Benchmark Electronics(BHE) - 2022 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income statements, shareholders' equity statements, and cash flow statements, along with detailed notes explaining the basis of presentation, accounting policies, and specific financial line items Condensed Consolidated Balance Sheets This table presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :--------------------------------------- | :------------------- | :------------------ | | Assets: | | | | Cash and cash equivalents | $247,298 | $271,749 | | Total current assets | $1,708,203 | $1,348,144 | | Inventories | $746,920 | $523,240 | | Total assets | $2,276,507 | $1,903,880 | | Liabilities and Shareholders' Equity: | | | | Total current liabilities | $848,900 | $654,382 | | Long-term debt, less current installments | $296,425 | $129,289 | | Total shareholders' equity | $1,000,617 | $973,802 | | Total liabilities and shareholders' equity | $2,276,507 | $1,903,880 | Condensed Consolidated Statements of Income This table outlines the company's revenues, expenses, and net income over specific reporting periods, including earnings per share Condensed Consolidated Statements of Income (in thousands, except per share data) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | $771,575 | $571,882 | $2,135,687 | $1,622,265 | | Gross profit | $66,750 | $53,705 | $183,108 | $143,845 | | Income from operations | $25,284 | $11,794 | $63,123 | $34,427 | | Income before income taxes | $23,330 | $10,429 | $58,115 | $29,327 | | Net income | $18,829 | $8,065 | $47,010 | $23,351 | | Basic EPS | $0.54 | $0.23 | $1.34 | $0.65 | | Diluted EPS | $0.53 | $0.23 | $1.32 | $0.64 | - Sales for the three months ended September 30, 2022, increased by 35% year-over-year, while net income increased by 133.5%[8] - For the nine months ended September 30, 2022, sales grew by 31.6% and net income more than doubled, increasing by 101.3% compared to the same period in 2021[8] Condensed Consolidated Statements of Comprehensive Income This table details net income and other comprehensive income components, such as foreign currency translation adjustments and derivative gains/losses Condensed Consolidated Statements of Comprehensive Income (in thousands) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $18,829 | $8,065 | $47,010 | $23,351 | | Foreign currency translation adjustments | $(3,541) | $(1,438) | $(8,197) | $(3,146) | | Unrealized gain on derivatives, net of tax | $730 | $214 | $4,293 | $1,796 | | Other comprehensive loss | $(2,833) | $(1,111) | $(3,967) | $(981) | | Comprehensive income | $15,996 | $6,954 | $43,043 | $22,370 | - Comprehensive income for the three months ended September 30, 2022, increased by 130% year-over-year, and for the nine months, it increased by 92.4%[10] Condensed Consolidated Statements of Shareholders' Equity This table tracks changes in shareholders' equity, including net income, dividends, share repurchases, and stock-based compensation Condensed Consolidated Statements of Shareholders' Equity (in thousands) | Item | December 31, 2021 | September 30, 2022 | | :------------------------------------ | :------------------ | :------------------- | | Total Shareholders' Equity | $973,802 | $1,000,617 | | Net income (9 months ended Sep 30, 2022) | N/A | $47,010 | | Dividends declared (9 months ended Sep 30, 2022) | N/A | $(17,406) | | Shares repurchased and retired (9 months ended Sep 30, 2022) | N/A | $(9,391) | | Stock-based compensation expense (9 months ended Sep 30, 2022) | N/A | $13,282 | | Other comprehensive loss (9 months ended Sep 30, 2022) | N/A | $(3,967) | Condensed Consolidated Statements of Cash Flows This table categorizes cash flows into operating, investing, and financing activities, showing changes in cash and cash equivalents Condensed Consolidated Statements of Cash Flows (in thousands) | Item | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operations | $(124,717) | $(1,308) | | Net cash used in investing activities | $(27,928) | $(32,143) | | Net cash provided by (used in) financing activities | $139,785 | $(66,928) | | Net decrease in cash and cash equivalents and restricted cash | $(22,412) | $(104,793) | | Cash and cash equivalents and restricted cash at end of period | $249,337 | $291,197 | - Net cash used in operating activities significantly increased to $(124.7) million in the first nine months of 2022, primarily due to increases in inventories and accounts receivable[18] - Net cash provided by financing activities turned positive at $139.8 million in the first nine months of 2022, driven by increased borrowings under the credit agreement[18] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for specific line items and accounting policies presented in the financial statements Note 1 – Basis of Presentation Benchmark Electronics, Inc. provides advanced manufacturing services, including design, engineering, and technology