Plexus Corp (PLXS) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Plexus Corp. conference call regarding its third fiscal quarter 2008 earnings announcement. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call for questions. The conference call is scheduled to last approximately one hour.

I would now like to turn the call over to Mr. Angelo Ninivaggi, Plexus Vice President, General Counsel, and Secretary. Sir, you may begin.

Thank you. Hello, everyone, and thank you for joining us this morning. Before we begin, I would like to establish that statements made during this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in protecting future results and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of major factors that could cause actual results to differ materially from those projected, please refer to the Company's periodic SEC filings, particularly the risk factors in our most recent Form 10-Q filing. The Company provides non-GAAP supplemental information, including earnings and EPS, excluding restructuring costs, charges for the impairment of goodwill and other long-lived assets and adjustments to the valuation on the allowance for the deferred tax assets. The Company also provides supplemental information on return on invested capital in comparison to excluding our large unnamed defense customer. For a full reconciliation of non-GAAP supplemental information, please refer to yesterday's press release and our periodic SEC filings.

Joining me this morning are Dean Foate, President and Chief Executive Officer of Plexus; and Ginger Jones, Vice President and Chief Financial Officer. We will begin today's call with Dean making some comments about the third quarter and the outlook for Q4. Ginger will follow-up with details on the financials and we'll then open the call up to questions. Please limit your questions to one question and one follow-up. Let me now turn the call over to Dean Foate. Dean?

Thank you, Angelo, and thanks for joining us, everyone, this morning. Last night we reported results for fiscal third quarter 2008. Revenues were $456 million with GAAP EPS of $0.41. Revenues surpassed our guidance range, while earnings were at the high end of our guidance range. Third quarter revenues grew a modest 1% sequentially from our second fiscal quarter. Our wire line networking sector and our medical sectors were stronger than anticipated and offset modest weakness in our industrial commercial sector and a significant, but anticipated $26 million reduction in revenue from our large episodic defense program.

It is important to note that excluding the episodic defense program, revenue grew a very healthy 7.3% sequentially from Q2 to Q3. Now for a few details about our revenues by market sector in the third quarter and our outlook for the fourth quarter. Our wire line networking sector experienced strong 12% sequential growth in our third fiscal quarter, even better than our expectations for solid performance as six of our top ten customers beat earlier forecasts. We currently expect high single-digit growth in our wire line networking sector in the fourth quarter, although we currently expect mixed performance among our leading accounts. Our wireless infrastructure sector was down modestly this quarter, in line with expectations. We currently expect strong performance in Q4, as a couple of customers are indicating approved, but perhaps lumpy demand. Our medical sector performed much better than our expectations in the third quarter, as our largest medical accounts beat earlier forecasts. The sectors revenue was up about 8% sequentially. Earlier forecasts indicated revenues would be flat to a modest sequential decline. We currently anticipate that our medical sector would be down sequentially in Q4 in the mid single-digit percentage range due to inventory build at two larger accounts.

The overall performance of our industrial commercial sector was a little softer than expected, down approximately 3% sequentially in Q3. Examining the top 15 customers, the demand bias was clearly soft, as nine of the 15 missed earlier forecasts. Looking ahead to Q4, we currently anticipate flat to modest growth. Revenues in our defense/security/aerospace sector declined sharply in Q3, down 43% as expected, driven by a $26 million sequential reduction in revenue from our previously large, but still episodic defense account. The revenue for this account was just under $1 million in Q3.

Looking to our fourth quarter, we currently expect sequential revenue growth of approximately 26% for a defense/security/aerospace sector due to strength from three of our key accounts, including our episodic defense account. As you may recall, in our June 17, investor day press release, we announced that we received follow-on purchase order for approximately $5 million of additional production for this account that we expected to produce and ship during Q4, and that we are aware of potential, but unconfirmed orders of approximately $17 million of additional product.

Now, having reviewed that history, here's the latest for our episodic defense account. We now anticipate that we'll produce and ship approximately $3 million of product in Q4 of fiscal 2008. Looking ahead to fiscal 2009, we have approximately $25 million of revenue included in our full year forecast, $19 million of the forecast is confirmed purchase orders. The balance is high probability follow-on orders.

Turning now to new business wins, we won 15 significant new manufacturing programs, which in the aggregate will add approximately $108 million of annualized incremental revenue as they rarmp their production primarily during fiscal 2009. 11 of the 15 programs increased our share with current customers, included some incremental business for our facility in Mexico. The balance of the manufacturing wins were new accounts targeted by our sector teams. Our overall funnel of manufacturing opportunities continues to be strong at just under $1.8 billion of qualified new business. Our funnel is nicely balanced across our targeted market sectors. On the engineering services front, we won approximately $17 million of engineering services business in the quarter, with about 80% of the total in our medical sector.

Overall demand for engineering services has held up well over the last few quarters, while opportunities continue to exist in the near-term, it appears customers are more closely watching their R&D spend as they enter the second half of calendar 2008. We are a little cautious, as we have seen a few programs delayed or canceled.

