Benchmark Electronics, Inc. (NYSE:BHE) Q4 2022 Earnings Call Transcript February 1, 2023
Operator: Good day and welcome to the Benchmark Electronics, Inc. Fourth Quarter 2022 Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Paul Mansky with Benchmark Electronics. Please go ahead.
Paul Mansky: Thank you, Chad, and thanks everyone for joining us today at Benchmark’s fourth quarter fiscal year 2022 earnings call. Joining me this afternoon are Jeff Benck, CEO and President; and Roop Lakkaraju, CFO. After the market closed today, we issued an earnings release pertaining to our financial performance for the fourth quarter of 2022. And we have prepared a presentation that we will reference on this call. The press release and the presentation are available online under the Investor Relations section of our website at bench.com. This call is being webcast live and a replay will be available online following the call. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as the appendix in the presentation.
Please take a moment to review the forward-looking statements advice on Slide 2 in the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today’s remarks that are not statements of historical fact are forward-looking statements, which involve risks and uncertainties as described in our press releases and SEC filings. Actual results may differ materially from these statements, most notably due to the ongoing impact of the global supply chain constraints, macroeconomic conditions and COVID. Benchmark undertakes no obligation to update any forward-looking statements. For today’s call, Jeff will be covering a summary of our fourth quarter and fiscal year results. Roop will then discuss our detailed financial results and our first quarter and fiscal year 2023 guidance.
Jeff will then return to provide more insight on sector demand trends, business wins, and closing commentary. If you will, please turn to Slide 3. I’ll turn the call over to our CEO, Jeff Benck.
Jeff Benck: Thank you, Paul. Good afternoon and thanks to everyone for joining our call today. Hopefully by now, you have seen our press release and results for the fourth quarter of 2022, which again demonstrated our continued execution of our growth strategy. Referencing Slide 3, revenue in the fourth quarter of $751 million was up 19% year-over-year. Our GAAP and non-GAAP gross margin was 9.6%, while our GAAP operating margin was 3.6% or 4.3% on a non-GAAP basis. Supply chain premiums were approximately $10 million lower than our guidance in the quarter as we continue to see these decreases. Excluding the effect of supply chain premiums, we delivered non-GAAP gross margin of 10.2% and non-GAAP operating margin of 4.6%. When comparing the most of our peers, who exclude stock-based compensation from their non-GAAP results, our non-GAAP margin would be 5.2% given the approximately 70 basis points of stock-based compensation included in our results.
Finally, we delivered both GAAP and non-GAAP earnings of $0.60 per share, which was another record quarter of earnings for the company. In the fourth quarter, although we saw some greater than expected softening in the Semi-Cap sector late in the quarter, we still managed to grow Semi-Cap well into the double digits year-on-year. Coupled with the continued strength in EMS and the diversity of our model, we delivered quarterly earnings at the midpoint of our guidance range. Turning to the full year on Slide 4. In 2022, we grew revenue 28% and delivered non-GAAP earnings of $2.09. This represented a record earnings performance for the company. GAAP and non-GAAP gross margins were 8.8%, while GAAP operating margins were 3.1%. On a non-GAAP basis, our operating margins of 3.6% were up 60 basis points year-on-year.
Excluding the effects of supply chain premiums, revenue grew 20% year-over-year to approximately $2.6 billion with double digit growth in five of our six sectors. Non-GAAP gross margin expanded to 9.7% and non-GAAP operating margin of 4%, was up 80 basis points year-over-year. I would like to congratulate the entire Benchmark team for their continued execution as we deliver on our strategic objectives. As many of you are aware, we communicated specific financial targets back in 2020 that indicated what we felt was possible by the end of 2022. These were established in the middle of the global pandemic and before the full effect of the related supply chain disruptions were known. Despite these challenges, we never lost focus on our execution and ultimately met or exceeded each of these targets across every metric.
However, we recognize this is a journey and while 2022’s results represented a key waypoint, we have much room for further improvement. Now let me pass it over to Roop to share a few more details.