solutions, to various industries globally. The unaudited interim financial statements are prepared in accordance with SEC rules and U.S. GAAP - The Company provides advanced manufacturing services, design and engineering services, and technology solutions[20] - Key industries served include aerospace and defense (A&D), medical technologies, complex industrials, semiconductor capital equipment (Semi-Cap), next-generation telecommunications, and advanced computing[20] - Manufacturing operations are located in the United States, Mexico (Americas), Asia, and Europe[20] Note 2 – New Accounting Pronouncements The company adopted ASU No. 2020-04 for reference rate reform (LIBOR to BSBY transition), which did not materially impact its consolidated financial statements. Other recently issued accounting standards are also not expected to have a material impact - The Company adopted ASU No. 2020-04 for the transition from LIBOR to the Bloomberg Short-Term Bank Yield Index Rate (BSBY)[23] - This transition and adoption did not have a material impact on the consolidated financial statements[23] Note 3 – Inventories Inventory costs increased significantly from December 31, 2021, to September 30, 2022, primarily driven by a substantial rise in raw materials Inventory Costs (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :---------------- | :------------------- | :------------------ | | Raw materials | $729,202 | $504,307 | | Work in process | $15,301 | $15,338 | | Finished goods | $2,417 | $3,595 | | Total Inventories | $746,920 | $523,240 | - Raw materials increased by $224.9 million, representing a 44.6% increase from December 31, 2021, to September 30, 2022[25] Note 4 – Goodwill and Other Intangible Assets The company's goodwill remained constant at $192.1 million, primarily allocated to the Americas segment. Net carrying amount of other intangible assets decreased slightly, with estimated future amortization expenses provided Goodwill and Intangible Assets (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------------- | :------------------ | | Goodwill | $192,116 | $192,116 | | Net Carrying Amount of Intangible Assets | $60,282 | $64,231 | | Amortization of intangible assets (9 months ended Sep 30) | $4,792 (2022) | $4,793 (2021) | | Amortization of capitalized purchased software costs (9 months ended Sep 30) | $3,019 (2022) | $1,490 (2021) | Estimated Future Amortization Expense of Acquired Intangible Assets (in thousands) | Year ending December 31, | Amount | | :----------------------- | :------- | | 2022 (remaining three months) | $1,592 | | 2023 | $5,979 | | 2024 | $4,817 | | 2025 | $4,817 | | 2026 | $4,817 | Note 5 – Borrowing Facilities The company's long-term debt increased significantly, primarily due to new borrowings under its revolving credit facility, which was expanded to $450 million. As of September 30, 2022, the company had $276.1 million available for future borrowings and was in compliance with all debt covenants Long-term Debt Outstanding (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :--------------------------------- | :------------------- | :------------------ | | Revolving credit facility | $170,000 | — | | Term loan | $131,250 | $131,250 | | Less unamortized debt issuance costs | $(1,943) | $(1,670) | | Total Long-term debt | $299,307 | $129,580 | - The Revolving Credit Facility commitments were increased from $250 million to $450 million on May 20, 2022[33] - As of September 30, 2022, the Company had $170.0 million outstanding under the Revolving Credit Facility and $131.3 million under the Term Loan Facility[39] - The Company had $276.1 million available for future borrowings under the Revolving Credit Facility and was in compliance with all financial covenants[39][38] Note 6 – Leases The company's lease expenses primarily consist of operating lease costs, which increased slightly year-over-year. Operating lease right-of-use assets and liabilities remain significant, with a weighted-average remaining lease term of 9.9 years for operating leases Total Lease Cost (in thousands) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating lease cost | $4,278 | $4,270 | $12,977 | $11,866 | | Total lease cost | $4,839 | $4,803 | $14,687 | $14,075 | Lease Assets and Liabilities (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------------- | :------------------ | | Operating lease right-of-use assets | $95,533 | $99,158 | | Operating lease liabilities, noncurrent | $87,983 | $90,878 | | Weighted average remaining lease term – operating leases | 9.9 years | 10.0 years | | Weighted average discount rate – operating leases | 4.1% | 4.1% | Note 7 – Common Stock and Stock-Based Awards Plans This note details the company's dividend policy, share repurchase program, and stock-based compensation plans, including the types of awards granted, associated costs, and unrecognized compensation expenses Dividends This section details the