Executive Summary / Key Takeaways

• Benchmark Electronics (BHE) is a specialized electronics manufacturing services (EMS) provider focused on high-complexity, regulated markets like Semi-Cap, A&D, and Medical, leveraging integrated design, engineering, and manufacturing capabilities.
• Despite a challenging Q1 2025 with a 6% year-over-year revenue decline to $631.8 million, driven by softness in Medical and AC&C, the company maintained a stable 10.0% non-GAAP gross margin, demonstrating operational discipline.
• Strategic investments in capacity expansion in key regions (Penang, Mexico, Romania) and differentiated technological capabilities (precision technology, liquid cooling, RF solutions) are enabling share gains, particularly in Semi-Cap (+18% YoY in Q1) and A&D (+15% YoY in Q1), and positioning BHE for future growth.
• Strong free cash flow generation continued in Q1 2025 ($27 million), supported by ongoing working capital efficiency efforts, providing financial flexibility for strategic investments, debt reduction, and capital return (dividends, share repurchases).
• Management anticipates a return to year-over-year revenue growth in the second half of 2025, driven by expected market recoveries and the ramp-up of new program wins, projecting sequential growth throughout the balance of the year, barring significant tariff-induced recession.

A Foundation Built on Complexity and Precision

Benchmark Electronics, Inc. has carved out a distinct position in the competitive electronics manufacturing services (EMS) landscape since its founding in 1979. Rather than pursuing high-volume, low-mix consumer electronics, BHE strategically focuses on providing advanced manufacturing services, including integrated design, engineering, and technology solutions, for complex, highly regulated markets. This includes sectors such as Semiconductor Capital Equipment (Semi-Cap), Commercial Aerospace and Defense (A&D), Medical Technologies, Industrial, and Advanced Computing and Communications (AC&C).

This deliberate focus on complexity is central to BHE's value proposition and competitive strategy. The company positions itself as a trusted partner, engaging with customers from initial product concept through volume production, offering capabilities like printed circuit board assemblies (PCBAs), complex subsystem to full system build and integration, and specialized Precision Technology (PT) services such as precision machining and advanced metal joining. A key differentiator lies in its Design Engineering Services, providing everything from design for manufacturability to turnkey product design and regulatory support. This integrated approach, coupled with specialized technical capabilities in areas like high-frequency RF solutions, microelectronics, optics, miniaturization, and complex computer system assembly (including expertise in water-cooled infrastructure for high-performance computing), enables BHE to offer accelerated time-to-market and time-to-volume for high-reliability products.

BHE's strategic investments in geographically diverse manufacturing locations across the Americas (United States and Mexico), Asia, and Europe are designed to support its global customer base and facilitate regional production closer to consumption. With a significant U.S. manufacturing footprint (36% of total capacity) and a broader North American presence (over 55%), the company is particularly well-positioned to assist customers with supply chain optimization, regionalization, and nearshoring/reshoring initiatives, a growing trend amplified by recent geopolitical and trade dynamics. Recent capacity expansions include a new facility in Guadalajara, Mexico, which came online at the end of 2024, doubling capacity in Romania, and breaking ground on a fourth building in Penang, Malaysia in Q1 2025, aimed at enhancing vertical integration and supporting Semi-Cap growth.

Competitive Positioning in the High-Mix, Low-Volume Arena

In the EMS industry, BHE competes with a range of players, from large global giants like Flex (FLEX) and Jabil (JBL) to more specialized firms like Sanmina (SANM) and Plexus (PLXS). While larger competitors often leverage scale for cost advantages and broader market reach, BHE differentiates itself through its deep expertise in high-complexity, highly regulated niches and its integrated design-to-manufacturing capabilities.

Compared to Flex and Jabil, which have significantly larger revenue bases and broader market exposure, BHE's focus allows it to achieve higher margins within its specific segments. For instance, BHE's TTM Gross Profit Margin stands at 10.09%, comparing favorably to Flex's 8% (2025) and Jabil's 9% (2024), and its TTM Operating Profit Margin of 3.68% is competitive with Sanmina's 4% (2024) and Plexus's 4% (2024), though trailing Jabil's 7% (2024) and Flex's 5% (2025). BHE's strategic emphasis on engineering content and precision technology contributes to this margin profile, allowing for potentially higher pricing power in specialized applications.