Roop Lakkaraju: Thank you, Jeff. And good afternoon. Please turn to Slide 6 for our revenue by market sector. Total Benchmark revenue was $751 million in Q4, which is 3% lower sequentially and 19% higher year-over-year. Medical revenues for the fourth quarter decreased 13% sequentially due to material constraints, but increased 14% year-over-year due to growth with existing customers and new program ramps. Semi-Cap revenues decreased 5% sequentially, while increasing 9% year-over-year. A&D revenues for the fourth quarter increased 5% sequentially due to increased demand, but decreased 5% year-over-year as we worked to try to offset continued supply chain constraints. Industrials revenue for the fourth quarter were down 8% sequentially, but up 14% year-over-year.
Throughout the year, we saw increasing demand from energy-related products, building infrastructure and LiDAR solutions. Advanced Computing was down 2% sequentially, up 55% year-over-year due to the ramp of high-performance computing programs. In the Next-Gen Communications sector revenues were up 24% sequentially and 64% year-over-year due to continued demand strength from existing programs and new ramps for broadband infrastructure. In the fourth quarter, our top 10 customers represented 53% of sales. Please turn to Slide 7. Our GAAP earnings per share for the quarter was $0.60, which represents 71% growth on a year-over-year basis. Our GAAP results included restructuring at other one-time costs, totaling $800,000 related to the closure of our previously announced site in Moorpark, California, offset by net gain of $2.3 million from legal settlements.
For Q4, our non-GAAP gross margin of 9.6% improved 100 basis points sequentially, primarily due to a better absorption across our sites and a reduction in supply chain premiums. Excluding supply chain premiums, our gross margin was 10.2%. Our SG&A was $39.5 million, up sequentially due primarily to higher variable compensation and healthcare expenses. Non-GAAP operating margin was 4.3%. This compares to operating margin of 4.6%, excluding supply chain premiums. In Q4 2022, our non-GAAP effective tax rate was 19.1%, which was as forecasted. For the quarter non-GAAP EPS of $0.60 was in line with the midpoint of our Q4 guidance, up 25% year-over-year. Non-GAAP ROIC in the fourth quarter was 9.9%, a 10 basis point increase sequentially and 130 basis point improvement year-over-year.
Turn to Slide 8 for our revenue comparison by market sector for the full year 2022 versus 2021. Total Benchmark revenue for 2022 is $2.9 billion, an increase of $631 million year-over-year, aided by growth in all sectors except A&D. For the year, medical revenues increased 28% year-over-year from growth with existing customers and new program ramps. Semi-Cap revenues increased 31% due to increased demand for wafer fab subsystems across our customer base. The A&D sector declined by 9% due to market constraints, even as end demand continue to improve throughout the year. Industrials revenues were up 39% primarily from continued demand improvements from oil and gas control systems and building infrastructure programs. Advanced Computing was up 56% from the planned ramp and execution of high performance computing programs that will continue throughout 2023.
Next-Gen Communications revenues were up 36% primarily from new program ramps, and continued strength in broadband infrastructure programs. Our top ten customers represented 51% of sales for the full year 2022. We had one customer Applied Materials that was greater than 10% of revenue for the full year. Please turn to Slide 9. Our GAAP earnings per share for fiscal year 2022 was $1.91, representing 93% growth on a year-over-year basis. Our GAAP results included restructuring and other one-time cost totaling $5.7 million related to the closure of our previously announced site, Moorpark, California and other smaller restructuring activities and a net gain of $3 million from legal settlements. Our non-GAAP gross margin of 8.8% decreased 30 basis points due to higher supply chain premiums.
Without supply chain premiums, our gross margin was 9.7%. Our SG&A was $150.2 million, up year-over-year due primarily to higher variable compensation, continued investment in IT infrastructure and medical expenses. Non-GAAP operating margin was 3.6%. Excluding the impact of supply chain premiums, our operating margin was 4%. Our non-GAAP effective tax rate was 19.1% for the year. Non-GAAP EPS of $2.09 was 55% higher year-over-year. Turning this Slide 10 to review the effects of supply chain premiums on a trended basis over the last eight quarters. We expected supply chain premiums to decline sequentially in Q4 and they did to $46 million versus $74 million in the prior quarter. Excluding supply chain premiums, our revenue in the fourth quarter was $705 million, a sequential increase of $7 million or 1% growth and a year-over-year increase of $113 million or 19% growth.