company's cash dividend declarations and payments to shareholders - The Company declared a quarterly cash dividend of $0.165 per share for most of 2021 and 2022[47] Cash Dividends Paid (in millions) | Period | 2022 | 2021 | | :-------------------------------- | :--- | :--- | | Three months ended September 30 | $5.8 | $5.9 | | Nine months ended September 30 | $17.4 | $17.4 | Share Repurchase Authorization This section outlines the board-authorized share repurchase program and its utilization - The Board of Directors authorized a total of $400 million for share repurchases[48] - During the nine months ended September 30, 2022, the Company repurchased 0.4 million common shares for $9.4 million at an average price of $24.96 per share[48] - As of September 30, 2022, $154.6 million remained under the stock repurchase program authorization[48] Stock-Based Compensation This section describes the company's stock-based incentive plans, associated costs, and unrecognized compensation Total Stock-Based Compensation Cost (in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :------- | :------- | | Three months ended September 30 | $4,800 | $4,000 | | Nine months ended September 30 | $13,300 | $10,900 | Unrecognized Compensation Cost and Remaining Amortization Period (as of Sep 30, 2022, in thousands) | Award Type | Unrecognized Compensation Cost | Remaining Weighted-Average Amortization Period | | :------------------------------------ | :----------------------------- | :--------------------------------------------- | | Restricted Stock Units | $24,407 | 2.57 years | | Performance-based Restricted Stock Units | $6,892 | 1.7 years | - The Company's 2019 Omnibus Incentive Compensation Plan authorizes various awards, including stock options, restricted shares, and restricted stock units[49] Note 8 – Income Taxes Income tax expense increased for the nine months ended September 30, 2022, with the effective tax rate remaining stable. The company benefits from tax incentives in foreign locations, which significantly lowered foreign income tax expense Income Tax Expense (in thousands) | Item | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------- | :----------------------------- | :----------------------------- | | Current: | | | | U.S. Federal | $(9) | $(426) | | State and local | $609 | $528 | | Foreign | $14,715 | $8,734 | | Deferred | $(4,210) | $(2,860) | | Total | $11,105 | $5,976 | Effective Tax Rates | Period | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | 19.3% | 19.1% | | Nine months ended September 30 | 19.1% | 20.1% | - Tax incentives in China (expiring 2023) and Thailand (expiring 2030) lowered foreign income tax expense by approximately $4.5 million ($0.13 per diluted share) for the nine months ended September 30, 2022, compared to $3.4 million ($0.09 per diluted share) in 2021[64] Note 9 – Revenue The company primarily generates revenue from manufacturing services, recognizing it over time as products are built or upon shipment. Contract assets and advance payments from customers are significant, reflecting the timing of revenue recognition and cash collections Disaggregation of revenue This section breaks down the company's external revenue by market sector and reportable operating segment External Revenue by Market Sector (in thousands) | Market Sector | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :------------------- | :--------------------------------------------- | :-------------------------------------------- | | Industrials | $155,278 | $451,260 | | A&D | $86,238 | $257,322 | | Medical | $165,546 | $448,653 | | Semi-Cap | $186,325 | $544,661 | | Computing | $94,562 | $218,254 | | Telecommunications | $83,626 | $215,537 | | Total External Revenue | $771,575 | $2,135,687 | Segment Revenue by Reportable Operating Segment (in thousands) | Reportable Operating Segment | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :--------------------------- | :--------------------------------------------- | :-------------------------------------------- | | Americas | $400,905 | $1,066,760 | | Asia | $337,726 | $945,434 | | Europe | $68,400 | $208,591 | | Elimination of intersegment sales | $(35,456) | $(85,098) | | Total Segment Revenue | $807,031 | $2,220,785 | - For the nine months ended September 30, 2022, 90.6% of the Company's revenue was recognized over time[78] - The Company's revenues are primarily generated from manufacturing services, including the sale of manufactured products built to customer specifications, and design, development, and engineering services[67] - Under the majority of manufacturing contracts, revenue is recognized progressively based on the cost-to-cost method as the customer controls work-in-progress[68] Contract Assets and Advance Payments (in thousands) | Item | September 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------------- | :------------------ | | Contract assets | $187,730 | $155,243 | | Advance