of Directors approved another quarterly dividend increase, raising the quarterly dividend from $0.16 to $0.165 per common share. During the nine months ended September 30, 2023 and 2022, cash dividends paid totaled $17.6 million and $17.4 million, respectively. On September 11, 2023, the Company declared a quarterly cash dividend of $0.165 per share of the Company’s common stock to shareholders of record as of September 29, 2023. The dividend was paid on October 13, 2023. The Board of Directors currently intends to continue paying quarterly dividends. However, the Company’s future dividend policy is subject to the Company’s compliance with applicable law, and depends on, among other things, the Company’s results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in the Company’s debt agreements, and other factors that the Board of Directors may deem relevant. Dividend payments are not mandatory or guaranteed; there can be no assurance that the Company will continue to pay a dividend in the future.

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" under Part II, Item 7 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 December 31, 2022.

### 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 U.S. GAAP. See Note 2 to the condensed consolidated financial statements in Part I, Item 1 of this Report for a discussion of recently enacted accounting principles. Also, our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements included in our 2022 10-K. There have been no changes to the items disclosed as critical accounting estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2022 10-K.

## Market risk

As filed, 3,245 characters.

Our international sales comprise a significant portion of our net sales. We are exposed to risks associated with operating internationally, including:

- Foreign currency exchange risk;
- Import and export duties, taxes and regulatory changes;
- Inflationary economies or currencies; and
- Economic and political instability.

Additionally, some of our operations are in developing countries. Certain events, including natural disasters, can impact the infrastructure of a developing country more severely than they would impact the infrastructure of a developed country. A developing country can also take longer to recover from such events, which could lead to delays in our ability to resume full operations.

We transact business in various foreign countries and are subject to foreign currency fluctuation risks. We use natural hedging and forward contracts to economically hedge transactional exposure primarily associated with trade accounts receivable, other receivables, trade accounts payable, and lease liabilities that are denominated in a currency other than the functional currency of the respective operating entity. We do not use derivative financial instruments for speculative purposes. Certain forward currency exchange contracts in place as of September 30, 2023 have not been designated as accounting hedges and, therefore, changes in fair value are recorded within our condensed consolidated statements of income.

The Company enters into forward currency exchange contracts designated as cash flow hedges of forecasted foreign currency expenses. Changes in the fair value of the derivatives are recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets until earnings are affected by the variability of the cash flows.

Our sales are substantially denominated in U.S. dollars. Our foreign currency cash flows are generated in certain European and Asian countries and Mexico.

We are also exposed to market risk for changes in interest rates on our financial instruments, a portion of which relates to our invested cash balances. We do not use derivative financial instruments in our investing activities. We place cash and cash equivalents and investments with various major financial institutions. We protect our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by generally investing in investment-grade securities.

We are also exposed to interest rate risk on borrowings under our Credit Agreement. As of September 30, 2023, we had $128.8 million outstanding on the floating rate term loan facility, and we have an interest rate swap agreement with a notional amount of $128.0 million and a fixed interest rate of 4.039%. Under this swap agreement, we receive variable rate interest rate payments and pay fixed rate interest payments. The effect of this swap is to convert a portion of our floating rate interest expense to fixed interest rate expense. The interest rate swap is designated as a cash flow hedge.

For additional information regarding our forward currency exchange contracts and interest rate swap agreement, see Note 14 to the condensed consolidated financial statements in Part I, Item 1 of this Report.

## Controls and procedures

As filed, 3,309 characters.

As of the end of the period covered by this Report, the Company’s management (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO)) conducted an evaluation pursuant to Rule 13a-15 under the Exchange Act of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based on this evaluation, the CEO and CFO concluded that as of the end of the period covered by this Report, such disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the last fiscal quarter covered by this Report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

We are currently upgrading our ERP system, which is expected to occur in phases over the next several years. We have completed the implementation of the upgrades at certain of the Company’s locations and have revised and updated the related controls. These changes did not materially affect our internal control over financial reporting. As we implement the upgrades of this ERP system at the remaining locations over the next several years, we will continue to assess the impact on our internal control over financial reporting.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by individuals’ acts, by collusion of two or more people, or by management overriding the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-057674. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.