Plexus Corp (PLXS) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corp conference call regarding its first fiscal quarter 2010 earnings announcement. (Operator Instructions). The conference call is scheduled to last approximately one hour. I will now like to turn the call over to Mr. Angelo Ninivaggi, Plexus Vice President, General Counsel, and Secretary. Angelo?

Hello 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 such as statements in the future tense and statements including believe, expect, intend, planned, anticipate, and similar terms and concepts are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting 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-K filing and the Safe Harbor and Fair Disclosure statement in yesterday's press release.

The Company provides non-GAAP supplemental information. For example, our call today may refer to earnings or EPS excluding restructuring costs or other unusual items. Non-GAAP financial data is provided to facilitate meaningful period-to-period comparisons of underlying operational performance by eliminating frequent or unusual charges. Similar non-GAAP financial measures including return on invested capital are used for internal management assessment because such measures we believe provide additional insight into ongoing financial performance. 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, Ginger Jones, Vice President and Chief Financial Officer, Todd Kelsey, Senior Vice President of Global Customer Services, and Mike Buseman, Senior Vice President of Global Manufacturing Operations. We will begin today's call with Dean providing first-quarter commentary about our market sector performance and outlook, our new business wins, past [the] utilization and guidance for the second quarter of fiscal 2010. Ginger will follow up with details about first quarter financial performance and make some additional comments about the second quarter of fiscal 2010. Let me now turn the call over to Dean Foate. Dean.

Thank you, Angelo. Good morning, everyone, and good morning to everyone in the room. Apparently when things are going well we attract a few more management to the call. Last night we reported results for our first fiscal quarter of 2010. Revenues were $430 million with EPS of $0.44. Revenue was at the top end of our guidance range while EPS exceeded our guidance range due in part to a legal settlement and other items that Ginger will outline in a few moments.

We were pleased to announce a strong start to fiscal 2010 with revenues growing 10% sequentially and a strong earnings performance even after adjusting for the legal settlement benefit. Importantly, our key financial metric, return on invested capital, improved to 18.1% due to the strong earnings performance, but also due to disciplined working capital management, a very good result considering our revenue trajectory and the challenging supply chain environment. The quarter was not without challenges as we continued to experience demand volatility as customers struggled with forecasts during the economic recovery.

While most of last year the overall forecast volatility was biased negatively, the bias now appears to be trending toward near-term forecast increases, or what we refer to as drop in demand. Much of this demand occurs inside of component lead times that have in many cases stretched in this constrained supply chain environment. I've discussed before this load and chase challenge where we load the demand into our procurement system, then chase the material so that it all arrives in time to meet production schedules. As you might imagine, drop in demand creates a number of productivity and execution challenges.

As our financial metric suggests, our supply chain organization and operating teams are executing extremely well in this challenging environment and very important, our customer management organization is doing a great job managing customer requests and expectations so that we can execute on aggressive yet realistic commitments. The extended team is demonstrating the agility and flexibility inherent in our operating model, a strong value proposition for our customers as they work to capitalize on opportunities in their end markets. Our expectation is that the choppy demand environment will continue in the near term as will some supply chain constraints.

Turning now to comments on our sector performance and our fiscal first quarter and our current expectations for our second quarter of fiscal 2010. We expected a strong performance from our wireline networking sector in Q1 and it did not disappoint. The sector exceeded our expectations as eight of our top ten accounts beat earlier forecasts, contributing to a 20% sequential growth in the sector.

Looking ahead to Q2, we currently expect low single-digit percentage growth for our wireline networking sector as three of our top five customers are forecasting revenues that are sequentially lower than the exceptional levels achieved in Q1. Our wireless infrastructure sector was a disappointment in Q1. We had anticipated modest growth. Instead, three of our larger accounts all missed earlier forecasts, contributing to a 4% decline for the sector.

On an encouraging note, we currently expect a much stronger result in Q2. Three of our larger accounts are forecasting improved demand, including the continuing ramp of a very significant program won during fiscal 2009. While current expectation for Q2 is that our wireless infrastructure sector revenue growth will likely exceed 30% quarter over quarter.

Our medical sector finally returned to growth in Q1 overcoming a long succession of end market difficulties that I have articulated in past reports. As expected, our medical sector grew 15% sequentially due primarily to end market improvement with our larger accounts.