BHE's competitive advantages are particularly evident in sectors like Semi-Cap and A&D, where its technical capabilities and focus on reliability are critical. The company's ability to secure competitive takeaways and grow share, as seen in its Q1 2025 Semi-Cap performance (+18% YoY) compared to a broader market growth rate recently estimated around 3%, underscores its strong positioning in this niche. Similarly, the robust growth in A&D (+15% YoY in Q1 2025) reflects both strong market demand and BHE's ability to capture opportunities through existing program expansion and new wins, including in the growing space subsector.

However, BHE's smaller scale relative to industry leaders can present challenges, potentially leading to higher operating costs per unit in certain areas compared to the most scaled competitors. Supply chain risks, while easing generally, can still impact BHE, although its diversified global footprint and proactive management, including seeking advance payments from customers, help mitigate some of these vulnerabilities. The company's strategy to evaluate tuck-in M&A opportunities is aimed at enhancing capabilities in high-value areas within its existing sectors, further strengthening its competitive moat without diluting its focus.

Operational Execution and Financial Performance

Benchmark's financial performance in the first quarter of 2025 reflected the mixed demand environment and ongoing strategic adjustments. Revenue for the quarter was $631.8 million, a 6% decrease compared to $675.6 million in Q1 2024. This decline was primarily attributable to significant softness in the AC&C sector (-50% YoY), impacted by customer disengagement and program timing delays, and a decrease in Medical revenue (-10% YoY) due to inventory rebalancing and end-demand weakness.

Despite the top-line pressure, BHE demonstrated resilience in profitability. The non-GAAP gross profit margin remained flat year-over-year at 10.0%, marking the sixth consecutive quarter of achieving a double-digit non-GAAP gross margin. This stability highlights the effectiveness of the company's operational focus, cost control initiatives, and favorable revenue mix stemming from its high-value sector strategy. However, the decrease in revenue, coupled with increased selling, general, and administrative (SG&A) expenses (up to $38.8 million from $37.3 million in Q1 2024, partly due to higher stock-based compensation) and significant restructuring charges and other costs ($11.4 million in Q1 2025 vs. $3.3 million in Q1 2024, including a $10.1 million tax assessment settlement in the Americas), led to a notable decrease in income from operations, falling to $11.8 million from $25.5 million in Q1 2024.

Segment operating performance was varied. The Americas segment reported an operating loss of $4.4 million in Q1 2025, down significantly from income of $10.2 million in Q1 2024, primarily due to lower revenue and the impact of the tax assessment settlement. In contrast, the Asia segment saw operating income increase by 14% to $38.6 million, driven by higher revenue and effective cost control. Europe also delivered strong operating income growth, up 18% to $8.0 million, benefiting from higher revenue and cost management.

Net income for Q1 2025 was $3.6 million, or $0.10 per diluted share, a substantial decrease from $14.0 million, or $0.38 per diluted share, in Q1 2024. The effective income tax rate also increased significantly to 56.6% in Q1 2025 from 26.7% in Q1 2024, primarily due to the mix of profits in various jurisdictions and losses in a jurisdiction where no tax benefit could be recognized, partially offset by foreign tax incentives.

Financially, BHE continues to prioritize liquidity and capital efficiency. The company generated $31.5 million in operating cash flow and $27 million in free cash flow in Q1 2025, marking the eighth consecutive quarter of positive free cash flow. This performance is supported by ongoing efforts to optimize working capital, including driving inventory turns higher (currently around 4 turns, with a target closer to 5). As of March 31, 2025, BHE held $355.3 million in cash and cash equivalents and maintained significant borrowing availability ($390.6 million) under its revolving credit facility, remaining in compliance with all debt covenants. The company continues to return capital to shareholders, paying $6.1 million in dividends and repurchasing $8.0 million of stock in Q1 2025, with $141.5 million remaining under its share repurchase authorization.

