Benchmark Electronics Inc Q4 FY2021 Earnings Call

Good afternoon, and welcome to the Benchmark Electronics, Inc. Fourth Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Lisa Weeks, Chief Strategy Officer and Head of Investor Relations. Please go ahead.

Thank you, operator, and thanks, everyone, for joining us today for Benchmark's fourth quarter and fiscal year 2021 earnings call. Joining me this afternoon are Jeff Benck, CEO and President; and Roop Lakkaraju, CFO. After the market closed today, we issued an earnings release highlighting our financial performance for the fourth quarter of 2021, and we've prepared a presentation that we will reference on this call. The press release and presentation are available online under the Investor Relations section of our website at www.bench.com. This call is being webcast live, and a replay will be available online following the call. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as in the appendix of the presentation. Please take a moment to review the forward-looking statements advice on Slide 2 in the presentation. During our call today, we will discuss forward-looking information. And as a reminder, any of today's remarks that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties as described in our press releases and SEC filings. Actual results may differ materially from these statements, most notably from the ongoing impact of global supply chain constraints and the COVID pandemic. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, Jeff will begin by covering a summary of our fourth quarter results, new program wins and a recap of 2021 objective progress. Roop will then discuss our detailed financial results, including a cash and balance sheet summary and our first quarter 2022 guidance. Jeff will wrap up with an outlook by market sector for the full year and a progress update on our financial model and our strategic initiatives for the year 2022 before we conclude the call with Q&A. If you will please turn to Slide 3, I will turn the call over to our CEO, Jeff Benck.

