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Benchmark Electronics Inc (NYSE:BHE)
Q3 2020 Earnings Call
Oct 28, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Benchmark Electronics Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lisa Weeks, Vice President of Strategy and Investor Relations. Please go ahead.

Lisa K. Weeks -- Vice President-Strategy & Investor Relations

Thank you, operator, and thanks, everyone, for joining us today for Benchmark's Third 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 third quarter, 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 two 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 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 the COVID-19 pandemic, and Benchmark undertakes no obligation to update any forward-looking statement. 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.

If you will please turn to slide three in the presentation, I will turn the call over to our CEO, Jeff Benck.

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Thank you, Lisa. Good afternoon, and thanks to everyone for joining our call today. 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. I also want to thank our supply chain team, who's done an incredible job of managing through many global logistical challenges this year to continue production for our operations in support of our customers. All in all, a solid quarter for Benchmark and my continued thanks to the entire team for their hard work and support of our customers. Please turn to slide four. 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.

Now I'll turn the call over to Roop to discuss the third quarter results. Roop?

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

Thank you, Jeff, and good afternoon. I hope everyone and their families continue to stay safe and healthy. Please turn to slide six for our revenue by market sector. 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. If you please turn to slide seven. 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 EPS was $0.32 for the quarter. Non-GAAP ROIC was 5.8%. Our non-GAAP EPS improved sequentially based on our improved operational performance, lower net interest expense and lower tax rate. Please turn to slide nine for an update on cash flow and a summary of our balance sheet.

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.

I will now turn the call back to Jeff. Jeff?

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Thanks, Roop, for that update. 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. Now if you please turn to slide 15.

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. If you now please turn to slide 16. 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.

And with that, I will now turn the call over to the operator to conduct our Q&A. Operator?

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Jaeson Schmidt of Lake Street. Please go ahead.

Jaeson Schmidt -- Lake Street -- Analyst

Hey guys. Thanks for taking my questions. I just want to start, Jeff, you mentioned customers are being a bit more cautious then, hence, why you won't see that seasonal uptick in Q4. I know there's a variety of different moving parts given the business segments. But can you just discuss, have you seen any significant change in your overall visibility? Or just comment how visibility has changed from three months ago.

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Yeah. Thanks, Jaeson. Good to hear from you. I think I'll start with saying a little bit that we are seeing probably more stabilization and demand and not quite the level of fluctuation. Certainly, in Q2, it was pretty crazy. And then Q3, it -- there was still a lot of movement. But in the end, we landed where we thought we would. What -- as we look at Q4, you're absolutely right, there is quite a few moving parts, and we see continued strength in semi-cap and defense products and those segments. What probably was a little different than the way we thought about it a few months ago was that we've seen a little bit of softness in medical in fourth quarter with some of the COVID-specific products that we had some upside.

And certainly, we enjoyed some of that, and some of that will continue in part of Q4, but we see some of that coming to an end as folks build up inventories and do what they needed to do. I think we're getting decent visibility to it. So it's not like this is a complete surprise, but it certainly shifted a bit over the last couple of months. And that's just what caused us -- when you look at our guide being more in line with Q3 than what might be a higher seasonal Q4. And I would say that's the bigger -- the driver. We're still bullish on medical and we have not only a great win -- a set of wins that were ramping, but that will really be happening for us more in '21.

Jaeson Schmidt -- Lake Street -- Analyst

Okay. And then just going off that, sticking with the medical business. I mean are you starting to see the funnel build back up for COVID-related or COVID-adjacent projects for 2021?

Jeffrey W. Benck -- President, Chief Executive Officer & Director

I would say when you -- we have a very diverse medical business, and we've highlighted 12 products that we built that fight COVID. And we have some exciting new therapeutic, and we talked about DnaNudge's rapid COVID test that's non -- right on point, point of care. And they've got a great position in Europe and super excited about that. So there's examples like that. We did build a number of ventilators for multiple customers. And the course of treatment for COVID has shifted, right, and people are going to ventilators as the last resort. So that's an area where there was a ton of demand, and people were building up stores, and we've seen that come back down to normal levels. So there's some kind of moving within that. When I think about our medical business, though, we really have been broadly winning everything from -- I talked about our renal product, other diagnostic products, new ultrasound devices, new mobile MRIs and X-ray devices.

So we have a very diverse set of products and -- you wouldn't necessarily put under a COVID banner. I just think that we knew some of the COVID activity was going to provide upside in the second half of this year, but we didn't see that necessarily sustaining. I think some of the new diagnostic COVID products next year could be nice incremental business for us, but probably not as much of the emergency room things as, hopefully, we keep more people out of emergency rooms, right, in the new year.

Jaeson Schmidt -- Lake Street -- Analyst

Okay. No, that's very helpful. And then just last one for me, and I'll jump back into queue. $1.3 million in COVID-related costs in Q3. Is that a good figure to use just for the foreseeable future or until something changes? And just relatedly, the goal for SG&A to be under $130 million next year, that includes any potential COVID-related costs, correct?

