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Benchmark Electronics Inc (NYSE:BHE)
Q2 2020 Earnings Call
Jul 29, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. Welcome to Benchmark's Second Quarter 2020 Earnings Conference call. [Operator Instructions]

I would now like to turn the conference over to Lisa Weeks, Vice President of Strategy and Investor Relations. Please go ahead.

Lisa Weeks -- Vice President, Strategy and Investor Relations

Thank you, operator, and thanks to everyone for joining us today for Benchmark's second quarter 2020 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 second quarter and we have 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, we will discuss forward-looking information. As a reminder, any of today's remarks that are not statements of historical fact 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 the COVID-19 pandemic, and Benchmark undertakes no obligation to update any forward-looking statements.

For today's call, Jeff will begin by covering a summary of our second quarter results and by providing a current status of our global operations. Roop will then discuss the second quarter results in more detail, including a cash and balance sheet summary and our third quarter guidance. Jeff will wrap up with an outlook by market sector and an update on our strategic initiatives before we conclude the call with Q&A.

If you will please turn to Slide 3 in the presentation, I will turn the call over to our CEO, Jeff Benck. Jeff?

Jeff Benck -- President and Chief Executive Officer

Thank you, Lisa. Good afternoon everyone, and thank you for joining our call today. Our second quarter results were achieved against the backdrop of mandatory facility shutdowns, component constraints, and extra processes required to keep everyone safe. I want to thank the entire Benchmark organization for doing a remarkable job and taking care of one another, and making sure we are operating as effectively as possible in the new world.

During Q2, we achieved revenue of $491 million, which was down sequentially from Q1, but supported by strong demand in our Medical and Semi-Cap sectors. Non-GAAP gross margin for the quarter was 7% and non-GAAP earnings per share were $0.07. Our non-GAAP earnings include $4 million or $0.10 per share of COVID related costs that we could not fully anticipate as we entered the quarter. In addition to these COVID costs, we experienced other production inefficiencies as a result of the current pandemic environment. Our overall performance was helped by the aggressive cost reduction actions taken earlier in the quarter. Our cash conversion cycle for the quarter was 84 days. Despite operating challenges, we generated $23 million in cash flow from operations and returned $6 million of cash to shareholders as part of our recurring quarterly dividend payment.

As we look forward, I wanted to step back and offer a few perspectives. I'll do that on Slide 4. Since I joined Benchmark last year, we've made a lot of positive changes and all of these have been supported by an amazing team. From the hard work required to execute on our strategic initiatives and goals that we outlined last year, to overcoming unique challenges presented by the unprecedented global pandemic of today, let me simply say our team has risen to the occasion. Before I arrived, the company had embarked on a strategy to diversify the markets we serve and drive our portfolio mix with a greater concentration in higher value markets. In the past year, we have worked further to align the customers where we can add the most value and these efforts have paid off. Today we enjoy a diverse portfolio of products across many high growth and high value sectors.

That being said, we are not immune to the current recession that this disease has caused and we have an unprecedented amount of demand changes in our portfolio that's required a lot of the team's attention to ensure we capitalize on new opportunities while mitigating any risks. We believe this diverse portfolio and exposure to high value segments will allow us to expand our quarterly revenue through the balance of the year.

Supply chain in our complex high mixed environment is a constant focus, and our recent results have been supported by the strong performance of our supply chain team. During the second quarter and due to the team's efforts, we were not significantly impacted by component shortages, but they did in some places contribute to operational inefficiencies. Further, our revamped go-to-market organization has grown the manufacturing and engineering services opportunity pipeline by over 30% in the past 12 months, and have delivered three quarters of sequential growth in bookings, which bodes well for our long-term growth potential. As we look out to the end of the year, we are still on track to exit 2020 with at least 9% gross margin and we expect to build on this momentum into 2021.

Please turn to Slide 5. As the global pandemic continues to evolve, we have expanded protocols focused on keeping a safe work environment for our employees. Our actions are informed by the best practices published by the CDC, the WHO and local authorities, and we've completed a Company Employee Survey to solicit direct feedback on our actions to date and ensure our employees agree that we are maintaining a safe work environment. Where possible we are continuing to permit about 20% of our employees to work from home. We have shifted our customer engagements to a virtual environment with real time video supported factory tours as we limit travel to protect our teams. We even hosted a virtual grand opening of our new Phoenix operation with Governor Ducey and Mayor Gallego. Our teams have adapted well to the new reality, and we are finding creative ways to stay close to our customers and continuing to collaborate with them on solving new challenges.

