Benchmark Electronics, Inc. Stock

Hello, everyone. Thank you for joining us, and welcome to the Benchmark Electronics Q2 2026 Earnings Call. [Operator Instructions]

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 4 of our 5 sectors with A&D 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 -- this 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. David?

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 onetime 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 2 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.

[Operator Instructions] Your first question is from the line of Steven Fox with Fox Advisors.

I had a few questions. I guess, 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? Like what kind of trends do you think you're capitalizing there? And then I had a couple of follow-ups.

Yes. Steven, I think it's a similar question to last quarter, right? 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 word 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.

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?

Yes, absolutely. So 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 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 around the corner that we're not seeing. Like can you -- what can you say about just sort of the shape of the orders or bookings or anything else that maybe a nuance that gives you confidence that there's legs to the current upturn?

Yes. 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 in 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, 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 kind of the beaten guide up here and the $3 billion milestone. First question for me is kind of around the advanced computing space. I mean, you're seeing a significant ramp in AI-related revenue. I mean, the clustered AI, the on-prem cloud programs you've kind of mentioned. Can you help size up sort of the next-gen HPC opportunities, how they're different?

And then sort of -- I mean, I would assume we expect to see accelerating growth in 2027 from that program starting to ramp here in Q4. But can you help size that program up versus the current ones you're currently kind of ramping here?

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 said 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 clustered AI and the on-prem business and then bolt on the HPC, we remain optimistic about the prospects of AC&C.

Okay. No, that makes sense. And I kind of want to go back to supply chain. Is there any data you can give us around sort of lead times and kind of the difference of what those were 90 days ago maybe?

It really depends on the components, 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 3, 4, 5 months to suddenly 7, 8, 9 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. Again, things like memory, it stands on its own, and we're managing that as well.

All righty. Last one for me, and then I'll hang up the mic here. So if we go back to kind of late 2025, early 2026. I mean we're all kind of waiting for Semi to return, and I would say it has. As bookings starts to pick up strength and it clearly shows it has as well. I mean, what are your thoughts going forward in '26 and 2027? Where do you think bookings in the Semi space sort of peaks? Do you expect the strength? What are your customers saying about kind of what order trends should look like going into the back half of the year and into 2027? Or does it continue to rise from here you think?

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 '23, '24, '25, and we're now seeing the fruits of that labor, if you will. So 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 year 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 share of wallet just in this quarter with 3 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.

Your next question comes from Anja Soderstrom with Sidoti.

Congrats on the great quarter here. So with the expansions in Penang and Thailand, how much revenue is that expected to support? And what's the margin profile there? And what are you expected to support? What verticals are they supporting?

Yes. 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 Penang 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 we think about CapEx given those expansions?

Yes. So we talked about the 2% to 2.5% for 2026. I see that probably continuing into next year as we're doing the same thing with the 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'd align with is that 2% 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.

Okay. And then in terms of cash conversion days, you had a really nice job there for the quarter. How should we think about that going forward?

Look, we did have a great one, and we're very happy with that. The team is 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.

Yes, we could as inventory grows, but we are looking at the turns, and we got into the 5 turns, and we're going to continue to drive that to the 5 to 5.5. So again, our focus is on this cash conversion cycle, and we'll continue to drive it.

Okay. And then how should we think about the capital allocation priorities and the fact that you didn't do any buyback for the quarter?

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

Your next question is from Patrick Muth with Needham.

This is Patrick Muth on for Jim Ricchiuti over at Needham. I wanted to dive into a little bit about the Medical side of the business. You guys mentioned signs of a turn in Medical. Can you unpack what's driving that? Is it primarily from new program ramps -- program ramps, excuse me, underlying demand improvement? Any color on that would be helpful.

And then my second question is on the OpEx trajectory. How should we start to think about your expense levels going forward? And are there any step-ups in OpEx plan to support growth? Or should we expect leverage from here?

So on the OpEx side, I'll take that first. Yes, 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 1.5x to 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 is -- has bottomed, has 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 3 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 its, 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.

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.

Thank you for standing by. Welcome to the Benchmark Q1 Fiscal Year 2026 Earnings Call and Webcast. [Operator Instructions]

I would now like to turn the conference over to Paul Mansky, Benchmark Investor Relations. You may begin.

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.

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.

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 12% (sic) [ 2% ] sequentially, reflecting improved momentum as we progress 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.

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 2 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 Instructions] And your first question comes from the line of Max Michaelis with Lake Street Capital Markets.

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

Max, we don't discuss kind of how the capacity online is. 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.

Perfect. And then sticking with semi, I mean, when we think about this strength here going throughout 2026, are you seeing this broad-based strength across your entire customer base? Or is it kind of a onesie-twosie deal?

No, no. This is broad-based. This is definitely broad-based. And we started hearing the signals at Semicon in October, and I shared that information in one of our earlier calls. And those signals started materializing into orders. And now we're up and running, as you could see with our performance.

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 potential visibility into future orders that you're in conversations with right now?

Well, what I can say is those are the 2 key drivers, but we're also anticipating as we exit the year and enter 2027, HPC is going to actually start picking up on its own and contributing nicely as well.

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

I had a couple of questions as well. I guess, first of all, I was wondering if you could dial in on the operating leverage you're seeing as per the guidance for Q2. I was wondering, first of all, if there's any sort of unusual headwinds like as you ramp capacity that maybe is limiting that? And as your mix shifts, how do we think about operating leverage as you get into the second half of the year? And then I had a follow-up.

Yes. So if you look at our operating leverage -- Steven, thanks for the question. As we've referenced, I mean, we expect kind of the bottom line to kind of grow to 1.5 to 2.0 is what we're thinking on dropping to the EPS, so as you get throughout the year. Now the current operating margin will be impacted a little bit as we've expanded kind of the overall growth by some variable compensation and a little bit of impact from just other corporate expenses due to some ramp and some other things. But overall, I mean, we feel good about the back half and being able to leverage up on the operating margin as we continue throughout the year. So, you see some of that from Q1, our guide in Q2 and then kind of throughout the remainder of the year, you'll see that coming through.

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

Yes. I would frame it into 2 areas. One is we're increasing our share of wallet with our existing customers. And two, we're actually winning new share with some new customers, so newer brands, newer logos, if you will. So it's contributing from both fronts. And from our perspective, this is an area that we made investments in over the course of the last several years, and we're starting to see the fruits of those labors.

And if I could just follow up on that real quick. When you talk about some of these wins, like does the product or the services you're providing in the future, is it similar mix to what you would say you've done over the last 2 to 3 years? Or there's any changes on that front?

Yes, Steven. I would say it's very similar for the most part. Now, you'll see products change with regards to the level of complexity, but how we serve our customers in the semiconductor capital equipment space is a combination of our precision technology solutions as it relates to machining and such, as well as electronic, mechatronics, system integration and PCBA assembly. So it's really the total breadth of services that we're able to bring to bear for our customers.

