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Text: For today's call, Jeff will begin by covering a summary of our third quarter.
Roop will then discuss our detailed third quarter results, including a cash and balance sheet summary and fourth quarter guidance.
Jeff will wrap up with an outlook by market sector, an update on our strategic initiatives and a discussion on our midterm financial model before we conclude the call with Q&A.
We hope you are all staying safe and healthy during these unprecedented times.
In Q3, we delivered revenue of $526 million, which was up 7% sequentially from Q2, supported by strong demand in our defense, semi-cap and telco sectors and improved manufacturing productivity.
With improving operational efficiency, non-GAAP gross margins rebounded 170 basis points to 8.7% for the quarter.
Improved profits and focused expense management resulted in non-GAAP earnings of $0.32 per share, which includes $1.3 million or $0.04 per share of COVID-related costs.
We believe COVID costs are a part of the new operating normal.
And while we believe they will decline to some degree from current levels, they will likely not completely go away.
After a challenging couple of quarters, I'm pleased to report that our manufacturing and engineering services operations have essentially returned to pre-COVID productivity levels, which has supported our improved results for Q3.
This has not been without an incredible amount of work from our COVID task force and our entire employee population to maintain stringent protocols to ensure we keep our workplace safe and healthy, which remains a top priority.
Our cash conversion cycle for the quarter improved to 81 days from 84 days in Q2.
As I've mentioned previously, our go-to-market team continues to deliver exciting opportunities aligned to our complex and focused services and solutions that utilize the full breadth of the One Benchmark capabilities.
And we had another strong quarter of bookings in Q3, where we awarded business that should represent over $200 million of future engineering and manufacturing revenue.
In the medical sector, we were awarded a new program for a lab-free rapid COVID-19 testing device from DnaNudge that has begun production in our Netherlands facility.
We are excited to partner with DnaNudge to provide DFX support and high reliability manufacturing for what has turned out to be a very swift product ramp.
We also had design and manufacturing process wins with two other companies for a pulmonary treatment device and an optical diagnostic product for renal applications.
In the defense vertical, we were awarded new programs for secure communication radio modules that incorporate our design solutions and manufacturing services for electronics that will be deployed in military aircraft.
In industrials, we were awarded the full system box build for a LiDAR application, and we were awarded manufacturing for a new generation of oscilloscopes.
In computing, we were awarded a new prototype for a hyperscale computing customer and a new outsourcing award from an existing customer supporting network control and monitoring electronics.
Our new business pipeline continues to be strong across our targeted sectors and subsectors, and we remain very encouraged about the prospect for continued wins, where the outsourcing environment for both engineering and manufacturing projects remains favorable.
I hope everyone and their families continue to stay safe and healthy.
Total Benchmark revenue was $526 million in Q3, a 7% increase on a sequential basis.
Medical revenues for the third quarter were flat sequentially as expected from moderating demand for products involved in COVID-19 therapies, such as ventilators, x-rays and ultrasound devices.
New product demand is shifting more toward diagnostic devices, such as DnaNudge's diagnostic box, which we were awarded in Q3.
Semi-cap revenues were up 14% in the third quarter and up 45% year-over-year from continued strong demand across our semi-cap customers.
A&D revenues for the third quarter increased 18% sequentially due to strong defense demand in surveillance, connectivity, encryption and digital subsystems and from new program wins.
Conversely, commercial aerospace demand, which was 30% of 2019 revenues, remain muted and declined on certain platforms during the quarter.
Industrial revenues for the third quarter were flat sequentially from continued softness for products in the oil and gas industry, which was approximately 20% of our 2019 revenue.
In addition, demand remains muted for customers that support commercial building infrastructure and transportation markets.
Overall, the higher value markets represented 81% of our third quarter revenue.
In the traditional markets, computing revenues were flat sequentially from stable demand in high-performance computing and data center storage products.
Telco was up 16% from Q2 with improved demand in commercial satellite and network infrastructure products.
