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Nov. 4, 2021, 3:32 p.m. EDT

10-Q: BENCHMARK ELECTRONICS INC

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report (this Report) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and

OVERVIEW

We are a worldwide provider of innovative product design services, engineering services, technology solutions and advanced manufacturing services (both electronic manufacturing services (EMS) and precision technology services). In this Report, references to Benchmark, the Company or use of the words "we", "our" and "us" include Benchmark's subsidiaries unless otherwise noted.

From initial product concept to volume production, including direct order fulfillment and aftermarket services, Benchmark has been providing integrated services and solutions to original equipment manufacturers (OEMs) since 1979. Today, Benchmark proudly serves the following industries: aerospace and defense (A&D), medical technologies, complex industrials, semiconductor capital equipment (semi-cap), next-generation telecommunications and advanced computing.

Our customer engagement focuses on three principal areas:

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directly to the end-customer across all the industries we serve. Manufacturing services also includes precision technology services comprised of precision machining, advanced metal joining, assembly and functional testing primarily for the semi-cap market (serving semiconductor capital equipment customers) and A&D market.

Our core strength lies in our ability to provide concept-to-production solutions in support of our customers. Our global manufacturing presence increases our ability to respond to our customers' needs by providing accelerated time-to-market and time-to-volume production of high-quality products - especially for complex products with lower volume and higher mix in regulated markets with higher reliability requirements. These capabilities enable us to build strong strategic relationships with our customers and to become an integral part of their business.

We believe our primary competitive advantages are our leading edge technical capabilities in engineering services (including product design in which we can take a product idea from concept to design to volume manufacturing), technology solutions (especially high frequency RF solutions, microelectronics, and miniaturization), and manufacturing services (including electronics and complex precision machining capabilities) provided by highly skilled personnel. We also have diversified end market and regulated market experience in our targeted higher-value markets. To support customers in these markets, we have invested in strategic global supply chain design and execution.

In addition, we believe that a strong focus on human capital through the talent we hire and retain is critical to maintaining our competitiveness. We are driving a customer-centric organization with a high degree of accountability and ownership to develop processes necessary to exceed customer expectations and deliver financial performance aligned to our goals. Through our employee feedback process, we solicit and act upon information to improve our Company and better support our customers and business processes in the future. We have taken steps to attract the best leaders and are accelerating our efforts to increase our diversity and inclusion in our employee and management ranks as we seek to develop an innovative and forward thinking workforce for the future.

Our customers often face challenges in designing supply chains, demand planning, procuring materials and managing their inventories efficiently due to fluctuations in their customer demand, product design changes, short product life cycles and component price fluctuations.

We employ enterprise resource planning (ERP) systems and lean manufacturing principles to manage procurement and manufacturing processes in an efficient and cost-effective manner so that, where possible, components arrive on a just-in-time, as-and-when-needed basis. Because we are a significant purchaser of electronic components and other raw materials, we are generally able to capitalize on the economies of scale associated with our relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. Utilizing our agility and expertise in supply chain management and our relationships with suppliers across the supply chain we strive to help reduce our customers' cost of goods sold and inventory exposure. However, due to the COVID-19 pandemic, as well as global labor and supply disruptions, we continue to see component supply chain constraints across all commodity categories that are constraining our ability to produce the full demand forecasts we are receiving from customers.

We recognize revenue as the customer takes control of the manufactured products built to customer specifications. We also generate revenue from our design, development and engineering services, in addition to the sale of other inventory.

Revenue is measured based on the consideration specified in a contract with a customer. Under the majority of our manufacturing contracts with customers, the customer controls all the work-in-progress as products are being built. Revenues under these contracts are recognized progressively based on the cost-to-cost method. For other manufacturing contracts, the customer does not take control of the product until it is completed. Under these contracts, we recognize revenue upon transfer of control of product to the customer, which is generally when the goods are shipped. Revenue from design, development and engineering services is recognized over time as the services are performed. As a general matter, we assume no significant obligations after shipment as we typically warrant workmanship only. Therefore, the warranty provisions are generally not significant.