If you please turn to Slide 6, I can provide an update on the status of Benchmark Global Operations. In Asia, China and Thailand we are fully operational through the second quarter. As we entered Q2, our Penang, Malaysia operations, which includes our largest precision machining facility operated at 50% capacity based on local restrictions, which were subsequently lifted at the end of April. From the 1st of May, Malaysia has been fully operational. Our European sites in the Netherlands and Romania were fully operational in the second quarter and remains so today. Across the US, our five operations in California were impacted by shelter-in-place orders through April. Since early May and to the present all California locations as well as our other US sites are fully operational. In Mexico, we have two operations in Tijuana and one in Guadalajara. The 100% shutdown that impacted our Tijuana operations was lifted in mid-May after we passed some inspection and were given authorization to operate by the Baja's state. There has been a phase return to work since this time and the Tier 1 sites are now operating at approximately 75%.

Our Guadalajara facility has been essentially operating at 75% productivity due to at-risk employees being required to stay home for the Jalisco state government restrictions. We are staggering shifts and other protocols in our Mexican operations to keep our employees safe and optimize output. This has been and remains a highly dynamic environment. As shelter-in-place orders were lifted in the US, we had hoped the country could maintain the declining infection curve. Unfortunately this has not happened. As the incident rate domestically increases, there could be temporary shutdowns of one of our facilities at any given time. And we stand ready to execute decontamination protocols beyond our normal safe work in cleaning procedures. Our operation teams will continue to maintain our safety first approach, while managing schedules to ensure we meet delivery obligations to our customers.

Now I will turn the call over to Roop to discuss the second quarter results and following his commentary, I will share further insights regarding our business. Over to you, Roop.

Roop Lakkaraju -- Chief Financial Officer

Thank you, Jeff, and good afternoon. I hope everyone and their families are staying healthy and safe. Let me start by echoing Jeff's sentiment on the incredible efforts of our teams to support our customers through a very dynamic environment. As we manage through the COVID crisis, our priorities remain centered on one, the health and safety of our employees. Two, delivering for our customers. Three, maintaining a healthy balance sheet and four, ensuring the financial flexibility to run our operations through uncertainty.

Please turn to Slide 8 for our revenue by market sector. Total Benchmark revenue was $491 million. Medical revenues for the second quarter increased 14% sequentially and were up 18% year-over-year from continued new product ramps, strength throughout our medical customers and increasing demand for critical devices necessary to support the COVID-19 fight, including X-ray and ultrasound devices, ventilators and diagnostic equipment, which we estimate is approximately a third of our sequential growth. Semi-Cap revenues were up 5% in the second quarter and up 39% year-over-year from continued strong demand across our Semi-Cap customers. A&D revenues for the second quarter decreased 26% sequentially due to approximately $15 million lower revenue from our commercial aerospace programs, which is approximately 30% of the sectors revenue. The remaining decline in the sector is related to defense program timing changes, whether that is the end of certain programs or transitions to new programs. Demand from our defense customers for security solutions, aircraft, munitions and satellites remained strong. We expect continued strong demand in Q3 and Q4 2020 including new programs ramping which should result in sequential revenue growth.

Industrial revenues for the second quarter decreased 15% sequentially. Demand for products in the oil and gas industry, which is approximately 20% of our revenue, continued to be generally soft and will likely stay soft for the remainder of the year. In addition demand decreased for goods that support the commercial building and transportation infrastructure markets. Overall, the higher value markets represented 81% of our second quarter revenue. In the traditional markets, computing was up 20% quarter-over-quarter from new program ramps and two engineering and manufacturing programs in high-performance computing. Telco was down 10% sequentially. We saw pockets of strength in demand for network infrastructure, which was offset by lower demand for broadband and commercial satellite applications. Our traditional markets represented 19% of second quarter revenues. Our top 10 customers represented 44% of sales for the second quarter.

