BENCHMARK ELECTRONICS INC (BHE) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and Notes thereto in Part II, Item 8 of this Report. You should also bear in mind the Risk Factors set forth in Part I, Item 1A, any of which could materially and adversely affect the Company’s business, operating results, financial condition and the actual results of the matters addressed by the forward-looking statements contained in the following discussion.
For discussion and analysis regarding our financial condition and results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021, refer to Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 24, 2023.
2023 OVERVIEW
Sales for 2023 were $2.8 billion, a 2% decrease from sales of $2.9 billion in 2022. During 2023, sales to customers in our various industry sectors fluctuated from 2022 as follows:
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Complex Industrials increased by 1%
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A&D increased by 4%
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Medical decreased by 6%
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Semi-Cap decreased by 11%
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Advanced Computing increased by 9%
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Next-Generation Communications increased by 6%
The overall revenue decrease was primarily due to lower semi-cap revenue, as a result of lower demand from existing customers, and lower medical revenue, as a result of general softness across the industry and lower demand from existing customers, which were mostly offset by an increase in A&D revenue, as a result of strength in both defense and commercial aerospace and improved supply availability, and an increase in next-generation communications revenue, as a result of growth in broadband infrastructure programs.
Our sales depend on the success of our customers, some of which operate in businesses associated with rapid technological change and consequent product obsolescence. Developments adverse to our major customers or their products, the availability of electronic component supply, or the failure of a major customer to pay for components or services have adversely affected us by not allowing us to fulfill our total customer demand. A substantial percentage of our sales are made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us. Sales to our ten largest customers represented 52% of our total sales in 2023 and in 2022. Sales to Applied Materials, Inc. and subsidiaries, our largest customer in 2023 and 2022 represented 12% and 15% of our total sales in 2023 and 2022, respectively. After a period of unprecedented global labor and supply disruptions, we have seen a general easing of certain material constraints across commodity categories, with the exception of older technologies where semiconductor original equipment manufacturers are not adding incremental capacity. The lack of capacity regarding these older technologies could constrain our ability to produce the full demand forecasts we are receiving from customers needing those parts. Lead times are also improving from the previous highs that prompted many suppliers to categorize some of their constrained components with non-cancellable and non-returnable business terms. Until recently, these constraints led to last-minute allocations and created inefficiencies in our operations, as well as increased costs to us and our customers.
We experience fluctuations in gross profit from period to period. Different programs contribute different gross profits depending on the type of services involved, location of production, size of the program, complexity of the product and level of material costs associated with the various products. Moreover, new programs can contribute relatively less to our gross profit in their early stages when manufacturing volumes are usually lower, resulting in inefficiencies and unabsorbed manufacturing overhead costs. During periods of low production volume, we generally have unabsorbed manufacturing overhead costs and reduced gross profit. Gross profit can also be impacted by higher costs associated with other situations, such as supply chain constraints. This includes supply chain premiums for excess component costs paid to secure available supply resulting in revenue with cost recovery only with no margin. In addition, a number of our new program ramps require incremental investment during the launch and ramp phase, which can exert downward pressure on our gross profit.
We have undertaken initiatives to restructure our business operations with the intention of improving utilization and reducing costs. During 2023, we recognized $7.3 million of restructuring charges primarily related to the previously announced closure of our site in Moorpark, California in the Americas, and other smaller activities involving capacity reductions and reductions in workforce in certain facilities across various regions. Moorpark, California operations ceased as of March 31, 2023 with restructuring activity substantially completed in 2023.
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During 2022, we recognized $5.7 million of restructuring charges primarily due to expenses associated with announced site closures or exits, reductions in workforce and other restructuring activities primarily in the Americas. During 2022, we also incurred a $2.0 million loss on assets held for sale related to certain manufacturing capabilities in the Americas that the Company made the decision in 2021 to no longer continue and a gain on assets held for sale of $2.4 million related to the sale of the Angleton, Texas facility. Additionally, during 2022, the Company agreed to $3.3 million in legal settlements. See Note 17 to the consolidated financial statements in Part II, Item 8 of this Report for additional information on our restructuring charges.
Inflation, interest rates, disruption in the global economy and financial markets, and geopolitical events continue to create uncertainty. However, we are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date we filed this Report. These estimates may change as new events occur and additional information is obtained. Actual results could differ from these estimates under different assumptions or conditions.