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

Congrats on the quarter here. So, I'm just curious, in the Semi Cap, you say you expect sequential growth, but do you expect the second half to be much stronger still or...

Yes. Anja, this is David. We do. And we're looking at -- we don't typically go out and start providing specific sector growth rates, but we decided that for this sector specifically because there's been a lot of questions for us to share with you that we'll be somewhere around the mid-teens from an overall growth in this space.

Okay. And then also for AC&C, how should we think about that? That was very strong for the quarter. And do you expect that to step up? Or is it going to be on the same sort of level as the first quarter?

Yes. I would say, as we continue our ramp, we expect it to continue to improve. Now to what extent, we'll report back at that on that next quarter.

Okay. And then just remind me again for Penang, is that higher margin business? Or is it corporate average?

Yes, Anja. This is Bryan. So yes, it is higher margin. So it's primarily focused on precision technology Semi-Cap. So, that's why it is bringing the higher margin. So just to take that into consideration and then you look at our overall portfolio, you have the growth that we're seeing in the Semi-Cap space and you also have the AC&C, which is the lower end that kind of offset. But yes, as far as PT goes and that expansion, it is on the Semi-Cap, the higher end.

[Operator Instructions] Your next question comes from the line of Anja Soderstrom with Sidoti.

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

Yes. Anja, we're starting to see select lead times increasing in pockets. And we're seeing the same challenges as pretty much everybody in the memory space. And really, we're doing our very best to get in front of it and make sure that we manage the supply chain properly.

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

I was just curious, maybe some of this takes a little time to matriculate, but 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 we should think about beyond just sort of the secular trends that you're writing?

Yes, Steven. Our view on that is even if you have immediate resolution, defense is going to perhaps remain strong for the next 12, 18 to 24 months as those investments will need to really be there for replenishment purposes. That's probably -- and that's my opinion on that. But from an order perspective and market share and bookings, we continue to see momentum there. We're winning defense programs. And as I shared in my script, we're also winning in space. So, we remain very positive in this sector, and we see it picking back up in 2027.

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

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.

And this concludes today's conference call. You may now disconnect.

Good afternoon, ladies and gentlemen, and welcome to the Benchmark Q4 and Fiscal Year 2025 Earnings Call and Webcast.

[Operator Instructions]

This call is being recorded on February 3, 2025. And I would now like to turn the conference over to Mr. Paul Mansky, Benchmark Investor Relations. Please go ahead.

Thank you, Hina, and thanks, everyone, for joining us today for Benchmark's Fourth Quarter and Fiscal Year 2025 Earnings Call. With us today are Jeff Benck, our CEO; David Moezidis, our President; and Bryan Schumaker, our CFO.

After the market closed, we issued an earnings release pertaining to our financial performance for the fourth quarter and fiscal year ending December 2025 and have prepared a presentation, which we will reference on this call.

Both the press release and presentation are available under the Investor Relations section of our website at bench.com. This call is being webcast live, a replay of which will be available on our website 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, Jeff will start with an overview, followed by Bryan's detail of our Q4 and fiscal year 2025 results as well as Q1 2026 guidance.

We will then turn the call over to David to share his perspective on sector trends, business direction and closing remarks. This being his last conference call as CEO, after Q&A, we'll turn the call back to Jeff for some parting thoughts. If you please turn to Slide 4, I'll turn the call over to our CEO, Jeff Benck.

Thank you, Paul. Good afternoon, and thanks to everyone for joining today's call. Before I get started, I want to thank the entire Benchmark team for their contribution to closing out 2025 on a high note with continued progress against our strategic objectives.

This culminated in fourth quarter revenue of $704 million, which was up high single digits and included double-digit growth across 3 of our 5 focus sectors: AC&C, Medical and A&D.

At the same time, our fourth quarter earnings of $0.71 exceeded the high end of our guidance range provided last November. Our Semi-Cap sector is showing nice signs of improvement heading into 2026 after a softer Q4 of 2025.

Despite the expected semi softness in the quarter, we still managed to deliver gross margin of 10.6%, which was above the high end of our guidance range. This, coupled with our continued operating expense discipline drove operating margin to 5.5%, demonstrating the leverage in our model.

Again, great execution by the team across the board. Turning to the full year on Slide 5. 2025 revenue of $2.66 billion was in line with our prior year.

However, it played out differently because of instead of decelerating as in 2024. In 2025, we showed improving momentum, sequential growth and better year-over-year performance as the year progressed, which enabled us to deliver year-over-year growth in the second half as we expected.

At the same time, we drove sequential operating margin improvement throughout the year, expanding 90 basis points from Q1 to Q4. This improvement enabled us to deliver $2.40 in earnings, representing our fifth consecutive year of bottom line performance outpacing the top line. Regarding our 2025 business highlights on Slide 6, our strategy is clear.

We target 5 core high-value markets by focusing on complex high-mix opportunities that suit our strengths. We avoid commoditized markets and aren't pursuing an ODM approach building vanilla solutions. If you look at our business today, you'll see a very evenly balanced portfolio, each sector representing long-term growth opportunities where we believe we can excel and differentiate.

It is this focus that has led us to consistently deliver 10% or better gross margin. We are driving the same discipline in our internal operations as you see in our external go-to-market efforts.

The past year demonstrated this with steady sequential progress in operating margin even with sometimes challenging end market conditions. At the same time, we've been successful with our efforts to improve working capital efficiency, driving significant cash cycle improvement throughout the year.

Combining this with our growth in net income, we were able to deliver another year of positive free cash flow at the high end of our target range. We did so while continuing to invest in the business.

Looking forward, and David will click down on this more in a minute, we were very pleased by the momentum in our bookings over the course of 2025. This came from both new and existing customers and included some meaningful wins in higher growth subsectors for us, notably space, med tech and enterprise AI.

Our value proposition resonates with customers, and we continue to improve our execution, making it easier to capture new business from our installed base while attracting new customers because of the unique value we offer.

We are investing proactively in the business given the significant number of new wins. This includes expansion of our global precision technology footprint, specifically adding a fourth building in Penang, which is well timed for the Semi-Cap recovery cycle that's underway.

We are also investing in production equipment in our factories around the world, aligned with the new business we have won. I'm very encouraged by the momentum we're seeing in the business across Medical and AC&C. And now the semi space is poised for a strong recovery in 2026 as well.

With that, I'd like to turn the call over to Bryan to discuss our fourth quarter and fiscal year 2025 results in more detail as well as provide our first quarter outlook. Bryan, over to you.

Thank you, Jeff, and good afternoon, everyone. Please turn to Slide 7. Revenue in the quarter of $704 million, was up 7% year-over-year and toward the higher end of our prior guidance.