Addressing capacity utilization and global growth, as expected, our as tooled capacity utilization was at a healthy level in Q3, at approximately 82% overall. As we look forward, we continue to anticipate further investments and adjustments to our global footprint. As part of our strategic planning process, our sector teams help our operating leaders plan and project the future needs of global capacity and capabilities to support our customers' needs over the next several years. The value proposition of each of our sites undergoes healthy scrutiny so that we can make proactive investments and adjustments to our footprint. The outcome of this process is evidenced by recent announcements.

First, in the US, we recently announced that our San Jose area facility would relocate to a larger facility, and we showcased our expanded Chicago area facility at our investor day in June. We are also pleased to report that our Boise facility has attained ISO 13485 certification to support the growth of medical products manufacturing. Demand for certain services in the US remains high and all of our US sites are currently achieving high marks for execution and financial performance. However, in light of the longer-term trends of our business, we are carefully evaluating the longer-term viability of each US location.

Second, in Mexico, while our Mexico facility has struggled to achieve our financial objectives in recent years, for reasons that we have covered previously, the site has since significantly enhanced its capabilities and approved its execution. Our sector teams are increasingly confident that the long-term value proposition of this site is strategically important to our customer barks as evidenced by recent program wins and an improving new business development funnel. Third, in Asia, our previously announced capacity additions in Penang, Malaysia and Xiamen, China continue to track according to plans and we are evaluating further capacity investments in China, which we hope to announce soon. Finally in, Europe, we are making progress on our strategic assessment of market entry alternatives in Central and Eastern Europe, and we hope to add clarity to this effort in the coming fiscal year.

Turning now to our guidance, we currently expect our fiscal 2008 fourth quarter revenue to be in the range of 470 million to $490 million, with EPS excluding any restructuring charges in the range of $0.42 to $0.46 which includes approximately $0.05 cents per share of stock-based compensation expense.

In summary, our revenue guidance for Q4 is up approximately 5% sequentially at the midpoint, which we currently anticipate will be primarily driven by continuing strength in our wire line networking sector, a lumpy uptick in our wireless sector, and growth in our defense/security/ aerospace sector, offsetting what currently appears to be a one-quarter pullback in demand in our medical sector. Our fourth quarter revenue guidance implies that our full fiscal year revenue for 2008, which is all organic, will exceed 19% at the midpoint of our guidance, which would be an outstanding result in a challenging macroeconomic environment. With that, I would like to turn the call over to Ginger to discuss the numbers in further detail. Ginger?

Thank you, Dean, and good morning, everyone. As Dean mentioned earlier in the call, revenue was slightly above the top end of our guidance range and EPS was at the top end of the range. These results were consistent with a 20/10/5 financial model, 20% ROIC target, 10% gross margin target, and our 5% operating margin target. Drilling a little deeper into these results, gross margin was slightly higher than our expectations at 10.7% for the quarter. This improvement was the result of an improvement in the mix of customers and programs during the quarter and good results for our engineering services business. Gross margin for the quarter was down from the 11.4% gross margin in the second quarter of 2008. This decline was expected and was primarily the result of reduced revenue from our large episodic defense program.

As we had expected, SG&A costs increased from the prior quarter. There were two items that impacted our spending during the third quarter. First, we recorded an allowance for doubtful accounts for a customer that declared bankruptcy during the third quarter. This allowance increased SG&A by approximately $1.3 million, or approximately $0.03 of EPS. This expense was offset by stock-based compensation expense that was approximately $900,000, or $0.02 of EPS lower than we expected as a result of forfeitures recorded during the quarter. These forfeitures were the result of stock options issued to employees that expired or were forfeited during the third quarter. The total of these two items led to SG&A expense being approximately $0.01 of EPS higher than our expectations during the quarter. Excluding these two items, SG&A expense increased from approximately $24 million in the second fiscal quarter to approximately $26 million in the third quarter. This was consist went our guidance and reflects investments in our market sector based business development engine, variable incentive compensation, and continued investment to support our planned growth.

Moving on to the balance sheet and cash flow the cash conversion cycle increased during the quarter. Up eight days compared to the second fiscal quarter, cash cycle days of 60 days and a few days higher than our expectations. As you saw in the press release, days and receivables increased by two days to 48 days. Days in receivables were unusually low at 46 days last quarter based on the timing of payments from some major customers and have returned to what we believe are more normal levels. Days in inventory increased 5 days to 77 days. There were three factors that drove the increased inventory levels.

First, continued increases in inventory levels for some customers to enhance their flexibility and to support direct order fulfillment programs. Second, inventories put in place for several new programs that did not ship during the quarter, resulting in higher inventory levels than planned. And lastly, inventory to support our continued revenue growth in the fourth quarter of '08. And then finally, accounts payables days increased by 1 day to 57 days. We are mindful of these significant investments in working capital and are always trying to improve them, but we also recognize that without the right inventory we are not able to grow with our customers, support new business models like direct order fulfillment or launch new programs. Including these additional investments in working capital, ROIC for the quarter was strong at 21%, above the targeted 20% from our 20/10/5 model and well above our weighted average cost of capital. We continue to believe that ROIC is the most important single measure of our business as it reflects both our performance on the income statement and the investments on the balance sheet.