RESULTS OF OPERATIONS
The financial information and the discussion below should be read in conjunction with the consolidated financial statements and notes thereto in Part II, Item 8 of this Report. The following table presents the percentage relationship that certain items in our consolidated statements of income bear to sales for the periods indicated:
| Year Ended December 31, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Sales | 100.0% | 100.0% | ||
| Cost of sales | 90.5% | 91.2% | ||
| Gross profit | 9.5% | 8.8% | ||
| Selling, general and administrative expenses | 5.1% | 5.2% | ||
| Amortization of intangible assets | 0.2% | 0.2% | ||
| Restructuring charges and other costs | 0.3% | 0.3% | ||
| Income from operations | 3.9% | 3.1% | ||
| Other expense, net | (1.0)% | (0.1)% | ||
| Income before income taxes | 2.9% | 3.0% | ||
| Income tax expense | 0.6% | 0.6% | ||
| Net income | 2.3% | 2.4% |
2023 Compared With 2022
Sales
As noted above, sales decreased 2% in 2023. The percentages of our sales by market sector were as follows:
| Year Ended December 31, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Complex Industrials | 21% | 21% | ||
| A&D | 13% | 12% | ||
| Medical | 20% | 21% | ||
| Semi-Cap | 23% | 25% | ||
| Advanced Computing | 12% | 10% | ||
| Next-Generation Communications | 11% | 11% | ||
| Total | 100% | 100% |
Complex Industrials. 2023 sales increased 1% to $596.5 million from $593.6 in 2022 as a result of strength with existing customers.
Aerospace and Defense. 2023 sales increased 4% to $361.5 million from $347.6 million in 2022 primarily due to strength in both defense and commercial aerospace and improved supply availability.
Medical. 2023 sales decreased 6% to $556.6 million from $592.9 million in 2022 primarily due to general softness across the industry resulting in lower demand from existing customers.
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Semi-Conductor Capital Equipment. 2023 sales decreased 11% to $646.3 million from $722.1 million in 2022 primarily due to slower overall market recovery.
Advanced Computing. 2023 sales increased 9% to $337.7 million from $310.5 million in 2022 primarily due to the contribution from multiple high performance computing programs completed during the period.
Next-Generation Communications. 2023 sales increased 6% to $340.4 million from $319.6 million in 2022 primarily due to growth in broadband infrastructure programs.
Our international operations are subject to the risks of doing business abroad. See Part I, Item 1A of this Report for risk factors pertaining to international sales, fluctuations in foreign currency exchange rates and a discussion of potential adverse effects in operating results associated with the risks of doing business abroad. During 2023 and 2022, 58% and 61%, respectively, of our sales were from international operations.
Sales by geographical segment were as follows:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | ||||||
| Sales: | ||||||||
| Americas | $ | 1,611,783 | $ | 1,475,929 | ||||
| Asia | 1,055,938 | 1,251,475 | ||||||
| Europe | 299,835 | 284,103 | ||||||
| Elimination of intersegment sales | (128,580 | ) | (125,176 | ) | ||||
| Total sales | $ | 2,838,976 | $ | 2,886,331 |
Americas. 2023 sales increased 9% to $1.6 billion from $1.5 billion in 2022 primarily due to increases in sales in our advanced computing, complex industrials and next-generation communications sectors.
Asia. 2023 sales decreased 16% to $1.1 billion from $1.3 billion in 2022 primarily due to a decrease in existing customer demand of our semi-cap and medical sectors.
Europe. 2023 sales increased 6% to $299.8 million from $284.1 million in 2022 primarily due to an increase in sales in our semi-cap and A&D sectors.
Gross Profit
Gross profit increased 6% to $271.1 million in 2023 from $255.2 million in 2022 primarily due to our mix of revenue and expense discipline. Gross profit margin increased to 9.5% in 2023 from 8.8% in 2022 primarily due to improved operational efficiencies and the proactive cost reduction actions taken by our manufacturing sites.
Income from Operations
2023 income from operations increased 22% to $109.7 million from $90.1 million in 2022. The increase was primarily due to improved gross margin and cost actions taken to reduce selling, general and administrative (SG&A) expenses.
Income from operations by reportable segment was as follows:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | ||||||
| Income from operations: | ||||||||
| Americas | $ | 63,484 | $ | 55,202 | ||||
| Asia | 124,279 | 134,649 | ||||||
| Europe | 17,380 | 16,889 | ||||||
| Corporate and intersegment eliminations | (95,479 | ) | (116,671 | ) | ||||
| Total income from operations | $ | 109,664 | $ | 90,069 |
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Americas. 2023 operating income increased 15% to $63.5 million from $55.2 million in 2022. The increase was primarily due to higher revenue and expense control.