payments from customers | $211,601 | $118,124 | Note 10 – Accounts Receivable Sale Programs The company utilizes accounts receivable sale programs, selling up to $120 million of specific receivables at a discount. During the first nine months of 2022, $330.0 million in receivables were sold, generating $328.9 million in cash proceeds - The Company may sell up to $120.0 million of specific accounts receivable at any one time under trade accounts receivable sale programs[81] Accounts Receivable Sold and Cash Proceeds (in millions) | Period | Accounts Receivable Sold | Cash Proceeds (net of discount) | | :-------------------------------- | :----------------------- | :------------------------------ | | Three months ended September 30, 2022 | $103.4 | $102.9 | | Nine months ended September 30, 2022 | $330.0 | $328.9 | | Three months ended September 30, 2021 | $109.1 | $108.8 | | Nine months ended September 30, 2021 | $275.4 | $274.8 | Note 11 – Contingencies The company is involved in various legal actions in the ordinary course of business, but management believes these matters will not have a material adverse effect on its consolidated financial position or results of operations - The Company is involved in various legal actions arising in the ordinary course of business[83] - Management believes the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations[83] Note 12 – Restructuring Charges The company recognized $4.9 million in restructuring charges during the first nine months of 2022, primarily related to site closures and workforce reductions in the Americas. This also included a loss on asset sales and a gain on the sale of a facility - The Company recognized $4.9 million of restructuring charges during the nine months ended September 30, 2022[85] - Charges were primarily related to site closures in San Jose, CA, Angleton, TX, and Moorpark, CA, and workforce reductions[85] - During the nine months ended September 30, 2022, the Company recorded a $2.0 million loss on assets held for sale and a $2.4 million gain on the sale of a building in Angleton, Texas[88] Accrued Restructuring Activity (in thousands) | Item | Balance as of Dec 31, 2021 | Restructuring Charges (2022) | Cash Payment (2022) | Balance as of Sep 30, 2022 | | :----------------- | :------------------------- | :--------------------------- | :------------------ | :------------------------- | | Severance | $3,257 | $2,498 | $(1,665) | $3,803 | | Lease facility costs | $17 | $1,261 | $(1,262) | $16 | | Other exit costs | $237 | $1,152 | $(1,205) | $82 | | Total | $3,511 | $4,911 | $(4,132) | $3,901 | Note 13 – Ransomware Incident The company incurred costs from a 2019 ransomware incident, with total insurance recoveries of $10.5 million collected by December 31, 2021. No further insurance recoveries are expected as of September 30, 2022 - A ransomware incident affected some of the Company's systems in the fourth quarter of 2019[89] - Total insurance recoveries collected as of December 31, 2021, amounted to $10.5 million[91] - No further insurance recoveries are expected as of September 30, 2022[91] Note 14 – Earnings Per Share Basic and diluted earnings per share significantly increased for both the three and nine months ended September 30, 2022, compared to the prior year, reflecting improved net income Earnings Per Share | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic EPS | $0.54 | $0.23 | $1.34 | $0.65 | | Diluted EPS | $0.53 | $0.23 | $1.32 | $0.64 | Weighted-Average Number of Shares Outstanding (in thousands) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic | 35,151 | 35,423 | 35,184 | 35,806 | | Diluted | 35,348 | 35,666 | 35,604 | 36,287 | Note 15 – Financial Instruments The company uses derivative instruments, including forward currency exchange contracts and an interest rate swap, to manage foreign currency and interest rate risks. These derivatives are designated as cash flow hedges, with changes in fair value recorded in accumulated other comprehensive loss - The Company uses forward currency exchange contracts to hedge forecasted foreign currency expenses, with a notional amount of $12.5 million as of September 30, 2022[95] - An interest rate swap agreement with a notional amount of $123.8 million as of September 30, 2022, hedges interest rate exposure on borrowings, converting floating rates to a fixed rate of 2.928%[97] - Both derivative instruments are designated as cash flow hedges, with changes in fair value recorded in accumulated other comprehensive loss[95][97] Fair Values of Derivative Instruments (in thousands, as of Sep 30, 2022) | Derivative Type | Balance Sheet Location | Asset Derivatives | | :------------------------------------ | :--------------------- | :---------------- | | Forward currency exchange contracts | Other current assets | $247 | | Interest rate swap | Other current assets | $976 | Note 16 – Accumulated Other Comprehensive Loss