Thank you, Lisa. Good afternoon, and thanks to everyone for joining our call today. Hopefully, by now, you've seen our press release and the great results we delivered for the fourth quarter and for the full year. We've made tremendous progress on many fronts in support of our long-term strategy. Even with ongoing supply chain challenges and intermittent COVID disruptions, we delivered both revenue and EPS which exceeded the high end of our guidance range in the fourth quarter. We achieved revenue of $633 million, which was $48 million above the midpoint of our guidance and was up 21% year-over-year, driven by strong demand and execution in our Semi-Cap, Industrial and Computing sectors. With higher revenue, the right sector revenue mix and better utilization across our network, we achieved non-GAAP gross margins of 9.8% and operating margins of 3.8%. As a reminder, our non-GAAP operating margins include stock-based compensation expenses, which were approximately 70 basis points in the fourth quarter. We delivered earnings per share of $0.48, which was also above the high end of our guidance and up 23% sequentially and 41% from the fourth quarter of last year. Our cash conversion cycle results were 69 days, an improvement of 2 days over Q3 despite higher inventory levels as we received increased prepayment support from our customers. As mentioned previously, these results were achieved with a backdrop of ongoing supply chain challenges. In the third quarter, we estimated that again, we were unable to fulfill over $100 million of demand in the quarter requested by our customers, which is similar to the unfulfilled demand we experienced last quarter. Furthermore, on behalf of our customers, we've been absorbing inefficiencies, increasing labor costs and additional expenses driven by the constrained supply chain environment. While we always strive for good balance, given the prolonged length of this constrained environment, some of these increased overhead costs are being passed on to our customers. Thanks to the diligent efforts of our supply chain and operations team, we were able to fulfill a meaningful amount of the tremendous backlog we've experienced, enabling our fourth quarter upside. However, demand is continuing to increase. So while a large amount of our demand was filled in the quarter, new orders came in and this has served to keep demand levels and corresponding backlog elevated. Unfortunately, we don't see broad recovery in the constrained supply chain market in 2022. Our operations teams are managing through replanning based on inconsistent supply deliveries and are doing a great job of maximizing throughput in our operations when components do arrive. Despite the challenges with supply chain inefficiencies and the ongoing disruption still caused by COVID, we delivered strong Q4 results. Please turn to Slide 4. Our go-to-market organization, working closely with our engineering and operations teams, continues to secure new wins with our existing customers while bringing in a large number of new accounts across our targeted sectors. When I joined the company almost three years ago, we set an internal goal of consistently achieving over $200 million in new bookings per quarter. In 2020, we accomplished that and achieved over $800 million in new bookings. I'm proud to share that 2021 was even stronger, where we accomplished greater than $900 million in new bookings for the year. These bookings and the ability of our teams to ramp new programs are key ingredients for driving sustainable revenue growth. Their consistent performance has contributed to our growth in 2021 and will contribute to our future growth in 2022 and beyond. Let me highlight a few of the exciting wins for Q4. In Medical, we were awarded new design and manufacturing programs through a point-of-care diagnostic instrument and a state-of-the-art cell therapy system. We were also awarded the manufacturing of a robotic surgical system, which was announced by our customer, Titan Medical. Benchmark was selected for our differentiation in the design and manufacture of visualization systems and complex electromechanical capabilities. We're proud to be a partner of Titan Medical, where we will continue to build on our deep medical expertise to scale their new Enos robotic system into production. In Semi-Cap, we continue to win new design awards for wafer handling and processing equipment in support of next-generation semi-cap tools. The