Asia. 2023 operating income decreased 8% to $124.3 million from $134.6 million in 2022. The decrease was primarily due to lower revenue partially offset by expense control.
Europe. 2023 operating income increased 3% to $17.4 million from $16.9 million in 2022. The increase was primarily due to higher revenue and expense control.
Selling, General and Administrative (SG&A) Expenses
SG&A expense decreased to $147.0 million in 2023 from $150.2 million in 2022. The decrease was primarily due to cost actions taken, coupled with lower variable compensation expense.
Amortization of Intangible Assets
Amortization of intangible assets was $6.0 million in 2023 and $6.4 million in 2022. The decrease was primarily due to certain assets becoming fully amortized in 2023.
Restructuring Charges and Other Costs
During 2023, we recognized $7.3 million of restructuring charges primarily due to expenses associated with announced site closures or exits, reductions in work force and other restructuring activities primarily in the Americas. During 2023, we made the decision to no longer continue certain manufacturing capabilities in the Americas. In connection with that decision, we assessed the facility and equipment assets used in those manufacturing capabilities and recorded $1.1 million of impairment charges as a result of that assessment. The asset impairment charges are included in restructuring charges and other costs in the consolidated statement of income.
During 2022, we recognized $5.7 million of restructuring charges primarily due to expenses associated with announced site closures or exits, reductions in workforce and other restructuring activities primarily in the Americas. During 2022, we also incurred a $2.0 million loss on assets held for sale related to certain manufacturing capabilities in the Americas that the Company made the decision in 2021 to no longer continue and a gain on assets held for sale of $2.4 million related to the sale of the Angleton, Texas facility. Additionally, during 2022, the Company agreed to $3.3 million in legal settlements.
See Note 17 to the consolidated financial statements in Part II, Item 8 of this Report for additional information on our restructuring charges.
Interest Expense
Interest expense increased to $31.9 million in 2023 from $12.9 million in 2022 primarily due to additional borrowings to support our operations as well as the higher interest rate environment.
Interest Income
Interest income increased to $6.3 million in 2023 from $1.7 million in 2022 primarily due to higher interest rates.
Other (Expense) Income, Net
Other expense, net, was $2.8 million in 2023 primarily consisting of foreign exchange losses. Other income, net, was $5.4 million in 2022 primarily consisting of gain on litigation settlements, partially offset by foreign exchange losses.
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Income Tax Expense
Income tax expense in 2023 was $16.9 million representing an effective tax rate of 20.8% compared with $16.1 million of income tax expense in 2022 representing an effective tax rate of 19.1%. The higher effective tax rate in 2023 is the result of the mix of profits in our foreign and U.S. jurisdictions and higher tax rates for our locations in Asia.
The Company has been granted certain tax incentives, including tax holidays, for its subsidiaries in Thailand, China and Malaysia that expire at various dates, unless extended or otherwise renegotiated, and are subject to certain conditions with which the Company expects to comply. The tax incentives in Thailand will expire on December 31, 2030. The tax incentives in China expired on December 31, 2023 and the tax incentives in Malaysia expired on March 31, 2021. The Company has applied for a continuation of the Malaysia tax holiday, which will extend the tax incentive period for five to ten years if approved. The Company will also apply for a China tax holiday in 2024. There is no guarantee of being awarded these tax incentives in the future. See Note 8 to the consolidated financial statements in Part II, Item 8 of this Report.
Net Income
We reported net income of $64.3 million, or $1.79 per diluted share, for 2023, compared with net income of $68.2 million, or $1.91 per diluted share, for 2022. The decrease of $3.9 million in 2023 is primarily the result of items discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our organic growth and operations through funds generated from operations and occasional borrowings under our Credit Agreement (as defined below). Cash and cash equivalents and restricted cash totaled $283.2 million at December 31, 2023 and $207.4 million at December 31, 2022, of which $269.6 million and $167.7 million, respectively, was held outside the United States in various foreign subsidiaries.
Our operations, and the operations of businesses we acquire, are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. We believe we operate in substantial compliance with all applicable requirements, and we seek to ensure that newly acquired businesses comply or will comply substantially with applicable requirements. To date, the costs of compliance and workplace and environmental remediation have not been material to us. However, material costs and liabilities may arise from these requirements or from new, modified or more stringent requirements in the future. In addition, our past, current and future operations, and the operations of businesses we have or may acquire, may give rise to claims of exposure by employees or the public, or to other claims or liabilities relating to environmental, waste management or health and safety concerns.