Accumulated other comprehensive loss increased, primarily due to negative foreign currency translation adjustments, partially offset by unrealized gains on derivative instruments Changes in Accumulated Other Comprehensive Loss (in thousands) | Item | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------------------------------------------- | :----------------------------- | :----------------------------- | | Beginning balance | $(17,158) | $(16,651) | | Foreign Currency Translation Adjustments | $(8,197) | $(3,146) | | Derivative Instruments, Net of Tax | $4,293 | $1,796 | | Ending balance | $(21,125) | $(17,632) | - Unrealized gains and losses relating to derivative instruments reclassified from accumulated other comprehensive loss were recognized as a component of cost of sales[104] Note 17 – Segment and Geographic Information The company operates and manages its business geographically, with three reportable segments: Americas, Asia, and Europe. All segments showed significant net sales and operating income growth for the nine months ended September 30, 2022 - The Company has three reportable operating segments: Americas, Asia, and Europe, with performance evaluated and resources allocated on a geographic basis[105] Net Sales by Segment (in thousands) | Segment | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------- | :----------------------------- | :----------------------------- | | Americas | $1,066,760 | $888,224 | | Asia | $945,434 | $635,274 | | Europe | $208,591 | $162,484 | Income from Operations by Segment (in thousands) | Segment | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------- | :----------------------------- | :----------------------------- | | Americas | $41,094 | $31,282 | | Asia | $91,320 | $64,210 | | Europe | $10,526 | $7,918 | Total Assets by Segment (in thousands, as of Sep 30, 2022) | Segment | Total Assets | | :-------- | :------------- | | Americas | $1,085,331 | | Asia | $836,895 | | Europe | $186,256 | | Corporate | $168,025 | | Total | $2,276,507 | Note 18 –Supplemental Cash Flow and Non-Cash Information This note provides additional cash flow details, including income taxes paid, interest paid, and non-cash investing activities such as additions to property, plant, and equipment in accounts payable Supplemental Cash Flow Information (in thousands) | Item | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------------------------------------------- | :----------------------------- | :----------------------------- | | Income taxes paid, net | $20,883 | $17,769 | | Interest paid | $6,807 | $6,336 | | Additions to property, plant and equipment in accounts payable | $21,921 (2022 only) | $7,980 (2021 only) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook, highlighting the impact of the COVID-19 pandemic, supply chain constraints, and strategic initiatives. It includes detailed analysis of sales, profitability, and liquidity OVERVIEW Benchmark Electronics is a global provider of advanced manufacturing services, design, and technology solutions, serving high-value, regulated markets. The company emphasizes integrated concept-to-production solutions, technical capabilities, and strategic supply chain management as key competitive advantages - Benchmark provides advanced manufacturing services (EMS and precision technology services), design and engineering services, and technology solutions[116] - The Company serves industries such as aerospace and defense, medical technologies, complex industrials, semiconductor capital equipment, next-generation telecommunications, and advanced computing[117] - Key competitive advantages include leading-edge technical capabilities in engineering, technology solutions (e.g., high frequency RF, microelectronics), and manufacturing services, supported by a global manufacturing presence and strategic supply chain design[124] COVID Pandemic Update The COVID-19 pandemic continued to negatively impact the company's revenue and operating results in 2021 and the first nine months of 2022, primarily due to operational inefficiencies, reduced productivity, and persistent global supply chain constraints across all commodity categories - The COVID-19 pandemic negatively impacted revenue and operating results during 2021 and the first nine months of 2022[132] - Impacts include operational inefficiencies, reduced productivity levels, and persistent component supply chain constraints across all commodity categories[132][133] - The Company provides critical infrastructure products and essential services, allowing it to continue operations despite the pandemic[133] Third Quarter 2022 Highlights Sales for the third quarter of 2022 increased by 35% year-over-year, driven by strong demand in both Higher-value and Traditional markets. However, component supply chain constraints continue to create operational inefficiencies and increased costs Sales Performance (Three Months Ended Sep 