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

Yeah. Jaeson, this is Roop. Good to talk to you. So I'll start with your latter first. And that $130 million would include some amount of what I'd characterize or we'd characterize as new normal sort of costs, right, cleaning protocol, et cetera. So that includes about that -- within that $130 million annually.

Jaeson Schmidt -- Lake Street -- Analyst

$1.3 million.

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

No, no. $130 million annual SG&A cost. The $1.3 million is probably a little bit higher. Obviously, lower than Q2. It came down. We think it'll probably normalize just under $1 million is where we'd expect. Maybe $800,000 to $1 million as we move forward.

Jaeson Schmidt -- Lake Street -- Analyst

Okay. Thanks a lot guys.

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

Thanks, Jaes. No worries.

Operator

Our next question comes from Anja Soderstrom of Sidoti. Please go ahead.

Anja Soderstrom -- Sidoti -- Analyst

Hi everyone. Thanks for taking my questions. And so just a follow-up on your comments around the medical. You said you see that might be ramping with more elective-related production in 2021. Will that be an early event for 2021? Or is it more in second half?

Jeffrey W. Benck -- President, Chief Executive Officer & Director

It's funny. We believe the ramp will start in first half. We just -- it's probably not at the beginning of the year. And somewhat that's a little bit unpredictable, just a little bit in how the macro economy performs because we sort of thought we'd start to see elective surgeries come back and some of those other activities. I think we're probably seeing less of that at the end of this year.

We've obviously got new programs that are outsourcing that are coming to fruition, and they will help us next year. When I look at medical, and I'll have Roop kind of add on it, we see next year being a pretty strong growth year for us overall in aggregate. But the timing, it certainly will build as we go through '21. Do you want to add anything?

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

Yeah. Thanks, Jeff. And so I think you've answered it well there. The only thing I would add is, to your specific comments, first half, second half, we'll see it start to ramp with those new program ramps in Q1 and carrying through the year for overall sequential growth annually is what we expect, Anja.

Anja Soderstrom -- Sidoti -- Analyst

Okay. And then the fourth quarter is going to be rather soft in terms of medical?

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

Correct.

Anja Soderstrom -- Sidoti -- Analyst

For this year?

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Yes, for this year.

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

Yes, correct.

Anja Soderstrom -- Sidoti -- Analyst

Okay. Thank you for that additional color. And in terms of Mexico, where are you standing there now with the capacity and how you're ramping there?

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Mexico has been one of the more challenging regions, and we still have some. It's the one site -- we said we're essentially back at productivity levels pre-COVID. Mexico is maybe the one exception where we still have some restrictions with some high-risk folks that are out. It's not materially changing what our ability to deliver for customers are so we're not necessarily missing customer forecast or commits on it. But it's still a little bit of inefficiency because the sites there do have a small percent of the population that isn't allowed to come into the office because -- into the plant because of their risk classification.

So I would say that we're watching it closely because everyone around the world is seeing upticks, and we don't know exactly what the full fall will bring. But we've been able to manage through it so far, and we're kind of staying close to it. And it's not anything like it was back in second quarter, but still a little bit more disrupted there than anywhere else in the world.

Anja Soderstrom -- Sidoti -- Analyst

Thank you. And how impactful is that additional cost for you? And is that going to fall off then as we come out of COVID or?

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Well, it's kind of embodied in that $1.3 million that Roop talked about, right, that, that was quite a bit less than when we were $4 million a few quarters ago. So we believe that it'll be, like Roop said, under that $1 million level, and that will include paying people that may stay home or whatever is required to protect the folks there. And so it's not a major driver now. That could change if restrictions change and things amp up because of the case load and all that. It certainly feels like people are trying to figure our way through it without shutting down of companies and facilities and all that, but that's -- I guess, that's the risk. But right now, that's not how we're thinking about it. We're thinking that it's in -- at that $1 million level.

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

And Anja, maybe I'll just add. The SG&A range being relatively flat between Q3 and Q4 contemplates that, and our overall margin being 9% to 9.1% in Q4 also contemplates that. So it's kind of all-inclusive.

Anja Soderstrom -- Sidoti -- Analyst

Okay. Thank you. And then in general, people speaking about manufacturers moving out of China. Is that something you see? I know you have a small footprint in China. But is that something you see? And are you beneficial to have a bigger footprint than -- in the U.S. and Mexico and elsewhere in Asia?

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Yeah. We certainly have seen an increase in people wanting to source not only domestically, but also in regions that are closer to where the end demand is. So if you -- for example, we used to build everything in China, and even some of it was coming back to the Americas. You might see that now going to Mexico as an alternative. So we've seen incremental demand in our Mexico facilities where people want a low-cost region alternative but maybe don't want to be all the way over in China. Our own China plant, we have moved some customers within our own network. If they want to stay in Asia, maybe Thailand or Penang is a great alternative to them.