COVID-19 Pandemic Update

In late 2019, there was an outbreak of a new strain of coronavirus (COVID-19) first identified in Wuhan, Hubei Province, China, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Further, the COVID-19 outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, "shelter-in-place," "stay-at-home," and total lock-down orders, business limitations or shutdowns and similar orders. As a result, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and created significant volatility and disruption of financial markets. In an effort to first and foremost protect the health and safety of our employees, we also took proactive action to adopt social distancing policies at our locations globally, including working from home for certain employees, limiting the number of employees

attending meetings, reducing the number of people in our locations at any one time, and significantly limiting employee travel. More recently, a more contagious variant of COVID-19 (the Delta Variant) has spread globally, which has caused some governments to reimplement various measures to reduce the spread. It is unclear at this point the full impact the Delta Variant will have on the global economy and on our Company.

As a result of the COVID-19 pandemic, our revenue during 2020 was negatively impacted primarily as a result of operational inefficiencies relating to reduced productivity levels throughout our facilities and supply chain constraints, which affected our ability to support customer demand. Additionally, the COVID-19 pandemic negatively impacted our 2020 results due to increased direct costs associated with labor expenses and personal protective equipment for our employees, as well as under absorption of fixed costs.

Benchmark provides critical infrastructure products and essential services in each of our locations, which has allowed us to continue to operate. The COVID-19 pandemic continues to affect the Company's operations into 2021. End market demand continues to grow as more customers recover from the pandemic. However, we continue to see component supply chain constraints across all commodity categories which are constraining our ability to produce the full demand forecasts we are receiving from customers. See "Third Quarter 2021 Highlights" below and "Risk Factors-Shortages or price increases of components specified by our customers have resulted in delayed shipments and could adversely affect our profitability" in Part II, Item 1A of this Report for additional information.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in the United States in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021, and contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The Company evaluated the impact of these provisions and determined these provisions did not have any impact on the year ended December 31, 2020 or the nine months ended September 30, 2021. In addition, the CARES Act allows for employee retention tax credits to be taken in U.S. payroll tax filings and allows for the deferral of the employer portion of social security taxes with 50% to be paid at the end of calendar years 2021 and 2022, respectively. Accordingly, the Company has deferred the payment of the employer portion of social security taxes for the year ended December 31, 2020 until the end of 2021 and 2022, respectively. The Company has also determined it was entitled to employee retention credits and filed for the credits in the second quarter 2020 payroll tax reports pursuant to the guidance provided by the Internal Revenue Service. The amount of credits has been recorded in operating expenses for the year ended December 31, 2020. The Company has determined that it is not eligible for employee retention tax credits as of September 30, 2021, and the deferral of the employer portion of social security taxes is not available for 2021.

We continue to monitor the evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, the exact extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations, is currently unknown and will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the COVID-19 pandemic and its severity; the emergence and severity of its variants, including the Delta Variant; the actions to contain the virus or treat its impact, including the availability and efficacy of vaccinations (particularly with respect to emerging strains of the virus) and the rate of inoculations; general economic factors, such as increased inflation; global supply chain constraints and shortages; labor supply issues; and how quickly and to what extent normal economic and operating conditions can resume, which may not return fully to pre-pandemic levels.

Accordingly, our current results and financial condition discussed herein may not be indicative of future operating results and trends. See "Risk Factors" in Part I, Item 1A of our 2020 10-K and in Part II, Item 1A of this Report for additional risks we face due to the COVID-19 pandemic.

Third Quarter 2021 Highlights

Sales for the three months ended September 30, 2021 were $571.9 million, a 9% increase from sales of $526.0 million during the three months ended September 30, 2020. During the third quarter of 2021, sales to customers in our various industry sectors fluctuated from the third quarter of 2020 as follows:

Higher-Value Markets

? Industrials increased by 26%,

? A&D decreased by 4%,

? Medical decreased by 12%, and

? Semi-cap increased by 35%.

Traditional Markets

? Computing increased by 28%, and

? Telecommunications decreased by 5%.