Free cash flow for the quarter was approximately $9 million negative, with year to date positive free cash flow of approximately $26 million. We announced a financial recapitalization on February 25, that included a 200 million share repurchase authorization and 150 million of new long-term debt. I am pleased to announce that we have completed this recapitalization plan. We discussed the recapitalization in detail on the last call, so today I will spend a few minutes on the conclusion to this plan.

First, on the share repurchase authorization, we have completed a share repurchase of $200 million, or approximately 20% of our market capitalization at the time of the announcement. This repurchase was completed at an average price of $26.87. 100 million of this was under an accelerated share repurchase program that was completed in April 2008, resulting in the repurchase of 3.8 million shares at an average price of $26.51. The remaining 100 million open market share repurchase was completed earlier this month and resulted in the repurchase of 3.7 million shares at an average price of $27.25.

Moving on to the long-term debt, the unsecured credit facilities were completed and funded on April 4, which included $150 million of long-term debt. Along with this debt, we renewed our existing $100 million line of revolving credit. This credit availability can be increased by an additional $100 million in revolving credit under certain circumstances. There are currently no borrowings under the revolving line of credit. The interest rate on the long-term debt has been fixed for the entire term, using interest rate swaps at a blended rate of 5.7%. Through this financial recapitalization, I feel that we have created and efficient capital structure, with a reasonable level of debt at favorable interest rates. Importantly, we also believe that we have adequate cash and liquidity to fund our ongoing growth plans.

Moving on to the guidance, I would like to give you a few further comments on our financial model for the fourth quarter of 2008. Gross margins are expected to be slightly lower than the gross margin in third quarter, based on our forecasted customer mix, but still at a level slightly above our 10% gross margin target. This is down from the higher margins in the first half of fiscal 2008, as we have discussed many times, quarters with a large concentration of orders with our large episodic defense program had a positive impact on gross margins. Depreciation expense is expected to be approximately $8 million in Q4, up from $7.4 million in Q3. SG&A for the fourth quarter of 2008 will be in the range of 26.5 million to $27 million. The tax rate for fiscal 2008 is projected to remain at 20%. I will remind everyone that this rate will continue to vary based on the mix of forecasted earnings between taxing jurisdictions. Earnings in our Asian locations benefit from negotiated tax holidays in both Malaysia and China, while US earnings are taxed at a full 38% federal and state tax rate. This variance in tax rate means that relatively minor changes in the earnings forecast can result in large swings in the tax rate.

Our expectations for the balance sheet are for cash cycle days to remain in the range of 66 to 68 days. The capital spending projection for fiscal 2008 has increased to 55 million to $60 million. This increase is the result of investments in the fourth quarter to support growth and includes capital to complete the fit-out of our third facility in Penang, Malaysia. When we acquired this building, we had three separate blocks of manufacturing space that we have been finishing with required infrastructure such as flooring, IT, and electrical infrastructure, and other investments to support manufacturing as we needed it. These investments in the fourth quarter will mean that all of the manufacturing space in this facility will now be ready. We expect to generate free cash flow in fiscal 2008 in the range of 10 million to $15 million. I'm not planning to talk in any detail about our F '09 expectations on this call. We are working hard now to finalize our F '09 annual plan. But I would like to share some high level comments as you think about the 20/10/5 financial model.

As we discussed in our investor day June 18, we believe that the best way to create value for shareholders is through continued strong revenue growth and by delivering our 20/10/5 model. We are carefully balancing our existing customers, new programs, and investments to support growth, while delivering that financial model. So my first point is we do now believe that gross margins will increase in the future and the more likely trend in the near term is downward back to the 10% in our model. Second, SG&A is currently above the 5% target in our financial model. We are mindfully making investments in people, processes and tools to support our growth targets. Our objective is to leverage these investments and return SG&A spending closer to our 5% target in the second half of fiscal '09. In the near term, we would expect cash cycle days to remain in the range of 66 to 68 days. And lastly, I remind everyone that the first quarter of our fiscal year, the December quarter, generally has higher fixed costs and costs of goods sold and SG&A as we give wage increases to our North American employees. With that, I will turn the call back to Angelo.

Thank you, Ginger. As we open the call for questions, we ask that you please limit yourself to one question and one follow-up. We will now take questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question is coming from Brian White of Collins Stewart, please go ahead.

Good morning. When we look at the medical market, showed very nice upside. I think even at the analyst day, the comments weren't overly bullish there. So what surprised you and are some of the FDA issues and reimbursement concerns behind the medical area?

Great question, Brian. First, let me address the second part of your question here, which is related to the FDA and the reimbursements. The FDA issue that was plaguing one of our key customers is now behind us, so we are seeing production back to kind of a normal pattern of production. It's hard to say whether or not the demand is going to return to what it would have been had they never had that FDA-related issue. On the reimbursement side of things, there hasn't to my knowledge been any change and that still is going to be a challenge for manufacturers of imaging-related products.

What happened in the quarter with key customers, I think, is -- it's just a situation where some of our customers were maybe a little too conservative in their forecast that they gave us. They had a little more success in the quarter than originally anticipated and saw improved demand. I'm looking forward. We expected to pull back a little bit, not, not to the level that we saw in Q2, if my memory serves me correct, but we will see maybe perhaps a 4 or 5% pullback and then we'll be back to hopefully sequential growth here as we come into '09.

