Benchmark Electronics (BHE) Q2 2026 earnings call transcript

I will now hand the conference over to Paul Mansky, Benchmark investor relations. Please go ahead. Thank you, Piercey, and thanks everyone for joining us today for Benchmark's second quarter 2026 earnings call. With us today are David Moizades, our president and CEO and Brian Schumaker, our CFO. After the market closed, we issued an earnings release pertaining to our financial performance for the second quarter of 2026, along with a presentation which we will reference on this call. Both are available under the investor relations section of our website. This call is being webcast live, a replay of which will be available approximately one hour after we conclude. The company has provided a reconciliation of our gap to non-gap measures in the earnings release, as well as in the appendix to the presentation.

Please take a moment to review the forward-looking statements disclosure and slide 2 of the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks which are not statements of historical fact are forward-looking statements which involve risk and uncertainties as described in our press releases and SEC filings. Action results may differ materially from these statements. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, David will start with highlights from the quarter followed by Brian with further detail on our results and guidance. We'll then turn the call back to David to share his respective on sector trends and closing remarks. I'll now turn the call over to our CEO, David Moisades, to discuss slides 4 and 5.

Thank you, Paul. Good afternoon and thank you for joining us today. I'm pleased to report that our second-quarter results reflect strong execution and continued broadening of demand across the markets we serve. Revenue of 756 million was up 18% compared to last year, while EPS of 75 cents grew at more than twice that rate. Both were above the high end of our guidance from last April. We saw healthy double-digit growth in four of our five sectors, with A and D undergoing previously discussed program transitions. I would note that with another strong quarter of bookings in Q2, A and D led the way which speaks to our optimism around the sector in the coming quarters. At the same time, our focus on execution allowed us to deliver operating income and EPS growth of 30% and 36%, respectively, well within our objective to grow both at 1.5 to 2 times the pace of revenue throughout 2026.

I'll let Brian speak to our expectations for the September quarter in a moment. But relative to the full year, I would leave you with this. Demand in the majority of our markets continues to improve. We are winning. And while there's always room for improvement, we are executing well operationally. Combined, this gives us the confidence to increase our 2026 revenue outlook to $3 billion.

Representing approximately 13% growth and achieving a historical high for the company. With that, I'll turn the call over to Brian to walk through the details for the quarter.

Thank you, David, and good afternoon, everyone. Please turn to slide six. Revenue in the quarter was $756 million up, 18% year over year, and non-gap EPS was $0.75 up 36% year over year. Both exceeded the high end of the guidance range from our last earnings call. As a reminder, our non-gap results exclude certain items as detailed in Appendix 1 of this presentation. For the second quarter, non-gap gross margin was 10.5%, improving 30 basis points year over year and 20 basis points sequentially primarily due to volume. Non-gap operating margin of 5.2% was up 50 basis points year over year and 40 basis points sequentially. This improvement was driven by higher revenue, which was partially offset by increased variable compensation expense.

Our second quarter, non-gap effective tax rate was 26.6%. Please turn to slide seven for the second quarter, 2026 revenue performance by sector.

Semi-cap revenue grew 17% both year over year and sequentially as momentum strengthened throughout the quarter. Industrial revenue increased 13% year over year and 20% sequentially, benefiting in part from revenue acceleration associated with the planned wind-down of our Phoenix facility.

Meanwhile, medical revenue once again delivered solid performance growing 22% year over year and 4% sequentially. Within AC and C, revenue grew considerably as 71% year over year and 21% sequentially driven by the AI-related program wins David has spoken to over the last couple of quarters.

Finally, A&D was down 12% year over year and 7% sequentially. Please turn to slide eight for our trended non-gap financials. In Q2, we delivered year over year and sequential improvement in revenue profitability and earnings reflecting disciplined execution and favorable mix. This momentum is expected to continue throughout the balance of 2026 positioning us to drive operating income and earnings growth at 1.5 to 2 times the pace of revenue growth. Please refer to slides 9 and 10 for an update on our balance sheet, cash flow, and working capital performance.

We continue to maintain a strong balance sheet which gives us the flexibility to invest in growth, fund strategic priorities, and remain disciplined in our capital allocation.

We ended the quarter with 315 million of cash and 134 million of cash net of debt while maintaining more than half a billion dollars of available borrowing capacity. In the second quarter, we generated $35 million in operating cash flow in 2022 million in free cash flow while continuing to invest in inventory, capacity, and capabilities to support future growth. In line with our return 6 million to shareholders through dividend during the quarter, capital expenditures were approximately 13 million in Q2, primarily supporting growth initiatives across the business.

For the full year, we still expect capital spending to be in the range of 2 to 2.5 percent of revenue.

Our fourth PT facility in Penang remains on schedule and began ramping operations earlier this this third quarter. Additionally, in Q3, 2026, we plan to break ground on our third building in the Yudia Thailand campus. We expect construction to be completed in Q4, 2027 to support the growth we're seeing in the region.