tools in this space represent some of the most complex engineering projects in the industry, and we're excited to be an extension of our customers' development team, helping them innovate. In the A&D sector, we were awarded the design and manufacturing of an advanced RF signal processing system for a new customer. We were awarded this program based on the depth of our experience and continued investments in our RF capabilities. We also won a program for manufacturing the electronics for a leading-edge drone with collision avoidance capability targeted at defense and industrial applications. In Industrials, we were awarded a manufacturing program for smart recycling. This new award is closely aligned with our commitment to sustainability as the objective of these connected devices is to manage waste operations in a sustainable way while reducing CO2 emissions. We were also awarded a first-time outsourcing program with a new warehouse automation customer to help them scale faster. In Computing and Telco, we were awarded new manufacturing programs for broadband products with an existing customer and the design and manufacture of a new mobile satellite communication systems for a new customer. Our new business pipeline continued to grow across our targeted sectors and we remain very encouraged about the prospects for continued wins, where more OEMs are looking for strategic outsourcing partners that can take on both manufacturing and engineering projects to help them get to market and scale faster. If you please turn to Slide 5. I would characterize 2021 as a year where we shared our key objectives going into the year and then subsequently overdelivered with our results. One year ago, we outlined strategic initiatives and three focus areas that were critical to achieving our midterm model, and I'm happy to report good progress on all three. First, we said we would grow revenue. We've been investing for growth in the verticals where we have a strong differentiated value proposition and strategic positions with industry-leading customers. A great example of this strategy in action is the incremental capital investment we are making in support of the semiconductor industry, which subsequently grew 49% for us last year. While these investments in our installed base have begun to pay off, we also believe new program bookings from new customer logos will further accelerate our revenue growth. Benchmark is the right partner for highly complex manufacturing and our engineering capabilities are a differentiator to win new deals. We then execute to bring programs to volume production on a global basis, and we are doing so with a high attach rate of engineering projects. In fact, the team has been so successful in this regard that we're increasing our attach rate goal of engineering to EMS wins from 50% to greater than 70% for 2022. These activities, along with operational execution, have enabled our 10% annual growth last year and set the stage for another growth year in 2022. Second, we said that we'd invest in sustainable infrastructure and talent. Over the past year, we've continued to make investments in shared services such as human resource systems, employee development and cybersecurity to ensure that our shared infrastructure can scale with continued growth. We're also investing to add additional capabilities in engineering and manufacturing, as requested by our customers while effectively managing our SG&A expenses. In parallel, we've made meaningful progress on our ESG and sustainability initiatives, which we will detail in our upcoming sustainability report. I will also provide an update on our journey after Roop's financial update. And third, we said we would grow earnings faster than revenue. Our new bookings and new program ramp achievement this year enables better leverage of our fixed costs in the business. This leverage, coupled with our intense focus on operational excellence, enabled 9.1% non-GAAP gross margins for 2021 and earnings per share growth of 42% year-over-year. I am proud of the way we wrapped up 2021, and I'm confident that with our backlog of demand and strong performance momentum, we will continue to execute against our strategic plan in 2022. And with that, I'll turn the call over to Roop to discuss the fourth quarter and full year 2021 financial results, before I come back to provide some additional color on our revenue outlook by sector and key objectives for the new year.

