Here at Sidoti. As I mentioned, next up we have Benchmark Electronics, which trades under the ticker BHE. I have Arvind Kamal, he is the Vice President of Finance with me, and Paul Mansky, the Senior Director of Investor Relations and Business Development. This is going to be conducted as a fireside chat. If you would like to submit your question, you can do so in the Q&A function at the bottom of your screen, and we will incorporate those as we go. With that, I will hand it over to you, Paul, for some-
Absolutely.
-disclosures.
Thank you, Anja. It is always great to be here at the Sidoti Small-Cap Virtual Conference. Appreciate the invitation as always. Just wanted to lay out, just as a reminder, today's remarks may include forward-looking statements subject to risks and uncertainties. Actual results may differ materially. Please see our financial releases and SEC filings for additional information. With that housekeeping out of the way, Anja, happy to turn it over to you.
Okay, so let us just start with a quick overview and background of the company for those who are new to the story.
Yeah, absolutely. Benchmark formed as a spin-out of a medical device company over 40 years ago. As a matter of fact, in January this year, we are going to celebrate our 40th year being listed as a NYSE company, very proudly, so. Historically, the company grew primarily through M&A, through a diverse M&A strategy. However, in recent years, and when I say recent, I mean probably the last seven or eight years, we have really focused on identifying core sectors that we want to go after, curating those, building up teams to support those, and extracting the opportunities. That is across the food chain. So that is everything from addressing very complex, highly regulated end markets from design through engineering, through manufacturing, across our global network of manufacturing sites and supply chain capabilities.
So what that's resulted in is a business that just a handful of years ago was about 50% exposed to legacy telco and compute, to now really being attractively balanced in our perspective across a subset of markets, including semiconductor, which is roughly about 30% of our mix. Industrial, Medical Technologies, Advanced Computing and Communications, and A&D, all 20%-ish, plus or minus. So a very good balance across sectors that we think that we have structural growth drivers, long-term structural growth drivers behind them, and that we can differentiate. That has allowed us to consistently drive gross and operating margin expansion, even during periods of macroeconomic malaise or flattish revenue, et cetera. That brings us to today, whereby, as you recall, maybe for those that participated, last quarter we did a couple of things. We announced that we had record bookings for the quarter, historical record bookings for the quarter.
Second time in a year we made that statement, while at the same time, we raised our revenue outlook for the year for the third time to greater than $3 billion in 2026, which would be a historical record for Benchmark. Meanwhile, we discussed growing our operating income and earnings at a rate of 1.5x - 2 x the rate of revenue growth. So really starting to see some of the power of the sector focus and the execution leverage that we have in the model. With that, I'll pause.
Okay, thank you. You mentioned that you've been increasing the outlook a couple of times in 2026 already. Can you just go over the primary catalyst for that, and then also how you're thinking about that extending into 2027? You also mentioned your margin expansion. Where is most of that going to come from? The gross margin or on the OpEx side?
Maybe I'll talk about the top-line drivers, and then I'll hand it over to Arvind to talk about the leverage opportunity. As you look at our top line, we really feel well-positioned across the portfolio. Now, each of those markets, and our participation therein, has its unique personality, as you might imagine. As we think about our 2026 in particular, the two that had the biggest impact as it relates to our increased confidence as we progressed through the year, would be semi-capital equipment, which probably doesn't come as a major surprise to many listening. As well as our participation in Advanced Computing and Communications, excuse me, Advanced Computing and Communications. Within that, specifically, some of our exposure to on-premises AI infrastructure.
And as opposed to some of the hyperscaler AI infrastructure spin that is the majority of the narrative in the market, our approach to that market is to support our OEM customers and their efforts to address demand, growing demand for private AI infrastructure, whether that be sovereign governments, three-letter agencies or enterprises, increasingly so, banks, things of that nature. So those are the two, if I rank order, and they are probably neck and neck, are the two biggest drivers behind our increased confidence as the year has progressed. And we think those demand trends continue into 2027.