Turning to working capital, our cash conversion cycle at 59 days improved 26 days year over year and eight days sequentially. Consistent with our operational discipline across the organization, the improvement in cash cycle days was broad-based among the major working capital categories. Inventory turns were within our target range of five while payables versus receivables improved three days sequentially and 16 days year over year. These results demonstrated our ability to support growth while continuing to improve working capital efficiency and cash generation. Please turn to slide 11 for our third quarter guidance. For the third quarter of 2026, we are guiding revenue to a range of 755 million to 795 million representing 14 percent year over year growth at the midpoint.

We forecast non-gap diluted earnings per share in the range of 76 to 82 cents. We anticipate non-gap gross margin of 10.5 to 10.7 percent and non-gap operating margin of 5.3 to 5.5 percent. Gap expenses are projected to include approximately 8.4 million of stock-based compensation and 3.5 million to 4 million of non-operating expenses including amortization, restructuring and other charges. Interest and other expenses are assumed to be approximately 3 million. We remain focused on initiatives to structurally lower our tax rate over the range of 26 to 27 percent.

Finally, for the quarter, we project weighted average diluted shares outstanding of approximately 36.4 million. With that, I would like to turn the call back over to David for our outlook by market sector and closing remarks. David.

Thank you, Brian. Turning to slide 12 for our outlook by sector. Within semi-cap, we saw demand improved throughout the quarter and that momentum has continued into Q3. This reflects both improving end-market conditions and the benefits of program wins secured during the last downturn. We expect these conditions to continue throughout 2026 and are pleased to be ramping production in our fourth Penang PT facility to support customer demand.

Looking ahead, we expect second half semi-cap revenue growth to accelerate versus both the first half and the prior year period.

Turning to industrial, excluding the one-time event Brian mentioned, revenue was slightly above expectations delivering modest year-over-year growth. Our outlook for the sector remains unchanged. Looking further out, we continue to see significant opportunities in industrial reflected by very strong bookings in the quarter, which included a competitive takeaway.

In aerospace and defense, following two years of approximately 20% growth, we entered 2026, expecting a transition year driven primarily by program timing within defense. While this impacted first half performance, we expect to improve in the second half over the first half. Meanwhile, we have continued to win new business. That momentum was evident in Q2, where A&D was the biggest contributor to our total bookings in the quarter.

For 2026, we continue to expect revenue to be roughly consistent with the prior year. However, as new programs ramp and given the multi-year nature of this market, we expect to return to growth in A&D in 2027.

Moving to medical, we are pleased with our continued performance in the quarter, both in terms of revenue growth and new bookings. Q2 included a strong number of engineering wins across multiple customers. While engineering engagements typically are smaller than manufacturing awards, there are important indicators of future growth opportunities as they convert into broader program wins and production ramps. And finally, turning to AC&C, we delivered outstanding results driven by the production ramp of one of the AI-related wins we have previously discussed. While still early in the ramp, our visibility continues to improve, and we remain excited about the opportunities ahead.

In summary, turning to slide 13, our performance in Q2 continues to validate our strategy, maintaining relentless focus on customer success while driving operational excellence across the enterprise. Done consistently, this amplifies the good times and helps insulate the business during the more challenging periods. For benchmark and a growing number of our customers, demand conditions are improving, reflected in double-digit growth across most of our sectors, record bookings, and a revised 2026 revenue outlook that represents a new high for the company. To fully realize this opportunity, we must continue to invest in the business, and we are. Not only in production capacity, including Penang and Thailand, but also in our people and processes. We will continue aligning our investments with customer demand and growth opportunities, while maintaining a strong focus on return on investment.

As a result, we believe we are well positioned to drive both growth and operating leverage over the long term. 2026 has been off to a strong start, but we still have work to do. We remain focused on execution and look forward to updating you on our progress throughout the year.

With that, I would like to again thank our customers, shareholders, and the entire benchmark team around the world for their continued trust, dedication, and execution.

Operator, we can now open for questions.

Yeah. Hi, Stephen. I think it's a similar question to last quarter. We see the defense environment remaining strong, and there's a combination of things that lead us to continue to believe that it's going to remain strong. I think I used the words replenishment in our last call.

But beyond that, we're actually winning. We're winning in the defense space, and we continue to win in space, which is something that I highlighted in our previous calls as well. So we're really, really proud by the performance of the team. And as I mentioned, the team led the way in bookings this quarter.

Yeah, absolutely. Fundamentally, it comes down to execution. So a lot of credit to our operations team for executing with that customer and allowing us to work closely with the customer to bring forward new creative solutions that open the door for us to take the business away from one of our competitors and increase our share of wallet with this particular customer.

Yeah. Look, we continue to remain optimistic on the year. And as you can see, if we didn't have that optimism, we wouldn't be signaling the 13% growth for the year and a new revenue high for the company. So that in itself hopefully reflects our view. Now, I also want to share with you that it's not always smooth sailing, right? We've got to work the supply chain. We've got to execute operationally, which I have a lot of confidence we're going to be able to do that. The supply chain environment, is tight. I signaled that a couple of quarters ago, we started seeing that tightness and memory.

So we're working the supply chain proactively. We have an excellent supply chain team that is working day and night to make sure that we're able to execute and meet our customer orders. And thus far, Stephen, I'm really pleased to say we've been able to do that.