If you please turn to Slide 9. Our revenue of $491 million reflects a decrease on a quarter-over-quarter basis. Our GAAP loss per share for the quarter was $0.09. Our GAAP results include restructuring and other one-time costs totaling $5.7 million. $3.3 million is related to the severance and other items for the announced closure of our Angleton site which Jeff will cover in more detail in his initiatives update. $1.2 million is related to the completion of our San Jose closure and the remaining is due to other various restructuring activities around our network. Our previously announced San Jose site closure has been completed on schedule and within our original cost estimates.

Turning to Slide 10. For Q2, our non-GAAP gross margin was 7%, a 140 basis points sequential decline. As Jeff stated earlier, our results were negatively impacted by $4 million of costs related to COVID-19 including site shutdown days pursuant to government orders, idle and not fully productive labor costs, personal protective equipment and incremental freight charges. The majority of these costs impacted our gross profit. We expect the second quarter to be the lowest quarterly gross margin in fiscal year 2020, and we still believe that we can exit 2020 at, at least 9% of gross margin.

Our SG&A was $28.5 million, a decrease of $3.1 million sequentially and $3 million year-over-year due to the cost containment measures, which we have continued, including salary reductions for certain management personnel, including the executive team, freezing travel, reducing discretionary spending and delaying hiring in addition to our reduction in variable compensation expense. Operating margin was 1.2%, a decrease from 2.3% in Q1 due to lower revenue, reduced gross margin offset by the lower SG&A. In Q2 2020, our non-GAAP effective tax rate was 29%, which was higher than expected for the quarter due to the distribution of income across our network and certain discrete tax items. The higher tax impact was approximately $0.01 per share. Non-GAAP EPS was $0.07 for the quarter and non-GAAP ROIC was 5.9%.

Please turn to Slide 11 for an update on cash flow and a summary of our balance sheet. Our cash balance was $356 million at June 30, with $194 million available in the US. We did repatriate cash in Q2. We will continue to repatriate future quarters when appropriate, while also balancing our foreign site's cash flow requirements. Our cash balances include $30 million of proceeds from borrowings under our revolving line of credit. At June 30, we were at a positive net of debt cash position of approximately $183 million which was higher than the end of Q1 by approximately $12 million. We believe we've got -- we have a strong capital structure and our liquidity position provides flexibility to manage our business through the current environment. We generated $23 million in cash flow from operations and $13 million free cash flow after netting $10 million of capital expenditures. Our accounts receivable balance was $302 million, a decrease of $16 million from the prior quarter. Contract assets were $154 million at June 30 and $160 million at March 31. Payables were down $11 million quarter-over-quarter. Inventory at June 30 was $364 million, up $26 million quarter-over-quarter.

Turning to Slide 12 to review our cash conversion cycle performance. Our cash conversion cycle days was 84. The primary driver for the slightly higher cycle days was the effect from the increase in inventory. Inventory days increased due to mix changes from customers late in the quarter and advanced inventory purchases to support long production cycles for products in our Semi-Cap and Medical sectors. Along with the inventory increase, we did see a corresponding increase in customer cash deposits, which is used to offset advanced inventory purchases.

Now turning to Slide 13 for a capital allocation update. In Q2, we continued to pay a quarterly cash dividend of approximately $5.8 million. As a reminder, we increased our recurring quarterly cash dividend to $0.16 per share on February 3, 2020. We expect to continue the recurring quarterly cash dividend. We suspended our share repurchase program in Q2, and we are not planning any share repurchases in the third quarter.

Turning to Slide 14 for a review of our third quarter 2020 guidance. We expect revenue to range from $490 million to $530 million. Our non-GAAP diluted earnings per share is expected to be in the range from $0.26 to $0.30 or a midpoint of $0.28. We expect to generate cash flow from operations for the full year even considering the challenging COVID-19 environment. Capex for the year will be approximately $30 million to $35 million as we prioritize investments to support new customers and expand our production capacity for future growth. Implied in our guidance is a 2.9% to 3.1% 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 non-recurring costs in Q3 of approximately $800,000 to $1.2 million. Other expenses net is expected to be $2.4 million, which is primarily interest expense related to our outstanding debt. We expect that for Q3, our non-GAAP effective tax rate will be in the range of 20% to 22%, because of the distribution of income around our global network. The expected weighted average shares for Q3 are 36.7 million. This guidance takes into consideration all known constraints for the third quarter and assumes no further significant interruptions to our supply base, operations or customers. The guidance also assumes no material changes to end market conditions due to COVID-19.