Just on the defense area, you said 3 million of the episodic program in the fourth quarter, 25 potentially in '09, so how is that going to play out in '09? Is it front-end loaded, back-end loaded, linear, or?

Yes, at this point, we're still trying to nail down the whole production plan for the year, but it's, it's safe to say that it's going to be more front end loaded and we'll see probably the bulk of that in the first couple quarters of the year.

Okay, thank you.

You're welcome.

Thank you. Your next question is coming from Shawn Harrison of Longbow Research. Please go ahead.

Hi. Just maybe a two-part demand question. The program wins, if you could kind of break that out by end market?

Let me grab a hold of the sheet here. It was pretty strong in our wire line sector. We had four of the wins in that sector. Three of the wins were in our medical sector, and then the four and three respectively in industrial/commercial and defense/security/aerospace. So a pretty balanced result at least in quantity. In terms of the revenue, I would say the bigger programs were won in medical and industrial commercial.

Okay, and then on that medical business, just getting back to the prior question, the inventory, is it more tied with imaging customers or, you know, where is it concentrated?

In terms of the--?

The inventory I guess your customers built, kind of effecting demand here going into the fourth quarter.

No, it's not really related to imaging product. It's different product technologies.

Okay. Then my follow-up is just on Mexico. I don't think the performance of the business was stated here. I guess just how far are we in terms of revenues away from break-even?

I'm going to turn this one over to Ginger quickly, but I did mention that one of the wins we announced here did go into the medical facility, so we're feeling pretty good about coming close there. I'm going to let her comment here in a sec and then also we've been taking a good look at the funnel of opportunities for '09 and we're seeing probably the funnel specifically for Mexico now has come up above $100 million about what I would say opportunities that we have a good shot at for fiscal 2009. And then we actually have some visibility to some opportunities for '010 here as well. I'll give you -- let Ginger speak a little bit about the economics of the facility at this point.

Sure. So we had a loss in the third quarter in our Mexico facility and we are currently forecasting a loss in the fourth quarter as well. But we are (inaudible) by that improvement to the pipeline. The third quarter revenue was at a run rate of $80 million and we have talked often that around $100 million is where we have break-even opportunity. So I think we have good visibility to break even in '09 based on our current pipeline.

Okay, and the loss in 3Q is maybe similar to what you saw in the second quarter?

The loss in the third quarter was $100 million, so slightly above the 710 we saw in Q2.

That's 710 contains some inventory gains, right?

It did. We did not have as much of those in the third quarter, so that's more of a steady operational result for that side for that quarter.

Okay, thank you very much, and congratulations on the quarter.

Thank you.

Thanks, Shawn.

Thank you. Your next question is coming from Alex Blanton with Ingalls and Snyder. Please go ahead.

Good morning.

Good morning, Alex.

I wanted to ask you a question about the overall environment. If you look at what it was for you, say, nine months ago at the end of calendar '07, compared with today and taking into account the entire world, faster growth in emerging countries and demand from those countries, possible shift of interest in customers in getting closer to the market because of logistics costs, and higher logistics costs and higher freight costs, and possibly lower demand in the US because of the recession here. What would you -- how would you characterize the overall environment for your business as compared with nine months ago? Is it better or worse or the same?

Well, I think that the short answer is, it's the same from an overall kind of health, I would say. But different for all the reasons that you just talked about. Certainly the, the cost of transportational logistics has gone up. That is impacting some customers' thought process and they are becoming more focused on the total cost of fulfillment. So this is why we feel so strongly about the need to improve our performance in Mexico and why we think it's going to be strategically important to us. Maybe surprised to hear it because of the challenges we've had down there, that we would anticipate at some point in our future having to actually add capacity either in Juarez or in another location in Mexico to support what we see over the next three to five years. So that's, that's a characteristic also that's sort of what I call the movement toward instant gratification. In other words, customers wanting highly configured product delivered quickly to their end market customers and if those end market customers are in the US, Mexico, particularly a border facility is important for that.

In terms of what's going on around the globe, one of the challenges for us, because we have such a high mix of product that we manufacture, and because still the significant amount of it is subassembly manufacturing, it's difficult for us to really have an accurate assessment of where all that product is consumed around the world. Now, we have certainly some customers that we build finished product and it's fulfilled directly into the end market, and there's no question that elements of the global marketplace are providing significant demand for some of those customers and if the global market, the rest of the world, if you will, has a pullback, it's likely to -- we're likely to feel that, of course, because our customers would feel it. But overall, it's interesting that times of economic stress can also create opportunities for companies that perform well.

So that -- in my opinion, the good performers, the ones that have a really strong focus on their marketplace have really got their Company aligned to support that marketplace so its operations and supply chain and value-add such as we have with the financial model on a global basis can really compete and gain share with incremental outsourcing and new program wins. And I think that has really been the key to our success, is just growing in spite of the difficult macroeconomic conditions because customers are, with the demand that they have, they are looking to align that demand with the best performers and we're benefiting from that.

Well, that's usually the case. In recessions, the better companies gain market share from the weaker ones. Second part of the question has to do with cost increases. Have you had any problems at all in passing along the cost increases which have been more than the usual amount. I characterize them as accelerating, passing those along to customers and had any impact on your earnings as a result of any lag in that, in passing those costs along?

