Earnings Call Transcript - BHE Q1 2026

Operator, Operator

Thank you for standing by. Welcome to the Benchmark Q1 Fiscal Year 2026 Earnings Call and Webcast. I would now like to turn the conference over to Paul Mansky, Benchmark Investor Relations. You may begin.

Paul Mansky, Head of Investor Relations

Thank you, operator, and thanks, everyone, for joining us today for Benchmark's First 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 first 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 historical statements of 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 an overview, followed by Bryan's further detail of our Q1 results and guidance. We'll then turn the call back to David to share his perspective on sector trends and closing remarks. If you please turn to Slide 4, I'll turn the call over to our CEO, David Moezidis.

David Moezidis, President and CEO

Thank you, Paul. Good afternoon, and thank you for joining us today. In the first quarter, we delivered revenue of $677 million and EPS of $0.58, both coming in towards the higher end of our expectations. Our first quarter performance reflects solid execution across the business and meaningful progress in our strategic priorities. As we look ahead, the combination of improving end-market conditions and our momentum in Semi-Cap and AC&C and the operational discipline we've been emphasizing gives us greater confidence in our outlook for the year. We now expect full-year revenue growth to be in the 9% to 10% range, up from our prior expectations of mid-single-digit growth. We also expect EPS growth to outpace revenue as we remain focused on execution and disciplined expense management. Turning to Slide 5. During the quarter, we saw evidence of improvement across a broad cross-section of our end-markets, reflecting the benefits of our well-balanced portfolio. Medical revenue continued to accelerate year-over-year and Semi-Cap returned to double-digit sequential growth. Within AC&C, the AI-related wins we've discussed on prior calls have begun to ramp, and our confidence continues to improve. Meanwhile, performance across the rest of the portfolio was in line with our expectations. These are early but clear signs that the customer-first initiatives we began implementing over the past 2 years are taking hold. That shows up in more disciplined customer engagements, clearer program prioritization and more consistent execution across the portfolio. We also delivered another quarter of solid bookings performance. This consistency reinforces our confidence in both the pacing of the year and the sustainability of our growth outlook. Operationally, we continue to drive leverage, with both operating income and earnings growing faster than revenue year-over-year. At the same time, our sustained focus on working capital efficiency drove another quarter of strong free cash flow despite stepped-up investments to support future growth. While we remain mindful of the broader environment, demand signals are stronger today than they were 90 days ago. Regardless, our priorities do not change; stay close to our customers, execute with consistency and continue to build a more resilient operating model. In short, we're encouraged by how the year has started and by the momentum we're seeing as we move forward. With that, I'll turn the call over to Bryan to walk through the financial details for the quarter.

Bryan Schumaker, CFO

Thank you, David, and good afternoon, everyone. Please turn to Slide 6. Revenue in the quarter was $677 million, up 7% year-over-year and above the midpoint of our prior guidance of $655 million to $695 million. Non-GAAP EPS was $0.58, which was at the higher end of our prior guidance range of $0.53 to $0.59. As a reminder, our non-GAAP results exclude stock-based compensation, amortization of intangible assets, restructuring, impairment and other items as detailed in Appendix 1 of this presentation. For the first quarter, non-GAAP gross margin was 10.3%, improving 20 basis points year-over-year and decreasing 30 basis points sequentially, primarily due to volume. Non-GAAP operating margin of 4.8% was also up 20 basis points year-over-year, but down 70 basis points sequentially, driven by lower revenue and higher variable compensation. Our first quarter non-GAAP effective tax rate was 27.4%, slightly above our prior guidance range, driven by jurisdictional mix. Please turn to Slide 7 for the first quarter 2026 revenue performance by sector. Semi-Cap revenue, while down slightly year-over-year, increased 2% sequentially, reflecting improved momentum as we progressed through the quarter. As expected, industrial and A&D moderated year-over-year, down 3% and 2%, respectively. Meanwhile, medical revenue grew 24% and AC&C grew 41% year-over-year. Please turn to Slide 8 for our trended non-GAAP financials. Year-over-year, we saw a consistent improvement across revenue, profitability and earnings. This reflects continued discipline in execution and mix. Although these metrics were sequentially down this quarter due to seasonal volume and variable expenses, we expect both sequentially and year-over-year improvement for revenue, profitability and earnings throughout the balance of 2026. Please refer to Slides 9 and 10 for a discussion of our balance sheet, cash flow and working capital trends. In the first quarter, we generated $47 million in operating cash flow and $29 million in free cash flow despite investing in both inventory and capital equipment to support our future growth. As of March 31, we were $120 million net cash positive. Our cash balance was $325 million, representing a $3 million sequential increase. We had $145 million outstanding on our term loan and $60 million outstanding on our revolver, leaving $486 million in available borrowing capacity. We invested approximately $18 million in capital expenditures during the quarter. Our fourth PT building in Penang remains on track to begin operations in Q3. Based on the momentum we are seeing in the business, we expect full-year 2026 capital spending to track to the higher end of the 2.0% to 2.5% range. Demonstrating our continued commitment to return value to shareholders, we distributed $6 million in cash dividends and repurchased $6 million in stock during the quarter. At quarter end, we had approximately $117 million remaining under our share repurchase authorization. Our cash conversion cycle for the quarter was 67 days, which is a 19-day improvement year-over-year and consistent with our strong fourth quarter performance. A key contributor to that progress was disciplined inventory management. Inventory days declined 14 days year-over-year even as we grew the top line over the same period. This discipline translated into an improvement in turns to 4.8 as compared to 4.0 in the prior year period. Please turn to Slide 11 for our second quarter guidance. For the second quarter of 2026, we expect revenue to be within a range of $700 million to $740 million, representing 12% year-over-year growth at the midpoint. We expect non-GAAP gross margin to be between 10.4% and 10.6%, and non-GAAP operating margin to be between 5.1% and 5.3%. We anticipate GAAP expenses will include approximately $6.1 million of stock-based compensation and $0.8 million to $1.2 million of non-operating expenses, including amortization, restructuring and other charges. Our non-GAAP diluted earnings per share is expected to be in the range of $0.65 to $0.71. Interest and other expenses are expected to be approximately $3.5 million. We continue to advance initiatives aimed at structurally improving our tax rate over the long term. However, for the second quarter and full year, we expect our effective tax rate will be in the range of 26% to 27%. Finally, for the quarter, our weighted average share count is expected to be approximately 36.3 million. With that, I would like to turn the call back over to David for our outlook by market sector and closing remarks.