Please turn to Slide 11 to review our cash conversion cycle performance. Our cash conversion cycle days were 96 in the fourth quarter compared to 79 days in Q3. The largest contributor to the increase was due to the lower accounts payable days, which was impacted by inventory being procured earlier in the quarter. Our accounts payable decreased $98 million sequentially or 19% lower. Total inventory declined sequentially in Q4 by $19 million. Turn to Slide 12 for an update on liquidity and capital resources. In Q4, we used $53 million of cash and operations and invested $13 million in CapEx. Our cash balance on December 31 was $207 million. As of December 31, we had $131 million outstanding on our term loan. $195 million outstanding borrowings against our revolver and had $251 million available to borrow under our revolver.
Turning this Slide 13, to review our capital allocation activity. In 2022, we invested $47 million in capital expenditures. We expect our CapEx spending in Q1 2023 to be between $20 million and $25 million. In Q4, we paid cash dividends of $5.8 million, culminating a $23 million for the full year 2022. Since 2018, we have paid cash dividends totaling $113 million. We did not repurchase any outstanding shares in the quarter. The total share repurchase in 2022 was $9.4 million or approximately 400,000 shares equal to a reduction of 1% of shares outstanding since the beginning of the fiscal year. As of December 31, 2022, we had approximately $155 million remaining in our existing share repurchase authorization. We continue to evaluate share repurchases opportunistically while considering market conditions in 2023.
While cash flow from operations in Q4 2022 fell short of our projection. Based on the progress we’re making in reducing our inventory and management of other working capital elements, we continue to expect to generate free cash flow in the $70 million to $90 million range in 2023. Please turn to Slide 14 for a review of our first quarter 2023 guidance. We expect revenue to range from $640 million to $680 million, which at the midpoint represents a 4% year-over-year growth. As we are no longer including supply chain premiums in our outlook. Excluding these, we are guiding to a midpoint equal to 14% year-on-year growth on a comparable basis. We expect that our gross margin will be between 9.5% to 9.7% for Q1, sequentially lower due to reduced semi-cap revenue, higher payroll taxes, and merit increases throughout the enterprise.
Our first quarter gross margins are holding up better than our forecasted revenue levels might indicate due to favorable EMS mix, continuing through 2023, we do have a number of new program wins that are expected to ramp, which will provide some temporary headwinds to gross margins. As we proceed through the second half of 2023, we expect sequential improvement in margins. SG&A expense will range between $38 million and $40 million. Our non-GAAP operating margin range is forecasted to be 3.6% to 3.8% from modeling purposes. Our non-GAAP guidance does exclude the impact of amortization of intangible assets and estimated restructuring in other costs. We expect to incur restructuring in other non-recurring costs in Q1 of approximately $200,000 to $600,000.
![11 Highest Paying Countries for Information Technology Professionals](https://imonkey-blog.imgix.net/blog/wp-content/uploads/2016/11/23172743/54688261_m.jpg?auto=fortmat&fit=clip&expires=1756080000&width=480&height=371)
Copyright: rawpixel / 123RF Stock Photo
The costs relate to continued activities associated with completing previously announced site closures. Our non-GAAP diluted earnings per share is expected to be in the range of $0.39 to $0.45 or a mid-point of $0.42. Other expenses net are expected to be $6 million due primarily to interest expense. Our interest expense is growing sequentially in year-over-year as a function of the additional borrowings to support our growth as well as the higher interest rate environment. We expect to reduce our borrowings and our interest expense throughout 2023 as we generate free cash flow. We expect that for Q1 our non-GAAP effective tax rate will be between 18% and 20% with a weighted average share count of 35.5 million in the period. And with that, I’ll turn the call back over to you, Jeff.
Jeff Benck: Thanks, Roop. Please turn to Slide 16. First, let me provide some additional color on the updates that Roop provided. Our first quarter guidance comprehends Semi-Cap sector softness impacting the first half of 2023. That being the case, we continue to see strength in several other sectors including medical, industrials and next-gen communications. In both 2021 and 2022, the effective supply chain premiums obscured the underlying rate of growth in several of our sectors. For comparative purposes, we’re providing a view of the sectors excluding these premiums, which we have presented in Slide 16 for your reference. In Semi-Cap, we closed out a banner year in 2022, growing revenue 30%. We’ve all seen the news from several companies and industry analysts in this space regarding forecast for lower Semi-Cap wafer fab equipment spending, attributable to the weakness in the memory markets and global trade restrictions, including those stemming from the U.S. Department of Commerce.
