Q2 2022 Benchmark Electronics Inc Earnings Call
Supply chain premiums.
Why chain premiums are excess component costs recovered as pass through revenue with no margin, we incurred the pass through revenue to protect access to available components supply and a normalized supply chain environment, we would expect to incur approximately $20 million annually.
Turning to slide seven.
Our GAAP earnings per share for the quarter was 49, our GAAP results included restructuring and other one time costs totaling $1 3 million related to the closure of our previously announced sites and more park, California, and Angleton, Texas and other smaller restructuring activities throughout our global network offset by $2 4 million.
Gain on the sale of assets held for sale related to the disposition of the Angleton, Texas facility.
For Q2, our non-GAAP gross margin was eight 1% below the midpoint of our second quarter guidance of eight 8%, we were lower than guidance entirely due to the incremental supply chain premiums incurred in the quarter if not for these premiums being greater than expected gross margin would have been in line with guidance.
Second quarter gross margin was lower than Q1, due to 50 basis points of incremental supply chain premiums and another 50 basis points related to revenue mix and further investment in new program ramps on.
On a year over year basis reported margins are lower by 70 basis points due to the higher supply chain premiums in Q2 2022 compared to Q2 2021, partially offset by operational efficiency gains.
Our SG&A was $35 8 million, which was down 1% sequentially due primarily to lower variable compensation.
non-GAAP operating margin was three 1%.
Excluding the impact of supply chain premiums, which have zero dollar impact on gross or operating profit or operating margin is three six which is in line with Q1 2022.
Q2 in Q2 2022, our non-GAAP effective tax rate was 19, 1% because of the mix of profits between the U S and foreign jurisdictions and non-GAAP EPS was <unk> 50 for the quarter, which is <unk> <unk> higher than the midpoint of our Q2 guidance. Please turn to slide eight.
We've shown the effects of supply chain premiums on a trended basis over the last six quarters on the slide for comparison in Q2 2022 alone we incurred approximately $91 million. We believe these impacts will return to a more normalized level in 2023 sequentially. This number grew by $34 million and on a year over year basis 81 million.
Due to the challenging supply chain environment.
Magnitude of these premiums are temporary in nature as the supply chain environment requires less premiums to be paid this cost recovery revenue will decrease excluding.
Excluding supply chain premiums are revenue in the second quarter of 2000 $20 million to $637 million, a sequential increase of $58 million or 10% growth.
And a year over year increase of $102 million or 19% growth.
As discussed gross and operating margins are diluted by this pass through revenue, while gross profit operating profit and EPS are unaffected.
Turning to slide nine.
non-GAAP ROIC in the second quarter was nine 6%, a 30 basis point increase sequentially and a 210 basis point improvement year over year in the period between Q1, 2021, and Q2 2022 ROIC has grown by 50% as a result of 44% revenue growth and 97%.
<unk> operating income growth.
Please turn to slide 10 to review our cash conversion cycle cash conversion cycle days were <unk> 77 in the second quarter compared to 82 days in Q1 with a decrease primarily due to the improvement in inventory days and in customer advance deposits, which grew $44 million sequentially or 34% growth customer advanced deposits.
26% of our net inventory value. Please.
Please turn to slide 11 for an update on liquidity and capital resources, we used $25 million of cash in operations and invested $7 million in Capex we.
We expect to use cash to support inventory and capacity expansion in 2022 and as a result, we will not generate cash flow from operations for 2022, we expect our cash capex spending in 2022 to be between 50 and $60 million, we expect to get back to generating cash flow from operations in our fiscal year 2023.
Our cash balance was $264 million at June 30, with $79 million available in the U S. Our cash balances increased $19 million sequentially. The increase in cash is supported by our borrowings against our revolver to support the growth of revenue Capex and proactive investment in inventory.
As of June 30, we had $131 million outstanding on our term loan and $135 million outstanding borrowings against our revolver.
Turning to slide 12 to review our capital allocation activity in Q2, we paid cash dividends of $5 8 million. The total share repurchases in Q2 or $3 9 million, which represented approximately 126000 shares.
As of June 32022, we had approximately $155 million remaining in our existing share repurchase authorization, we will evaluate share repurchases opportunistically, while considering market conditions conditions in the third quarter of 2022.
