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May 5, 2022, 4:56 p.m. EDT


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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


We are a worldwide provider of advanced manufacturing services (both electronic manufacturing services (EMS) and precision technology services), which includes design and engineering services and technology solutions. 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:

Our core strength lies in our ability to partner with our customers to provide concept-to-production solutions in support of our customers through a tightly integrated and seamless set of design, test, manufacturing, supply chain and support services. The integration of these services along with 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 advantage is our ability to engage with our customers at any point in their concept to production process by providing 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 and microelectronics), 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 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 manufacturing services 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 of 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 the 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 Pandemic Update

In late 2019, there was an outbreak of a new strain of coronavirus (COVID) first identified in Wuhan, Hubei Province, China, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID a pandemic. Further, the COVID

outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID, 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 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 took, and at times continue to take, proactive action to adopt social distancing policies at our locations globally. These measures include, but are not limited to, 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, more contagious variants of COVID, such as the Omicron variant and its subvariants, have emerged and spread globally, which initially caused some governments to reimplement various measures, or impose new restrictions, in an effort to lessen the spread of COVID and its variants. While some of these restrictions have begun to be lifted, the lingering impact of the COVID pandemic continues to create significant volatility throughout the global economy, including supply chain constraints, labor supply issues and higher inflation. Accordingly, it is unclear at this point the full impact COVID and its variants will have on the global economy and on our Company.

As a result of the COVID pandemic, our revenue during 2021 and the first quarter of 2022 has been 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 pandemic negatively impacted our operating 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 pandemic continues to affect the Company's operations into 2022. 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 "First Quarter 2022 Highlights" below 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 pandemic. The CARES Act among other things, permits net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021, and contains modifications on the limitation of business interest. The Company evaluated the impact of these provisions and determined these provisions did not have any impact on the three months ended March 31, 2022. 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 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. During December 2021, the Company paid approximately 50% of the social security taxes previously deferred. 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 was not eligible for employee retention tax credits as of December 31, 2021. The Company has not received the retention credits from the Internal Revenue Service that it applied for during the second quarter of 2020. The Internal Revenue Service has had some delays in processing the filings for the tax refunds.

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 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 pandemic and its severity; the emergence and severity of its variants, including the Omicron 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 2021 10-K for additional risks we face due to the COVID pandemic.

First Quarter 2022 Highlights

Sales for the three months ended March 31, 2022 were $636.1 million, a 26% increase from sales of $505.7 million during the three months ended March 31, 2021. During the first quarter of 2022, sales to customers in our various industry sectors fluctuated from the first quarter of 2021 as follows:

Higher-Value Markets

Traditional Markets

The overall revenue increase was due primarily to higher overall demand from both our Higher-value and Traditional markets (as discussed below). Higher-value market revenues were up 28% year-over-year from strength in the Semi-Cap and Industrials sectors. Traditional market revenues were up 18% year-over-year from strength in both Computing and Telecommunications sectors.

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 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 51% and 44% of our total sales during the three months ended March 31, 2022 and 2021, respectively. Due to the COVID 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. Lead times continue to extend, and more components are being placed on allocation by suppliers. Additionally, there continues to be 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.

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 unabsorbed manufacturing overhead costs and reduced gross profit. Gross profit can also be impacted by other situations, such as COVID and supply chain constraints.

We have undertaken initiatives to restructure our business operations with the intention of improving utilization and reducing costs. During the first three months of 2022, we recognized $2.3 million of restructuring and other costs due to expenses associated with various site closures and restructuring activities, as well as a $2.0 million loss on assets held for sale related to the Company's 2021 decision to no longer continue certain manufacturing capabilities in the Americas.


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
                                                                   March 31,
                                                               2022          2021
        Sales                                                    100.0 %      100.0 %
        Cost of sales                                             90.9         91.7
        Gross profit                                               9.1          8.3
        Selling, general and administrative expenses               5.7          6.0
        Amortization of intangible assets                          0.3          0.3
        Restructuring charges and other costs                      0.7          0.3
        Ransomware related incident costs (recovery), net          0.0         (0.7 )
        Income from operations                                     2.4          2.4
        Other expense, net                                        (0.3 )       (0.5 )
        Income before income taxes                                 2.1          1.9
        Income tax expense                                         0.4          0.3
        Net income                                                 1.7 %        1.6 %


As noted above, sales for the first quarter of 2022 increased 26% from the same quarter in 2021.