30, 2022) | Metric | Value | | :------------------------------------ | :---------- | | Sales (in millions) | $771.6 | | Year-over-year increase (%) | 35 | | Higher-Value Markets revenue increase (%) | 29 | | Traditional Markets revenue increase (%) | 60 | - Higher-value market revenues saw strength in Semi-Cap, Medical, and Industrials sectors[138] - Traditional market revenues were strong in Computing and Telecommunications sectors[138] - Component supply chain constraints, extended lead times, and increased pushouts of committed orders continue to create operational inefficiencies and higher costs[139] RESULTS OF OPERATIONS This section provides a detailed analysis of the company's financial performance for the three and nine months ended September 30, 2022, compared to 2021, covering sales, gross profit, operating income, and various expense categories Key Financial Ratios (Percentage of Sales) | Item | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Gross profit | 8.7% | 9.4% | 8.6% | 8.9% | | Selling, general and administrative expenses | 5.0% | 6.0% | 5.2% | 6.1% | | Income from operations | 3.3% | 2.1% | 3.0% | 2.1% | | Net income | 2.4% | 1.4% | 2.2% | 1.4% | Sales Sales for the third quarter of 2022 increased by 35% year-over-year, and by 31.6% for the first nine months, driven by strong demand across most market sectors and all geographic segments, with Asia showing the highest growth Sales by Market Sector (in thousands) | Market Sector | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :------------------- | :--------------------------------------------- | :-------------------------------------------- | | Industrials | $155,278 | $451,260 | | Medical | $165,546 | $448,653 | | Semi-Cap | $186,325 | $544,661 | | Computing | $94,562 | $218,254 | | Telecommunications | $83,626 | $215,537 | | A&D | $86,238 | $257,322 | Sales by Geographic Segment (in thousands) | Segment | Three Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | | :-------- | :--------------------------------------------- | :-------------------------------------------- | | Americas | $400,905 | $1,066,760 | | Asia | $337,726 | $945,434 | | Europe | $68,400 | $208,591 | - International operations accounted for 61% of sales in Q3 2022, up from 54% in Q3 2021[153] Gross Profit Gross profit increased by 24% in Q3 2022 and 27.3% for the first nine months, but gross margin declined due to changes in revenue mix, operational inefficiencies from supply chain challenges, and the dilutive effect of supply chain premiums Gross Profit (in thousands) | Period | 2022 | 2021 | Change (YoY) | | :-------------------------------- | :------- | :------- | :----------- | | Three months ended September 30 | $66,750 | $53,705 | +24% | | Nine months ended September 30 | $183,108 | $143,845 | +27.3% | Gross Margin (Percentage of Sales) | Period | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | 8.7% | 9.4% | | Nine months ended September 30 | 8.6% | 8.9% | - Gross margin decreased primarily due to revenue mix, operational inefficiencies from supply chain challenges, and the dilutive impact of revenue from supply chain premiums with no margin[157] Operating Income Operating income significantly increased by 114% in Q3 2022 and 83% for the first nine months, driven by higher revenue and gross profit across all geographic segments, partially offset by increased selling, general, and administrative expenses Operating Income (in thousands) | Period | 2022 | 2021 | Change (YoY) | | :-------------------------------- | :------- | :------- | :----------- | | Three months ended September 30 | $25,284 | $11,794 | +114% | | Nine months ended September 30 | $63,123 | $34,427 | +83% | Operating Income by Reportable Segment (in thousands, Nine Months Ended Sep 30) | Segment | 2022 | 2021 | Change (YoY) | | :-------- | :------- | :------- | :----------- | | Americas | $41,094 | $31,282 | +31% | | Asia | $91,320 | $64,210 | +42% | | Europe | $10,526 | $7,918 | +33% | Selling, General and Administrative Expenses Selling, general, and administrative (SG&A) expenses increased in both the third quarter and first nine months of 2022, primarily due to higher variable compensation and ongoing investments in IT infrastructure Selling, General and Administrative Expenses (in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :------- | :------- | | Three months ended September 30 | $38,544 | $34,387 | | Nine months ended September 30 | $110,675 | $98,969 | - The increases were primarily due to higher variable compensation and expenses related to continued IT infrastructure investments[163] Amortization of Intangible Assets Amortization of intangible assets remained consistent for both the three and nine months ended September 30, 2022, compared to the same periods in 2021 Amortization of Intangible Assets (in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :------- | :------- | | Three months ended September 