Turning to slide 13 for a review of our third quarter 2022 guidance, we expect revenue to range from $715 million to $755 million, which at the midpoint represents a 28% year over year growth our revenue range comprehensive.
Fly chain premiums of approximately $55 million, a reduction of $36 million sequentially. The.
The demand environment remains strong and in each sector demand outpaces supply with our investment in inventory and capacity as this demand moves into future quarters, we will be able to fulfill it.
We expect that our gross margin will be between eight six to eight 8% for Q3 on a sequential basis eight 7% midpoint assumes a 50 basis point improvement from lower supply chain premiums with the balance coming from operational efficiency gains.
G&A will range between 36% and $38 million.
Implied in our guidance is a three 5% to three 7% non-GAAP operating margin range for modeling purposes.
The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs, we expect to incur restructuring and other nonrecurring costs.
In Q3 of approximately one six to $2 4 million included in this range is.
He is a $800000 one time charge related to our currency translation adjustment due to a legal entity reorganization. The remaining costs relate to continued activities associated with previously announced site closures.
Our non-GAAP diluted earnings per share is expected to be in the range of 49 to <unk> 55.
Or a midpoint of 52.
Other expenses net is expected to be $4 1 million, which is primarily interest expense. We expect that for Q3, our non-GAAP effective tax rate will be between 18% and 20% the expected weighted average shares for Q3 or approximately $35 4 million.
In summary.
This guidance takes into consideration all known constraints for the quarter and assumes no further significant interruptions to our supply base operations or customers guidance also assumes no material impact to our results due to COVID-19 disruptions and with that I'll turn it back over to you Jeff Thanks for good update.
Please turn to slide 15.
Before I go into our sector outlook I wanted to highlight some wins, we secured in the June quarter. It is important to note that the breadth and balance of our wins today are good indicator of the health of our business Tomorrow.
These wins also reflect the diversity and complexity of the projects that we take on to help customers realize their product vision.
In semi cap, we continue to execute on our strategy of expanding our business with existing customers, while we are adding new customers to the portfolio too.
This past quarter, we secured new manufacturing wins for lithography build to print.
<unk> deposition or <unk> modules and advanced vacuum care tools.
We are excited to see that our strategic plan is enabling significant multiyear growth in the semi cap sector.
In medical we were awarded a new design and manufacturing program for the only DNA sequencing device to have both long and short DNA slash RNA read sequencing technologies for cancer diagnostics.
We were also awarded design programs for blood safety system, and the smart wound healing platform.
And industrials, we continue to expand our business with current customers with New program Awards and control measurement and test robotics and commercial transportation.
Our engineering bookings this past quarter was strong as we support a variety of customer programs in development testing and proof of concepts across all of the industrial Subsectors.
We also added a new customer related to sensory devices, then enhance user experiences incorporating the manufacturing of optics computing and power modules.
The A&D sector will continue to win new A&D manufacturing programs in the area of communications for both secure and non secure applications. Additionally, we continue to win New design awards in the area of connected Battle space. Most recently for asset tracking to serve the U S. Warfighter.
In computing and telco, we won an incremental broadband amplifier program and a growing next generation telecommunications portfolio.
We were awarded a first generation product design for our handheld radio wave technology platform, which was a new logo.
We also added a new logo in the Satcom module space, which continues to see solid growth in 2022.
Finally, while not a program win I want to highlight that last month, we were selected as the winner of the 2022 manufacturing leadership award for transformational cultures presented by the National Association of manufacturers.
This award was in recognition of an internally developed program called the benchmark Enterprise Excellence Olympics.
Which brought together our global operations teams spanning seven countries to compete in the Olympics themed event aimed at reinvigorating lean six Sigma culture and continuous improvement methodologies across the enterprise in a competition style event.
Now turning to slide 16.
I'll provide some color on expected demand trends by sector for the third quarter and full year.
Some investors have surface concerns about the possible convergence of several macroeconomic risks, including inflation interest rate increases geopolitical tensions supply chain challenges and the risk of a recession.
I am proud that our team has proven to be very resilient and done an excellent job navigating the pandemic and other challenges that have come our way.