Our traditional markets represented 19% of third quarter revenues.
Our top 10 customers represented 42% of sales in the third quarter.
Our GAAP earnings per share for the quarter was $0.16.
Our GAAP results included restructuring and other onetime costs totaling $7.2 million.
$6.3 million of these costs are related to the impairment of assets and severance and other items related to the decision to exit a certain line of business in our A&D sector related to turbine machining.
The remaining $900,000 of restructuring and other onetime costs are due to various restructuring activities around our sites.
$1.6 million insurance recovery related to our Q4 2019 ransomware event.
To date, we have recovered $6.6 million.
Turning to slide eight.
For Q3, our non-GAAP gross margin was 8.7%, a 170 basis point sequential increase.
During the quarter, gross margin was positively impacted by higher revenues, which enabled improved leverage across our cost structure, increased productivity across our sites and lower sequential COVID-19-related costs.
We estimate that we incurred approximately $1.3 million or approximately $0.04 per share of COVID costs in the quarter versus $3.4 million in Q2.
Our SG&A was $29.7 million, an increase of $1.2 million sequentially and a decrease of $1.2 million year-over-year.
We expect that our SG&A costs will be relatively flat sequentially between Q3 and Q4.
Operating margin was 3%, an increase from 1.2% in Q2 due to the higher revenue and increased gross margin.
In Q3, our non-GAAP effective tax rate was 18.6%, which was lower than expected as a result of the insurance recovery reported in Q3 and the distribution of profits around the globe.
Non-GAAP earnings per share was $0.32 for the quarter.
Non-GAAP ROIC was 5.8%.
Our non-GAAP earnings per share improved sequentially based on our improved operational performance, lower net interest expense and lower tax rate.
Our cash balance was $335 million at September 30, with $161 million available in the U.S.
We continue to have a strong capital structure, and our liquidity position provides flexibility to manage our business to support our future strategy.
We generated $6 million in cash flow from operations and used $6 million for capital expenditures.
Our accounts receivable balance was $306 million, an increase of $4 million from the prior quarter.
Contract assets were $161 million at September 30 and $154 million at June 30.
Payables were down $22 million quarter-over-quarter.
Inventory at September 30 was $353 million, down $11 million sequentially.
Turning to slide 10 to review our cash conversion cycle.
Our cash conversion cycle days were 81.
Accounts receivable days improved three days.
Inventory days improved six days, and customer deposits improved by one day to help support an overall sequential improvement of three days.
Turning to slide 11 for our capital allocation update.
In Q3, we continue to pay a quarterly cash dividend of approximately $5.8 million.
We expect to continue the recurring quarterly cash dividend.
There were no share repurchases in Q3.
We will consider restarting share repurchases opportunistically in Q4.
Turning to slide 12 for a review of our fourth quarter 2020 guidance.
We expect revenue to range from $500 million to $540 million.
We expect that our gross margins will be 9% to 9.1% for Q4, and SG&A will range between $29 million to $30 million.
This range contemplates the SG&A cost reductions that Jeff will review further in his following comments, the continued reduced travel offset by the reestablishment of certain employee salaries that have been temporarily reduced.
Implied in our guidance is a 3.3% to 3.5% operating margin range for modeling purposes.
The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs.
We expect to incur restructuring and other nonrecurring costs in Q4 of approximately $2.8 to $3.2 million.
Our non-GAAP diluted earnings per share is expected to be in the range of $0.32 to $0.36 or a midpoint of $0.34.
We estimate that we will generate approximately $45 million to $50 million cash flow from operations for fiscal year 2020.
capex for the year will be approximately $32 million to $38 million as we prioritize investments to support our new customers and expand our production capacity for future growth.
Other expenses net is expected to be $2.7 million, which is primarily interest expense related to our outstanding debt.
We expect that for Q4, our non-GAAP effective tax rate will be between 18% to 20% because of the distribution of income around our global network.
The expected weighted average shares for Q4 are 36.5 million.