Our non-GAAP EPS was $0.71, which exceeded our prior guidance of $0.62 to $0.68. As a reminder, our non-GAAP results exclude stock-based compensation, amortization of intangible assets, restructuring, impairment and other items as noted in Appendix 1 of this presentation.

For Q4, our non-GAAP gross margin was 10.6%, up 50 basis points sequentially and 20 basis points year-over-year due to volume and mix.

Non-GAAP operating margin of 5.5%, was up 70 basis points sequentially and 40 basis points year-over-year, driven by our ability to leverage our cost basis on higher revenue. Our fourth quarter non-GAAP effective tax rate was 25.4%. Please turn to Slide 8 for the full year 2025 financial results.

For the fiscal year, revenue of $2.66 billion was flat compared to the prior year, while non-GAAP EPS was up 5% to $2.40. For the full year, our non-GAAP gross margin was 10.2%.

Non-GAAP operating margin of 4.9%, was down 20 basis points year-over-year, primarily due to variable compensation. Our full year non-GAAP effective tax rate was 24.8%. Please turn to Slides 9 and 10 for our fourth quarter and full year 2025 revenue performance by sector.

Semi-Cap revenue decreased 8% quarter-over-quarter and 14% year-over-year. This was consistent with our expectations of a softer Q4 prior to expected improvements in 2026.

For the full year, Semi-Cap revenue grew 2%. Within Industrial, although down sequentially, revenue was up 3% year-over-year. This was in line with our expectations for the quarter. For the full year, industrial revenue was consistent with the prior year.

A&D posted another strong performance in the quarter and year, up 7% sequentially and 17% year-over-year. Full year revenue growth was also well into the double digits at 19% Meanwhile, Medical continued to improve with fourth quarter revenue up 14% quarter-over-quarter and 23% compared to the prior year.

The improved second half performance drove 7% growth on a full year basis. For our final sector, full year AC&C revenue was down in 2025, driven by a challenging first half. However, we are pleased with the return to growth in the fourth quarter with revenue up 22% sequentially and 27% year-over-year.

We expect this momentum to continue into Q1 as we ramp previously announced AI-related wins. Please turn to Slide 11 for trended non-GAAP financials.

Our Q4 revenue continued the sequential improvements that we saw throughout the year, exiting at a little over $700 million, which was up 7% versus Q4 2024. At the same time, fourth quarter gross margin of 10.6% continued our multi-quarter trend of 10% or greater performance.

Coupled with expense management, this translated into sequential improvements in operating margin and EPS performance throughout the year, with fourth quarter and full year EPS growing greater than twice the rate of revenue growth.

Please refer to Slides 12 and 13 for a discussion of our balance sheet, cash flow and working capital trends. In Q4, we generated $59 million in operating cash flow and $48 million in free cash flow.

For fiscal year 2025, we generated $85 million in free cash flow. As of December 31, we are in a net cash positive position of $111 million. Our cash balance was $322 million and a sequential increase of $36 million.

As of December 31, we had $148 million outstanding on our term loan and $65 million outstanding against our revolver, from which we have $481 million available to borrow.

We invested approximately $39 million in capital expenditures during the year, including $11 million in Q4. Our fourth PT building announced last year is on track to be completed at the end of Q2 and begin operations in Q3, which will require a step-up in capital spending over the next few quarters.

Demonstrating our ongoing commitment to return value, we distributed cash dividends of $24 million and repurchased $27 million in stock during the year. At the end of the quarter, we had approximately $123 million remaining under our existing share repurchase authorization.

Our cash conversion cycle in the quarter was 67 days as our working capital focus drove considerable improvements of 10 days sequentially and 22 days year-over-year.

Inventory days were down 6 days sequentially as we continue to actively manage our inventory as we grew the top line. This focus translated into inventory turns of 5.2 in the quarter. Before discussing our Q1 guidance, there are 2 things that I want to highlight.

First, during our year-end close process, we identified and corrected immaterial errors in prior periods related to our tax calculation, resulting in a cumulative understatement of income tax expense of $8.7 million. The aggregate impact of these corrections was an increase to income tax expense of $2.2 million for the fiscal year ended December 31, 2024, and an increase of income tax expense of $6.5 million 2 years prior to 2024.

Importantly, these corrections resulted in no change to previously reported cash taxes, operating cash flow, revenue, gross and operating margin or non-GAAP earnings per share.

Consistent with GAAP guidance, prior year periods in today's release have been revised accordingly, which will also be reflected in our Form 10-K set to be published the week of February 23.

Second, as we look to optimize our footprint, we recorded an $11.1 million noncash impairment on certain assets located at one of our Arizona facilities due to the end of life of a few programs.

Any follow-on programs will be consolidated within our other U.S. facilities. Please advance to Slide 14. Let me now turn to our guidance for the first quarter of 2026.

We expect revenue to be within a range of $655 million to $695 million, up 7% year-over-year at the midpoint. We expect non-GAAP gross margin to be between 10% and 10.4%. With those assumptions, we would expect non-GAAP operating margin to be between 4.7% and 4.9%.

We anticipate GAAP expenses to include approximately $5.4 million of stock-based compensation and $5.1 million to $5.5 million of nonoperating expenses, including amortization, restructuring and other charges.

Our non-GAAP diluted earnings per share is expected to be in the range of $0.53 to $0.59. Interest and other expenses are expected to be approximately $4.7 million. We are undertaking initiatives aimed at structurally improving our tax rate over the long term.

However, for the first quarter and full year, we anticipate that our effective tax rate will be in the range of 26% to 27%. Finally, our weighted average share count is expected to be approximately 36.3 million. With that, I would like to turn the call over to David to discuss market sector performance and outlook. David?

Thank you, Bryan, and hello, everyone. Let's please turn to Slide 15 for a discussion of our sector outlook. As Jeff mentioned, we saw good revenue momentum in the back half of the year. This was driven by a number of factors, starting with the new bookings we have secured over the last 12 to 24 months, which included a couple of competitive takeaways.

We also benefited from improved sell-through aligning with healthier end demand across some of our sectors as channel inventory normalized. Last but not least, was our focus on operational execution, which we saw in our successful launches and high marks in customer satisfaction.

Let's step through the demand dynamics we're seeing by sector, starting with Semi-Cap. In 2025, revenue grew low single digits year-over-year during the semi market's longer-than-usual cyclical downturn.

Additionally, China import restrictions added some pressure this past year. All the while, we continue to secure new wins and focus on expanding capacity, positioning us well for the upturn. On our last call, we pointed to the back half of 2026 as likely to be the demand inflection. Since that time, we have seen mounting evidence of it picking up earlier in the year.

Within Industrial, revenue saw improvement in the second half, but was flat for the full year in 2025. This was consistent with expectations we shared with you last quarter, which called for a return to year-over-year growth in the fourth quarter.