We believe that our business is well positioned to overcome future challenges that might result from these macro risks.
Our shifts years ago to higher value markets with complex programs has resulted in a more diversified portfolio with a stronger long term growth potential healthy margins and little exposure to consumer or Commoditized markets.
In semi cap revenues have grown double digit year on year for 11 consecutive quarters, and we expect Q3 to be number 12.
On a sequential basis after a slight pause due to incremental constraints from outside service providers that impacted our June quarter performance.
We expect sequential growth to resume in Q3.
Looking forward, we continue to believe secular drivers will provide an opportunity for continued growth in this sector. As we have several large customers that have order backlog supporting new fabs through much of 2023.
These drivers include increased silicon content across all devices.
<unk> post COVID-19 demand recovery and now the accelerated growth in new domestic semiconductor fabs.
To be further underpinned by the chips Act, which was just approved by Congress last week.
We remain well positioned in this sector with our $25 million capital investment this year to support breakthrough technologies developed by our customers with our design precision machining and electronics manufacturing capabilities.
For the full year, we now expect revenues to grow more than 25% in this sector.
In our medical sector, we saw strong growth in this business in Q2, expanding 42% sequentially and 53% year over year.
As one of our most supply chain impacted sectors. We were pleased with the operation teams ability to meet the underlying demand in the quarter.
We expect Q3 performance to reflect modest sequential growth over Q2 levels. Given the success, we have had partnering with our customers to address some of our supply constraints.
And with the strong backlog of demand we have in this area.
On a full year basis, we continue to benefit from increasing demand from existing programs and a large number of new program ramps now, reaching volume production, which positions medical to be among our fastest growing sectors. This year.
In industrials, we expect revenue in September quarter to be down modestly compared to June our second quarter performance in industrials with stronger than expected driven by increased demand from energy related products looks.
Looking into the back half new program ramps and advanced Lidar applications energy management systems, and Iot enabled smart devices positioned the sector to grow above the corporate average.
Moving to the A&D sector outlook, we continue to see indication of improved and demand from both the aerospace and defense sectors.
For the June quarter, we were pleased with the rebound from a challenging March quarter.
As you've likely heard from some of our peers. The defense sector. In particular continues to suffer from significant supply chain constraints as increasing demand has hit within the extended lead time environment.
As this improves and our recent design wins begin to ramp in the coming quarters. We expect further recovery next year.
Within telco the June quarter performed better than our expectations for flat versus March, which we expect to normalize in Q3.
On a full year basis and into 2023, we remain optimistic on double digit growth prospects driven by ramping next generation broad with broadband infrastructure wins government programs aimed.
To enable broadband from anywhere and increased satcom adoption around the world.
Finally in computing, we continue to help build some of the largest and most sophisticated supercomputers in the world.
Including a large high performance computing program ramping in the second half.
Even with the strong performance in the first half, we expect sequential and year over year growth in computing throughout the rest of the year.
Let's now turn to slide 17.
Back in the fall of 2020, we laid out our mid term model for the company, which we committed to achieving by the time, we exit 2022.
In 2021, we made steady progress against these goals, putting up milestones that clearly demonstrated we were tracking to these targets.
Excluding the effect of pass through revenue, our Q3 guidance reflects a gross margin of nine 4% and non-GAAP operating margin of over 4%.
Which would enable us to achieve all four of the performance metrics of our mid term target model in the quarter.
Taken further if we were to exclude stock based compensation like many of our peers. Our non-GAAP operating margin is expected to be greater than four 5% in the quarter.
There is always room for improvement.
But overall I am pleased with our performance, particularly admits to all the challenges we endured in the quarter.
<unk> supply chain efficiencies continued COVID-19 disruptions and inflationary impacts.
In summary, if you please turn to slide 18.
Demand trends among our target sectors continues to be robust. This is coming from growth within existing programs and the ramp of new program wins that we secured over the last few years.
It's a bit early to provide a full perspective on the market rate of growth in 2023, but.
But we believe the markets, we serve are well positioned to weather a potential recession.
Of course, it depends on the duration and severity of the market downturn.
However, based on the conversations we've had our customers are not seeing a slowing of demand.