Higher-value market revenues were up 9% year-over-year from strength in Industrials and Semi-cap, partially offset by decreases in A&D and Medical. Traditional market revenues were up 9% year-over-year from strength in the Computing market.

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, including in each case as a result of the COVID-19 pandemic, have adversely affected us. A substantial percentage of our sales are made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us. Sales to our ten largest customers represented 47% and 42% of our sales during the nine months ended September 30, 2021 and 2020, respectively.

For the three and nine months ended September 30, 2021, lead times continue to extend, and more components are being placed on allocation by suppliers. During the three months ended September 30, 2021, there was an increase in pushouts of previously committed component orders and tighter allocation and timing restrictions across the component suppliers. These last-minute allocations created inefficiencies in our operations and contributed to the sequential increase in inventory days for the quarter.

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. In addition, a number of our new program ramps remain subject to competitive constraints that can exert downward pressure on our margins. During periods of low production volume, we generally have idle capacity and reduced gross profit.

We have undertaken initiatives to restructure our business operations with the intention of improving utilization and reducing costs. During the first nine months of 2021, we recognized $5.2 million of restructuring and other costs due in part to expenses associated with various site closures and restructuring activities.







        RESULTS OF OPERATIONS
        The following table presents the percentage relationship that certain items in
        our condensed consolidated statements of income bear on sales for the periods
        indicated. The financial information and the discussion below should be read in
        conjunction with the condensed consolidated financial statements and Notes
        thereto in Part I, Item 1 of this Report.
                                                     Three Months Ended           Nine Months Ended
                                                       September 30,                September 30,
                                                     2021           2020          2021          2020
        Sales                                          100.0 %       100.0 %        100.0 %      100.0 %
        Cost of sales                                   90.6          91.2           91.1         91.9
        Gross profit                                     9.4           8.8            8.9          8.1
        Selling, general and administrative
        expenses                                         6.0           5.7            6.1          5.9
        Amortization of intangible assets                0.3           0.5            0.3          0.5
        Restructuring charges and other costs            1.1           1.4            0.6          1.0
        Ransomware related incident costs
        (recovery), net                                 (0.1 )        (0.3 )         (0.2 )       (0.1 )
        Income from operations                           2.1           1.6            2.1          0.9
        Other expense, net                              (0.3 )        (0.3 )         (0.3 )       (0.3 )
        Income before income taxes                       1.8           1.4            1.8          0.5
        Income tax expense                               0.4           0.2            0.4          0.1
        Net income                                       1.4 %         1.1 %          1.4 %        0.4 %
        








        Sales
        As noted above, sales for the third quarter of 2021 increased 9% from the same
        quarter in 2020. Sales for the first nine months of 2021 increased 6% from the
        same period in 2020. Sales by industry sector were as follows:
                                 Three Months Ended             Nine Months Ended
                                    September 30,                 September 30,
        (in thousands)           2021          2020           2021            2020
        Higher-Value Markets
        Industrials            $ 108,192     $  86,184     $   303,550     $   276,140
        A&D                      100,838       104,899         286,899         312,623
        Medical                  117,793       134,142         334,888         386,869
        Semi-Cap                 133,576        98,721         385,890         268,292
                                 460,399       423,946       1,311,227       1,243,924
        Traditional Markets
        Computing                 56,557        44,339         139,841         124,793
        Telecommunications        54,926        57,666         171,197         163,164
                                 111,483       102,005         311,038         287,957
        Total                  $ 571,882     $ 525,951     $ 1,622,265     $ 1,531,881
        


Industrials. Third quarter 2021 sales increased 26% to $108.2 million from $86.2 million in the third quarter of 2020. Sales during the first nine months of 2021 increased 10% to $303.6 million from $276.1 million in the same period of 2020. The increases were primarily due to continued demand improvements from oil & gas, commercial and building infrastructure programs as well as a new program ramp for LiDAR applications.