I'll now turn the call back to Jeff for a detailed look at our sector outlook. Jeff?

Jeff Benck -- President and Chief Executive Officer

Thanks, Roop, for that update. Following Roop's guidance for the third quarter, I wanted to provide additional color on our view of demand by sector for the second half of 2020 on Slide 16. As I stated earlier in the call, our global operations are at or near our planned staffing levels with the exception of Mexico. Given our current operational state, our ability to fulfill demand remains high. Through the second quarter and early in July, we have gained a better picture of the demand outlook from customers in each of our market verticals, and have a current snapshot of what our revenue trends could look like in the second half.

I want to reinforce, this is just a snapshot because there will likely be puts and takes across our sub sectors as we move forward. I will start with the Medical sector where demand grew almost 14% sequentially from Q1 and is forecasted to remain strong throughout the rest of the year from new program ramps in imaging systems and for critical care and diagnostic devices supporting COVID-19. On the flip side, our core medical products that supports cardiac, renal and orthopedic therapies have seen demand reductions in the second half that have offset some of the increases as hospitals and clinics are deferring planned procedures and elective surgeries based on hospital capacity. We expect demand for these products to increase when the COVID crisis lessens. But the end result for our portfolio, is that we believe it will remain at the Q2 level for the balance of 2020, which still represents double-digit year-over-year growth.

In Semi-Cap, the demand recovery for semiconductor capital equipment continues based on the current forecast from our customers. On the strength of this demand, we expect sequential quarterly revenue growth for the rest of the year further supported by some new program ramps as well. Our competitive position remains very strong and we look forward to increasing our industry leading precision machining position in this sector.

Our A&D sector is comprised of approximately 70% defense related products and 30% aerospace. Demand for radar, missiles, military aircraft and satellite communication devices remains strong, and we expect continued strength in the second half. However as Roop referenced earlier in our Q2 results, demand for commercial aircraft programs are not showing any signs of recovery in the second half of this year.

Moving to the Industrial sector. We see limited recovery for customers supporting oil and gas through 2020, which represents approximately 20% of sector revenue. We are also seeing softer demand for commercial and transportation infrastructure markets, as many of our customers' projects have been deferred. As a bright spot, we are seeing strength in testing instrumentation and IoT related products. Similar to Industrials, the traditional markets of Computing and Telco will remain mixed. We see strength in Computing as we saw in Q2 with very complex high performance computing projects landing in the second half. However, these programs tend to be project orientated. So it's important that the end customer scheduled supports installing these machines in the year. Demand from customers we support in security computing and enterprise data centers will remain muted given the lockdown on enterprise IT capital spending. On the Telco side, we've seen increases in network infrastructure products, supporting greater work from home bandwidth demand, but this has been offset by declines for next generation network build out and in some commercial satellite applications.

If you turn to Slide 17. Despite a challenging global backdrop that is most of our business development team grounded, we had our third sequential growth quarter of bookings growth. Our marketing team has been instrumental in working with our operation and sales teams on virtual tours and capability demonstration that is becoming a part of the new norm in our business. Fortunately, the demand environment remains favorable for outsourcing, as many companies continue to pivot to more variable design and manufacturing cost models. In the Medical sector, we were awarded programs for a fall detection system and a new drug delivery device, which have both coupled with front-end engineering projects. Also, as we stated last quarter, we were awarded new ventilator programs that are being rapidly transferred into manufacturing revenue for Benchmark.

In Defense, we were awarded a number of new programs including design and manufacturing for space module electronics, and for optical sensors for military applications. In Industrials, we were awarded a new product that will come to market for microbial cleaning in commercial venues, which has become a critical application in the new normal of living with COVID and beyond. I'm also pleased to announce that we have partnered with CoreKinect to provide IoT ecosystem hardware from our new Phoenix EMS operations. Our new business pipeline is strong across our targeted sectors and we remain very encouraged about the prospects for continued outsourcing wins in the coming quarters.