Our share gains, our exposure to logic versus memory and our involvement with EUV systems partially insulated us from this downturn. However, we’re not entirely immune. On a near-term basis, we have seen many estimates referencing WFE capital budgets coming down 20% to 25% in 2023, which most believe will be first half 2023 weighted. We expect this downturn to be briefed by historical standards and are confident in the multi-year demand drivers including increasing silicon content, the emergence of many new domestic fabs like here in Arizona for TSMC and further government investment via measures such as the CHIPS Act. We believe that we’ll continue to outperform sector growth rates given our program wins that will be starting in 2023, but in Q1, we are forecasting a sequential and year-over-year decline in this sector.
In Medical, we grew revenue 13% in 2022. This could have been much more, but supply chain challenges acutely impacted our ability to fully meet demand during the year. Looking forward, the anticipated macro resiliency of the Medical sector strength of our customers installed base and improving supply together give us confidence in the growth expected for the quarter and full year. In Industrials, 2022 saw revenue increased 24% excluding supply chain premiums on the back of growth from existing customer products and continued momentum and new program wins. We continue to see our business and industrial shift to support automation and energy efficiency solutions. We expect 2023 to be another growth year for our Industrial sector. Moving to the A&D sector, we’re expecting recovery in 2023.
Although commercial aero demand improved throughout the year, our defense sub sector was and is more heavily impacted by supply chain challenges in legacy systems where redesign is not an option. However, demand is solid and we are confident that defense spending will support continued growth. With steady improvement and component availability and deployment of next-generation systems later this year, we expect A&D to be a contributor to our growth. Turning to Next Generation Communications, we grew revenue in the sector by 24% in 2022, with the last few quarters growing at a much higher rate. We are well position here to benefit from major broadband infrastructure investments, satellite communications proliferation and government sponsored wireless broadband programs.
We expect 2023 will prove to be a significant year for us in the space with our sector growth expected to well exceed corporate averages. Finally, in Advanced Computing, we’ve been helping build some of the largest and most sophisticated high performance computing systems in the world. We have a large project currently underway on a new supercomputer platform that will contribute to the next two quarters performance in this sector. As that project completes, we’re expecting sector growth to moderate resulting in relatively flat revenue for the year. Turning to Slide 17, let me finish our sector discussion by highlighting some key wins we secured in the December quarter. Once again, we saw good balance across the portfolio, reflecting the diversity of complex projects that we take on to help customers navigate through the product lifecycle and accelerate their time to market.
This helped us end the year with over $930 million in new bookings, which is a leading indicator of future growth. In Medical, we continue to be awarded critical medical device and life science programs, this quarter we won new design opportunities for a minimally evasive robotic surgical platform and a novel rapid cancer diagnostic solution, as well as a manufacturing win for a cosmetic surgery treatment system. In Semi-Cap, we continue to execute with a number of significant wins. Our 2022 performance was a record year for us in next generation tool bookings. In Q4, we won a manufacturing award for a new way for handling project. And in engineering services, we had key wins in process metrology and in cutting edge lithography platform. In the A&D sector, we won an RF manufacturing program, which will be used in a compact flight computer for a space application.
We also won the design and manufacturing of an advanced communications module that goes into fighter jets. Finally, we want to secure communications module for military ground vehicles. In Industrials, we continue to rack up wins in the energy space that will also positively impact the environment. This quarter, those included manufacturing wins for a wind energy management system and energy efficient heat pumps. Within engineering, we are designing test development systems for climate controllers. In Advanced Computing and Next Generation Communications, this quarter we had two key wins in EMS and one in engineering. Within EMS, we won the program for a secure biometric reader in existing customer. We also won the business to provide a high performance optical transceiver, which represents a new logo for us.