This guidance takes into consideration all known constraints for the quarter and assumes no further significant interruptions to our supply base, operations or customers.
Guidance also assumes no material changes to end market conditions due to COVID-19.
Following Roop's comments on our guidance for the fourth quarter, I wanted to provide additional color on our view of demand by sector, shown on slide 14.
Overall, for the fourth quarter, we expect increased revenues from stronger demand and new programs in defense, industrials and telco to offset anticipated declines in medical as we pivot manufacturing from COVID-19-related therapeutic equipment to diagnostic, trauma and elective surgical devices.
The resulting Q4 revenue should be in line with Q3 levels.
We do not expect a seasonal uptrend in Q4 this year as customers are more cautious on increasing their demand signals given the economic and geopolitical environment.
Now turning to the medical sector.
During the first half of this year, we saw demand reductions in our core medical products in the cardiac, renal and orthopedic markets associated with trauma and elective surgeries as many of our existing customers and new customers reallocated their manufacturing and sales capacity in the fight against COVID.
As reported, one of the existing key cardiac customers, ZOLL Medical, enlisted Benchmark to support a rapid ramp of manufacturing capability to support ventilator production.
In the fourth quarter, we see declining demand for COVID-19 therapy devices, but the corresponding demand recovery for our non-COVID products isn't expected to start until first half of next year.
This anticipated recovery, along with new medical programs, gives us confidence that next year will be another growth year for the medical sector.
In semi-cap, after a stronger-than-expected increase in Q3, demand remained stable for semiconductor capital equipment in Q4.
We remain well positioned in this sector with our advanced precision machining and electronics manufacturing and further demand outlook.
This sector is expected to remain strong as the semiconductor capital equipment index is predicting another growth year in 2021.
Moving to the A&D sector outlook.
Our aerospace and defense sector is comprised of approximately 70% defense-related products and 30% commercial aerospace offerings based on 2019 revenue levels.
Defense demand across the portfolio remained strong in Q4 as we support many funded programs across the United States Armed Forces.
We are anticipating that our commercial aircraft programs, which have declined significantly in first half '20, have a limited demand recovery in Q4 and in fiscal year 2021.
As Roop mentioned earlier, we have not seen an uptick in orders in industrials for oil and gas and the building and transportation infrastructure markets, where many large projects continue to be delayed.
Despite soft demand, we do expect an overall increase in industrials in Q4 for new programs and an increased number of global engineering services projects.
Overall, we see stable demand across our computing and telco customer base.
High-performance computing projects are in flight as expected in the second half but are being offset to some degree with the persistent weakness in higher-value enterprise applications as the remote work trend continues.
In telco, network infrastructure product demand across a number of our customers remain strong from the continued need for greater bandwidth for data services.
After a nice rebound in Q3, demand from our commercial satellite customers remained stable in Q4.
As Roop shared in our guidance, with this revenue and sector mix forecast, we remain on track to achieve at least 9% gross margins in Q4.
We continue to make steady progress on our key strategic initiatives that we laid out for 2020.
My staff and I review progress regularly, and we share updates with our extended teams to ensure all of Benchmark is focused on a common set of goals.
First, customer focus is a top priority at Benchmark.
We are working as an organization using customer feedback to find ways to optimize our engagement model and make it easier to do business with our organization.
This attention, coupled with operational performance, are the cornerstones for customer satisfaction, which I'm happy to report remains at a high level.
With many of our growth and strategic accounts, we are building deliberate long-term technology road maps and business relationships to help inform how we can invest in and be more valuable to our customers in the future.
This customer-centric approach is an important foundation in growing our business.
In our sector strategies, we have a keen focus on selecting the vertical submarkets most aligned to our value proposition.
Our objective within these markets is to expand and scale with strategic customers by selecting the full breadth of services and capabilities.
This includes focused investment in technology innovations that differentiate Benchmark against other competitors and even against prospective customers' internal manufacturing to increase our win rates.