Thank you, Jeff, and good afternoon. Please turn to Slide 7 for our revenue by market sector. Total Benchmark revenue was $633 million in Q4, which is 11% higher sequentially and 21% higher year-over-year. Medical revenues for the fourth quarter were up 8% sequentially and 14% year-over-year which was higher than expected from continued improving demand in the cardiac and respiratory care markets. As planned, our second half medical sector revenues improved over first half 2021 levels from new programs and improving demand, which will continue in 2022. Semi-Cap revenues were up 22% sequentially and 62% year-over-year. Demand levels remain high, and our future backlog is robust for our complex precision machining and large electromechanical assembly services, which are primarily related to front-end wafer fab equipment. A&D revenues for the fourth quarter decreased 6% sequentially and 15% year-over-year from program transitions and lower demand in our commercial aerospace programs, which have yet to recover to pre-pandemic levels. Industrial revenues for the fourth quarter were up 15% sequentially and 29% year-over-year from demand improvements from oil and gas, building infrastructure and LiDAR applications. Overall, the higher value markets represented 81% of our fourth quarter revenue. In our traditional markets, Computing was up 5% sequentially and 28% year-over-year from the planned ramp of high-performance computing programs that will continue throughout 2022. In the Telco sector, revenues were up 15% sequentially and 16% year-over-year, primarily from demand improvement for satellite programs and new broadband ramps. Our traditional markets represented 19% of fourth quarter revenues. Our top 10 customers represented 49% of sales in the fourth quarter. Please turn to Slide 8. Our GAAP earnings per share for the quarter was $0.35. Our GAAP results included restructuring and other one-time costs totaling $4.1 million related to various restructuring activities throughout our global network, aligned to future business focus. For Q4, our non-GAAP gross margin was 9.8%. This is 50 basis points better than the midpoint of our fourth quarter guidance, driven by higher revenue, a better mix of revenue and better absorption across our global facilities. On a sequential basis, we were up 40 basis points from higher revenue and improved utilization even with supply chain inefficiencies from the current component environment. Our SG&A was $37.7 million, which was up 10% sequentially due primarily to higher variable compensation. Non-GAAP operating margin was 3.8%, which included 70 basis points of stock-based compensation. In Q4 2021, our non-GAAP effective tax rate was 22.2% because of the mix of profits between the U.S. and foreign jurisdictions. Non-GAAP EPS was $0.48 for the quarter, which is $0.07 higher than the midpoint of our Q4 guidance and $0.09 sequential improvement based on higher revenue and gross margin. Non-GAAP ROIC was 8.6%, an 80 basis point increase sequentially and a 240 basis point improvement year-over-year based on the strength of the year-over-year profit expansion. Please turn to Slide 9 for our revenue by market sector for the full year 2021 versus 2020 comparison. Total Benchmark revenue for 2021 was $2.26 billion, an increase of $200 million from revenue growth in Semi-Cap, Industrial, Computing and Telco sectors. We were pleased to see growth in both the higher value and traditional market sectors. For the full year, higher-value markets were up 9% from Semi-Cap and Industrials, which increased 49% and 15%, respectively, year-over-year. Semi-Cap strength was led by increased demand across our customer base and the front-end semiconductor capital equipment space, where we provide differentiated engineering design, electronics manufacturing and precision machining services. Industrial revenues were up 15% year-over-year, primarily from continued demand improvements from oil and gas, building infrastructure and commercial transportation programs. Overall, the A&D sector declined by 10% from 2020 revenues. Higher demand levels from existing and new defense programs did not offset the persistent weakness in commercial aerospace. Overall Medical revenues decreased 7% year-over-year from the slower ramp in new medical programs, the impact of supply constraints, which limited revenue growth and lower demand for elective surgery products in the first half of 2021. While demand improved in the second half, component availability continued to limit our ability to fulfill all demand from our medical customers. Revenues in the traditional markets were up 12% from 2020. Computing was up 16% year-over-year from the planned ramp and execution of high-performance computing programs that will continue throughout 2022. Telco sector revenues were up 8% year-over-year, primarily from new program ramps and continued strength in broadband programs. Overall, the higher value markets represented 81% and traditional markets represented 19% of both our 2021 and 2020 revenue, which is consistent with our desired portfolio target of 80% higher value and 20% traditional revenues. Our top 10 customers represented 47% of sales for the full year 2021. We had one customer, Applied Materials, that was greater than 10% of revenue for the full year. If you will, please turn to Slide 10. Our GAAP earnings per share for fiscal