Well, first, let me say part of the way to keep costs down when it's a logistics issue is to change the point of manufacture, or the integrated manufacturing solution between various geographies. So we have worked with customers to contain that cost by making those changes to the overall total fulfillment model. Secondly, we're not a high energy consuming Company, so we haven't -- that hasn't had a material impact to us at this point. The business runs on pretty much a cost-plus model and, cost of labor, cost of materials, those sort of adjustments do get reflected in our costs and get passed along to the customers, through the quarterly business review process. It can be challenging, but at this point we really haven't had significant challenges. And interestingly enough, most components that we buy at this point, we have not seen significant increases in component costs. Component costs have been fairly stable. The offset of demand versus the increase maybe in raw materials parts has kind of balanced itself off, although we are seeing with some of the metal, sheet metal, some of those sort of things, steel, you're starting to see some cost increases roll into that, those kind of products. But it hasn't been a material impact to us overall at this point.

Boards, bare boards, is it going to--?

Bare board fabs, I just read the report and for us it's been pretty stable.

So you haven't had any, any problem passing this along in a timely basis, what I mean. There hasn't been any lag so there's an effect on margins?

There's always a lag in how you pass it along. And there's always a lag, too, and when you have cost reductions in the supply chain when you pass those along, so they balance out. Right now we don't project any meaningful impact to our results as we look forward.

So what you're saying, is the lag is the same as it was before, so there hasn't been any overall change, okay.

Correct.

Thank you.

Thank you.

Thank you. Your next question is coming from Jim Suva of Citi Investment Research. Please go ahead.

Thank you, and congratulations. First of all, can you give us a quick housekeeping item, for the full year of '08, what would have been the amount of episodic defense revenues and that way we can at least compare it to, you had mentioned, I I believe if I'm right, about $25 million for '09. As you're looking up that number, maybe can you talk about how important is the election this year coming up of depending upon who wins, is there a chance that this $25 million could be upsided or $25 million kind of is what it is, or does that impact or change the probabilities of this segment? Thank you.

This is Ginger. I'll take the easy part of that question, which is the revenue for that episodic defense business was a total of $90 million for 2008, and you can compare that to the $25 million we're currently projecting or forecasting for '09.

Related to the election cycle, Jim at this point, it would be kind of wild speculation on my part to really suggest that the election is going to have impact on it one way or the other. Of the 25, I think I said 19 of that was baked on hard purchase orders, so that's going to happen. We wouldn't have put the rest of it in the forecast if we didn't think it was high probability and would happen. Beyond that, I think we continue to see the opportunity with that technology as episodic and something that we really don't think the analyst should plan for based on any kind of rumors in the marketplace or anything else until we actually give specific guidance on it. And I have no idea what's going to happen for global demand for that product. There's other things beyond the election. I mean there's competitive products in the marketplace, on and on, that could impact that, the demand for that technology.

Great, and as a quick follow-up, the medical, when you talk about a little bit of inventory build there from your customers, does this impact your engineering services in the medical segment, or are those two completely unrelated?

They are unrelated in this case. In fact, engineering had a really good quarter, winning new medical business, I guess that 80% of the new wins were in the medical sector, so it's been quite strong. Part of the inventory build is, one was a customer that essentially was overly enthusiastic about what they could sell in the marketplace. Another part of the inventory build actually was something that we did collectively with the customer as a decision was made through the quarter to actually transition some business from one of our facilities to another, so it was a hedge against the start-up of production in Asia as we transfer some of the manufacturing.

Great, thank you very much, and again, congratulations.

Thank you.

Thank you. Your next question is coming from William Stein of Credit Suisse. Please go ahead.

Thanks. Just wanted to address the gross margin. Ginger, I think you suggested that would be down sequentially. I'm a little bit confused, given the return of the episodic defense customer. I would think that would have an outsized beneficial effect on the gross margin, and then I have one follow-up.

Yes. Well, there's only $3 million of it in the fourth quarter, so it's only up $2 million. And frankly, that's just not enough to move gross margin substantially. And we have other changes in mix in our programs and customers for the fourth quarter that's going to bring that gross margin down.

Okay, thanks. And then the interest expense line, can -- you might have stated it. I apologize if I missed it. Can you give us an idea for what the total interest in other is expected to be, maybe in the coming quarter? And then if you can give us some color on that in fiscal '09?

Interest expense for the quarter was $2.3 million. I think it's going to be fairly consistent with that going forward. I -- that's got a full burden of our debt in the third quarter because we took out that debt on April 4. So I would guess that would be a pretty good starting point for your model as you think about Q4 in '09 as well.

Okay, great. Thank you.

Thank you. Your next question is coming from Kevin Kessel of JPMorgan. Please go ahead.

Yes, thank you. I just wanted to follow-up on your comments that you made regarding Mexico. Ginger, I think you said you 1 a million in the quarter and you're expecting a loss as well in the fourth quarter, but encouraged by the pipeline and what you guys are seeing there. At this point, would you say that the loss in the fourth quarter would be at the same level, or do you think it would be somewhat reduced? And then at the same time, I'm just curious, you guys had mentioned in the past that you had won a fairly large program that was slated to go to Mexico at some point in early, I think fiscal '09, maybe even late fiscal '08. I'm just wondering if that's still on schedule, because it sounded like the size of it in and of itself could be enough to get the revenue run rate to break even.