30 | $1,591 | $1,596 | | Nine months ended September 30 | $4,792 | $4,793 | Restructuring Charges and Other Costs The company recognized $1.3 million in restructuring charges and other costs in Q3 2022 and $4.9 million for the first nine months, primarily from site closures, workforce reductions, a loss on asset sales, and a gain on a facility sale Restructuring Charges and Other Costs (in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :------- | :------- | | Three months ended September 30 | $1,331 | $6,428 | | Nine months ended September 30 | $4,518 | $9,600 | - Charges for the first nine months of 2022 were primarily due to expenses associated with announced site closures or exits, reductions in force, and other restructuring activities, mainly in the Americas[165] - This includes a $2.0 million loss on assets held for sale and a $2.4 million gain on the sale of the Angleton, Texas facility[165] Ransomware Incident Related Costs, Net No insurance recoveries related to the 2019 ransomware incident were made in the third quarter or first nine months of 2022, as total recoveries reached $10.5 million by the end of 2021 and no further recoveries are expected Ransomware Related Incident Costs (Recovery), Net (in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :--- | :------- | | Three months ended September 30 | $0 | $(500) | | Nine months ended September 30 | $0 | $(3,944) | - No insurance recoveries were made in the third quarter or first nine months of 2022[166] - As of September 30, 2022, no further insurance recoveries are expected[166] Interest Expense Interest expense increased in both the third quarter and first nine months of 2022, primarily due to higher borrowings under the revolving credit facility to support working capital investments Interest Expense (in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :------- | :------- | | Three months ended September 30 | $(3,493) | $(1,987) | | Nine months ended September 30 | $(7,428) | $(6,215) | - The increases were primarily due to increased borrowings under the revolving credit facility to support investment in working capital[167] Interest Income Interest income increased in both the third quarter and first nine months of 2022, driven by higher prevailing interest rates Interest Income (in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :--- | :--- | | Three months ended September 30 | $452 | $122 | | Nine months ended September 30 | $843 | $451 | - The increases were primarily due to higher interest rates[169] Income Tax Expense Income tax expense increased for both the three and nine months ended September 30, 2022, with effective tax rates remaining relatively stable, influenced by the mix of profits across various jurisdictions Income Tax Expense (in thousands) | Period | 2022 | 2021 | | :-------------------------------- | :------- | :------- | | Three months ended September 30 | $4,501 | $2,364 | | Nine months ended September 30 | $11,105 | $5,976 | Effective Tax Rate | Period | 2022 | 2021 | | :-------------------------------- | :----- | :----- | | Three months ended September 30 | 19.3% | 19.1% | | Nine months ended September 30 | 19.1% | 20.1% | - Differences in effective tax rates are related to the mix of taxable income by taxing jurisdiction[170] Net Income Net income and diluted earnings per share significantly increased for both the third quarter and first nine months of 2022, reflecting the overall positive financial performance and factors discussed in the results of operations Net Income and Diluted EPS | Period | Net Income (in thousands) | Diluted EPS | | :-------------------------------- | :------------------------ | :---------- | | Three months ended September 30, 2022 | $18,829 | $0.53 | | Three months ended September 30, 2021 | $8,065 | $0.23 | | Nine months ended September 30, 2022 | $47,010 | $1.32 | | Nine months ended September 30, 2021 | $23,351 | $0.64 | - Net income for the third quarter of 2022 increased by 133.5% year-over-year, and diluted EPS increased by 130.4%[8][172] - For the first nine months of 2022, net income increased by 101.3% and diluted EPS by 106.3% compared to the same period in 2021[8][172] LIQUIDITY AND CAPITAL RESOURCES The company's liquidity is supported by existing cash balances, operating cash flows, and an expanded $450 million revolving credit facility. Cash used in operating activities increased significantly due to proactive investments in inventory and accounts receivable to support revenue growth. The company maintains a quarterly dividend and has remaining share repurchase authorization Liquidity and Capital Resources (in millions) | Item | September 30, 2022 | December 31, 2021 | | :--------------------------------------------------- | :------------------- | :------------------ | | Cash and cash equivalents and restricted cash | $249.3 | $271.7 | | Working capital | $900 | $700 | | Available for future borrowings