Performance in the quarter was led by improved demand in transportation, HVAC, automation and some other minor sectors. Industrial is among the most macro-sensitive sectors we sell into, while at the same time, it represents one of the greatest opportunities for future upside for the company in terms of addressable market.

It may take a little more time to fully ramp our efforts here, but with the wins we have already secured, coupled with a steady macro backdrop, we expect gradually improving performance as we progress through the year.

Moving to A&D. We had another strong revenue performance for the quarter and full year in 2025. Commercial air remained stable, while defense continued to be strong, consistent with the broader demand profile from this subsector. In the near to midterm, total A&D revenue growth is expected to moderate from its double-digit trajectory over the last few years due primarily to program timing within defense.

However, I'm extremely pleased with our now multiple quarters of bookings momentum across a broad set of space application, which bodes well for our future growth prospects, these programs ramp over the coming quarters.

Turning to Medical. This past summer, we signaled the bottom for this sector's performance based on improving demand and new program ramps. Despite the challenging first half, our back half execution drove solid revenue growth for the full year, led by our medical device programs.

We expect these same dynamics to hold true in 2026 with double-digit revenue growth expected for the first quarter and full year. Further out, our bookings momentum in 2025 within med tech has positioned us well to build upon our Medical sector performance.

Rounding out our sectors, AC&C revenue rebounded sharply in the fourth quarter, driven by very strong performance in computing. We expect this momentum to continue into the first half of the year. We believe strongly in our liquid cooling capabilities and capacity investments.

We look forward to bringing these capabilities to bear in both the AI infrastructure and next-generation supercomputer builds to come. Moving to Slide 16 before turning over to Q&A, I would sum up the state of our business as follows: I'm even more encouraged today than I was when joining the company over 2.5 years ago about our future. Let me tell you why.

First, 2025 was a solid year of progress towards our growth objectives. We had a strong year of bookings, which was well balanced across the entire portfolio. And we are particularly encouraged by our growing opportunities in space, med tech and while still a little early, AI-related wins.

At the same time, end markets in Medical and Semi-Cap are improving. While industrial still has some work to do, we think we're positioned for growth later in 2026.

Operationally, we implemented a number of initiatives in 2025 that position us to demonstrate increasing operating leverage as revenue scales. Additionally, we see no change to our capital allocation approach as our priorities continue to work well and remain shareholder-friendly.

We will continue to support the dividend, seek offset annual dilution through share repurchases and invest in the business to support our growth. Finally, as we look ahead, we're very encouraged by how the year is shaping up.

We remain confident in our mid-single-digit growth guidance, and we believe that outlook could strengthen further in the coming weeks as we gain additional visibility from our customers. With that, I'd like to thank our customers, employees and partners for a successful 2025, and I'm looking forward to building upon that in 2026 and beyond.

Operator, we can now open the call to Q&A.

[Operator Instructions]

And your first question comes from the line of Jim Ricchiuti from Needham & Company.

Congrats on the quarter and to you, Jeff, for your accomplishments at Bench over the years. So it sounds if we -- from the tone, besides Semi-Cap, you seem to be suggesting increased confidence in a couple of areas of the business. David, I think you highlighted Medical. But just in general, are there areas besides Semi-Cap, which I think we know and we've seen some real clear drivers, and I assume you're going to hear more from your customers over the next couple of months. But what areas of the business, in particular, has the tone of demand changed versus, say, 3 months ago?

Jim, good speaking with you. I would say there's really no surprise overall with regards to the performance we're seeing across the entire enterprise. We started signaling to all of you in July of last year that we felt Medical has turned the corner.

We also talked about AC&Cs, looking like it's going to have a strong Q4, and it did. And right now, we see that momentum continuing into the first half. Semi, we signaled in October that it looks like things are going to pick up.

And as we closed out the year and we started the new year, we certainly started seeing that. And finally, I think industrial has been really very consistent to us, right? It's just a steady eddy sector that we see it gradually picking up as we work our way throughout the quarter.

I want to just shift gears a little bit, just talking about margins. I mean you've done a nice job of delivering 10% gross margins pretty consistently even in a somewhat challenging top line environment.

So I'm just wondering how we should be thinking about gross margins as the top line begins accelerating? Or do you believe that maybe the greater opportunity is going to be driving some OpEx leverage?

Yes. I mean as we look at the top margin, again, like you said, I mean, 10.6% is what we were able to deliver on the gross margin for Q4. And kind of if you look at our range for Q1 when the revenue is down slightly from Q4, I mean, we're still midpoint of 10.2% on that percentage.

So we feel good about how we're tracking at that level. But you're right. I mean, if you look at our operating margin and our ability to deliver on that line, I mean, that's where we see our leverage as we continue to accelerate revenue. I mean we feel we're well positioned and able to utilize kind of our footprint and our actual SG&A. So we feel good about being able to leverage that going out into '26.

It seems to us, obviously, Semi is high-value business for us. So a recovery there helps. But we know -- when we talk about scale in the model, it's as much about -- as much as we grow revenue, our SG&A does not need to grow at the same rate, which drops more to the bottom line.

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

First of all, Jeff, congratulations for some great accomplishments at Benchmark, especially you weren't always got the best macro cars in the world when you joined.

But in terms of some of the comments, I was wondering if you can expand on a couple of comments on end markets. First of all, you said on the industrial business, there's great upside in the TAM available to you.

Can you give us some hints on what you envision sort of how that TAM expanding? And sort of a similar question on space, you mentioned new bookings in space and how that can help the growth. And then I had a couple of follow-ups.

Yes. Sure, Steven. It's David. So let me talk about industrial first around the TAM. So as you could just appreciate the industrial segment is an extremely, extremely broad segment with a broad set of customers out there globally.

And that allows us to really participate in a number of different subsectors. So if you think about the subsectors, you could participate in HVAC, you could participate in transportation, agriculture is an area that we've been successful.

Construction is an area that we've been successful, just name a few, right, building management and so on and so forth. There are a lot of companies out there, whether it's kind of those mid-tier type companies, mid-cap players, all the way to the large big cap guys that we're all familiar with that you would think of them as large broader conglomerates, again, both Western Europe as well as North America.

Shifting gears to space applications. We've talked about this in the prior quarter, and we're excited by the bookings momentum we're seeing in that space. This is going to contribute nicely to our A&D sector.

And we're just starting the early stages of some of the ramps. We expect it to really show itself in 2027. A&D has been really performing well for the last few years, double digits. And this year, we see it moderating, but we see it picking right back up given the bookings momentum that we've had in the space applications.

Great. That's very helpful. And then just a little more perspective I was hoping for on the gross margin. So they expanded to 10.6% from like 10.1% in 1 quarter. And like you said, Semi-Cap was not really contributing from a sales growth standpoint.