Yeah, thanks.
Arvind?
Thanks, Paul. I would say on the earnings side, as volume increases, we are seeing the benefits of improved utilization, better mix, operational improvements that we have implemented across the company. That is consistent with the model that we have discussed before, where operating income and EPS can grow 1.5x-2x the rate of revenue. And just a little bit of a context around some of the implementation of improvements, we have talked about global procurement, we have talked about global business services as we move the central shared services to that model, and then also IT outsourcing. So that is really what is helping some of that expansion. While we have not explicitly guided 2027, we expect this momentum to continue in the upcoming year.
Okay, thank you. And what is your exposure to the hyperscaler CapEx, and what happens to you if there is some moderation there?
Yeah. I guess the derivative and exposure for us would be our semi- capital equipment business, which, as I mentioned before, is approximately 30% of the mix for us. Very clearly there has been, whether it be memory and now increasingly other semiconductor products are increasingly tight supply out there. That has been an ongoing dynamic that we do not see changing, even amidst a change in the rate of change should it occur from a hyperscaler CapEx incremental increase, right? Fabs that have broken ground or are soon to break ground, concrete being poured, shells going up, those will be equipped to meet existing demand, not new demand to come, to meet existing demand. So we think that gives us some pretty good long-term visibility into the forecast that we are receiving from our very key semi-cap OEM customers.
Okay, and then Advanced Computing and Communications was up over 70% last quarter. Where is that growth coming from, and how durable is it? Also, it creates some lumpiness, right, in your revenue, and how should investors think about that?
Yeah. That is a fair question, and fully objectively, we did have a little bit of an easy comparison in AC&C on a year-over-year basis. Given what has historically been a fairly lumpy high- performance compute or super compute cycle in between program awards, builds, and ramps. You typically have a pause, new designs or new awards get doled out, designed, and then built. By definition, very programmatic. So we had a bit of an easy comparison, but really, I do not want to undersell that. What really was the difference for us is we talked a couple of quarters ago about a couple OEM wins that we had on the AI infrastructure side, which is separate from super compute, and separate from comms, obviously. So now we have a third layer of the cake within AC&C that they started ramping nominally in Q1, more materially in Q2.
Primarily one of the two wins, and we have another one yet to ramp. While at the same time, we have been talking about the super compute cycle coming back around, with some expectation that that starts warming back up as we exit this year and into next year. So we have not gotten specific about guidance there, and particularly on the AI side, because it is so new for us. But we feel pretty good about the direction of that business looking forward.
Okay, thank you. Back to your semi-cap exposure, which is now about 30% of your revenue, and you are guiding to low 20% growth, while we see some market estimates with 25% - 30% +. Are you losing shares, or why is that?
I would be disappointed if we got out of this conversation without that question because it is one of the ones that comes up quite a bit. I would point you back to, there is a WFE TAM, and oftentimes people expect every contributor into that WFE TAM grows uniformly across the board. We outgrew WFE TAM during the semi- capital equipment downturn, and we gained share throughout that downturn. We continued to gain share. Timing considerations being what they are and some of our unique exposures, we did not outgrow the estimated WFE TAM out there for 2026 in the first half. We expressly talked about on the call last quarter that you should expect some acceleration in that business for us, healthy acceleration for us, in that business in the second half. That is both on a half-over-half first half and half-over-half second half last year basis.
We think that as the dust settles, from high tide to high tide, we will demonstrate our strong positioning within the WFE TAM market.
Okay, thank you. Then, within Aerospace and Defense, which was actually down last quarter, and you are talking about it being roughly flattish for the year, despite the strong demand backdrop that we are seeing there. Can you just remind us what is going on there?