Yes, so on to the earnings or loss, we expect a similar loss in the fourth quarter, so my guess would be a loss of about $1 million in the fourth quarter. We do have a new customer who is ramping up there and we -- that ramp is starting now and so we are seeing the benefit of that already on the revenue line and we expect to see that help us get towards that break-even in F '09.

Okay, great. And then when you look at what you said about Malaysia, the additional CapEx to complete the third bay, should we expect, then, that that new site in Malaysia will be essentially full from a production point of view at some point during fiscal '09 and you would need at some point to think about further expansion there?

Well, I don't think that we will likely expect -- well, I should say I have to be careful on this, because we are making a modest addition to one of the facilities over in Malaysia, but I don't think that will make another big debt, at least on the island of Penang, out on the time horizon. Our focus right now is to get some balance to that capacity in China.

And, Kevin, I would just add, so we have finished off that third manufacturing bay, but I don't think it will be completely full in F '09. We're going to work once the shell is complete and it's ready for manufacturing we'll begin moving equipment and customers in there as we need it during '09.

Okay. I got that. And then, Dean, I think when you mentioned the new wins, you said 15 new wins. I didn't hear that any of them were in the wireless area. Seemed like every sector but wireless. Is that correct?

Yes, if I didn't say that, I should have.

There was one in wireless.

One in wireless.

One in wireless?

Right, pretty modest size.

Okay, and is there a way to flush out what you had said about the engineering cancellations and pushouts that you guys have seen recently that give you a little bit of pause? Is this something that -- are customers indicating to you the reasons that they are doing this? Are they saying it's macroeconomic concerns on their part, or is it that they are seeing direct demand strain and as a result, pulling back?

Well, it's a couple of things, and certainly part of it is cautiousness, tightening the belt and essentially, canceling or delaying programs is a way to tighten the belt. But I don't want to throw up the red flag yet. I was trying to just really throw up a caution flag and that is a little bit of a change that we have seen as we kind of move through this quarter. We had quite strong demand in the first half of the year and it has softened. I'm not convinced that it's going to hurt us yet. I think that if we just redouble our efforts on our go-to-market strategy, that we can bring in some other opportunities and get them closed. Steve Frisch who runs the engineering business might think differently, but I think that there's plenty of opportunity in the pipeline. So it's not that customers are not talking about programs and opportunities. There still are a lot of them, a very healthy pipeline. It's just that the ones that we had closed or thought we were going to close here in the near term, a couple of those did not come to fruition, so we're a little bit cautious.

I got it. Then just last, how can -- how should we think about concentration with your largest customer? Obviously there was some good success in the quarter. It's moved up. In the past, you guys have kind of mentioned trying to keep it below a 25%ish level. But it sounds like you're having a lot of success on the new program win side, too, and wire line I have to assume that there could be more upward pressure there. Can you just help us understand how we should kind of think about it? Was this quarter an aberration, or will it kind of stay at these levels?

My opinion right now is that we had a particularly strong quarter and it was a bit of an aberration and it will come back to a more normalized level at 19 to 21% and kind of bounce around in that range as we move through, through fiscal '09 unless we are wildly successful getting another program, but of course we hope to grow fast enough to continue to gain share with Juniper, with other business.

All right. Thanks so much.

Thank you.

Thank you. Your next question is coming from Steven Fox of Merrill Lynch. Please go ahead.

Hi. Good morning. A couple questions. First of all, I think you mentioned your as full capacity was up to 82% and you're looking for some higher revenue growth next quarter. Seems like it's kind of getting tight for this type of business and I was curious about any kind of risk that you run other inefficiencies as it gets this high, and how do you plan on managing it for the time being?

Yes, we do target 80% or so as a healthy percentage. We can go up as high as 100% at a facility, and of course it doesn't become so much of an efficiency hit as it becomes a problem to go and win new business. Now, customers like to come in and see some white space so they know that you can take on their product. So that is why the CapEx spend is out there, why we're configuring the third bay and the big facility over in Malaysia. It's why we're putting the modest expansion onto another facility over there, it's why we're talking about expansion in Mexico and frankly, why we made some modest expansions to some of our US facilities as well. So we're trying to stay ahead testify and I think we'll be fine from an execution standpoint in the near term.

Okay, fair enough. Then just on the industrial segment, you mentioned that it -- a decent amount of your customers struggled during the quarter relative to their forecast, but you're still looking to grow a little bit sequentially this quarter and it's had some problems in the last year. I guess just trying to get a better feel for why you think that this wasn't the beginning of maybe sort of slower growth trends for those customers, what you're seeing in terms of end demand as well as new programs.

Yes, I would characterize end market demand for most of the customers, as I said, it clearly had a bit of a negative bias during the quarter and, for most, it's not, not like there's a superstrong demand out there. I think growth that we are -- would project and the growth that we are seeing with key accounts here is more a consequence of winning new business, taking share away from some of our competitors, getting in front of some new product launches that had perhaps been slated for competitors, and essentially growing the business. And then I think maybe the overall economic situation is dampening demand for kind of existing programs with many of these accounts, but at the same time, I think we can continue to grow it, assuming the bottom doesn't fall out by incremental program wins.