So like how many basis points was related to just mix versus just typical volume drop down? And is there anything that stood out in terms of what was positive on the mix side to help the margins?

Yes. There wasn't really anything I would point to on the mix. I mean it was just kind of just the leverage of some of our plants and just overall mix, I guess, across the board. So I wouldn't point to -- I mean, you're right, Semi-Cap was down in the quarter.

But I wouldn't count on that all of a sudden seeing that growth throughout the year and that margin expanding significantly because it's also going to depend on AC&C. We talked about that being at the lower end. So you just got to balance that as you go throughout the year. But...

There is a bit of seasonality in Q1 that depending on where it hits in terms of the demand shift and change that you see it. We don't get quite as much leverage on the top side. But also, if you have sectors that are lower margin overall, that can weigh on it as well. So it's a little bit hard for you to get there because there is a lot of dynamics at play here.

Understood. That's helpful. And just real quick last one. On the Semi-Cap recovery that we could start baking in into our model, like I understand you're seeing it earlier now, but like any help on how -- what kind of slope we should be thinking about at least for now based on what you're hearing from customers?

Right now, we're still working through that, Steven. As I shared, we're feeling really good about it picking up based on some of the forecast adjustments that we're getting from our customers.

So we're going through the process of what can we pull in into the earlier quarters from the back end and how that's going to look for us. We do plan on getting that clarity in the coming weeks, and we'll be providing that update as we get it.

It is kind of ironic that Q4 was soft, and we called it soft going into it. We kind of felt that some of our customers said '26 is going to be great, but we're going to see some softness in closing the year, and it played out as we expected.

It is great to see that snap back I think that's a little bit where there's a little caution in, okay, it's great to see that come back. But what does this look like as you fill in the year? That's what David is talking about.

And your next question comes from the line of Max Michaelis from Lake Street Capital.

Congrats on the quarter as well. I just want to go back to Medical and maybe some of the programs. Can you -- is there any way you can go into a little bit more detail around some of the program wins in Medical?

And then maybe if those -- the momentum continuing into 2026, if those are different style programs, new wins. Can you just help me understand a little bit more about the programs?

Yes, yes. So Max, we've been winning in this space in kind of 2 categories, right? If we think about how we look at Medical, there's categories that we're winning in around med devices. And then there's categories we're winning in life sciences.

So those are the 2 areas that we see continued momentum. Now when we start talking about how is that going to roll into 2027, it is really the momentum of the ramps. We're going to be ramping and we're accelerating the production, and we're also seeing demand pickup from our end customers, the current base customers.

So when you put those 2 together, we're going to have a good FY '26 in Medical. And by the time we get towards second half or later in the year, we should be fully ramped on some of the bookings that we had in 2025, and that's why I commented that, that momentum should continue into 2027.

Okay. And then also another one you can probably help me out with here is when we think about the ramp-up in Semi, I mean, are customers coming to you already and then sort of your mid-2026, back half of 2026 recovery, is that when you start to see some of these orders actually roll through? Or are you guys able to just pretty much scale up as the orders come. I guess help me understand sort of the time line around the ramp-up, I guess, with the return of.

Yes, Max. I think the way to think about it is depending on what the orders then, what type of pull-ins we get, we could respond to it within 1 to 3 months.

So certain orders we were able to accelerate much quicker. And this is not something that catches us by surprise. We've been working with our customers now since last -- late summer of last year, doing capacity planning, doing simulations, really understanding what it could look like.

So in the October earnings call, I had signaled that it feels different this time. It feels like it's real and 2026 is going to be the year that semi finally comes back. And it took about 60 days for the verbal conversations to become something more meaningful.

And now we're sharing that with you that it's becoming more meaningful, and we're going to be looking at it. We're going to see how it plays out. And the orders that are being pulled in, we're going to be working closely with our customers to accelerate those outputs.

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

Congrats on the nice quarter here. Just in Aerospace and Defense, you said you saw some slowdown in Defense before it picks up or...

Hi Anja. So we had really strong run in A&D for the last few years, right? Last couple of years, it's been strong double-digit growth. And you get from time to time, program timing changes, things end of life, new program awards come to play.

And we're seeing that being the case as we are in 2026. That's why we're saying A&D is going to moderate in 2026. We're not saying it's falling apart or anything negative about it. We're just saying it's going to ease, it's going to moderate, and we're going to see it pick back up in 2027. And as I mentioned in my commentary, our commercial air looks good.

It's really more around some timing around some of the defense programs, and we're really, really bullish on the possibilities of space.

And can you remind me your exposure to the commercial air?

So we work with several customers in commercial applications where we build products for them and then they go ahead and integrate it into their products and then finally pass that product along to the likes of Airbus or Boeing, et cetera.

And then within the AC&C, do you expect that to continue to be strong. What kind of visibility do you have there given the rather large projects you have there?

Yes. So we actually expect the first half to continue to look strong. As you could appreciate in the AI space, as our customers win, we see those wins translate into orders for us.

So the visibility is good in the first half, and we're going to continue to work with our customers, and we believe that the second half could potentially fill in, but we're not in a position right now to start signaling that.

These are project-based opportunities, as you mentioned, Anja, and that's why waiting and letting it fill in is really important for us.

And then in terms of the cash cycle days, you had a pretty nice improvement there. How should we -- what are you targeting? How should we think about 2026?

As you mentioned, Anja, and thanks for the question. I mean you look at the improvement we made in Q4 to 67 on the cash conversion cycle days. I mean, we had significant momentum again in our inventory line.

As we look to kind of ramp some of these projects or programs, I mean, we're limiting kind of that, I guess, increase you'll see -- or sorry, stability is what we hope to see on that inventory days tracking right around that 69. I mean we're going to continue to drive that and hopefully get some more momentum.

But we're not counting on a significant amount there. I mean there's other line items there we're going to continue to drive. But I think based on the momentum and what we've done over the last year-over-year with 22 days improvement, I mean, again, we'll continue to drive it, but I mean, don't count on a significant amount.

And then in terms of CapEx, I think you said you expect that to tick up a little bit. What's driving that? And is that expansion in Penang included there? Or have you spent most of that?

No. I mean if you think of kind of the second half of the year that we're going to be kind of getting it operation -- or sorry, the first half and then into Q3 of getting it operational, that's where you'll see some of that tick up associated with that.

But we also have some of the program wins as you think about what you've been hearing here that will require some CapEx within our current footprint. So typically, we say the 1.5% to 2% of CapEx for the year. This may be 2% to 2.5% as you think about this year, just based on some of the things I've said. And again, this is all investment in growth as you think about what we're doing here.

Yes. It sort of goes in hand with the stronger bookings last year and then also the build-out of the fourth building in our -- in the Precision Technology over in Penang.

