BENCHMARK ELECTRONICS, INC. This quarterly report (this Report) contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act).
These forward-looking statements are identified as any statement that does not
relate strictly to historical or current facts and may include words such as
"anticipate," "believe," "intend," "plan," "project," "forecast," "strategy,"
"position," "continue," "estimate," "expect," "may," "will," or the negative or
other variations thereof. In particular, statements, express or implied,
concerning future operating results, including guidance for third quarter 2021
results and beyond, our ability to generate sales, income or cash flow, the
anticipated impact of the COVID-19 pandemic, our anticipated plans and responses
to the COVID-19 pandemic, our expected revenue mix, our business strategy and
strategic initiatives, our repurchases of shares of our common stock and our
intentions concerning the payment of dividends, among others, are
forward-looking statements. Although we believe these statements are based upon
reasonable assumptions, they involve risks, uncertainties and assumptions that
are beyond our ability to control or predict, relating to operations, markets
and the business environment generally, including those discussed in Part I,
Item 1A of the 2020 10-K and in any of our subsequent reports filed with the
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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Design & Engineering Services, which include design for manufacturability, manufacturing process and test development, concurrent and sustaining engineering, turnkey product design and regulatory services. Our engineering services may be for systems, sub-systems, printed circuit boards and assemblies, and components. We provide these services across all the industries we serve, but focus primarily in regulated industries such as medical, complex industrials, A&D, and semi-cap.
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Technology Solutions, which involve developing a library of building blocks or reference designs primarily in defense solutions, surveillance systems, radio frequency and high-speed design, and front-end managed connectivity data collection systems. We often merge these technology solutions with engineering services to provide turnkey product development from requirements through to volume production that we support with our manufacturing services. Our building blocks can be utilized across a variety of industries but we have significant capabilities in the A&D and the complex industrials markets. We have also developed differentiated capabilities in radio frequency (RF) and high-speed design for both components and substrates. The need to reduce size, weight, and power (SWaP) to accommodate high frequency electronics communications is important to customers in the A&D, medical, and next-generation telecommunications markets.
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Manufacturing Services, which include printed circuit board assemblies (PCBAs) using both traditional surface mount technologies (SMT) and microelectronics, subsystem assembly, system build and integration. System builds and integration often involve building a finished assembly that includes PCBAs, complex subsystem assemblies, mechatronics, displays, optics, and other components. These final products may be configured to order and delivered directly to the end-customer across all the industries we serve. Manufacturing services also includes precision technology
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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 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. Our agility and expertise in supply chain management and our relationships with suppliers across the supply chain enable us to help reduce our customers' cost of goods sold and inventory exposure.
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 over time based on the cost-to-cost method. Under 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 engineering services that include design and development elements also continues to be 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
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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. In the second quarter of 2021, the supply chain environment was also
adversely impacted due to rising COVID-19 cases in
On
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, its severity, 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, 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 for additional risks we face due to the COVID-19 pandemic.
Second Quarter 2021 Highlights
Sales for the three months ended
Higher-Value Markets
? Industrials increased by 15%,
? A&D increased by 9%,
? Medical decreased by 19%, and
? Semi-cap increased by 60%.
Traditional Markets
? Computing decreased by 10%, and
? Telecommunications increased by 21%.
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Higher-value market revenues were up 12% year-over-year from strength in A&D, Industrials and Semi-cap, partially offset by a decrease in Medical. Traditional market revenues were up 7% year-over-year from strength in the Telecommunications 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, can adversely affect 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 46% and 43% of our sales during the six months ended
For the three and six months ended
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 six
months of 2021, we recognized
RESULTS OF OPERATIONS
The following table presents the percentage relationship that certain items in our condensed consolidated statements of income (loss) 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 Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 91.2 92.9 91.4 92.2
Gross profit 8.8 7.1 8.6 7.8
Selling, general and administrative
expenses 6.2 5.8 6.1 6.0
Amortization of intangible assets 0.3 0.5 0.3 0.5
Restructuring charges and other costs 0.3 1.2 0.3 0.9
Ransomware related incident costs
(recovery), net - - (0.3 ) -
Income (loss) from operations 2.0 (0.4 ) 2.2 0.5
Other expense, net (0.3 ) (0.4 ) (0.4 ) (0.4 )
Income (loss) before income taxes 1.7 (0.8 ) 1.8 0.1
Income tax expense (benefit) 0.3 (0.1 ) 0.3 0.0
Net income (loss) 1.4 % (0.7 )% 1.5 % 0.0 %
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Sales
As noted above, sales for the second quarter of 2021 increased 11% from the same quarter in 2020. Sales by industry sector were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2021 2020 2021 2020
Higher-Value Markets
Industrials $ 99,906 $ 87,130 $ 195,358 $ 189,956
A&D 96,680 88,524 186,061 207,724
Medical 108,905 134,751 217,095 252,727
Semi-Cap 139,204 86,851 252,314 169,571
444,695 397,256 850,828 819,978
Traditional Markets
Computing 39,598 43,853 83,284 80,454
Telecommunications 60,369 49,857 116,271 105,498
99,967 93,710 199,555 185,952
Total $ 544,662 $ 490,966 $ 1,050,383 $ 1,005,930 Industrials. Second quarter 2021 sales increased 15% to
Aerospace and Defense. Second quarter 2021 sales increased 9% to
Medical. Second quarter 2021 sales decreased 19% to
Semiconductor Capital Equipment. Second quarter 2021 sales increased 60% to
Computing. Second quarter 2021 sales decreased 10% to
Telecommunications. Second quarter 2021 sales increased 21% to
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 second quarter of 2021 and 2020, 56% and 50%, respectively, of our sales were from international operations.
Gross Profit
Gross profit increased 38.0% to
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Selling, General and Administrative (SG&A) Expenses
SG&A increased to
Amortization of Intangible Assets
Amortization of intangible assets was
Restructuring Charges and Other Costs
During the first six months of 2021, we recognized
Ransomware Incident Related Costs, Net
During the fourth quarter ended
Interest Expense
Interest expense increased to
Interest Income
Interest income decreased to
Income Tax Expense
Income tax expense of
We have been granted certain tax incentives, including tax holidays, for our
subsidiaries in
Net Income
We reported a net income of
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our organic growth and operations through funds
generated from operations and occasional borrowings under our revolving credit
facility. Cash and cash equivalents and restricted cash totaled
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million at
Cash provided by operating activities was
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. If shortages of these components and other material supplies used in operations occur, vendors may not ship the quantities we need for production, and we may be forced to delay shipments, which can increase backorders and impact cash flows. 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, as discussed above under "COVID-19 Pandemic Update," we have been impacted by supply chain constraints, including shortages, longer lead times and increased transit times.
Cash used in investing activities was
Cash used in financing activities was
Under the terms of our
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
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.
As of
During the next 12 months, we believe our capital expenditures will approximate
On
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Directors authorized an additional
The Company began declaring and paying quarterly dividends during the first
quarter of 2018. In
Management believes that our existing cash balances and funds generated from operations 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.
CONTRACTUAL OBLIGATIONS
We have certain contractual obligations for operating and capital leases that
were summarized in a table of Contractual Obligations in our 2020 10-K. There
have been no material changes to our contractual obligations, outside of the
ordinary course of our business, since
CRITICAL ACCOUNTING POLICIES AND ESTIMATES AND RECENTLY ENACTED ACCOUNTING PRINCIPLES
Management's discussion and analysis is based upon our condensed consolidated
financial statements, which have been prepared in accordance with
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