Outlook and Future Growth Trajectory

Looking ahead, Benchmark's management anticipates a gradual improvement in the demand environment throughout 2025, leading to a return to year-over-year revenue growth in the second half of the year. While the first half of 2025 is expected to see a mid-single-digit year-over-year revenue decline, the second half is projected to grow at a mid-single-digit pace year-over-year, with sequential growth expected throughout the balance of the year, barring significant tariff-induced recession.

For the second quarter of 2025, BHE guided revenue to a range of $615 million to $665 million. Non-GAAP gross margin is expected to remain consistent at 10.2% to 10.4%, and non-GAAP operating margin is projected between 4.8% and 4.9%. Non-GAAP diluted earnings per share is guided to be in the range of $0.52 to $0.58. This guidance reflects continued operational discipline amidst ongoing market volatility and the impact of specific, non-recurring items like the tax assessment settlement and the final 2017 transition tax payment, which will negatively impact Q2 cash flow.

Growth in the second half of 2025 is expected to be driven by continued strength and share gains in Semi-Cap and A&D, coupled with anticipated recoveries in the Medical and AC&C sectors. Management is particularly optimistic about the Medical sector returning to year-on-year growth in the second half of 2025 as customer inventory rebalancing subsides and new program wins ramp up. Similarly, AC&C is expected to see a return to growth as early as Q4 2025, contingent on the successful ramp of new product introductions, including a new 5G wireless transport family and next-generation HPC platforms. The Industrial sector, while currently soft, is showing strong bookings momentum that is expected to translate into future revenue growth.

Strategic investments in capacity and capabilities are foundational to this growth outlook. The new Penang facility, expected to be fully online in 2026 with significant investment in 2025 ($60 million to $70 million in CapEx over the next 12 months), will enhance BHE's ability to capture opportunities in Semi-Cap and potentially other sectors. The expanded footprint in Mexico and Romania also positions the company to benefit from regionalization trends.

Risks and Considerations

Despite the positive outlook for the second half of 2025, several risks could impact Benchmark's performance. Tariff-related market uncertainty remains a significant concern, potentially causing customer decision delays or shifts in demand depending on executive orders. Geopolitical instability and trade restrictions could further disrupt supply chains or impact demand in specific regions or sectors. While supply chain constraints have generally eased, shortages of older semiconductor technologies could still limit production capacity.

Customer concentration is another inherent risk, with sales to the top ten customers representing 54% of total sales in Q1 2025. The loss of a major customer or adverse developments impacting their business could materially affect BHE's results. The Medical sector recovery has taken longer than anticipated, and further delays could impact the timing of the expected second-half growth. Similarly, the ramp-up of new programs in AC&C is subject to customer timelines and execution risks.

Fluctuations in foreign currency exchange rates and interest rates also pose market risks, although the company utilizes hedging strategies to mitigate some of this exposure. The settlement of the Mexico tax assessment, while resolved, highlights the potential for unexpected costs arising from legal or regulatory matters.

Conclusion

Benchmark Electronics is navigating a dynamic market environment by leveraging its core strengths in high-complexity manufacturing, specialized engineering, and strategic global footprint. Despite facing near-term revenue headwinds in certain sectors, the company has demonstrated consistent operational execution, maintaining strong gross margins and generating robust free cash flow.

The strategic focus on regulated markets like Semi-Cap and A&D is yielding tangible results in the form of share gains and double-digit growth, even as broader market conditions remain mixed. Investments in new capacity and differentiated technological capabilities, such as precision technology and liquid cooling expertise, are positioning BHE to capitalize on anticipated market recoveries, outsourcing trends, and regionalization opportunities. While challenges persist in Medical and AC&C, management's outlook points to a return to overall year-over-year growth in the second half of 2025, driven by ramping new programs and expected demand improvements.

For investors, BHE represents an opportunity to invest in a resilient EMS provider with a differentiated strategy focused on high-value niches. The company's financial discipline, evidenced by strong cash flow generation and a commitment to returning capital, provides a solid foundation. While macroeconomic uncertainties and sector-specific challenges warrant careful monitoring, BHE's strategic positioning and investments suggest potential for earnings growth to outpace revenue growth as market conditions improve, making it a compelling consideration for those seeking exposure to the complex electronics manufacturing space.