Aerospace and Defense. Third quarter 2021 sales decreased 4% to $100.8 million from $104.9 million in the third quarter of 2020. Sales during the first nine months of 2021 decreased 8% to $286.9 million from $312.6 million in the same period of 2020. The decreases were primarily due to a decline in customer demand in the commercial aerospace sector year over year.

Medical. Third quarter 2021 sales decreased 12% to $117.8 million from $134.1 million in the third quarter of 2020. Sales during the first nine months of 2021 decreased 13% to $334.9 million from $386.9 million in the same period of 2020. The decreases were due to the reduction of demand in COVID specific programs and supply chain constraints impacting demand recovery for certain customers.

Semiconductor Capital Equipment. Third quarter 2021 sales increased 35% to $133.6 million from $98.7 million in the third quarter of 2020. Sales during the first nine months of 2021 increased 44% to $385.9 million from $268.3 million in the same period of 2020. The increases were primarily due to high demand levels and our future backlog increasing for our precision machining and large electro-mechanical assembly services, which are primarily related to front-end wafer fab equipment.

Computing. Third quarter 2021 sales increased 28% to $56.6 million from $44.3 million in the third quarter of 2020. Sales during the first nine months of 2021 increased 12% to $139.8 million from $124.8 million in the same period of 2020. The increases were primarily due to a planned ramp of a high performance computing program that will continue into 2022.

Telecommunications. Third quarter 2021 sales decreased 5% to $54.9 million from $57.7 million in the third quarter of 2020. The decrease was primarily due to delays in new program ramps tied to component shortages. Sales during the first nine months of 2021 increased 5% to $171.2 million from $163.2 million in the same period of 2020. The increase was primarily due to strong demand from new and existing programs in commercial broadband.

Our international operations are subject to the risks of doing business abroad. See Part I, Item 1A of our 2020 10-K for factors pertaining to our international sales, fluctuations in foreign currency exchange rates and a discussion of potential adverse effects in operating results associated with the risks of doing business abroad. During the third quarter of 2021 and 2020, 54% and 51%, respectively, of our sales were from international operations.

Gross Profit

Gross profit increased 15.7% to $53.7 million in the third quarter of 2021 from $46.4 million in the third quarter of 2020, and increased 15.6% to $143.8 million for the first nine months of 2021 from $124.4 million for the same period in 2020. Gross margin increased primarily due to higher revenues.

Selling, General and Administrative (SG&A) Expenses

SG&A increased to $34.4 million in the third quarter of 2021 from $29.7 million in the third quarter of 2020, and increased to $99.0 for the first nine months of 2021 from $89.8 for the same period of 2020. The increases were primarily due to higher variable compensation costs and U.S. medical expenses.

Amortization of Intangible Assets

Amortization of intangible assets was $1.6 million in the third quarter of 2021 and $2.4 million in the third quarter of 2020, and $4.8 million for the first nine months of 2021 compared to $7.1 million for the same period in 2020. The decreases were primarily due to an intangible asset becoming fully amortized in 2020.

Restructuring Charges and Other Costs

During the first nine months of 2021, we recognized $5.2 million of restructuring and other costs primarily due to expenses associated with announced site closures or exits, reduction in force and other restructuring activities primarily in the Americas. During the first nine months of 2020, we recognized $8.7 million of restructuring charges, primarily related to site closures and restructuring activities in certain facilities in the Americas and Asia. In addition, during the first nine months of 2021, we incurred $4.4 million in costs related to asset impairments in the Americas. During the first nine months of 2020, we incurred $5.7 million and $1.0 million in costs related to asset impairments in the Americas and Asia, respectively. See Note 12 to the condensed consolidated financial statements in Part I, Item 1 of this Report for additional information on our restructuring charges.

Ransomware Incident Related Costs, Net

During the fourth quarter ended December 31, 2019, ransomware incident related costs incurred totaled $12.7 million or $7.7 million, net of estimated insurance recoveries of $5.0 million. These costs were primarily comprised of certain employee related expenses and various third party consulting services, including . . .

Nov 04, 2021

COMTEX_396357724/2041/2021-11-04T15:31:37

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