under Revolving Credit Facility | $276.1 | N/A | | Remaining share repurchase authorization | $154.6 | N/A | | Capital expenditures (next 12 months, estimated) | $50 - $60 | N/A | - Cash used in operating activities was $124.7 million during the first nine months of 2022, primarily due to a $228.5 million increase in inventories and a $123.6 million increase in accounts receivable[175] - The Revolving Credit Facility commitments were increased from $250 million to $450 million in May 2022[179] - The Company paid $17.4 million in cash dividends during the first nine months of 2022 and intends to continue paying quarterly dividends of $0.165 per share[186] CONTRACTUAL OBLIGATIONS There have been no material changes to the company's contractual obligations since December 31, 2021, other than those related to operating and capital leases as discussed in Note 6 to the financial statements - No material changes to contractual obligations since December 31, 2021, outside of the ordinary course of business, other than items discussed in Note 6 (Leases)[188] CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND RECENTLY ENACTED ACCOUNTING PRINCIPLES This section refers to the company's 2021 10-K for significant accounting policies and notes that there have been no changes to critical accounting estimates. Recently enacted accounting principles are discussed in Note 2 - No changes to the items disclosed as critical accounting estimates in the 2021 10-K[190] - Recently enacted accounting principles are discussed in Note 2 to the condensed consolidated financial statements[190] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to various market risks, including foreign currency exchange risk from international operations and interest rate risk on its borrowings. It uses natural hedging, forward contracts, and an interest rate swap to manage these exposures - The Company is exposed to foreign currency exchange risk, import and export duties, taxes, regulatory changes, inflationary economies, and economic and political instability due to its international operations[191] - The Company uses natural hedging and forward contracts to economically hedge transactional exposure primarily associated with trade accounts receivable, other receivables, trade accounts payable, and lease liabilities denominated in foreign currencies[193] - The Company is exposed to interest rate risk on borrowings under its Credit Agreement and uses an interest rate swap to convert a portion of its floating rate interest expense to fixed[197] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022. No material changes to internal control over financial reporting occurred, although ERP system upgrades are ongoing - The CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022[199] - No material changes in the Company's internal control over financial reporting occurred during the last fiscal quarter[202] - The Company is currently upgrading its enterprise resource planning (ERP) system in phases, with related controls revised and updated at certain locations[203] PART II—OTHER INFORMATION This section provides additional information on legal proceedings, risk factors, equity security sales, and required exhibits Item 1. Legal Proceedings The company is involved in various legal actions arising in the ordinary course of business. There have been no material changes to these proceedings since the 2021 10-K, and management believes their ultimate disposition will not materially affect the company's financial position or results of operations - The Company is involved in various legal actions arising in the ordinary course of business[206] - There have been no material changes to the legal proceedings previously reported in the 2021 10-K[206] - Management believes the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations[206] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in Part I, Item 1A of the company's 2021 Form 10-K - No material changes to the risk factors previously disclosed in Part I, Item 1A of the 2021 10-K[207] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares of its equity securities during the quarter ended September 30, 2022. As of that date, $154.6 million remained authorized under the existing share repurchase program - The Company did not repurchase any common shares during the quarter ended September 30, 2022[208] - As of September 30, 2022, $154.6 million remained available under the share repurchase authorization[208] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications from the CEO and CFO, and various XBRL-related documents - Exhibits include the Restated Certificate of Formation, Amended and Restated Bylaws, Section 302 and 1350 Certifications of the Chief Executive Officer and Chief Financial Officer, and Inline XBRL documents[210] SIGNATURES This section contains the required signatures for the filing, certifying its accuracy and completeness