Management believes that our existing cash balances, funds generated from operations, and borrowing availability under our revolving credit facility will be sufficient to permit us to meet our liquidity requirements over the next 12 months. Management further believes that our ongoing cash flows from operations and any borrowings we may incur under our revolving credit facility will enable us to meet operating cash requirements in future years. If we consummated significant acquisitions in the future, our capital needs would increase and could possibly result in our need to increase available borrowings under our Credit Agreement or access public or private debt and equity markets. There can be no assurance, however, that we would be successful in raising additional debt or equity on acceptable terms.
2023 Cash Flows
Cash provided from operating activities was $174.3 million in 2023 and primarily consisted of $64.3 million of net income, adjusted for $45.4 million of depreciation and amortization, $15.3 million of stock-based compensation expense, a $42.1 million decrease in accounts receivable, and a $45.1 million decrease in inventories partially offset by a $35.3 million decrease in accounts payable. Working capital was $0.9 billion as of December 31, 2023.
We primarily purchase components only after customer orders or forecasts are received, which mitigates, but does not eliminate, the risk of loss on inventories. Supplies of electronic components and other materials used in operations are subject to industry-wide shortages. In certain instances, suppliers may allocate available quantities to us. When shortages of these components and other material supplies used in operations have occurred, vendors have at times been unable to ship the quantities we need for production, forcing us to delay shipments, which can increase backorders and impact cash flows. Vendors also may increase the costs of components based on the market conditions including these shortages. In certain instances, we request and receive advance payments from customers as prepayments of inventory to meet working capital demands of a contract, offset inventory risks such as inventory purchased in advance of current needs and protect the Company from the failure of other parties to fulfill obligations under a contract. For example, we have been impacted by supply chain constraints, including shortages, longer lead times and increased transit times.
Cash used in investing activities was $77.1 million in 2023 primarily due to capital expenditures for property, plant and equipment of $73.5 million and purchased software of $4.3 million. The purchases of property, plant and equipment were primarily for machinery and equipment in the Americas.
Cash used in financing activities was $23.6 million in 2023. Borrowings under the Credit Agreement were $749.5 million and principal payments under the Credit Agreement were $743.6 million. In addition, we paid $23.5 million of dividends during 2023 and $5.8 million for employee taxes paid to settle stock-based awards exercised during the year.
Credit Agreement
On December 21, 2021, the Company amended and restated the Company’s prior $650 million credit agreement by entering into a $381 million amended and restated credit agreement (the Amended and Restated Credit Agreement). Under the terms of the Amended and Restated Credit Agreement, in addition to the $131.3 million term loan facility, we have a $250.0 million five-year revolving credit facility to be used for general corporate purposes, both with a maturity date of December 21, 2026.
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On May 20, 2022, the Company entered into Amendment No. 1 (the Amendment) to the Amended and Restated Credit Agreement (as amended, the Credit Agreement). The Amendment increased the revolving credit facility commitments from $250 million to $450 million. The Amendment also established that the interest on outstanding borrowings starting on the next reset date and any new borrowings under the Amendment (other than swingline loans) will accrue, at the Company’s option, at (a) Bloomberg Short Term Bank Yield Index (BSBY) plus the Applicable Rate (as defined in the Credit Agreement, approximately 1.00% to 2.00% per annum depending on various factors) or (b) for U.S. dollar denominated loans, the base rate (which is the highest of (i) the federal funds rate plus 0.50%, (ii) the Bank of America, N.A. prime rate, (iii) the one-month BSBY adjusted daily rate plus 1.00% and (iv) 1.00%).
On February 3, 2023, the Company entered into Amendment No. 2 to the Credit Agreement, which increased the maximum amount of trade accounts that the Company may elect to sell at any one time to $200.0 million.
On May 1, 2023, the Company entered into Amendment No. 3 to the Credit Agreement (Amendment No. 3), which increased the revolving credit facility commitments from $450 million to $550 million. Amendment No. 3 also established that the interest on outstanding borrowings starting on the next reset date and any new borrowings under Amendment No. 3 (other than swingline loans) will accrue, at the Company’s option, at (a) Term Secured Overnight Financing Rate (SOFR) plus 0.10% plus the Applicable Rate (as defined in the Credit Agreement, approximately 1.00% to 2.00% per annum depending on various factors) or (b) for U.S. dollar denominated loans, the base rate (which is the highest of (i) the federal funds rate plus 0.50%, (ii) the Bank of America, N.A. prime rate, (iii) Term SOFR plus 1.00% and (iv) 1.00%).