Congrats, Jeff, on accomplishment at Benchmark.

Thank you Anja.

Thank you Anja.

Thank you Anja.

And there are no further questions at this time. I will now hand the call back to Mr. Jeff Benck for any closing remarks.

Thank you, operator. As I transition out of the CEO role at the end of this quarter, this will be my last earnings call with all of you.

I just wanted to take a moment to express how incredibly proud I am of what we've achieved together over my 7 years leading Benchmark. None of this would have been possible without the dedication of my executive team and the 12,000-plus talented professionals who make Benchmark their home.

During my tenure, we accomplished several milestones that set new records for our company in revenue, margins, earnings and share price. I'm deeply grateful to our investors, the analysts who have covered us and my Board for their unwavering support throughout this journey.

At the end of the quarter, I'll be passing the reins to David, whose capable leadership gives me great confidence that Benchmark's momentum will not only continue, but accelerate. The future is bright, and I look forward to watching this great company reach even greater heights. Thank you all, and throw off for now.

And this concludes today's call. Thank you for participating. You may all disconnect.

Good afternoon, ladies and gentlemen, and welcome to the Benchmark Third Quarter 2025 Earnings Call and Webcast. [Operator Instructions] This call is being recorded on November 4, 2025. And I would now like to turn the conference over to Paul Mansky.

Thank you. Please go ahead.

Thank you, Ina, and thanks, everyone, for joining us today for Benchmark's third quarter 2025 earnings call. With us today are Jeff Benck, our CEO; David Moezidis, our President and Chief Commercial Officer; and Bryan Schumaker, our CFO. After the market closed, we issued an earnings release pertaining to our financial performance for the third quarter ending September 2025, and we have prepared a presentation, which we will reference on this call. Both the press release and presentation are available under the Investor Relations section of our website at bench.com. This call is being webcast live and a replay of which will be available on our website 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 include 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, Jeff will start with an overview, followed by Bryan's detail of our Q3 results and forward guidance. We will then turn the call over to David to discuss demand trends by sector and some additional color on recent wins. Jeff will conclude with some final remarks before opening the call for Q&A.

If you'll please turn to Slide 4, I'll turn the call over to our CEO, Jeff Benck.

Thank you, Paul. Good afternoon, and thanks, everyone, for joining today's call. Before I get started, I would like to remind everyone of a press release we issued in early September, detailing our succession planning at Benchmark, in which we announced that David Moezidis has been promoted to President and will be the next Benchmark CEO effective March 31, 2026, upon my retirement. I'm confident in the Board's decision and believe he's the right successor as we embark on the next phase of the company's growth. Congratulations again, David.

Now onto our third quarter 2025 results, which again demonstrated our consistent execution. Revenue of $681 million showed a return to year-over-year growth, with non-GAAP EPS of $0.62. Both revenue and earnings were at the high end of our prior guidance. Q3 represented the eighth consecutive quarter of 10% or greater gross margin. As we'll discuss momentarily, I was particularly encouraged by the broadening of sectors that contributed to our revenue growth. We expect this trend to continue in the fourth quarter, where we anticipate improving year-over-year growth.

Turning to Slide 5 for highlights in the quarter, mapped to our strategic objectives. During the quarter, we saw double-digit year-over-year growth in both medical and A&D and sequential growth in 4 of our 5 sectors. Semi-cap was the exception where we saw some softening in demand from our OEMs due to increased China restrictions and the evolving tariff environment. Meanwhile, we continue to book new program wins in this sector, which David will speak to later in the call. Our reacceleration of revenue has been supported by solid momentum through the year in new bookings. The third quarter was a continuation of the same, including strategic customer wins in both engineering and manufacturing.

Turning to financial discipline. The entire team remains focused on working capital management and improving our inventory turns, the result of which was a multiyear record cash cycle quarter. Coupled with our net income performance, we generated $25 million in free cash flow, which adds up to greater than $74 million generated over the last 12 months. We're doing this while continuing to invest in the business, including the construction of our new 4th PT building in Penang, Malaysia. I might add that while we're investing abroad, our Americas manufacturing footprint is still approximately 50% of our total capacity, which is a key differentiator as more customers look to build domestically, or at least increase their exposure to U.S. manufacturing production.

I'll now turn the call over to Bryan to discuss our third quarter results in more detail and provide our fourth quarter outlook. Bryan, over to you.

Thank you, Jeff, and good afternoon, everyone. Please turn to Slide 6. Revenue in the quarter of $681 million was up 6% sequentially and at the high end of prior guidance. Our non-GAAP EPS was $0.62 at the high point of prior guidance of $0.56 to $0.62. As a reminder, our non-GAAP results exclude stock-based compensation, amortization of intangible assets, restructuring, and other expenses. For Q3, our non-GAAP gross margin was 10.1%, down 10 basis points sequentially and year-over-year due to mix. Non-GAAP operating margin was 4.8%, up 10 basis points sequentially, driven by our ability to leverage our cost basis on higher revenue. Our third quarter non-GAAP effective tax rate was 24.5%.

Please turn to Slide 7 for our third quarter 2025 revenue performance by sector. AC&C revenue was up 18% quarter-over-quarter, while down year-over-year. In medical, revenue was up 15% versus the prior quarter and 18% year-over-year. Industrial revenue was up 8% quarter-over-quarter and 1% year-over-year. In A&D, revenue was up 2% quarter-over-quarter and 26% year-over-year. Finally, semi-cap revenue decreased 3% quarter-over-quarter and 1% year-over-year.

Please turn to Slide 8 for trended non-GAAP financials. Q3 revenue was up compared to prior quarters, and we have consistently delivered non-GAAP gross margin of 10% or more. Please refer to Slides 9 and 10 for a discussion of our balance sheet, cash flow, and working capital trends. In Q3, we generated $37 million in operating cash flow and $25 million in free cash flow. Our cash balance on September 30 was $286 million, an increase of $21 million from Q2. As of September 30, we had $149 million outstanding on our term loan and $70 million outstanding against our revolver, from which we have $476 million available to borrow. Our Q3 2025 liquidity ratio, as calculated by our debt covenant, was 0.2x, down from 0.7x in the prior year period.

We invested approximately $11 million in capital expenditures during the quarter, primarily to enhance capabilities and infrastructure at our Americas and Asia facilities, supporting long-term growth and operational efficiency. Demonstrating our ongoing commitment to return value to shareholders, we distributed cash dividends of $6 million and repurchased $10 million in stock during the quarter. At the end of the quarter, we had approximately $124 million remaining in our existing share repurchase authorization.

Our cash conversion cycle in the quarter was 77 days, improving 8 and 13 sequentially and year-over-year, respectively. Inventory days were down 8 sequentially as we continue to actively manage our inventory as we grew the top line. This focus translated into inventory turns of 4.8 in the quarter.

