Prepared remarks
Hello, everyone. Thank you for joining us, and welcome to the Benchmark Electronics Q2 2026 Earnings Call. I will now hand the conference over to Paul Mansky, Benchmark Investor Relations. Please go ahead.
Thank you, Piercy, and thanks, everyone, for joining us today for Benchmark's Second Quarter 2026 Earnings Call. With us today are David Moezidis, our President and CEO; and Bryan 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 1 hour after we conclude. The company has provided a reconciliation of our GAAP to non-GAAP 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 on 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 risks and uncertainties as described in our press releases and SEC filings. Actual 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 Bryan with further detail on our results and guidance. We'll then turn the call back to David to share his perspective on sector trends and closing remarks. I'll now turn the call over to our CEO, David Moezidis, 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 $0.75 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 Aerospace & Defense undergoing previously discussed program transitions. I would note that with another strong quarter of bookings in Q2, A&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 1.5x to 2x the pace of revenue throughout 2026. I'll let Bryan 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 Bryan to walk through the details for the quarter.
Thank you, David, and good afternoon, everyone. Please turn to Slide 6. Revenue in the quarter was $756 million, up 18% year-over-year, and non-GAAP 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-GAAP results exclude certain items as detailed in Appendix 1 of this presentation. For the second quarter, non-GAAP gross margin was 10.5%, improving 30 basis points year-over-year and 20 basis points sequentially, primarily due to volume. Non-GAAP 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-GAAP effective tax rate was 26.6%. Please turn to Slide 7 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&C, revenue grew considerably at 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 8 for our trended non-GAAP 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 1.5x to 2x 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 $0.5 billion of available borrowing capacity. In the second quarter, we generated $35 million in operating cash flow and $22 million in free cash flow while continuing to invest in inventory, capacity and capabilities to support future growth. In line with our balanced capital allocation strategy, we also returned $6 million to shareholders through dividends 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% of revenue. Our fourth PT facility in Penang remains on schedule and began ramping operations earlier this quarter, the third quarter. Additionally, in Q3 2026, we plan to break ground on our third building in the Ayutthaya, 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 of 59 days improved 26 days year-over-year and 8 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 5, while payables versus receivables improved 3 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% year-over-year growth at the midpoint. We forecast non-GAAP diluted earnings per share in the range of $0.76 to $0.82. We anticipate non-GAAP gross margin of 10.5% to 10.7% and non-GAAP operating margin of 5.3% to 5.5%. GAAP expenses are projected to include approximately $8.4 million of stock-based compensation and $3.5 million to $4 million of nonoperating 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 time. However, for the third quarter, we anticipate our effective tax rate will be in the range of 26% to 27%. Finally, for the quarter, we project weighted average diluted shares outstanding of approximately 36.4 million. With that, I'd like to turn the call back over to David for our outlook by market sector and closing remarks.
Thank you, Bryan. Turning to Slide 12 for our outlook by sector. Within Semi-Cap, we saw demand improve 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 Bryan 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 multiyear 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, they 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.
Questions and answers
Your first question is from the line of Steven Fox with Fox Advisors.
I had a few questions. First of all, on the Aerospace business, can you give us a little more color into the new bookings that you're talking about, especially as it relates to maybe current events in Iran or government budgets changing, et cetera? What kind of trends do you think you're capitalizing on there? And then I had a couple of follow-ups.
Yes. Steven, I think it's a similar question to last quarter. We see the defense environment remaining strong. There's a combination of things that lead us to continue to believe it's going to remain strong. I used the word replenishment in our last call. 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. We're really proud of the performance of the team. As I mentioned, the team led the way in bookings this quarter.
Great. That's helpful. And then on the competitive takeaway you mentioned in the Industrial market, can you give a little bit more color in terms of why you were able to have success with that customer and gain share there?
Absolutely. Fundamentally, it comes down to execution. 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 opened the door for us to take the business away from one of our competitors and increase our share of wallet with this particular customer.
Got it. And then, David, just bigger picture on what you're seeing. Obviously, there's a lot of concerns over what maybe is around the corner that we're not seeing. What can you say about the shape of the orders or bookings or anything else that might give you confidence that there's legs to the current upturn?
We continue to remain optimistic on the year. 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. That in itself reflects our view. It's not always smooth sailing. We've got to work the supply chain and execute operationally, which I have a lot of confidence we'll be able to do. The supply chain environment is tight. I signaled that a couple of quarters ago. We started seeing that tightness in memory. We're working the supply chain proactively. We have an excellent supply chain team that is working day and night to make sure we're able to execute and meet our customer orders. Thus far, Steven, I'm really pleased to say we've been able to do that.
Your next question is from the line of Max Michaelis with Lake Street Capital Markets.