Perhaps more exciting, our Q2 forecast for our medical sector indicates revenue growth for all of our top ten accounts. As a consequence we currently expect quarter-over-quarter growth in our medical sector to approach 20%. Overall revenue in our industrial and commercial sector was relatively flat in Q1 when compared to the final quarter of fiscal 2009. This was an improvement from the modest sequential decline in revenues that we had anticipated earlier. The better result was primarily driven by more aggressive ramp of a newer customer program.

We currently anticipate a strong result in Q2 as a fairly broad based improvement in customer demand in combination with new program ramps delivers growth in the high teens to perhaps 20%. Our defense, security and aerospace sector was down sequentially as expected in Q1. We currently expect Q2 will be a growth quarter for this sector. Our forecast indicates a mid teens percentage range increase in revenues as we benefit from newer program ramps.

Turning now to new business wins. Our pace of new business wins continue at a healthy level. During Q1 we won 16 significant manufacturing programs which we currently estimate will deliver approximately $108 million in annualized revenue when the programs are fully ramped in production in the coming quarters, subject, of course, to the risks around the timing and ultimate realization of the forecasted revenues. We won new programs in each of our market sectors. Not included in the $108 million of new wins was a substantial new program win with the Coca-Cola Company. Generally our customers are sensitive to our disclosures involving new business wins, and in all cases we try to accommodate the request to treat the information as sensitive, or in some cases as confidential.

What we can say is that this program is a follow-on program to the Coca-Cola freestyle product that we previously announced and currently manufacture. We have been awarded the manufacture of the crew-serve version of the technology. While the Coca-Cola freestyle product is designed for self-serve applications, the crew-serve product is designed for applications behind the service counter. While we enjoy modest revenues from both programs in fiscal 2010, we currently anticipate that we'll ramp to production levels with the Coca-Cola freestyle program and the crew-serve program during fiscal 2011.

We believe the significant new win is another indication of the value of our service offerings in complex mechatronics design and manufacturing, a strategy we began pursuing in fiscal 2008. Final assembly of both products is planned at our mechatronics focus facility in Appleton, Wisconsin, with sub assemblies manufactured at our facility in Juarez, Mexico.

Addressing capacity utilization and global growth. Our as tool capacity utilization in Q1 was approximately 76% overall for the Company. Utilization rates are trending toward improvement in all of our operating regions. Utilization rates in Asia are higher than the corporate average, an indication that further capacity expansion in Asia will likely be required to execute our longer-term growth strategies.

Turning now to our guidance. Our current expectation is that our second quarter of fiscal 2010 will be exceptional. We're establishing second-quarter revenue guidance of $470 million to $495 million with EPS of $0.44 to $0.52, excluding any restructuring charges, and including approximately $0.07 per share of stock-based compensation expense. As this report suggests, improving end market conditions across all of our sectors in combination with new business wins that continue to ramp during the quarter should result in sequential revenue growth of approximately 12% at the midpoint of our guidance with strong earnings leverage.

Looking further ahead, we currently anticipate sequential revenue growth to continue in our third and fourth quarters of fiscal 2010. We expect the rate of revenue growth to moderate in comparison to the growth rate implied by our second-quarter guidance. I will now turn the call over to Ginger for a detailed review of the numbers. Ginger?

Thank you, Dean. Good morning, everyone. As mentioned by Dean earlier, revenue was at the top end of the guidance range. GAAP diluted EPS was clearly above our guidance range, but excluding the three items discussed in the press release was also at the top of our guidance. Compared to our original guidance for the quarter, diluted EPS was favorably impacted by three items. First, a legal settlement in the amount of $3.2 million which was a $0.05 benefit. The estimated full year tax rate of 1% compared to our earlier estimate of 5% which was a $0.02 benefit. I will discuss the tax rate in greater detail in a few minutes. And then, finally, stock option expense was $0.01 lower than expected.

Gross margin was 10.3% for the fiscal first quarter or 9.6% excluding the benefit of the legal settlement. This was in line with our expectation and consistent with the fiscal fourth quarter of 2009.

Selling and administrative costs were $24.3 million, in line with our expectations for the quarter and as expected higher than spending in the fiscal fourth quarter of 2009. As we discussed in the year-end earnings call, this expected increase in selling and administrative costs was largely the result of higher variable incentive compensation accruals as we began accruing for full year fiscal 2010. This increased SG&A during the quarter by approximately $2 million with a similar amount of spending expected in the remaining quarters of the year. This is only an accrual which may be adjusted up or down based on how the fiscal year progresses.