David Moezidis, President and CEO

Thanks, Bryan. Let's turn to Slide 12 for our outlook by sector. Within Semi-Cap, since late last year, we've been sharing our view that a potential recovery in 2026 was showing more promise. This became more evident in the first quarter as revenues were stronger than expected, increasing double digits sequentially. Over the past several years, we supported existing programs, secured new wins and invested in capacity, including investments such as our Penang 4 facility in anticipation of an industry upturn. Looking ahead, we expect this to translate into both sequential and year-over-year growth throughout the year. Within industrial, revenue was in line with our expectations, and we see modest growth in 2026. Within the sector, we're seeing good performance from transportation and agriculture, while automation and HVAC saw softer conditions. Overall, we remain positive on the outlook for the sector longer term. Turning to aerospace and defense, our commercial air business continues to perform well. After two years of double-digit growth, we expect A&D to moderate in 2026, driven primarily by program timing within defense. Importantly, bookings activity across defense and space remains strong, positioning the sector for a return to growth as these programs are expected to ramp later in the year and into 2027. Medical delivered another standout quarter in Q1, and we expect this performance to continue over the next several quarters, supporting our growth for the year. I'm particularly encouraged by the breadth of the growth drivers in medical, which includes our competitive wins, strong end-markets and new program ramps. Lastly, in AC&C, we delivered exceptional year-over-year results in the quarter, driven by the initial ramp of AI-related wins we've discussed over the past several quarters. These wins were enabled in part by our liquid cooling capabilities, which supported our HPC programs and are now seeing traction in clustered AI solutions. While still early in the ramp, our visibility continues to improve, leading us to expect strong growth from this sector in 2026. As a validation that our customer-first initiatives are working, I'm pleased that we were recently named HP Enterprise's 2026 Manufacturing Partner of the Year, a meaningful acknowledgment from a strategic customer. In summary, turning to Slide 13. We are pleased with our first quarter performance and how 2026 is taking shape. The progress we're seeing did not start in Q1. It reflects the work we've put in over the past several years, which gives us the confidence to raise our full-year revenue outlook to 9% to 10%, with operating income and earnings growing faster than revenue, both sequentially and year-over-year throughout the remainder of the year. At the same time, we remain committed to investing in the business with customer satisfaction as our central focus. This includes continued capacity expansion around the world, as well as ongoing investment in our leadership and capabilities. Whether capacity, talent or manufacturing efficiency, these investments share a common objective to deepen customer engagement, accelerate innovation and support the opportunities ahead of us. With that, I'd like to thank our customers, our shareholders and the entire Benchmark team around the world for their continued trust, dedication and execution. Operator, we can now open for questions.

Operator, Operator

Your first question comes from the line of Max Michaelis with Lake Street Capital Markets.

Maxwell Michaelis, Analyst (Lake Street Capital Markets)

Congrats on the quarter as well as the guide. First one for me, I want to stick to Semi here. With Penang 4 opening up in Q3, can you remind me how much excess capacity that will bring online?

David Moezidis, President and CEO

Max, we don't discuss how much capacity comes online in exact terms. But what we can tell you is the additional capacity that is coming online is setting us up to serve our customers inside of 2026 and positioning us for further growth in 2027.

Maxwell Michaelis, Analyst (Lake Street Capital Markets)

Perfect. And then sticking with semi, when we think about this strength going throughout 2026, are you seeing this broad-based strength across your entire customer base? Or is it more one-off?

David Moezidis, President and CEO

No, this is broad-based. We started hearing the signals at Semicon in October, and I shared that information in one of our earlier calls. Those signals started materializing into orders. Now we're up and running, as you can see with our performance.