Indeed, several customers have share gain plans or they are still committed to addressing unmet customer demand due to supply constraints.
Turning to operations, we're continuously improving efficiency and our team working in partnership with our customers has done a remarkable job securing key supplies.
But even with our accelerating growth.
Still unable to meet all customer demand in the near term.
We now expect our business.
Even excluding supply chain premium revenue to grow rate of greater than 20% on the full year.
We also expect earnings growth will more than double revenue growth as we see further leverage from our higher revenue levels.
This is enabling us to feel confident about achieving non-GAAP EPS of $2 per share or more in 2022.
And we're expecting that our ROI see will exceed 10% as we exit the year.
It is encouraging for our team to see the fruits of their labors over the last several years coming through our results.
And I'm appreciative of their commitment and dedication to our customers.
We remain confident in our strategy and are excited about the incremental leverage in our model.
We are hosting an analyst day in New York on November 8th and look forward to discussing this further along with our long term objectives.
With that I'll now turn the call over to the operator to conduct our Q&A session.
Thank you.
A question answer session.
Right.
Thanks, John .
Hey, Jerry.
Paul.
Handset before pressing the keys.
Your question. Please press Star then.
Sure.
Thanks, Jeff Campbell all of them out there.
Our final question.
Hello, Matt.
Sidoti. Please go ahead.
Hi.
Good afternoon. This is Stefan <unk> sort of strong. Thank you for taking my questions.
Sure.
Okay.
Our first question is which end market do you think you've like lease resistant to an economic.
Slow down.
Yes.
Thats a good question I think.
The traditional markets of computing telco would be one that might be more sensitive to a data center enterprise slowdown, but the.
The segment that we the sub segments, we're supporting for compute or really in the high performance computing area, which are very project driven and we've got pretty good line of sight that things continue there and in telco. We're working on some very large rollout of Nextgen broadband solutions. So.
Even though those market segments might be a little more sensitive I think that we.
So we feel pretty good if thats really our weakest position, we don't really have.
Really any meaningful exposure to consumers so from that standpoint.
Now what we see right now is a lot of discussion about consumer purchasing behavior, but certainly from our talks with customers demand feels pretty resilient elsewhere.
Alright, Thank you and I have another question so for the new program wins.
We have a balance between new logos and existing customers.
It's interesting because it depends a little bit.
By sector, but one of our goals.
Certainly over the last several years has been.
We've got a great marquee list of Blue chip customers and we knew that we could go deeper across that customer base and so we've been really pleased that we've continued to get incremental wins for.
And frankly, that's where we have relationships and we have teams in place so.
It's just really supports that we're doing a good job for them, but at the same time. We also recognize organic growth from new customers is also important so I'd say, it's really pretty evenly balanced where we certainly are by our winning incrementally, but we're also bringing on.
New clients, we haven't really put a metric on it I'll give you. One example, though for semi cap for example, we we actually support some of the top wafer fab equipment and capital suppliers in the industry. The industry leaders and we've continued to win next generation platforms, there, which is exciting but we've also started.
When some back end solutions, where we hadn't had much exposure in the past. So it's great to see is starting to play in the test area. Some of the things that arent necessarily about the creation of the wafer in the semiconductor space. One example, where we are.
Diversified while we've gone deeper with with the key customers we've had.
Well good question.
Alright, thank you so much and I'll jump back in the queue.
Yeah.
Thank you.
Again, if you wish to ask a question. Please press Star then one.
Please hold.
This concludes our question and answer session I would like to turn the conference back over to Palmer.
For any closing remarks. Please go ahead.
Thank you Maria and thank you everyone for participating in Benchmark's second quarter 2022 earnings call before we go I'd like to remind listeners of a couple of upcoming events. This Friday August 5th will be attending the 11th annual Needham virtual industry Industrial Tech robotics and Cleantech one on one conference that will follow on August two.
With our participation in the Oppenheimer, 25th annual technology Internet and communications.
Lastly, as Jeff mentioned, please hold the date for benchmarks analyst day event set to be held on November eight at the New York Stock Exchange.
Commemorating our 25th year of being listed on the NYSE.
With that we look forward to speaking with you soon and wish you all a good evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
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