Yeah, I'll take that one. Let me just step back and look at the growth we've already achieved in Aerospace and Defense . We've grown that business by roughly 20% each year over the last two years. As we entered into 2026, we indicated that it would take a little bit of a breather as several programs work through timing and ramp transitions. What we're seeing this year is largely a function of program timing, not a reflection of a demand, which remains quite strong. Last quarter, we had indicated that our record total bookings, we had record total bookings, and A&D was the largest contributor.
We're seeing strong demand across both defense and aerospace, and we think this sets us up for a stronger second half in 2026, and a return to growth in 2027.
Okay. Thank you. Just in general, how far out is customer visibility for you today? Has that changed meaningfully over the past year?
Well, as you might imagine, the answer is different across different sectors. On balance, visibility has consistently improved throughout the year. A blended corporate average has improved throughout the year. Again, I would argue that semi-capital equipment is one of those areas. I'd argue that even with the challenge that on a year-over-year basis, we had in A&D in this past quarter, given the bookings profile of that business, which we've talked about a couple times, that visibility is poised to continue to improve from here as well. Elsewhere, the medical device continues to be very consistent performer for us, as does industrial.
With the help of a competitive lift and shift within industrial that David Moezidis directly spoke to on our earnings call last quarter, I think that does, given the time- to- revenue nature of lift and shift versus new product introduction wins, I think that further bolsters some of our visibility as we've looked next couple quarters past.
You mentioned medical, so within Medical Technologies, there were some challenges during COVID, and then after COVID with inventory buildups, and then that has normalized now, but how has that sort of changed your approach to medical, if at all?
It hasn't really changed the approach. We've been continuing to invest in that sector and win business in that sector, and even more broadly across sub-sectors therein. We still don't participate heavily in things that you would consider to be disposable. That's not really our business. We like to maintain a focus on highly complex products. That having been said, you're right. We did have an inventory normalization, channel inventory, not OEM inventory, but channel inventory normalization that impacted us as well as others coming out of the COVID. That's long been anniversaried out. So what you're seeing driving our growth now are two things. That's the growth of the new products that we won, the new programs that we won that are ramping into the market, normalization of existing programs.
On top of that, another three-layered cake, as I tend to like to refer to, is about a year ago, we started talking about a pretty significant piece of lift and shift business there. So we're tied to anniversary that business, about the one-year anniversary mark. That'll come off, so you may see medical normalize a bit from here, but we still expect it to be a very solid growth business for us.
And congrats on the lift and shift. Can you also just remind investors or inform investors who might not be familiar with this, how that is different from a new contract win or a new ramp?
Absolutely. So a lift and shift is an existing piece of business that has already been fully ramped into the market, that is being provided by an alternative manufacturing partner. That for whatever reason, the OEM has decided that that business would be better served by us. Which means, as we pick up that business and that immediate kind of market share shift, we're not ramping to a developing market, we're ramping to a fully throated market opportunity. So it's a much faster time to full revenue, as opposed to getting a brand-new market, having to wait for the market to adopt and grow, et cetera. So typically, two to three quarters, versus in some market sectors, in medical, for instance, they could be four to six quarters before you fully ramp a brand-new product into the market. So much faster time to revenue.
Okay. Thank you. There's been growing discussion about supply constraints extending beyond the memory. What are you seeing there, and how are you thinking about that in terms of meeting demand?
Yeah. There has been a growing list of that. We haven't gotten back to necessarily the legacy golden screw of the supply chain premium crisis post-COVID, but the list is growing, and times are elongating. Everybody knows about the memory crunch, but we're seeing other semiconductors as well involved in that, and even some board- level extension. One of the things we did coming out of COVID is we invested heavily in our entire supply chain team, procurement ops, et cetera. I think we have the best in- class team there, and they've done a yeoman's job in positioning us, not only coming out of that, but being prepared for new challenges, above and beyond just day-to-day challenges.
We think that right now we're in a good position to be able to meet demand in 2026 and well into 2027, but everybody in this market has work to do as you look at the full year 2027 still, just as a function of lead times elongating from 9 months to 10 months to 12 months to 16 months to 18 months.