Congrats on beating the guide and the $3 billion milestone. First question for me is around the advanced computing space. You're seeing a significant ramp in AI-related revenue across clustered AI and on-prem cloud programs you've mentioned. Can you help size up the next-gen HPC opportunities and how they're different? I would assume we expect to see accelerating growth in 2027 from that program starting to ramp here in Q4. Can you help size that program versus the current ones you're ramping?
Max, it's somewhat tough for us to size it because we typically don't disclose that level of detail. What I can tell you is you said it properly: we expect HPC to start picking up very late in Q4 and into 2027. From that perspective, we could start seeing it contribute more in 2027 than in 2026. If you combine the activities we have in clustered AI and the on-prem business and then add HPC, we remain optimistic about the prospects of AC&C.
Okay. That makes sense. I want to go back to supply chain. Is there any data you can give us around lead times and differences from 90 days ago?
It depends on the components. The more complex components that rely on major foundries are the ones where lead times have increased meaningfully. In some areas we've seen lead times go from 3, 4, 5 months to 7, 8, 9 and in some cases 12 months. We have a strong supply chain team that works hard to ensure we place orders in a timely manner. We lived through this during COVID and learned many lessons, and we're working hard to ensure it doesn't repeat. Memory stands on its own, and we're managing that as well.
All right. Last one for me. If we go back to late 2025, early 2026, we were all waiting for Semi to return, and it has. As bookings pick up strength, what are your thoughts going forward in 2026 and 2027? Where do you think bookings in the Semi space peak? Do you expect the strength to continue? What are your customers saying about order trends into the back half of the year and into 2027?
That's a great question and has several dimensions. There were many bookings we secured in 2023, 2024 and 2025, and we're now seeing the fruits of that labor. New incremental bookings are not required for the performance we've laid out for the next couple of quarters; we expect strength to continue into the second half for our Semi group. We've been able to increase share of wallet in this quarter with three of our core customers, which is encouraging. There were still new bookings in the quarter with respect to Semi. This is an area we're really positive on.
Your next question comes from Anja Soderstrom with Sidoti.
Congrats on the great quarter. With the expansions in Penang and Thailand, how much revenue is that expected to support? What's the margin profile there, and what verticals are they supporting?
We don't give individual revenue by factory, but they are contributing to what we're seeing in the region. The Penang facility is a PT facility, so its margin profile aligns with Semi-Cap. The Thailand facility is more of an EMS facility and is complementary to other factories in our portfolio. That should give you an idea of the revenue and margin dynamics.
Okay. How should we think about CapEx given those expansions?
We talked about 2% to 2.5% of revenue for 2026, and I see that probably continuing into next year as we do the same with the new factory build-out in Thailand, ramping from Q3 into next year, Q4. So I would align with that 2% to 2.5% for next year as well. It will change depending on where we see growth, and we'll invest in that growth.
Okay. In terms of cash conversion days, you had a really nice improvement for the quarter. How should we think about that going forward?
We did have a great quarter on that front and are very happy with the results. The team is doing a great job driving improvements across all factors. When I came in, it was about 90 days and now we've gotten it down to 59, so there's great momentum. As inventory grows with the business, turns matter; we're at about five turns and will continue to drive toward 5 to 5.5. Our focus is on the cash conversion cycle and we will continue to improve it.
Okay. How should we think about capital allocation priorities and the fact that you didn't do any buybacks this quarter?
That hasn't changed. The dividend is solid and unchanged. We'll continue to look at buybacks to offset dilution. We paused buybacks this quarter, but it's something we're still considering for the full year to offset dilution.
Your next question is from Patrick Muth with Needham.
This is Patrick Muth on for Jim Ricchiuti. I wanted to dive into the Medical side of the business. You mentioned signs of a turn in Medical. Can you unpack what's driving that? Is it primarily from new program ramps or underlying demand improvement? Any color would be helpful. And then my second question is on the OpEx trajectory. How should we think about expense levels going forward? Are there any step-ups in OpEx planned to support growth, or should we expect leverage from here?
On OpEx, we're still going to drive leverage. We have initiatives in place to get utilization up in our factories and drive costs down. OpEx was impacted this quarter by variable compensation as we overperformed for the year. But we believe for the full year and going forward we will get leverage, and that's why we talked about 1.5x to 2x EPS growth relative to the top line. That leverage will continue.
Patrick, I'll address the Medical question. If you go back to last January, it was this time last year that we signaled Medical had bottomed. That proved accurate, and Medical has continued to perform well since then. What's driving the growth in Medical? There are three catalysts. One is overall demand picking up. Another is that during the inventory digestion period in the medical channel, we continued to drive bookings and secured a very meaningful win that was a competitive takeaway. That engagement was a lift-and-shift type, meaning the time to revenue is much faster. Those dynamics have helped contribute to Medical's success over the past 12 months.
There are no further questions at this time. I will now turn the call back to Paul Mansky for closing remarks.
Thank you, Piercy, 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 17 and Sidoti's Small-Cap Conference on September 24. For updates to these and other investor conferences and 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.