Now if you please turn to Slide 18. During the first half of 2020, even with the significant challenges brought on by the pandemic, we've continued to make progress on our strategic initiatives, and I wanted to share a few updates as we close the call today. Benchmark is in the services business, and one of our top priorities is to deepen our relationship with customers as a strategic partner and trusted innovation collaborator. I can report that customer satisfaction which I review with the team weekly remains very high. During the crisis, there is a heightened level of communication and coordination required in serving customers and as I noted last quarter, I have personally received multiple inputs on the discipline and excellence of our teams. In fact, in Q2, we received three service excellence awards from our top customers recognizing our performance during this pandemic.

As I stated earlier in the call, I couldn't be prouder of our organization. In addition, we are partnering with Applied Materials on their SuCCESS2030 Sustainability Initiative and participated in their announcement at SEMICON West earlier this month. Benchmark is committed to supporting ESG initiative and are excited when we can further these actions working closely with a valued customer. Turning now to growing our business, with our revamped go-to-market organization, we have had our third consecutive quarter of sequential growth in new program wins. We have the right team on the field and we'll continue to reap benefits from the investment in this area. We are making progress in our Medical, Semi-Cap and Defense accounts and starting to see early results with new engineering and EMS wins in our Industrial sector.

We continue to drive enterprise efficiencies. Against a very challenging macro backdrop, our teams have maintained focus on meeting the needs of our customers and our operating performance is improving. We have also continued our global footprint optimization program, which we started almost a year ago. The objective of this program is to utilize ongoing voice of the customer feedback to align our geographic capabilities and footprint to meet customer needs. The outcome of our most recent round strategic reviews, is that we decided to close our Angleton Texas operations. We plan to consolidate many of the programs into other Benchmark manufacturing operations, which will improve utilization and efficiencies. I want to thank the employees of the Angleton operation for their dedication and support in the coming quarters until these transitions are completed.

This initiative isn't just about closing factories. As we are also looking at where we want to expand our investment and footprint. In support of that in June, we announced our newest facility with the virtual grand opening of Benchmark Phoenix. This new state-of-the-art facility in Phoenix features RF design in manufacturing circuit fabrication Micro-E, SMT, systems integration and testing all under one roof. This enables us to provide the proverbial one-stop shop for sophisticated customers, looking for extremely densed hybrid circuit designs, who might also have a need for Micro-E or SMT assembly on the same design. And with our new facility, they don't need to look any further. The customer response for this type of advanced manufacturing operation has been very positive and we look forward to the growth from this operation.

Finally, I want to close with our initiative on engaging talent and shift in culture. First, Benchmark has a great cultural foundation and the work we've completed over the past year, since I joined, is a testament to the support we provide each other in this organization. At Benchmark, we are committed to advancing diversity and inclusion efforts at all levels in the company. In this endeavor, we are committed to more transparency, education and diversity training, and talent recruitment to improve our pipeline of diverse future leaders. We look forward to sharing details on our progress in the future as part of our increasing focus on environmental, social and governance affairs.

Now, let me wrap up. The senior leadership team is engaged in driving these initiatives and the level of collaboration throughout our organization is energized. We remain committed to our long-term strategy and we'll use this unprecedented time of change to hone our skills, rightsize our operations and expand our technical capabilities, so that we will emerge with a stronger organization and business in the years to come.

And with that I'll now turn the call over to the operator to conduct our Q&A.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Jason Smith from Lake Street. Go ahead.

Jason Smith -- Lake Street Advisors -- Analyst

Hey guys. Thanks for taking my questions. Just wanted to start with Q2 and if you could discuss the linearity in the order patterns. Is it fair to assume sort of April was the bottom, May better, and June was even better than that. And I guess relatedly, could you just discuss how orders have tracked so far this month?

Jeff Benck -- President and Chief Executive Officer

Yes. I can start, and then will let Roop kick in. We obviously, given the lead time, the order load kind of progresses through the quarter, and it starts some of that backlog of orders is actually for the start of the quarter end. I think we've seen reasonably good linearity. It's not like we had a sudden up tick at the end of the quarter. I think that was normal. But that being said, we did have demand adjustments in reductions for 2Q and also looking out in Q3 and Q4. We did also say in the prepared remarks that we see continued recovery, but when you think about where we might have been before this recessionary environment, we're not in that level, but we do see improving demand as we go. We also -- it's a bit of a tale of two cities for us, right, where we've got some existing products that there is the demand is weaker and we can go in any sector you might be interested in knowing more about. But then as we get to other areas like some of the COVID related products we're seeing an increased demand. So from that standpoint that's a little more insight. Roop, do you want to add to that?