Sales are analyzed by management by industry sector and by geographic segment, which reflects our reportable segments. Our global business development strategy is based on our targeted industry sectors. Management measures operational performance and allocates resources on a geographic segment basis.

Sales by industry sector were as follows:

                                 Three Months Ended
                                      March 31,
        (in thousands)           2022          2021
        Higher-Value Markets
        Industrials            $ 137,146     $  95,452
        A&D                       81,187        89,381
        Medical                  116,873       108,190
        Semi-Cap                 183,437       113,110
                                 518,643       406,133
        Traditional Markets
        Computing                 55,056        43,686
        Telecommunications        62,384        55,902
                                 117,440        99,588
        Total                  $ 636,083     $ 505,721

Industrials. First quarter 2022 sales increased 44% to $137.1 million from $95.5 million in the first quarter of 2021. The increase was primarily due to continued demand improvements from oil and gas, building infrastructure, and light detection and ranging (LiDAR) applications.

Aerospace and Defense. First quarter 2022 sales decreased 9% to $81.2 million from $89.4 million in the first quarter of 2021. The decrease was primarily due to program transitions and lower demand in our commercial aerospace programs which have yet to recover to pre-pandemic levels.

Medical. First quarter 2022 sales increased 8% to $116.9 million from $108.2 million in the first quarter of 2021. The increase was primarily due to new programs ramping and improving demand with existing customers.

Semiconductor Capital Equipment. First quarter 2022 sales increased 62% to $183.4 million from $113.1 million in the first quarter of 2021. The increase was primarily due to higher demand across our customer base in the front-end Semi-Cap space where we provide differentiated engineering design services, precision machining capabilities, and complex system assembly.

Computing. First quarter 2022 sales increased 26% to $55.1 million from $43.7 million in the first quarter of 2021. The increase was primarily due to the planned ramp of high performance computing programs.

Telecommunications. First quarter 2022 sales increased 12% to $62.4 million from $55.9 million in the first quarter of 2021. The increase was primarily due to demand improvement for satellite programs and new broadband ramps.

Our international operations are subject to the risks of doing business abroad. See Part I, Item 1A of our 2021 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 first quarter of 2022 and 2021, 61% and 55%, respectively, of our sales were from international operations.

Sales by geographic segment were as follows:

                                               Three Months Ended
                                                    March 31,
        (in thousands)                         2022          2021
        Net sales:
        Americas                             $ 305,580     $ 276,838
        Asia                                   287,246       188,304
        Europe                                  70,341        60,880
        Elimination of intersegment sales:     (27,084 )     (20,301 )
        Total net sales                      $ 636,083     $ 505,721

Americas. First quarter 2022 sales increased 10% to $305.6 million from $276.8 million in the first quarter of 2021. The increase was primarily due to increasing demand with existing customers and new program ramps.

Asia. First quarter 2022 sales increased 53% to $287.2 million from $188.3 million in the first quarter of 2021. The increase was primarily due to increasing demand with existing customers, production ramps of new programs for existing customers and new customer program ramps.

Europe. First quarter 2022 sales increased 16% to $70.3 million from $60.9 million in the first quarter of 2021. The increase was primarily due to increasing demand with existing customers and new customer program ramps.

Gross Profit

Gross profit increased 36% to $57.6 million in the first quarter of 2022 from $42.2 million in the first quarter of 2021. Gross margin increased primarily due to higher revenues.

        Operating Income
        First quarter 2022 operating income increased 29% to $15.4 million from $11.9
        million in the first quarter of 2021. The increase was primarily due to an
        increase in revenue and respective gross profit partially offset by an increase
        in selling, general and administrative (SG&A) expenses.
        . . .

May 05, 2022


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