My pleasure.

Hi, Max. It's somewhat tough for us to size it, right? Because we typically don't go there. What I can tell you is you actually set it properly. We expect HPC to start picking up very late in Q4 and into 2027. So from that perspective, I think we could start seeing it contribute more in 27 than we will in 26. However, if you combine the activities that we have, just like you mentioned in cluster AI and the on-prem business, and then bolt on the HPC, we remain optimistic about the prospects of AC and C. Okay.

It really depends on the component, right, that we're talking about. The more complex the component, and it has reliance on fabs out there, like a TSMC or some of the players in the space, those are the ones that you need to be a lot more thoughtful about lead times increasing. In some areas, we've seen lead times go from three, four, five months to suddenly seven, eight, nine, and in some cases, 12 months. Again, as I mentioned earlier in the call, we have a fantastic supply chain team that works very hard to make sure that we're putting the orders in place in a timely manner. Naturally, we lived through this during COVID and the whole golden screw phenomenon.

So there was a lot of lessons there, and we're working hard to make sure it doesn't repeat. You know, again, things like memory, it stands on its own, and we're managing that as well.

Okay, look, that's a really good question. And it has several dimensions to it with regards to the response. There is a lot of bookings that we were very successful with in 2324-25, and we're now seeing the fruits of that labor, if you will. So, you know, from a bookings today, new incremental bookings, I don't want you to think that those new incremental bookings are required for the performance that we've laid out in front of us in the next couple of quarters, which we're going to continue to see that strength accelerate into the second half here with our semi group. Now, with regards to our ability to continue to be successful, what I can tell you is we've been able to increase Cheryl wallets just in this quarter with three of our core customers.

So, we're pleased with that particular performance. So, there were still bookings in the quarter with respect to semi. So, this is an area that we're really positive on.

Sure, Max.

Yeah, we don't give the individual revenue by factory, but it is contributing to what we're seeing over there. If you think about the Panane facility, we talked about it being PT. So, if you think of the margin profile of that, semi-cap, and then the Thailand facility is more of an EMS facility. So, they're complementary to other size of factories that we have already in our portfolio. So, it's in line with those just to give you an idea from a revenue standpoint.

Okay, and how should I think about CapEx, given the success of? Yeah, so we talked about the two to two and a half for 2026. I see that probably continuing into next year as we're doing the same thing with a new factory with Thailand ramping up, kind of the build-out from Q3 to next year, Q4 time frame, kind of getting that up and going. So, I would think right now at this point, that's about what I align with is I two to 2.5 for next year too, because it will change depending on kind of where we see the growth and we continue to see growth and we're going to invest in that growth just to be clear.

Look, we did have a great one and we're very happy with that. The team's doing a great job to drive that on all factors. If I look at kind of where I, when I came in, it was the 90 and now we've gotten it down to the 59. So, great momentum on that front. Yeah, we could as inventory grows, but we are looking at the turns and we got into the five turns and we're going to continue to drive that to the 5 to 5.5. So, again, our focus is on this cash conversions cycle and we'll continue to drive it.

Yeah, that has not changed. I mean, we're still, again, the dividend solid not changing that thing. The dividend, we're going to continue to look at buybacks to offset dilution. That is not changing. Yeah, we took a pause this quarter, but it's definitely something we're still looking at for the full year to offset dilution.

Yeah, as we look at it, we're still going to drive leverage through that. I mean, we've talked about the initiatives, some of them that we have in place, and looking at the top line, driving that, getting the utilization out of our factories, and dropping it down. It was impacted this quarter with variable comp as we continue to overperform for the year. So, but we believe for the full year and going forward to leverage that OPEX. And that's why we talked about the 1.5, the 2X EPS growth compared to the top line, so that leverage will continue.

Okay, Patrick, I'll address your first question. If you go back to last January, actually, it was this time, exactly last year, we signaled on the call that we felt medical as bottom, as found the bottom, if you will. And fortunately, it proved to be accurate. And we've seen medical continue to perform really well since then. Your question is, what's driving the growth in medical? And I'd say there's three catalysts to it. One is the overall demand picking up. That was really a big element of it. The other thing is, while the medical space was going through it, if you will, channel inventory digestion period, we worked really hard to continue to drive bookings. And one of the bookings was also a very meaningful win for us, which I've shared on these calls, which was a competitive takeaway, which actually was a lift and shift type of an engagement, which means the time to revenue is much faster.

So, those are the dynamics that have helped contribute to the success of medical over the course of exactly the last 12 months.

Thank you, Patrick.

I will now turn the call back to Paul Mansky for closing remarks. Thank you, Percy. And thank you, everyone, for participating in Benchmark's second quarter, 2026 earnings call. During Q3, we'll be participating in Needham's 15th annual virtual industrial tech, robotics, and power conference on August 17th, and Sedodi's small cap conference on September 24th for updates to these and other investor conferences in events, including a replay of today's call. Please refer to the events section of our website at ir. bench. com.

With that, thank you again for your support. And we look forward to speaking with you soon. This concludes today's call. Thank you for attending. You may now disconnect.