Operator

He'll be -- his call dropped. He will be right back.

Jeff Benck -- President and Chief Executive Officer

Okay. No problem. Anyway Jason does that help. Okay.

Jason Smith -- Lake Street Advisors -- Analyst

Yes. And then I know in Q2 you expected some constraints within the Semi-Cap market. I think that was mostly related labor and with your facilities now being open. Assumption for Q3 is that through the constraints to all be alleviated at this point?

Jeff Benck -- President and Chief Executive Officer

Yes. Yes. It is in fact, we did say we were -- we had strong demand and we were constrained based on the California sites disruption and that we knew that that would be a challenge for us to meet all of the demand and some would roll through the quarter. We continue to make progress on that in July, and I feel pretty confident that that we're going to not have any pent-up or backlog that we can fulfill in the quarter. So that's one of the reasons that Semi-Cap recovery is doing good and we continue to see third quarter to be stronger there, and we've indicated that.

Jason Smith -- Lake Street Advisors -- Analyst

Okay. And the last one from me and I'll jump back in the queue. The COVID costs that impacted Q2, what's the assumption for Q3?

Jeff Benck -- President and Chief Executive Officer

Yes. That's an interesting one to call. I'd go so far as to say, we expect expense will be the COVID related costs to be less than what we saw in the current quarter, because we had a lot of operational disruption, a tremendous amount, right, more than a lot even some of our competitors based on where operations are located. But that being said, we're almost fully operational everywhere. We do have -- the Mexico sites, which are only 75%. So, I see that cost being left but it won't be zero, and it still could be a fairly significant number north of 1 million or more right because we still have personal protective equipment, we still got extra cleaning and who knows what other disruptions might come about. So somewhere, not zero, but probably less than what we called out in the second quarter.

Roop Lakkaraju -- Chief Financial Officer

Hey, Jeff, it's Roop. Jason, I got reconnected. Jeff, I apologize. If I could just get back to add to Jeff to answer on that linearity question. Just a couple of things on that linearity. April, obviously, because of kind of how the quarter happened, we did see the linearity increase as we got later in the quarter in June and as we made mention, because some of the Medical products and Semi-Cap products we've got long production cycle time so that carried into the third quarter. And obviously, we'll see that ramp as we continue through the rest of the quarter end. We've obviously got revenue growth also. So that's also contemplated in terms of that linearity. So you see, it kind of up into the right as we will continue through Q3.

Jason Smith -- Lake Street Advisors -- Analyst

Okay. I appreciate that color. Thanks guys.

Jeff Benck -- President and Chief Executive Officer

No worries.

Operator

[Operator Instructions] Our next question is from Anja Soderstrom from Sidoti. Go ahead.

Anja Soderstrom -- Sidoti -- Analyst

Hi. Thank you for taking my question and congratulations on a good quarter, despite the challenges you encountered.

Jeff Benck -- President and Chief Executive Officer

Thank you.

Anja Soderstrom -- Sidoti -- Analyst

So I just have -- so last quarter you sort of said it wasn't really a demand issue for you, it was more of the operational and supply challenges issues for you. How does that -- how does demand look for you going into the second half and maybe also into 2021, if you could give some color on that?

Jeff Benck -- President and Chief Executive Officer

Yes. I think as we did provide guidance for the third quarter, so we are seeing improvement in demand. And we also are much better from an operational standpoint. So we don't anticipate to be constrained by supply. We believe that we'll be able to fulfill the demand that's there. It is good to see some improvement there. And as we look at the second half, in general, that we see some sequential as we go. A little early for '21 to talk a lot about it, other than to say, we see a lot of strength in Medical. We believe that will kind of continue into '21, certainly with the pipeline of new wins, because we've continued to win good business there. We also expect Semi-Cap recovery to continue into '21. In fact, this year the Semi-Cap recovery very heavily dominated by logic and as we look at '21, we think memory has a good opportunity and certainly just coming out of the SEMICON conference, memory looks to have a strong '21. So we anticipate that that will be a good business line for us. And then Defense continues to be pretty solid and has not been as affected by the downturn here. So that's a little bit of indicator of what we are thinking about it in 2021.