But we've also got a number of customers in China that are ultimately selling into that market. And so we're building the product for that region, and they're not impacted by tariffs because it's not coming back. And that's why it still makes sense for us to have support in the region. We just have the one facility, as you said so it's not like we've got a huge exposure that half of our production capacity is there. In fact, we have more -- approaching half in the U.S., which is pretty appropriate given our mix and our focus on the defense sector as well as FDA medical products.

And we definitely see -- we definitely don't see people moving away from U.S. manufacturing, and there does seem to be more people that are looking to outsource and stay domestically. And so that's a good trend for us.

Anja Soderstrom -- Sidoti -- Analyst

So do you see maybe that being a driver for new logos coming on board? Or is it more with existing customers you see this trend?

Jeffrey W. Benck -- President, Chief Executive Officer & Director

The pipeline definitely has improved for us. We've seen about a 30% improvement in overall pipeline of opportunities. Some of that is, though, the trend that outsourcing in general, more people are -- like in a tough economic environment, people are deciding, where is my differentiation? Maybe I'm really good at product development, but why do I need to build my own product? Maybe I'm not as competitive as what Benchmark could do for me. Or I might need help with engineering or test development and I can rely on someone like Benchmark to do both engineering and manufacturing. So that trend is serving us well.

Plus in the high-value markets we participate, the penetration of outsourcing really hasn't reached 50%. So there's still a lot of companies building their own products that this is a time to really decide whether they want to continue doing that. On top of that, though, yes, there is an adder for companies that may be manufacturing in Asia that want to come back to the U.S. and be in region, and that's a piece of the incremental demand that we're seeing. But I think there's a couple of good secular trends that are really supporting it.

I wouldn't put it all on that move from China back to the U.S. But when you add it all together, it bodes pretty well for the future potential and new logos coming on. And we're seeing some bigger companies in our mix, which is great. And we're also seeing repeat business from companies that are strategic to us, and that speaks to their customer satisfaction, which right now is -- we're doing pretty well and our measure's on that. So that's encouraging. But that's how...

Anja Soderstrom -- Sidoti -- Analyst

Thank you. And then lastly, just to circle back to Jaeson's question about what you see in sort of end market demand and your customers and as it relates to your revenue guidance for the next two years. I can agree with maybe 2021 being a little bit muted at 5%, but I would expect that to maybe accelerate in 2022 as we hopefully are sort of seeing a light at the end of the tunnel there.

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Well, what I think we're all trying to judge is the macro environment. And what I think we wanted to do is, look, we didn't want to go out three years, right, in this environment. That seems pretty far away. But we did want to give a little bit of a midterm model over the next two years through '22 how are we thinking about the business. We also wanted to give share that -- while we brought SG&A down dramatically this year because of all the furloughs, pay cuts and things we did, that we also did some structural things through this quarter to bring our footprint down. So as we restore some of those temporary actions, we keep SG&A at a manageable level and in line kind of with revenue opportunity.

But when you think about the growth prospect for the company, I think we -- Roop and I would also say that a lot of what we're looking at is based on the wins that we've won and new business coming on that will ramp over the next two years. The headwinds that we're facing are the macroeconomic environment, the -- some of the existing industrial products like oil and gas. We don't see commercial aerospace coming back in '21. And so those are actually bringing our growth rate down, but we have enough momentum that we're overcoming that. As you get to '22, I would be inclined to say if that macro environment improves, then you're going to like the upside growth a lot because we're growing organically based on new business not counting on a really significant upswing in the macro environment and the return of the current customers because we haven't lost any customers through the downturn.

But oil and gas is up 20%, 30%. Aerospace is off 40%. Even some of the elective surgery in medical, we see off 10%, 15% maybe. So as that all comes booming back, which hopefully it's in late -- hopefully, it's in the second half '21, maybe '22, I think that could be a sweetener and certainly help the demand outlook in line with your comments.

Anja Soderstrom -- Sidoti -- Analyst

Okay. Thank you very much. That was all for me.

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

Thanks, Anja.

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Thank you.

Operator

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

Lisa K. Weeks -- Vice President-Strategy & Investor Relations

I just wanted to put in a reminder that Benchmark will be supporting a number of virtual conferences before our next earnings call in February. On November 19, we will support the NYSE Industrial's Investor Day. On December 8, the Raymond James Technology Investors Conference. And on January 13, we will support the Needham Growth Conference. We will look forward to engaging with you during these events. In the meantime, if you have any further questions, please feel to reach out to us, and we'll be happy to follow up. Thank you, and hope you all have a great day.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Lisa K. Weeks -- Vice President-Strategy & Investor Relations

Jeffrey W. Benck -- President, Chief Executive Officer & Director

Roop K. Lakkaraju -- Chief Financial Officer & Executive Vice President

Jaeson Schmidt -- Lake Street -- Analyst

Anja Soderstrom -- Sidoti -- Analyst

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