Okay. Thank you very much.

Thank you.

Thank you. Your next question is coming from Amit Daryanani of RBC Capital Markets. Please go ahead.

Thanks a lot. Good morning, guys.

Good morning.

Just had a quick question, Dean. I think you were talking about evaluating the long term viability of the U.S. sites, maybe I'm reading too much into it, especially the fact you've added some of the capacity there. But just given the macroeconomic environment, is that an indication we are potentially to consolidate some of these sites in North America?

Well, what I want to be clear on, is I want to be very clear that all of our facilities in the United States are performing very well to our financial goal and are executing very well on behalf of our customers. I think what we have done at Plexus is I think that we have gotten ourselves to the point where we are not playing defense, that we're playing offense, and we have a very, very much improved our strategic planning process. It's become more market-sector oriented. We utilize our market sector teams to really represent the voice of the customer and help guide us in terms of what do we need for capacity capabilities, whether they are technical or regulatory, around the globe, what are the longer-term trends in each one of these market sectors, so that we can make the right decisions in terms of growth of capacity or consolidation of capacity around the globe.

And as we look forward, we believe that we are going to see, or are seeing maybe a bit of a renaissance in terms of the nature of manufacturing for electronic products here in the United States that we're going to see a shift toward the higher level product assembly for fulfillment into the end markets in North America. Some of it's going to be highly regulated product, but I think the days of lots of board-level assembly are perhaps gone and perhaps the notion of super close proximity to the customers has been on a slow fade.

So having said that, what we're saying is that, anything we would do would be -- we would like to do it in a position of strength and as part of strategy as opposed to waiting until we have a facility that's hurting and then have to take a sort of defensive action to course correct. So we haven't made any decisions. It's part of our strategic planning process, but I want to signal that an outcome of this could be that we need further capacity in the U.S. to support (inaudible) and higher level assembly and perhaps that we have a location that doesn't fit the model over the next, or the trends over the next two to three years, five years out in the future.

That's actually helpful. When we look at the medical segment, sounds like the next quarter should be a little soft, partially because of the inventory buildouts with OEMs. Could you just maybe talk about why the inventory correction may be just a one-quarter event and not a multiple-quarter event?

Well, as I said, with one of them, it was definitely -- it was kind of self-inflicted, because we're transferring a program from one of our locations to another. So we built up inventory in order to create a buffer there to support the transfer. So we know with one of the customers that there was not a market-driven inventory build-up, but more of an operational buildup of inventory. So we'll see that come down and normalize in the prior couple of quarters. Otherwise, we look forward, I don't want to get too much into what's going to happen out in '09, but right now we feel pretty good about growth of our medical accounts in '09 as a consequence of program wins and of the funnel and our medical team has done a great job positioning us well with some of these customers and we hope to get the fruits of all that effort on their behalf here in the coming year.

All right, and just maybe a last question, I'll hop off after that. Ginger, when you talk about fiscal '09, you talked about margins that have driven back to close to 10%. I think you have an excellent defense business in the last several quarters, you sustained north of 10% margins, consistently. I'm curious, is partially the reason why you expect this big degradation is we may be sacrificing margins to get higher revenue growth for the model so that maybe we are going to have to a little bit more higher volume business, even though the ROIC is there, the margins (inaudible)?

I'm not sure that that would be a significant part of it. I think there's a couple trends we see, one of which we are continuing to add capacity in new regions. We've talked about some of that this morning. We'll continue to do some of that as we hopefully put some new footprint up in China. That is going to have a short-term drag on our operating -- on our gross margins as we put that capacity in place and we haven't completely filled it yet, so that's a little bit of a timing issue. We also have a mix of business. We see more -- it's possible to see more of our business moving to Asia and that has some changes to our gross margin. So I don't know that I see it being a change in the business we're accepting, but more a change in how we're continuing to build capacity to support future growth.

Yes, also just comment a little bit on the SG&A line in that we have talked about the growth in China, the opportunity to develop end markets, customers in Asia. We also have talked extensively about our desire to expand into Europe. Part of that is of course the manufacturing capacity, but also part of it is the go-to-market teams that you need in place to work with customers and develop customers in those marketplaces. So as you expand the business, unfortunately it's not -- some of these costs are not linear. You need to have some, maybe a little bit of a step-up in terms of costs for some resources and then you need to grow into some of those costs. So no alarm bells going off here. It's really just a part of carefully managing the growth of the business and trying to gain access to some new markets and to have the capacity in place to support development of those markets.

Got it. Thanks a lot, guys.

Thank you.

Thank you. Your next question is coming from Sherri Scribner of Deutsche Bank. Please go ahead.

Great, thank you. I just wanted to get a little more clarity on the share buyback for the full year, because I'm not sure I fully understood what you said there. Clearly, you've done the full 200 million in cash and I think you said the average price was about $26.87 for the full 200, and where does that leave you in terms of how many shares you bought back? I'm estimating somewhere around 7.5 million. Is that roughly right?

We bought back -- yes, 7.5 million.

Okay.