Please advance to Slide 11. Let me now turn to our guidance for our fourth quarter of 2025. We expect revenue to be within a range of $670 million to $720 million, up mid-single digits year-over-year at the midpoint. We expect non-GAAP gross margin to be between 10.1% and 10.3%. With those assumptions, we would expect non-GAAP operating margin to be between 5% and 5.2%. On a GAAP basis, we expect expenses to include approximately $2.3 million of stock-based compensation and $4.9 million to $5.3 million of nonoperating expenses, including amortization, restructuring, and other charges. Our non-GAAP diluted earnings per share is expected to be in the range of $0.62 to $0.68. Interest and other expenses are expected to be approximately $4.3 million. We expect our Q3 effective tax rate will be between 24% and 25%. Our weighted average share count is expected to be approximately 36.2 million.

With that, I would like to turn the call over to David to discuss market sector performance and outlook. David?

Thank you, Bryan, and hello, everyone. Let's please turn to Slide 12 for a discussion of our performance and outlook by sector. I'm pleased to share that we had another terrific quarter of meaningful bookings. Our go-to-market strategy and our breadth of capabilities in all geographies differentiate us well in the market.

Let's turn to some of them. First, our AC&C revenue performed better than initially expected in the third quarter. While we were down year-over-year, we saw strong sequential growth aided by improvements in both advanced computing and communications. During the quarter, we had several bookings, one in engineering and in EMS, a notable award for a security appliance program. To summarize our outlook on AC&C, we have much improved visibility into a return to growth as a result of our AI wins that are starting to ramp in Q4 and into 2026, coupled with HPC builds over the coming quarters.

Turning to medical. As I shared on our July call, we believe we've turned the corner in the first half of the year as our customers' channel inventory normalized and end demand improved. At the same time, we have been ramping new products from prior bookings reported earlier in the year. In the quarter, this translated to a return to revenue growth in the teens, both sequentially and year-over-year. These same dynamics lead us to expect sequential and year-over-year growth to continue in the fourth quarter. Longer term, I continue to be encouraged by our traction in the medtech subsector, which has been growing for several quarters now. In fact, medtech delivered a few large engineering wins in the quarter across more than just one customer. We view engineering as an excellent on-ramp to potential follow-on manufacturing wins.

Our industrial sector revenue performance was up high-single digits sequentially but flat year-over-year. This was consistent with the expectations we provided on the last quarter's call, which calls for strengthening throughout the balance of the year. We continue to see that being the case with a return to year-over-year growth expected in the December quarter. I was pleased by the industrial sector's bookings this past quarter, which included a number of manufacturing wins in the transportation subsector as well as design work in surveillance and detection. Looking forward, we view industrial as representing a substantial source of future upside for us, both as a function of expanding our base business as well as adding new market-leading customers.

Moving to A&D. We had another strong double-digit year-over-year revenue performance in the quarter and expect solid year-over-year revenue growth in Q4. This is driven by stability in commercial air, while defense demand remains strong. Meanwhile, our satellite and space business continues its impressive ramp, which has seen bookings momentum steadily building throughout the year. In the third quarter, we saw a significant step up, which I'm excited to say included a couple of very substantial manufacturing wins. Our broad exposure across growth subsectors in A&D, coupled with ongoing new business momentum, provides us with confidence in the sector.

Finally, in semi-cap, September quarter revenue was roughly flat as expected as new program ramps were offset by near-term industry challenges and cyclical recovery. Although semi-cap demand is taking longer to ramp than traditional cycles, the multiyear growth catalysts are evident everywhere, from incremental AI-related demand to increased silicon content in everyday products to daily announcements of new fabs being planned. Throughout, our commitment to this sector is unwavering, evidenced by our capacity expansion, both domestically and in Malaysia. This commitment resonates with our customers, as every quarter, we see program expansion wins spanning both across precision machining and engineering. Although, near-term demand signals remain mixed, looking a bit further out, our conversations with customers point to signs of strengthening in the second half of 2026, with the potential of acceleration as the year progresses. In summary, as you can tell, some very exciting things are going on across each of our market sectors. I look forward to updating you on our progress in the coming quarters.

With that, I'd like to turn the call back over to Jeff for his closing remarks. Jeff?

Thanks, David. Please turn to Slide 13. I firmly believe Benchmark is at one of the most compelling points in the company's history. Over the last 90 days, I've traveled around the world visiting some of our top customers, and I'm both impressed with and grateful for the depth and breadth of the strategic partnerships my team and I have established over the last 7 years. At the same time, I visited many of our facilities in North America, Thailand, Malaysia, Romania, and the Netherlands, where our site teams are executing well and focused on customer satisfaction, driving further efficiencies and providing a safe work environment for our employees. We've also built a commercial organization designed to complement our site teams and accelerate our business development efforts.

Our unique value proposition and customer-centric approach is clearly resonating and our bookings momentum with existing customers and new competitive takeaways is proving the point. Our diversified portfolio in 5 high-value sectors better enables us to successfully navigate market fluctuations. As we've progressed through the first 3 quarters of 2025, we've achieved a return to sequential growth. And now with our third quarter results and 4Q guide, we return to year-over-year growth. As we've improved our business fundamentals, incremental growth in 2026 will enable us to demonstrate leverage in our model that will enable us to grow earnings faster than revenue. Throughout, we will continue to prudently manage our spending to balance growth, profitability, and cash generation, while at the same time, returning capital to shareholders.

With that, I'll now turn the call over to the operator to conduct our Q&A session.

[Operator Instructions] And your first question comes from the line of Steven Fox from Fox Advisors.

A couple of questions, if I could. First of all, on the high-performance compute comments, I know that those programs at times have been quite sizable. Can you maybe just characterize them? And I guess we're talking about sometime mid-to-late '26 to see revenues from what you're talking about.

Yes. I think we talked about on the script about a few things. We certainly have seen traditionally with our high-performance computing, working on 3 of the top 5 [ supercomputers ] in the world. Those are really large projects, and they can last for multi-quarters. But, they tend to be -- they have a fixed duration that goes on and then ends. We are working on some new solutions that will go into some of the large government installations with our customers, and we expect that we'll start to see work on those in '26. Some of that will even move into '27.

But one of the things, Steve, we talked about as well on the call is that, that capability for those large platforms and the water-cooled infrastructure that we have supporting that is also enabling us to play more directly in some of the AI opportunities. And so, while we're not really looking at the cloud, what you would say, the model builders or necessarily the cloud infrastructure guys, we are looking at the sovereign AI and enterprise AI opportunities and see an opportunity to participate there, which is what we talked about starting from this quarter and ramping into '26.