year 2021 was $0.99. Our GAAP results included restructuring and other one-time costs totaling approximately $9.8 million, primarily related to site consolidation efforts, reduction in force activities and other restructuring type activities around our network. Our 2021 non-GAAP gross margin was 9.1%, a 70 basis point sequential increase. This exceeded our goal of 9% gross margin for the full year of 2021. Our non-GAAP SG&A for 2021 was $136.7 million, an increase of $14.5 million from 2020. The increase is primarily due to higher variable compensation, medical expenses and continued IT infrastructure investments. Non-GAAP operating margin for the year was 3%, an increase from 2.5% in 2020 from higher revenue and improved gross margins from ongoing operational efficiencies. In 2021, our non-GAAP effective tax rate was 20.9%. Non-GAAP EPS in 2021 was $1.35 and non-GAAP ROIC was 8.6%. Both metrics improved substantially over 2020 levels as non-GAAP EPS grew 42% and non-GAAP ROIC grew 240 basis points. Please turn to Slide 11 to review our cash conversion cycle performance. Cash conversion cycle days were 69 in the fourth quarter compared to 71 days in Q3. Turning to Slide 12 for an update on liquidity and capital resources. During the fourth quarter, we continued to invest in inventory to support our customers. We used $1 million of cash in operations and invested $10 million in CapEx, which resulted in free cash flow usage of $11 million for the quarter. Our cash balance was $272 million at December 31, with $77 million available in the U.S. Our cash balances decreased $19 million sequentially. The decrease in cash is primarily investment in inventory to support revenue growth. As of December 31, we had $131 million outstanding on our term loan, zero outstanding borrowings against our revolver and our cash net of debt is a positive $141 million. Our strong cash balances and available liquidity continue to allow us to support our growing revenue and customer demand profile. Turning to Slide 13 to review our capital allocation activity. In 2021, we invested $42 million in capital expenditures. We had additional authorized expenditures in 2021 beyond the $42 million spent, which we'll roll into this year. As such, we expect our CapEx spending in 2022 to be between $50 million and $60 million. For the full year, we expect operating cash flow to be between $40 million and $60 million as we continue to focus on cash generation while appropriately investing in inventory to support our revenue growth. In Q4, we paid cash dividends of $5.8 million and $23 million for the full year of 2021. Since 2018, we have paid cash dividends of $90 million. We did not repurchase any outstanding shares in the fourth quarter. The total share repurchases in 2021 was $40.2 million, which represented approximately 1.4 million shares or a reduction of approximately 4% of shares outstanding since the beginning of fiscal year. As of December 31, 2021, we had approximately $164 million remaining in our existing share repurchase authorization. At a minimum, we'll continue to repurchase shares to offset our annual equity dilution. Beyond that, we will evaluate share repurchases opportunistically while considering market conditions. Since 2018, we have invested approximately $200 million in our business through capital investments and returned almost $500 million of cash to shareholders through buybacks and dividends. The Benchmark balance sheet remains strong, and we expect our ability to invest in our operations and return capital to shareholders based on the strong momentum we have in our business. Please turn to Slide 14 for a review of our first quarter 2022 guidance. We expect revenue to range from $565 million to $605 million, which at the midpoint represents a 17% year-over-year improvement. For the first quarter, we expect the Medical sector to grow based on increasing demand and new program ramps. We expect Semi-Cap revenue and Industrial revenues to remain strong and at revenue levels consistent with Q4. A&D revenues will be down sequentially from lower volume demand. Computing and Telco will also be down sequentially from some near-term impacts from the timing of material availability, which will improve through the year. As Jeff mentioned earlier, the demand environment remains strong. And in each sector, demand outpaces supply. Similar to previous quarters, we have over $100 million of unfulfilled demand that continues to move into future quarters of 2022. We expect that our gross margins will be between 9% to 9.3% for Q1 and SG&A will range between $34 million and $36 million. Implied in our guidance is a 3% to 3.3% non-GAAP 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 Q1 of approximately $3 million to $3.5 million. Our non-GAAP diluted earnings per share is expected to be in the range of $0.32 to $0.38 or at midpoint of $0.35. Other expenses net is expected to be $2.9 million, which is primarily interest expense related to our outstanding debt. We expect that for Q1, our non-GAAP effective tax rate will be between 19% to 21% because of the distribution of income around our global network. The expected weighted average shares for Q1 2022 are approximately 35.5 million. In summary, our 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 in our operations due to COVID. And with that, I'll turn the call back over to you, Jeff.