Do you think it helps the outsourcing value proposition with the supply chain constraints, that you're better positioned to combat that? And if companies were doing it in-house and on themselves?
Yeah. Well, it's definitely a conversation starter, as people think about a holistic global supply chain management. I'd say the other big one within that is, there were years when people thought about reshoring and using the term "reshore" almost exclusively, and then it evolved to "nearshore," and, well, what's the definition? And then you had the evolving tariff considerations thrown into that mix. What we think is ultimately coming of that is a preference for manufacturers, excuse me, for OEMs to have manufacturing close to demand. While at the same time having access to top talent for premium elements of the BOM, and then having a low-cost option for the more competitive elements of the BOM. We think we're pretty well-positioned to be able to address each of those elements.
Okay. Thank you. Then, one last on that topic. How does the price increases or input cost affect you? Are you able to pass those on, or is there a lag there, or?
Arvind, you want to take first crack at that one, and I'll follow through.
Yeah. Given the structure of our contracts, in almost all cases we do pass on the price increases to our customers. From that standpoint, I think we're protected and we're managing the overall margin through that pass-through.
Okay. Thank you. What kind of utilization do you have, and how do you think about capacity expansion?
Yeah, the utilization really depends on the site and the mix of business that's running through it. It's not something we quantify. What I can say is, from our current footprint, we have the capacity to support well over $3 billion of annual revenue. But when it does come to capacity expansion, we're very deliberate. We're investing in areas where we see strong customer demand and attractive growth opportunities. A real good example of this is the PT4 expansion in Penang, which is helping our semi-cap growth. It's one of the reasons why our capital spending is running a bit higher this year. At the same time, we're also looking to optimize our overall network. We're consolidating factories where it makes sense, including the closing of a site in the Phoenix area.
I think we've done a really well job on this front. In this business, you have to constantly look at your network of factories based on how the demand is evolving and our customer requirements.
Yeah.
In terms of capacity improvement, is there a lot of room still for automation to drive that, or where are you on that front?
Yeah, I think Josh Hollin, our CTO, is leading the charge on the automation front, as well as Dave Valkanoff on the Chief Operating Officer front. We are into our journey. There's obviously considerable room for continued improvement, and it's a rapidly evolving field. We think between increased capacity of existing footprint coupled with investment and incremental footprint, we're in a position to drive thoughtful productivity increases.
Okay. Thank you. Let's go back to your margin opportunities, which we talked about before, that you've done a good job with the operating margin expansion over the last several quarters. Can you just remind us what's been driving that and how you're thinking about those going forward?
Yeah. It really starts with gross margin. We've consistently delivered gross margins above 10% over the last several years. And quite honestly, we expect that to remain the case for the foreseeable future. On the operating margin side, we made a lot of progress this year, but some of that has been masked by the higher variable compensation tied to our stronger performance in the first half. At the same time, we've deployed a lot of the initiatives that I spoke about a little bit earlier. Just to remind us, that's the global procurement, the global business services, and IT outsourcing. Looking ahead, as we see those opportunities continue to expand our margin through the combination of those operational improvements, scale and discipline, execution as the business grows.
Well, then lastly, I would add, we've been working on our tax rate, which we hope to show improvements in the upcoming year.
Okay. Thank you. Then let's look at your balance sheet and your working capital. Can you just quickly go over the balance sheet and then also talk about the working capital needs? The inventory levels were elevated before across your peers as well, I would say, and that has come down and become more normalized. But what should be the primary catalyst for free cash flow as we look forward?