Anja Soderstrom -- Sidoti -- Analyst

Okay. Thank you. That was good color. And then for Medical and then you have the COVID related production there helping you. How long do you see that lasting and sort of when do you think the elective will kick in? Will it be sort of like -- maybe a little bit downtick in between or will it sort of locate each other?

Jeff Benck -- President and Chief Executive Officer

So maybe...

Roop Lakkaraju -- Chief Financial Officer

I should...

Jeff Benck -- President and Chief Executive Officer

Go ahead.

Roop Lakkaraju -- Chief Financial Officer

Hey, sorry, Jeff. Maybe if I could, I'll start, if I could on that one. So yes, we do have COVID upside [Phonetic] on, but we've got some general strength in the Medical sector based on the bookings that we've seen, the strong bookings growth over the course of the past few quarters. And we've got a number of new ramps. Now we've got strength within our existing Medical customer base, in addition to the COVID products. So I think as the COVID products over the next couple of quarters or few quarters may start to decline, we'll see the continued ramps of the medical programs that we have under way and continue to shrink with some of our other customer -- medical customers into '21.

Anja Soderstrom -- Sidoti -- Analyst

Okay. Thank you. And then lastly. so have you -- I guess it's been a little bit difficult for you this quarter, but have you sort of implemented on your production efficiencies during the quarter that you think might be more permanent and carry over into the next year and help margins?

Roop Lakkaraju -- Chief Financial Officer

So you said production efficiencies, did you say?

Anja Soderstrom -- Sidoti -- Analyst

Yes..

Roop Lakkaraju -- Chief Financial Officer

Just to clarify.

Anja Soderstrom -- Sidoti -- Analyst

Or any other operational efficiencies?

Roop Lakkaraju -- Chief Financial Officer

Yes. I mean obviously we've got, we outlined that Mexico operations for which we are still seeing some challenges. With that said, our other global operations are up and running. And so I think, we've got contemplated any such considerations at this time in terms of what we've guided. Obviously, we'll have to see how the general market and the COVID environment continues in the second half and what have -- there may be a vaccination and these sort of things. So I think for the second half Mexico is still a concern for us. The other sites are up and running at this point in time.

Jeff Benck -- President and Chief Executive Officer

Let me just add a little bit there. Obviously, we've got a lot -- we had a lot of inefficiency in Q2. I mean, we talked about $4 million that that was very specific COVID expenses that we would say this -- that would have contributed $0.10 of EPS if we wouldn't had to spend that money, which is a big deal. But beyond that, there is a lot of other inefficiency like, productivity engineering designers that maybe were 85%, 90% efficient because they're working from remote and they can't collaborate quite as easily. So there's a lot of other just general inefficiencies that we see the opportunity not only adjusting to the new normal, but then also as we get further through and hopefully as Roop said, there is progress on remedies and ways to combat this disease.

But we also took a lot of cost out like with a lot of the actions we took on expense. So -- so that will mitigate that a little bit because as the COVID costs go down, then some of the other furloughs and salary reductions and things we'd like to obviously to not continue infant item. So that's a little of the dynamic there. But certainly, when you look at the margins in the second quarter, we know we can do substantially better and we're sort of guiding to that, we're talking about exiting the year 9% plus.

Anja Soderstrom -- Sidoti -- Analyst

Okay. Okay. Thank you for the color. That was all from me.

Operator

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

Lisa Weeks -- Vice President, Strategy and Investor Relations

Yes. I just wanted to put in a reminder that Benchmark will be supporting a number of virtual conferences in the third quarter. On August 6, we'll be supporting the Needham Industrial Technologies Conference. On August 11, The Oppenheimer Technology Internet and Communications Conference. On September 17, The Lake Street Capital Markets Big4 Conference, and on September 23, The Sidoti 2020 Fall Conference. We look forward to engaging with you during these events. And I wanted to say thank you again for joining our call today. If you have any further questions, please feel free to reach out and I'll be happy to follow-up. Thank you again.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Lisa Weeks -- Vice President, Strategy and Investor Relations

Jeff Benck -- President and Chief Executive Officer

Roop Lakkaraju -- Chief Financial Officer

Jason Smith -- Lake Street Advisors -- Analyst

Anja Soderstrom -- Sidoti -- Analyst

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