Finally, in Advanced Computing, we’re helping an existing customer engineer a large functional tester for a high performance computing platform. In summary, please turn to Slide 18. 2022 was another significant year for us as we overcame many challenges delivering record revenue and earnings. We did this with the aid of double digit growth in five of our six sectors. We expect that momentum will continue in 2023 across most of our sectors and we are guiding to grow in at least four of the six. We recognize some customers are frustrated with the current environment as supply chain issues persist, costs have escalated, and like our peers, we’re not able to meet all of our demand. In fact, we continue to have approximately $200 million in unfulfilled demand exiting 2022.
We saw gradual improvement last year, but look forward to meaningfully close the gap in 2023 working closely with our OEM customers on solving these critical issues. Finally, I’d like to highlight the team’s effort in ESG. I’m very proud to say in its report published in November of 2022. MSCI elevated us to a AA rating. That puts us in the top 10% of MSCI’s peer group for Benchmark. This is obviously a team effort and one for which every Benchmark team member should be proud. In conclusion, I want to say that I am as confident today in the future for Benchmark as I was back in 2020. We’ve invested for sustainable growth, while further demonstrating our resiliency to overcome unforeseen challenges. I just want to reiterate, despite our near-term Semi-Cap headwinds, we believe the long-term targets that were introduced at our Analyst Day in November are still achievable by 2025.
With the anticipated return to Semi-Cap growth beyond 2023, coupled with the growing frequency of manufacturing outsourcing discussions in key growth sectors and the larger trend toward near sourcing. The leading companies of today and tomorrow need partners like us more than ever to help develop and ultimately build their increasingly complex and innovative products. We look forward to updating you on our progress in the quarters to come. With that, I’ll now turn the call over to the operator to conduct our Q&A session.
See also 25 Wealthiest Countries in the World by GDP per Capital and 11 Best Dividend Stocks for Rising Interest Rates.
Q&A Session
Follow Benchmark Electronics Inc (NYSE:BHE)
Follow Benchmark Electronics Inc (NYSE:BHE)
Operator: Thank you. And the first question will be from Jaeson Schmidt from Lake Street. Please ahead.
Jaeson Schmidt: Hey guys. Thanks for taking my questions. Just want to start with the commentary on the Semi-Cap market. Just curious if you could provide more color on sort of what you’re seeing. You mentioned that it started to soften at the end of Q4. I mean, is this primarily just order softening or have you started to see more cancellations and decommits from customers within that segment?
Jeff Benck: It was really pushing of orders to the out quarters. We did see demand drop and that’s kind of been reflected in what we’re looking at for 2023 Jaeson. As we said, it did start. We had anticipated some slowdown in fourth quarter and that was kind of considering our guidance, but I would say it was more pronounced as we got to the back end of the quarter than we had anticipated. And thankfully with the diversity of the portfolio, we were able to still bring in the earnings in the midpoint of our guidance. But as we look into 2023, particularly the first half that that softness in semi continues. We also, even since our Analyst Day there were further the restrictions on China and I would say the memory environment didn’t get better.
And so, incrementally, I think we saw increased pressure on that. The industry a lot of people are picking wafer fab equipment to be down 20%, 25%, obviously, we feed into that with some of our large OEMs. That being said, we do think that we will do better than the industry. We had gained a lot of share in the last few years and we do have a number of new wins that will help us there. And we also it wasn’t every customer in the segment, so there are some customers still that have backlog that hasn’t changed, that also contribute to kind of supporting that business. But that being said, you see us reflecting that there is headwinds in Semi-Cap.
Jaeson Schmidt: Okay. No, that’s helpful. And just curious, what sort of gives you the confidence that this is really just the first half issue. Just assuming, I mean, supply chain constraints ease a little bit and just given how tough this first half is, the second half should be better? Or do you have better visibility into some of the orders that you’ll start to ship in the second half? Can you just give us some comfort in why the second half should be better?
Jeff Benck: Yes. I can give a little color there. I mean, we do have particularly in this environment, we do have visibility into the back half of 2023. And we certainly see the opportunity for sequential improvement based on the demand that’s reflected on us. Of course, that can change. But right now we’ve talked to all of our key customers here. Everyone’s porting to a very strong 2024 and they want to prepare for that. So, there’s even some thought about what does the what is fourth quarter or the back half of 2023? Does it incrementally improve from here? But we’re seeing the more pronounced impact in the first half.