Yeah, no. I would say, we like where the balance sheet is today with how we're thinking about managing our leverage ratio and those kinds of things. But really specifically related to the free cash flow generation and working capital, I would think about inventory in terms of efficiency. So as the business grows, inventory will grow with it. As we've mentioned previously, our focus remains on maintaining inventory turns at 5x or better. Additionally, we're placing emphasis on the overall working capital equation. We've also talked a little bit about, and specifically in the prior earnings calls, is we stepped up our capital investment, in 2026 to be 2%-2.5% of our revenue versus our normal 1.5%-2%. And this is really to support our growth. But that being said, the primary driver of free cash flow remains net income growth.
As revenue and margins improve, we expect that to translate into stronger cash generation. Look, the bottom line is we've consistently delivered our free cash flow objectives, and at this point, I really don't see anything structurally changing that trajectory over time.
Okay. Thank you. We've seen more M&A and divestitures in the sector than we have in the past. Can you just talk about your capital allocation approach?
Yeah. Maybe what I'll do is I'll cover the capital allocation, and then I'll let Paul cover the M&A part of it. Just from our capital allocation priorities are pretty straightforward, it's to increase shareholder value, and it's done through maintaining the dividend, repurchasing shares, and investing in the business, where we see attractive returns through the CapEx lens. Paul, you want to cover the M&A portion?
Yeah, certainly. Part of that investment in the business, Arvind touched on CapEx, as well as other internal capabilities. There's also inorganic, which is something we always consider. I think we've flagged it at various times over the last couple of quarters, that after having gone through a period of internal focus exclusively after starting as external focus almost exclusively for the first several decades of the company's life, we spent the last seven or eight years or greater without any material M&A activity. I think that probably evolves over the next couple of years, as we look at opportunities to accelerate our existing business, as opposed to necessarily breaking into any new markets. We are interested in whether that be footprint or capabilities, accelerating our existing strategy.
Okay. Thank you. Where do you believe Benchmark has the strongest competitive advantage versus the larger EMS players?
Yeah. It ultimately comes down to our focus, which is highly complex regulated products. But really, it is the customer engagement and the customer satisfaction, in that a piece of business that is a certain size is a lot more important to us than it is to some others in the market, and we can distinguish ourselves in terms of service and product realization there. C-level access all the way through. We think that is very important. Layer that on, and in kind of a subset of that, is you look at our thoughtful kind of network of capabilities, of manufacturing capabilities. Again, I think we touched on it earlier in our discussion, where you have manufacturing close to demand, you have a low- cost option, and then you have a best-in-class option for particularly sophisticated products that require a specific workforce or capability set.
Those are all very key tenets to our differentiation versus our competitors.
Okay. Thank you. One last final question here. Are customers increasingly looking for EMS partners for more engineering design content rather than just manufacturing, and how is that then affecting your margins?
I'm actually glad you asked that question, because I don't think I would've been able to answer the first question fully without highlighting the fact that we are kind of an end-to-end product realization company, which is also fairly unique to us. From that initial design consultation through engineering, to your question, through manufacturing, whether that be traditional SMT or precision machining, which we think is also very unique to us. To your question, engineering, with the increase in product complexity that we've talked about, silicon density, semiconductor density within products, engineering is an increase in consideration throughout the industry, and we invest aggressively in our engineering efforts. We find that it is a fantastic way to help our customers and control kind of our destiny as it relates to transitioning that into manufacturing opportunities going forward. It's a great partnership opportunity, and it's core to our customer satisfaction initiatives.
Okay, thank you. Actually, that concludes my questions, and we're out of time, so good timing. I want to thank you, Arvind and Paul, for joining us today, and everyone in the audience who tuned in. I know you have a full one-on-one schedule, and some four-on-one schedules, I guess. But if anyone would like to touch base with the management team after this, we're happy to put you in touch, or you can reach out to them directly. With that, I'll hand it over to you guys for some closing remarks.
No, I just want to wrap by thanking you again, Anja and Sidoti, for having us today. Enjoy the conference and look forward to a full day of one-on-one meetings around it. Thank you again.
Thanks, Anja.
Thank you. Thank you, everyone. Thank you.
Thank you.