This thesis is playing out well across each of our higher-value sectors.
In fact, over the last year, we have seen improvements in engineering services tied to EMS deals and vice versa.
Next, we continue to drive enterprise efficiencies.
We are continuing work on our global footprint optimization, where we are winding down manufacturing in some locations and ramping up new production in other locations.
The goal is to gain efficiencies with fewer rooftops by selecting locations with operational synergies and align with customer preference.
To this end, in the third quarter, we made the decision to exit a line of business in our A&D sector related to turbine machining.
This is the right decision when we look at strategic alignment of the impacted facility and the prolonged downturn in commercial aerospace demand driven by the pandemic.
These decisions are never easy, but we're focused on our long-term strategy.
In addition, we have a rigorous focus on controlling our costs and expense management through improved processes, G&A centralization activities and intense focus on project and investment prioritization.
We are reshaping our SG&A landscape.
For next year, we are targeting SG&A at or below $130 million even with the end to temporary salary cuts and corporate furloughs, higher travel expenses and higher variable compensation.
The hard work we have invested in our HR, IT, finance and other shared services to enable centralization are yielding lower costs next year.
Unfortunately, this does require restructuring activities, which, as Roop has mentioned, will occur this quarter.
Finally, I want to close with our initiative on engaging talent and shifting our culture.
As I've said, Benchmark has a great cultural foundation that starts with a committed workforce who wants to deliver for our customers.
Our investments in this initiative will include focus on better self-service tools, increased empowerment and critical skills development to ensure the talent the organization needs in future leaders can be found within our own diverse team.
This includes the ongoing commitment to advancing diversity and inclusion efforts at all levels in the company, which we are enhancing as part of our ongoing ESG focus.
For technology companies like Benchmark, competitiveness requires innovation, fresh ideas and creative thinking, all areas fueled by diversity.
The attentive work on these strategic priorities formed the foundation for setting our midterm target model through the year 2022.
The company had a great start at pivoting the higher-value markets before my arrival, and we are now at our target mix between traditional and higher-value splits.
The right markets and customer selection remains key to our strategy.
Setting COVID and the resulting macroeconomic uncertainty aside, we believe that we can grow revenue at a 5% compound annual growth rate over the next two years by growing our current accounts and ramping new programs with our targeted new customers.
While we're overcoming some pretty significant revenue decline headwinds in our aerospace and oil and gas markets and other demand softness in our installed base due to the pandemic recession, our growth expectations speak to the strength in our recent bookings and outsourcing wins.
As the economy picks up later in 2021 and through 2022, we expect our growth can accelerate further with this new win momentum and recovery in our customer installed base.
With our current mix of business, the success of ongoing operational excellence initiatives and our current global footprint, we are targeting gross margins in the range of 9.3% to 9.7%.
On the SG&A expense line, I'm committed to effective overhead management and have taken the necessary actions to drive an efficient organization that is rightsized to support our customers and employees effectively.
As the company expands and needs greater investments and capabilities, we will keep expenses aligned to our future revenue growth.
The resulting non-GAAP operating margin target range will be between 3.4% to 3.8%.
With this model, we feel comfortable that we can grow earnings faster than revenue.
As operating margins improve, we see resulting improvement in ROIC.
I am confident and remain excited about our team's ability to capitalize on the growth opportunities in our diverse end markets, where our deal pipeline in win rate is increasing, and we remain focused on executing our ongoing initiatives to increase incremental value for our customers, employees and shareholders.

user
q3 non-gaap earnings per share $0.32.
q3 gaap earnings per share $0.16.
q3 revenue $526 million versus refinitiv ibes estimate of $511.3 million.
sees q4 2020 non-gaap earnings per share $0.32 to $0.36 excluding items.
sees q4 2020 revenue $500 million to $540 million.
benchmark electronics - continue to make progress on improving gross margins as co expect to achieve our 9% target in q4.
restructuring charges are expected to range between $2.8 million to $3.2 million in q4.

assistant