Jaeson Schmidt: Okay. And then just the last one from me, and I’ll jump back into queue. Just want to make sure I heard right. So, I mean, it sounds like gross margin will take a step back as these new programs ramp, but you expect an improvement in Q3 and Q4 sequentially?
Jeff Benck: Yes, that’s right, Jason. So, obviously from a sequential standpoint, from Q4 to Q1, we’ll see a slight drop, but still staying strong. But with the new ramps or incremental ramps through the middle of the year, we’ll see a little bit of a headwind there, and then it sequentially picks back up in the Q3 to Q4 timeframe as you’d indicated.
Jaeson Schmidt: Okay. Perfect. Thanks a lot guys.
Jeff Benck: Thanks, Jaeson. No worries.
Operator: And the next question is from Steven Fox from Fox Advisors. Please go ahead.
Steven Fox: Hi, good afternoon. I had a few questions. First of all, just following up on the Semi-Cap question about the second half of this year. Jeff, would you attribute it mainly to sort of new fabs coming online? No transitions, any other color you can provide in terms of why your customers are confident about 2024? And along those lines, there were some incremental China restrictions from other governments that seemed to be online to be enacted. Are you considering those in your revised thinking for Semi-Cap? And then I had a follow up.
Jeff Benck: Yes, I think when you look at 2024, certainly incremental fabs coming online is meaningful. I mean, right here, we’re looking across the way here in Phoenix where we’re headquartered, and Intel is building a new fab. We got TSMC that’s really just signed up to their second, what I would call not just a typical, but substantial multi-node fab here as well. And there’s been a lot of indications that other handheld device customers are going to use the most, going to buy more silicon from the Phoenix area, and the fab that’s coming on. All those all of that you can imagine it’s not out of the ground yet. The buildings aren’t completely completed. And obviously once they come online, you got to buy the fab equipment to be able to produce silicon and stuff.
So, we certainly see that, I think as a pretty good pickup. Also, just watching the commentary on memory and right now there’s been a lot of pressure on that, but I think people believe that the inventory gets burned off in the first half and there’s some incremental positive commentary from that. But a lot of what we are we have pretty senior relationships that our customers and we’re talking to them about what they’re seeing and they’re much closer to it, because they we don’t sell directly to an Intel at TSMC, but we, obviously we sell to the wafer fab equipment suppliers, and they’re just universally bullish on 2024. Doesn’t mean, that they can’t change that view, but we’re just trying to give you the best insight we have at this point.
I do think that the advanced nodes, the EUV growth there to be able to achieve some of the 5-nanometer, and more 3-nanometer technology is more significantly dependent on that. So, we’re seeing, really solid strength in EUV platforms and a lot of demand there. So that also is great that we’ve got that a strong position there and that also supports a little bit our outlook. So that’s kind of where, how we see things.
Steven Fox: And just one other point, you covered everything except for just like the Netherlands following through on China restrictions.
Jeff Benck: Yes. That’s interesting. It’s I can’t say that, that’s fully reflected necessarily because some of that only came out in the last week or two. It’s interesting though I would tell you that there was a big impact we thought in fourth quarter from China and those restrictions, but then people got licenses to ship for another year and that kind of muted the impact a little bit. So it’s pretty dynamic, so it’s a little bit hard to at first there’s like, oh, this is another big impact, but then, I saw the other one moderate a bit. So, we’re kind of waiting to see kind of how that plays out and where people’s wins are with those fab customers. There’s also been a commitment, I don’t know if you’ve seen, but for incremental fabs to be built in Japan and Europe outside of China. And so while we’re seeing a lot go on domestically with the CHIPS Act there’s this increased fabs support and commitment by the governments outside of China.
Steven Fox: Great. That’s really helpful. Yes. And then as a follow-up, the new bookings number is pretty impressive, is 930 million. Can you just sort of from just a high level standpoint, tell us what’s going on with your new win rates, where you’ve been most successful? What maybe are the key drivers behind the latest new bookings number that you just gave us? Thanks.