Thanks, Roop, for that update. Following Roop's comments on our guidance for the first quarter, I wanted to provide some additional color on our view of demand by sector for 2022; that's on Slide 16. For the first quarter, we expect revenue to decline sequentially following normal seasonality and with ongoing supply chain constraints, limiting further upside. We do anticipate healthy double-digit growth year-over-year as compared to the first quarter last year. From this perspective, we expect sequential revenue growth each quarter throughout the remainder of the year, supported by new programs and further demand recovery in Medical, Industrials and Telco and continued strong demand in Semi-Cap and Computing. In fact, the only sector where we see muted growth for 2022 is in A&D. In Semi-Cap, we have a solid demand forecast through 2022 in support of the industry need for more tools and advanced semiconductor capital equipment across our customer base. Advances in semiconductor technology and the quest for ever smaller process nodes are fueling this growth in support of advanced communications, AI and the growing digital economy. We remain well positioned in this sector to support the breakthrough technologies developed by our customers with our design, precision machining and electronics manufacturing capabilities. We expect revenues to grow 10% to 15% in this sector over 2021 levels. In our Medical sector, 2022 growth is underpinned by higher demand from existing programs and a large number of new program ramps in ultrasound imaging, cardiac care and diagnostic devices. With our deep expertise in design and manufacturing for complex medical products and our recent program wins, we have confidence that 2022 will be a great year for the Medical sector. In fact, we anticipate the Medical sector will be our fastest-growing sector for the year. In Industrials, we expect another growth year primarily from new program ramps in advanced LiDAR applications, energy management systems and IoT-enabled smart devices. We further expect demand from our legacy energy and infrastructure customers to remain stable in the year. Moving to the A&D sector outlook, we expect revenues to be flat to potentially down in 2022. Our commercial aerospace recovery remains muted with no significant demand improvements anticipated this year. However, our defense revenue continues to offset some of this weakness with the ramp of new programs for advanced military imaging sensors and navigational satellite antennas. We are pleased with the strength of our defense portfolio but we're also excited about the eventual return to growth for customers in our aerospace sector and are still aggressively pursuing new programs to add to our portfolio. For the full year, we also expect growth in the traditional markets. In the Telco market, we expect revenue growth from new programs focused on broadband and satellite applications. Our customer base is benefiting from a variety of stimulus packages including the government initiative for rural broadband expansion. We expect revenue in this sector to expand throughout the year with potential for acceleration if component supply improves. In Computing, we expect continued revenue contribution from high-performance computing projects throughout the year as well as stronger demand for secure and industrial computing applications. These products will support another growth year for this sector. Let's now turn to Slide 17. Given the strong demand and revenue outlook for this year, we are well aligned to our midterm model, where we have made steady progress on growing revenue and improving margins. For the full year, we achieved 10% annual revenue growth, which is twice the expected growth rate we had previously forecasted. Our current demand outlook and new program bookings give us confidence that we can expect to achieve high single-digit revenue growth in 2022. On the gross margin line, we achieved our goal of at least 9% in 2021. Given our mix, operational excellence programs and site rationalization activities, we believe that our gross margins in 2022 will be between 9.3% and 9.4%, which is within the model range limited by ongoing supply chain inefficiencies and disruption to our operations teams. With focused execution on expense management, we anticipate that operating margins will track well to the 2022 model. You only have to look at our Q4 2021 results to understand the power of revenue leverage in our business model. We will update you regularly on our progress against achieving our 2022 financial targets as we navigate through the year. We will also look forward to sharing our longer-range financial model with you after midyear. If you will turn to Slide 18. ESG and sustainability remain both strategic and operational imperatives for Benchmark. With oversight from our Board of Directors, we established an ESG Sustainability Council in October of 2020 and have continued to make both qualitative and quantitative progress on our ESG journey. In the first quarter of 2021, we mapped our current performance against the technical requirements for the EMS, ODM industry within the SASB framework and released our first SASB fact sheet. This was an important first step toward providing additional transparency as we further enhance our ESG performance. We followed that up in Q2 with an expanded discussion in the ESG section of our proxy statement and achieved an EcoVadis Silver Medal recognition, placing Benchmark in the top 25 percentile of rated companies on ESG-related initiatives. Building on the SASB fact sheet we published last spring, we began mapping our ESG program to align with the Global Reporting Initiative and other frameworks such as the Task Force on Climate-Related Financial Disclosures and the United Nations Sustainable Development Goals, all with the objective of further increasing our transparency for investors and customers. On the governance front, while we have a diverse corporate board today with 22% of our directors represented by women, in the fourth quarter, we added a racially diverse director to our Board, expanding our racial and ethnic diversity. We still have work to do, and we are continuing to expand our DEI programs to bring more focus here as an organization. To this end, we recently launched our first global inclusion council which I had the privilege to kick off with a fantastic group of Benchmark employees. I'm looking forward to incorporating the ideas from these important employee voices as we work to continuously provide an inclusive culture for all employees. Many of our metrics and key initiatives in this area will be highlighted in the upcoming launch of our first stand-alone sustainability report this spring. This report is an exciting milestone for us, and we look forward to updating you on our progress in this area. Finally, if you turn to Slide 20, I want to provide some perspective on our 2022 strategic initiatives which will look very familiar to you. Fundamentally, the playbook we have built over the past several years is working. And for that reason, our strategy remains largely unchanged. Growing revenue remains a top priority at Benchmark. Our teams are doing a great job of finding the right customers and technically rich programs for Benchmark, and we have set our bookings target in excess of $900 million for 2022. In parallel, we are focused on ensuring that we secure component supply to support our growth objectives with new and existing programs. We must also invest in our infrastructure and talent, which is required to sustain the growth in our business and support our longer-term financial objectives. As I shared earlier, we have an aggressive ESG and sustainability roadmap and have made a tremendous amount of progress over the past year. Ultimately, as this past year demonstrated, we have the capability to grow earnings faster than revenue. Revenue growth enables higher utilization to better leverage our fixed costs. These attributes should allow us to further expand growth and operating margins in 2022. These improvements will ultimately culminate in continued earnings expansion, which will be reflected in our updated longer-term model. The last few years have certainly been an unpredictable journey. But I look forward to 2022 with optimism, knowing that we have an incredibly dedicated team who has demonstrated the ability to achieve results. As momentum continues to grow and some of the current supply challenges subside, we can expect to accelerate progress toward our goals. I want to express again my deep appreciation to our teams and hard-working suppliers around the world who are working tirelessly to support our customers. I look forward to sharing our progress in the coming months. With that, that concludes our prepared remarks. And we will turn it over to Q&A.