As of December 31, 2023, we had $127.1 million in borrowings outstanding under the term loan facility and $205.0 million outstanding under our revolving credit facility and $4.4 million in letters of credit outstanding under our revolving credit facility. See Note 5 to the consolidated financial statements in Part II, Item 8 of this Report for more information regarding the terms of our Credit Agreement.
The Credit Agreement contains certain financial covenants related to interest coverage and debt leverage, and certain customary affirmative and negative covenants, including restrictions on our ability to incur additional debt and liens, pay dividends, repurchase shares, sell assets and merge or consolidate with other persons. Amounts due under the Credit Agreement could be accelerated upon specified events of default, including a failure to pay amounts due, breach of a covenant, material inaccuracy of a representation, or occurrence of bankruptcy or insolvency, subject, in some cases, to cure periods. As of December 31, 2023, we were in compliance with all of these covenants and restrictions.
As of December 31, 2023, we had $340.6 million available for borrowings under the Credit Agreement. During the next 12 months, we believe our capital expenditures will approximate $60 million to $70 million, principally for machinery and equipment to help increase our production capacity to support anticipated revenue growth and our ongoing business around the globe.
Share Repurchase Authorization
On March 6, 2018, the Board of Directors approved an expanded share repurchase authorization granting the Company authority to repurchase up to $250 million in common stock in addition to the $100 million previously approved on December 7, 2015. On October 26, 2018 and February 19, 2020, the Board of Directors authorized the repurchase of an additional $100 million and $150 million of the Company’s common stock, respectively.
Share purchases may be made in the open market, in privately negotiated transactions or block transactions, at the discretion of the Company’s management and as market conditions warrant. Purchases will be funded from available cash and may be commenced, suspended or discontinued at any time without prior notice. Shares repurchased under the program are retired. The Company did not repurchase shares in 2023. As of December 31, 2023, the Company had $154.6 million remaining under the share repurchase authorization.
Dividends
During 2023, 2022 and 2021, cash dividends paid totaled $23.5 million, $23.2 million and $23.3 million, respectively. On December 13, 2023, the Company declared a quarterly cash dividend of $0.165 per share of the Company’s common stock to shareholders of record as of December 29, 2023. The dividend of $5.9 million was paid on January 12, 2024.
The Board of Directors currently intends to continue paying quarterly dividends. However, the Company’s future dividend policy is subject to the Company’s compliance with applicable law, and depending on, among other things, the Company’s results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in the Company’s debt agreements, and other factors that the Board of Directors may deem relevant. Dividend payments are not mandatory or guaranteed; there can be no assurance that the Company will continue to pay a dividend in the future.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements in Part II, Item 8 of this Report, which have been prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are summarized in Note 1 to the consolidated financial statements in Part II, Item 8 of this Report. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories, revenue recognition, income taxes, long-lived assets, stock-based compensation and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our revenue is recognized when a contract exists and when, or as, we satisfy a performance obligation by transferring control of a product or service to the customer. A contract exists when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. For the Company, the arrangement with the customer is generally documented through a master agreement which outlines the general terms and conditions of the arrangement and a specific purchase commitment from the customer.
Our performance obligations are satisfied over time as work progresses or at a point in time. The determination of how our performance obligations are satisfied requires judgment and is assessed on a contract by contract basis. Under the majority of our contracts, our performance obligations are satisfied over time as work progresses since the customer controls all of the work-in-progress as products are being built. For these contracts, the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use a cost-based input measurement of progress because it best represents the transfer of assets to the customer. For our other contracts, revenue is recognized upon transfer of control of the product or service, which is generally upon shipment or delivery depending on the terms of the underlying contract. Revenue from design, development and engineering services is generally recognized over time as the services are performed.
Generally, there are no subjective customer acceptance requirements or further obligations related to goods or services provided. Our contracts with customers do not allow for a general right of return.
Income Taxes
We estimate our income tax provision in each of the jurisdictions where we operate, including estimating exposures related to uncertain tax positions. We must also make judgments regarding our ability to realize the future tax benefit from our deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. As of December 31, 2023, our valuation allowance was $18.5 million and primarily relates to the deferred tax assets of our foreign locations.