Two tranches, 3.7 million in the first tranche, and -- I'm sorry, 3.8 million in the first tranche and 3.7 million in the second tranche.

So when I look in the overall share count as we move into fiscal '09, what number are you using, or would you assume for fiscal '09 as we work through all the share buybacks?

I think that's going to be somewhere in the range of 40 million shares outstanding.

Okay, okay. And then in terms of the CapEx, I know you're not giving guidance for fiscal '09, but you took the CapEx guidance up from fiscal '08. It looks like it used to be about 3% of revenue, looks like in the fourth quarter you'll be about 4% of revenue. Directionally, do you expect the CapEx will go up in fiscal '09 with these further expansion plans that you have and would that be somewhere around 3 to 4%, or what are you thinking there?

I think directionally, it will be up. We're not ready to give a final number yet, but I think it would certainly be modestly above the 55 million to 60 million.

Okay, thank you.

Thank you.

Thank you. Your next question is coming from Reik Read of Robert Baird and Company. Please go ahead.

Good morning. I know, Dean, that you've talked about, that you really haven't seen much in the way of macro weakness, but as you go forward and if you were to see some of that, what are the segments that have, in your view, the most sensitivity to it? Is it the industrial, maybe the wireless and then the wire line and medical and defense are relatively less impacted?

Yes, I don't know that I could disagree with you on that. I think that that probably is the way we would see it. The thing is is that our business is quite diversified in each one of these end market verticals, and you have customers in each one of them that have perhaps some relative stability even in times of economic situations because of the unique niche that they occupy in the marketplace. So it's kind of hard to really generalize I think to the market sector. So I don't know that I could give any further insight to that other than the breakdown that you just listed.

Okay, okay. And then on the Mexico side of things, as you do put more of that volume through and those losses further dissipate, do you anticipate those going to the bottom line, or is there some reinvestment? How should we think about that from a modeling perspective?

Yes, Reik, we talked a little bit about that at investor day. Certainly we hope to get our Mexico site back to a not only breakeven but profitability and back to a normal level of Plexus profitability, but at the same time in '09, we're also going to be making investments in other regions to support future growth, so I don't see a significant impact to our 20/10/5 plan, because we're managing all of those pieces, bringing Mexico back to profitability and new investments to continue to deliver the 10/5 portion of that plan.

So this is just a mechanism that allows you to make more investments than you otherwise could?

That's correct, and that's why aside of the fact that it just bugs us tremendously that we don't make profit down there because we, quite frankly, like to make profits, we have to make profits down there so that we can expand the business and support the model.

Okay, great. Thank you much.

Thank you.

Thank you. Your next question is coming from Kevin Kessel of JPMorgan. Please go ahead.

Yes, hi there, Dean. Just a follow-up. I wanted just to clarify or try to understand better the industrial, so the industrial segment I think you said 9 of the 15 had lower than expected demand this quarter. But you do expect still to grow this upcoming quarter and if I understood your answer to the prior question, correctly this is strictly due to you either taking share from competitors or winning new business that's scheduled to ramp in the September quarter from the existing book of business as you guys already have in industrial.

Yes, first, let me caution you not to get too enthusiastic here, because we expect it to grow in Q4, but it's going to be pretty modest. Flat to up is the way I would characterize it. The growth at this point is a consequence really of more recent program wins that are still, we're still fulfilling product and gaining share. It's not really as I see it any sort of real improvement in end market demand. Other than interestingly enough, we do see one of our capital equipment guys having a little better quarter coming up, very modestly, however.

I got it. And then, Ginger, just on the, on the valuation allowance, not the valuation, excuse me, the doubtful accounts that was taken in the quarter?

Yes.

For the customer that went bankrupt, do you foresee any further risk from other customers that might be in similar situations that -- as that one, and was that a full reserve for that customer? I assume it was, but just wanted to kind of better understand that situation.

Yes, that was a full reserve. I don't think it indicates any more weakness in our customer base. I think it was an isolated situation. We had one customer that was in a start-up phase, and frankly, was pretty early on in their life with us and we entered bankruptcy and we've taken a forward serve for that. So I don't think it indicates anything broader about our customer base.

Any sense on collectibility, I guess, you obviously took the reserve, but does it look like a real long shot at this point?

I think it's a pretty long shot. So there are -- the possibility that some components of that business will be sold at some point in the future, which may generate some return for unsecured creditors, but I think that would be a pretty long shot.

And I assume all the inventory that was held, none of it was -- it was all proprietary, in other words, it can't be utilized amongst other customers?

That's correct.

All right. Thanks so much.

Thank you.

Thank you. There appear to be no further questions at this time. I would like to turn the floor back over to your host for any closing remarks.

Well, let me thank everyone for joining us this morning, some great questions, and thanks to the analysts and the shareholders for supporting Plexus. I would also like to pass along to any of the Plexus folks that are listening in today my thanks. This is -- of course, there's a challenging economic environment in play today and we're having what appears to be a very, very good year and I want to thank everyone for their efforts and hard work throughout the year to make Plexus the best in the world at serving customers in the higher mix, low to mid volume space in the marketplace. Thank you.

Thank you. This concludes today's Plexus Corp. third fiscal quarter 2008 earnings announcement conference call. You may now disconnect.