Our first question is from Jim Ricchiuti with Needham & Company.

A couple of questions. Jeff, when you talk about this $100 million of unfulfilled demand, which you've had for the last couple of quarters, like a lot of folks trying to keep up with the demand, how much — is there a shelf life to some of this demand where some of this potentially can go away? Or does it just continue to roll out into the next couple of quarters?

Yes. Thanks, Jim. I appreciate you asking the question because I want to clarify a little bit. Last quarter, when we were ending the fiscal year and we know a lot of people had a year-end, we were concerned about whether there was a potential for some of that roll over to perish as budgets got reset and plans got set for 2022. As we think about the demand that we anticipate not being able to fulfill this quarter, we feel pretty strongly that the bulk of that will roll into Q2, Q3 and the second half. We certainly always are cognizant of that and pay attention to it. But we continue to see the demand fill in. Even though in the fourth quarter, as we were able to accomplish more, we still saw that unfulfilled roll. So I think we feel pretty good about that level of demand staying later in the year.

Is any of that — is that business spread across your verticals? Is it concentrated in any one or two where the constraints are particularly challenging?

Yes, it's pretty spread. Obviously, from a component standpoint, that's probably more challenging in some sectors, although we do Semi-Cap assembly of large machines that still require components. You have constraints on aluminum and other things, so it's really pretty broad-based. I wouldn't say it's centered on any one sector. It's pretty spread.

And if I could, maybe just a point of clarification, going back to the slide that you showed for new business wins. As we look through that list, how many of these represent entirely new customers as opposed to new wins at existing customers?

It's pretty balanced. I'm happy about some of the new logos. We're seeing larger companies that are brand leaders bringing opportunities to us, and that's exciting to bring new logos in. But we also have put a focus on growing our footprint with the strategic accounts that we have. So there's a fair number of those in the mix as well. I don't know the exact split; I didn't actually go through and work that out.

Yes, Jim, it's about evenly split, relatively evenly split.

Got it. And then last question, I'll just jump back in the queue. We're obviously all hearing about cost pressures. But I'm wondering, as you think about what kind of pressures you are seeing in terms of labor and challenges keeping people? How much of a headwind is that actually? It looks like you are managing through that.

I think we're managing pretty well given the environment, as you saw from our results. But I will comment on both points. There is a war on talent going on. We really do have to put a lot of energy into that. We're spending more on agencies to help with recruiting and putting additional resources in HR to help. We've been able to get talent, but we have to stay focused on that. We're seeing this more in the U.S. than at our international sites. On the point of inflation, we've always traditionally look at the product costs and component costs. As costs go up, given our business model, we work with customers to pass that on because it's their bill of material and we work together on that. There are some other inflationary costs that we're contending with, and we've absorbed a lot on behalf of our customers. In some cases, where it's a short-term issue, we help customers out because we want to be a great partner. But given some inflationary costs aren't going away, we are asking customers to help in some situations. We're continuing to work through that. As you saw, with our own operational efficiency improvements and better utilization, that's really what's driving our margin improvement, and we look for that to continue in 2022.

The next question is from Jaeson Schmidt with Lake Street.

Congrats, it seems like a really strong finish to the year. I want to circle back to sort of that $100 million in unfulfilled demand. Just a clarification. How much of that relates to sort of new bookings in Q4? And how much of that was just sort of roll over from Q3?

It's interesting because in the last several quarters we've had almost that level of roll. You can imagine we fulfilled some of that as we went through the quarter, but then we saw new orders come in and backfill that. So at any given quarter, some percentage of that rolls, but we're seeing pretty strong future order load as many of our customers are ramping and the economy is improving for them. We don't provide a cut of that publicly. At a site level we have better visibility. There's a fair amount of new load coming in. Another issue is lead times—if you come in now and want product in two months, the lead time might be six months now. So something requested in Q1 might not land until Q3. Some customers have unrealistic expectations about how fast you can get things given the current environment. We see a mix of new bookings as well as some orders we couldn't fulfill as requested in the quarter.

Okay, that's really helpful. And I know the supply chain is obviously the big wild card out there. But like the Industrial, Medical and Telco segments, in particular, clearly outperformed based on what you previously expected back at the end of October. Was that really just driven by a better supply environment? Were you guys able to meet some of that demand?

Yes, Jaeson, I would say that's an accurate way to assess it. We were able to get some additional parts in the quarter that allowed us to fulfill the backlog of demand that we had across those sectors, which we think carries through, especially on the Medical side as we get into 2022 and throughout 2022.

Semi-Cap had a really strong fourth quarter as well. Industrial started improving in the second half, but Semi-Cap was super strong in Q4 and it's staying at that level in Q1 despite seasonality.