Maxwell Michaelis, Analyst (Lake Street Capital Markets)

And then last one, just with AC&C. You talked about strong momentum with enterprise AI clusters as well as on-prem cloud infrastructure. Any other use cases you can touch on, or maybe visibility into future orders that you're in conversations with right now?

David Moezidis, President and CEO

What I can say is those are the two key drivers, but we're also anticipating that as we exit the year and enter 2027, HPC will start picking up on its own and contributing nicely as well.

Operator, Operator

And the next question comes from the line of Steven Fox with Fox Advisors.

Steven Fox, Analyst (Fox Advisors)

I had a couple of questions as well. First, I was wondering if you could dial in on the operating leverage you're seeing as per the guidance for Q2. Is there any unusual headwind, like as you ramp capacity, that might be limiting that? And as your mix shifts, how should we think about operating leverage as you get into the second half of the year? I have a follow-up after that.

Bryan Schumaker, CFO

Steven, thanks for the question. If you look at our operating leverage, we expect the bottom line to grow roughly 1.5x to 2.0x relative to revenue as we proceed through the year. Current operating margin will be impacted a bit as we've expanded overall growth by some variable compensation and due to other corporate expenses related to ramp and other items. But overall, we feel good about the back half and being able to leverage up on operating margin as we continue throughout the year. You can see some of that from Q1, our guide in Q2 and then throughout the remainder of the year.

Steven Fox, Analyst (Fox Advisors)

Great. That's helpful. As a follow-up, David, you mentioned new programs you've been working on for years in the Semi-Cap space. Can you give us a better sense of what's coming to fruition now that changes the mix or supports the growth? I'm trying to understand how some of those efforts are paying off in the next 6 to 12 months.

David Moezidis, President and CEO

I would frame it into two areas. One, we're increasing our share of wallet with our existing customers. Two, we're winning new share with some new customers, newer brands and new logos. So it's contributing from both fronts. This is an area we invested in over the last several years, and we're starting to see the fruits of those efforts.

Steven Fox, Analyst (Fox Advisors)

When you talk about some of these wins, is the product or services mix similar to what you've done over the last 2 to 3 years, or are there changes on that front?

David Moezidis, President and CEO

It's very similar for the most part. You'll see changes in product complexity, but how we serve customers in the semiconductor capital equipment space is a combination of our precision technology solutions related to machining, as well as electronics, mechatronics, system integration and PCBA assembly. It's really the total breadth of services we bring to bear for our customers.

Operator, Operator

And the next question comes from the line of Anja Soderstrom with Sidoti.

Anja Soderstrom, Analyst (Sidoti)

Congrats on the quarter. In Semi-Cap, you say you expect sequential growth; do you expect the second half to be much stronger still?

David Moezidis, President and CEO

Yes, Anja. We do expect the second half to be stronger. We don't typically provide specific sector growth rates, but for Semi-Cap specifically, we indicated it's likely to be around the mid-teens overall growth in this space.

Anja Soderstrom, Analyst (Sidoti)

Okay. And for AC&C, that was very strong for the quarter. Do you expect that to step up further, or will it be at a similar level as Q1?

David Moezidis, President and CEO

As we continue our ramp, we expect AC&C to continue to improve. We'll report back on the extent of that next quarter.

Anja Soderstrom, Analyst (Sidoti)

And remind me again for Penang, is that higher margin business or corporate average?

Bryan Schumaker, CFO

Anja, yes, the Penang PT expansion is higher margin. It's primarily focused on precision technology for Semi-Cap, which contributes at the higher end of our margin profile. When you look at our overall portfolio, you have growth in Semi-Cap and AC&C, which can offset at the lower end, but PT is on the higher end.

Operator, Operator

And your next question comes from the line of Anja Soderstrom with Sidoti.

Anja Soderstrom, Analyst (Sidoti)

Sorry, I just had one more. Do you see any difficulty in the supply chain or component availability at all?

David Moezidis, President and CEO

Yes, we're starting to see select lead times increasing in pockets, and we're seeing the same challenges as many others in the memory space. We're doing our best to get in front of it and manage the supply chain properly.

Operator, Operator

We do have a follow-up question coming from the line of Steven Fox with Fox Advisors.

Steven Fox, Analyst (Fox Advisors)

I was curious: how do you think the conflict in Iran is impacting defense program run rates, maybe not this quarter but over the back half of the year? Is that something to consider beyond the secular trends?

David Moezidis, President and CEO

Even if there's an immediate resolution, defense is likely to remain strong for the next 12 to 24 months as investments will be needed for replenishment purposes. From an order and bookings perspective, we continue to see momentum there. We're winning defense programs and winning in space. We remain very positive in this sector and see it picking back up in 2027.

Operator, Operator

I'm showing no further questions at this time. I would like to turn it back to Paul Mansky for closing remarks.

Paul Mansky, Head of Investor Relations

Thank you, operator, and thank you, everyone, for participating in Benchmark's First Quarter 2026 Earnings Call. For updates to upcoming investor conferences and events, including a replay of this call, please refer to the Events section of our IR website at bench.com. With that, thank you again for your support, and we look forward to speaking with you soon.

Operator, Operator

This concludes today's conference call. You may now disconnect.