Differences in our future operating results as compared to the estimates utilized in the determination of the valuation allowance against our deferred tax assets could result in adjustments to the respective valuation allowances in future periods. For example, a significant increase in the operations of our foreign locations or future accretive acquisitions of our foreign locations would result in a reduction in our valuation allowance in the period of occurrence and would increase our income in the period such determination was made. Alternatively, significant economic downturns in our U.S. or foreign locations generating additional operating loss carryforwards could possibly result in an increase in our valuation allowance and would decrease our income in the period such determination was made.
The OECD and the G20 Inclusive Framework on Base Erosion and Profit Shifting have published the Pillar Two model rules designed to address the tax challenges arising from the digitalization of the global economy. The Pillar Two model rules adopt a global corporate minimum tax of 15% for multinational enterprises with average revenue in excess of €750 million on their global consolidated financial statements. The Council of the European Union has adopted the Pillar Two model rules and has directed EU member states to implement legislation enacting the Pillar Two model rules. Many countries, including non-EU member states, have implemented laws based on the Pillar Two model rules to be effective as of January 1, 2024.
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The Company has manufacturing operations in several of the foreign jurisdictions that have implemented the Pillar Two model rules. The Company is still in the process of assessing the potential impact of the Pillar Two model rules on the Company’s provision for income taxes, net income and cash flows for the calendar year of 2024 and future years. The potential impact, if any, of the Pillar Two model rules to the Company’s provision for income taxes, net income and cash flows is currently not known or reasonably estimable. The Company expects to be in a position to report the potential impact, if any, in its interim financial statements for the quarterly period ending March 31, 2024.
We are subject to examination by tax authorities for different periods in various U.S. and foreign tax jurisdictions. During the course of such examinations, disputes may occur as to matters of fact and/or law. In most tax jurisdictions, the passage of time without examination will result in the expiration of applicable statutes of limitations, thereby precluding the taxing authority from examining the relevant tax period(s). We believe that we have adequately provided for our tax liabilities.
Impairment of Long-Lived Assets and Goodwill
Long-lived assets, such as property, plant, and equipment and purchased intangible assets, subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount that the carrying amount of the asset exceeds the fair value of the asset.
Goodwill is tested for impairment on an annual basis, at a minimum, and whenever events and circumstances indicate that the carrying amount may be impaired. Circumstances that may lead to impairment include unforeseen decreases in future performance or industry demand or the restructuring of our operations as a result of a change in our business strategy. We perform a qualitative assessment to determine if goodwill is potentially impaired. If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, then we would be required to perform a quantitative impairment test for goodwill. This process involves determining the fair values of the reporting units and comparing those fair values to the carrying values, including goodwill, of the reporting units. An impairment loss would be recognized to the extent that the carrying amount exceeds the fair value. For purposes of performing our goodwill impairment assessment, our reporting units are the same as our operating segments as defined in Note 13 to the consolidated financial statements in Part II, Item 8 of this Report. As of December 31, 2023 and 2022, we had $154.0 million of goodwill related to our Americas reporting unit and $38.1 million of goodwill related to our Asia reporting unit.
Based on our qualitative assessments of goodwill as of December 31, 2023 and 2022, we concluded that it was more likely than not that the fair value of our Americas and Asia reporting units were greater than their carrying amounts, and therefore no further testing was required.
Changes in economic and operating conditions that occur after the annual impairment analysis or an interim impairment analysis, and that impact these assumptions, may result in a future goodwill impairment charge.
Recently Enacted Accounting Principles
See Note 1(s) to the consolidated financial statements in Part II, Item 8 of this Report for a discussion of recently enacted accounting principles.
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CONTRACTUAL OBLIGATIONS
We have certain contractual obligations that extend beyond 2023 under lease obligations and debt arrangements. Non-cancellable purchase commitments do not typically extend beyond normal lead-times of 4 to 20 weeks; however, some electronic component manufacturers now have lead-times in excess of 52 weeks. Most purchase orders beyond this time frame are normally cancellable; however, as a result of the recent constrained environment some manufacturers have looked to limit their liability by adding non-cancellable, non-renewable (NCNR) terms. We do not use off-balance sheet financing techniques and we have not guaranteed the obligations of any entity that is not one of our wholly owned subsidiaries.
A summary of our operating lease obligations as of December 31, 2023 can be found in Note 6 to the consolidated financial statements in Part II, Item 8 of this Report.
A summary of our long-term debt obligations as of December 31, 2023 can be found in Note 5 to the consolidated financial statements in Part II, Item 8 of this Report.
U.S. federal income tax on deemed mandatory repatriation is payable over four years pursuant to the U.S. Tax Reform. See Note 8 to the consolidated financial statements in Part II, Item 8 of this Report.
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