Okay. And just the last one for me, and I'll jump back into queue. On the increase in the target for the engineering attach rate, what do you think is really driving that? Is it the concentrated sales efforts you guys have been making? Is it more demand coming from your customers? Can you explain the momentum you're seeing there?

We've put a big effort on making sure that our EMS deals include engineering opportunities and that our go-to-market is well established now. When I arrived a couple of years ago, many customers didn't know we did engineering. Part of it is awareness. As we grow, customers are looking to lean on us to do more work. One trend is people are tight for labor, so if you want to accelerate a program and can't hire engineers, you can come to us and we can help as an extension of your team. We're doing more design-for-manufacturability and physical product design. In some cases, we're doing engineering design before we've won the manufacturing, with the intention to participate in manufacturing later. Who better to build it than the team that designed it and understands design for manufacturability because we're a manufacturer. That's a trend we're pushing on.

The next question is from Anja Soderstrom with Sidoti.

I just have a follow-up. You were talking about talent constraints being a driver for your engineering attach. How about the supply chain constraints? Do you see more of your customers being prone to increase the outsourcing due to this? Or what do you see in terms of it?

They certainly have come to us for help. It's taxing our supply chain team—they're working night and day to try to help solve problems. Many OEMs ask, 'Can you find these parts?' We have invested additional resources under our new Chief Procurement Officer to add skills and resources because it is such a crazy environment. I can't say whether that leads a customer to outsource for the first time because they can't find parts, but outsourcing is more challenging given so many new program wins over the last 18 months. As you think about ramping those, you're in the middle of a ramp and trying to get parts when lead times are extending, which adds pressure. But we're supporting and trying to help our customers, and at times they help us. It's really about partnership.

And what do you see in terms of decommits? I mean you have longer lead times, so it's also longer term risk for you to have decommits as lead times are longer, right?

One thing I will say about Q1: we're just in the beginning of the quarter and it feels almost more challenging than Q4. Q4 we were able to secure a bit more supply, which is why we overachieved. It feels like a Q3-type environment right now, so I would have hoped it would improve a bit, but we're still dealing with it. That is factored into our view of our outlook for the quarter. There are still decommits happening, no question. Anyone that tells you otherwise is not really being upfront about it.

Okay. Also, some people thought the environment would start improving in the second half of this year; it seems more and more people think the supply chain constraints will sustain through this year. What needs to happen for it to improve? Are you seeing any improvement? What do you think needs to happen for it to improve?

If you go back to the middle of last year, we thought by mid-2022 we would see improvement. As we went through 2021, we did not see it improving, and from our perspective it will extend through 2022. It continues to be broad-based. You'll see pockets of improvement, but generally across commodity categories it's still constrained, and parts are on allocation. To your question of what must change: with how strong demand is today and our view that there could be more strength in 2022, people need to put additional capacity in place to support the incremental demand.

We're a little self-serving because we need to build more Semi-Cap equipment for our customers so they can build more wafers and ultimately help resolve part shortages. From our suppliers and other CEOs, they are adding capacity, but those additions started in the second and third quarters of last year and take at least a year to come online. So that doesn't really kick in until the middle of this year, which is why we had initially said the second half. In the meantime, demand has gotten stronger, so adding capacity isn't keeping up and is elongating the timing. We're hoping to see sequential improvement late in the year, but we believe we'll be dealing with this through all of 2022.

You're a little bit ahead of that then because you built up the capacity before all this happened, right?

Right, we're working that out. I would also tell you from our suppliers and partner CEOs that when they started adding capacity it was a one-year journey at a minimum, so the benefit comes later in the year. The demand environment has strengthened, so the added capacity hasn't been sufficient yet. We expect more capacity to help and to de-risk 2023 to some extent, especially as new fabs come online and domestic investments increase.

This concludes our question-and-answer session. I would like to turn the conference back over to Lisa Weeks for any closing remarks.

Thank you again for joining our call today. If you have any follow-up questions regarding our earnings release today, please don't hesitate to reach out, and I'll be happy to follow up. I also want to put a reminder that Benchmark will be supporting the Sidoti Spring Conference in March, and we look forward to engaging with you at this event. Please have a great afternoon, and we look forward to sharing our first quarter results with you in our April earnings call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.