And then just on the semi-cap comments. We've heard from a number of companies that have been talking about customers pointing to the second half of '26. I was wondering if you could address the probability, the time line, why it can happen. And secondly, you did mention some of your advanced machining capabilities pulling down some wins. I wonder if that was more or less momentum or anything else you could say about what's going on with machining in terms of winning programs.

Steven, I'll take that one. This is David. Let me start by our view of the second half. It really has a lot to do with the customer conversations that we've had. As you're probably aware, SEMICON was here. The show was in Phoenix a few weeks ago, and we had the opportunity to sit down with pretty much all of our customers, and then we had some follow-up sessions after that as well. And for the most part, there was a lot more optimism exuded in the conversations than I would say in prior years. And there was more dialog around what we're doing to position ourselves and prepare ourselves for the liftoff. So that's why we thought it's important to point out that there's indications -- positive indications that this is going to pick up in the second half of 2026.

For the second part of your question around precision machining and our continued wins in that space, I'd say the fact that we've made these significant investments, particularly in Penang, Malaysia, has really served us well. A lot of our customers are looking at their supply chain and looking to partners like us to provide them with alternate solutions, particularly in low-cost locations. We're in a terrific position to be able to do that. And as Jeff mentioned, we are investing in PT 4, which further positions us to expand in this space.

Congrats, David, on your appointment as well.

Thank you. And your next question comes from the line of Max Michaelis from Lake Street Capital Market.

I want to go back to the A&D space. Looking at the space award, can you remind me, is this your second award? And then as well, maybe along with the A&D space, is there any other subsectors, niche areas of A&D that you're also seeing green shoots from similar to space?

I'll address that. This is David. The one that we've been really bullish on and we've been calling out it has been in the space and communication arena. And this is somewhat of a 1-2 combination. We won some business in the prior period, and we won some more incremental business in the current period. So that's somewhat -- some of the elements we're talking about step up in our confidence in this space.

I also might just add that we -- while space has been particularly stronger for us and our work there, we also just continue to see the defense side of the business do well. So obviously, defense spending is pretty -- is increasing, particularly in Europe, as well as maintaining the level in the Americas. So that really has underpinned the strength. And then adding to that, some of this new space is -- those 2 are probably outdriving growth over traditional commercial air for us.

And then last one for me, just around AI. Have you guys thought about what the enterprise AI and some of these large programs that you're ramping up next year, what AI could be as a percentage of revenue of the AC&C business?

Yes. We, have talked about it. And certainly, we're looking at forecasts. I think we just want to get a bit further into it before we really try to put an estimate on it, just because the timing is not always exactly defined in terms of the ramp. We know there's a lot of demand there. But because we're not really focused on the hyperscalers, but supporting more of the commercial and enterprise kind of opportunities, I think, that is staged a little bit later than some of these huge buildouts that we've seen right now.

And then the sovereign AI, you have seen governments say, look, we don't want to rely on everything just in the cloud. And we're excited about that opportunity as well. We're talking about it because it can be meaningful, but I think it's a little early. I'd like to see us ramp it a couple of quarters and be able to give you more color. So I would say, hang tight and as we get into '26, we'll try to give you a little more visibility.

[Operator Instructions] Your next question comes from the line of Jim Ricchiuti from Needham.

You may have touched on this. I apologize. I joined the call a little late, but I'm wondering if customers in any of your verticals that have exposure to the government have expressed any concerns or seeing any delays at all related to the government shutdown.

Jim, this is David. We've actually seen minimal impact in the shutdown affecting our customers. We've got long-range contracts. And as a result of that, it's really not being felt by us. So that's really the short answer.

Although that being said, we'd love to see it come to an end just because the knock-on effects of going longer, there's probably some inevitability that somewhere we may see something. But we're fortunate, to this point, as David said, we really aren't seeing an impact yet.

And then maybe switching gears over to the medical. Some of the supply chain and industry players in this vertical, I think, have called out the fits and starts in the medical market over the past year. I'm just wondering how you're seeing demand as you look out into 2026. Have we seen the inventory levels get burned down? Are you just a little bit more confident about the momentum and the recovery in this part of the business?

Yes. It's, David again. Look, I think there's 2 parts to the answer. One is -- and I mentioned this in the July call, and I perhaps exuded some bullishness as a result of it, where I mentioned that we feel that we've turned the corner as the inventories were starting to clear up in our customers' channels. And certainly, that's proving to be right. And we've seen pretty good growth in Q3, and we're projecting that growth to continue into Q4 and 2026.

But let me talk about the other side of the equation. On our July call, I had also mentioned that we won a competitive takeaway, which was a lift and shift. And the reason why I emphasize the word lift and shift, in medical, when you get a lift and shift when the time to revenue is certainly faster than when you win something ground up, and the ground-up opportunity could take 18 to 24 months or longer for it to hit volume. But when you do a lift and shift competitive takeaway, it moves a lot faster. And the compliment goes to our engineering and our operations team for coming up with a world-class automation solution in this particular award.

David, thanks for the reminder on that. And by the way, I wish you best of luck. You as well, Jeff.

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

A lot has been covered already. But nice work on the cash cycle. Is there more room for improvement there? Or how should we think about cash conversion?

Yes, you're right. We've made significant progress if you look over the last couple of quarters, especially in the inventory. And it started off at 89 days in Q1, went down to 83 days in Q2, and now in Q3 hit 75. So yes, we've had a lot of focus on that, working with advanced planning, global procurement excellence, working with customer engagement, supplier collaboration, lean manufacturing. So we feel good about where we're going with this. We may see some bumps depending on the growth side of it. But as you saw this quarter, we've been able to manage through that and feel good about our position. So we're at 4.8 turns right now. Again, we've always talked about the 5.5 moving in that direction. So we feel good about the continued momentum there.

And then how should we think about CapEx spend for 2026? Do you expect that to accelerate over this year or...

Yes. It's probably up some from this year. If you look at finishing up PT 4, continue to invest in our factories, both on the automation front and some other things to continue to improve the performance out of the factories. And then also, as you think about some of the growth that David and Jeff have been talking about, we may experience some additional there. So it won't be significant, but it is moving towards that top end of 2% probably.

Yes, definitely growth driven as we have a number of large wins that won't be so much more facilities related other than the PT4 finish that Bryan talked about, but just incremental equipment in the facilities to support some of the revenue growth. I could anticipate seeing a tick up there.

Operator, are there any other questions?

No further questions at this time. I will now hand the call back to Mr. Paul Mansky for any closing remarks.

Thank you, Ina, and thank you, everyone, for participating in Benchmark's Third Quarter 2025 Earnings Call. For updates to upcoming investor conferences and events, including a replay of this call, please refer to the Events section of the IR website at ir.bench.com. With that, we thank you again for your support and look forward to speaking with you soon. Have a good evening.

And this concludes today's call. Thank you for participating. You may all disconnect.