SG&A costs as a percentage of revenue decreased to 5.7%, an expected result as we obtained better leverage from the increased revenue during the first quarter and as we continue to control headcount and discretionary spending.

The last item for discussion on the income statement relates to our tax rate. The tax rate for the first quarter was 1% which was lower than the 5% we expected when we set the original guidance. This change is primarily the result of changes in revenue and product mix that resulted in a shift of earnings between taxing jurisdictions for the full year. Variations in the mix of forecasted earnings between jurisdictions can have a significant impact quarter to quarter on our estimated tax rate. Earnings in our Asian locations benefit from negotiated tax holiday in both Malaysia and China, while US earnings are taxed at the full 38% federal and state tax rate. This contrast in rates and the volatility we see in our customer forecasts has led to the variations in tax rates we have seen in recent quarters.

Moving on to the balance sheet and cash flow, the cash conversion cycle increased by only one day during the quarter of 69 days, a significant achievement given the increase in revenue in the first quarter, anticipated growth in the second fiscal quarter, and the tightening supply chain environment. We consider this an excellent outcome and the result of hard work by our supply chain team. This was significantly better than our expectations for the quarter of 74 to 76 days. Days in receivables increased by five days to 50 days based on normal variation in customer payments at quarter end. Days in inventory increased by five days to 88 days.

The total value of inventory increased by approximately $50 million or about 16%. This increase in inventory dollars was expected based on increasing revenue through the fiscal year and the lengthening lead times for some components. About 60% of the increased inventory dollars was for customers in the wireline wireless sector that have seen significant recent improvements in demand.

Finally we have a total of $23 million of cash deposits on our balance sheet, equivalent to six days of inventory, which helps to mitigate our inventory risk. Accounts payable days increased by nine days to 69 days. This increase was primarily the result of the timing of inventory purchases late in the quarter which naturally lead to higher AP balances.

In addition, we saw continued results from our efforts to extend payables terms. We have made significant improvement over the last several quarters in accounts payables days, increasing 19 days from the 50 days at the end of fiscal 2008. Free cash flow for the quarter was negative, primarily based on the investments in working capital during the quarter. We spent $12.3 million in capital expenditures for the fiscal first quarter.

I will now turn to some comments on the second quarter of fiscal 2010. We are happy to say that with the increase in revenue our internal financial expectations for the quarter trend closer to our long term 20/10/5 financial model. For those new to the Plexus story, our financial model targets a 20% ROIC, 10% gross margin, and 5% operating margin. The 20% ROIC target is based on a spread of 500 basis points above our estimated weighted average cost of capital of 15%.

So looking specifically to the second quarter, gross margin should be consistent with our model and near 10%. SG&A for the second quarter of 2010 will increase and is expected to be in the range of $26 million to $26.5 million. As expected this is an increase from spending from the first quarter of fiscal 2010. As discussed above this includes the continuing quarterly accruals for variable incentive compensation.

In addition, in the second quarter we will see the impact of annual merit adjustments for our employees. In past years this increase was in the fiscal first quarter. Finally we are anticipating modest increases in headcount and discretionary spending as we see higher revenue place additional demands on the organization. We are continuing to be cautious about adding back headcount or spending after our strong cost control actions in fiscal 2009. As a result, we expect to see leverage on the SG&A line as revenue increases during the year. Depreciation expense is expected to be approximately $9.5 million to $9.8 million in Q2, up slightly from the $9.1 million in Q1. The estimated effective tax rate for fiscal 2010 is projected to be in the low single digits.

As we've demonstrated in recent quarters, this tax rate can vary significantly during the year, based on the mix of forecasted earnings between taxing jurisdictions.

Our expectations for the balance sheet are for the key accounts of inventory, accounts receivable and accounts payable to increase in dollar terms for the second quarter. Based on the forecasted levels of revenue, we expect these increases will result in increased cash cycle days as well. We currently expect cash cycle days of 70 to 74 days for the fiscal second quarter, a sequential increase from the first quarter. This increase is largely the result of additional inventory for new program transitions and a small decrease in days of payables from the strong results in the first quarter.

Our capital spending forecast for fiscal 2010 is estimated to be in the range of $65 million to $75 million. This is an increase of $5 million from our estimate last quarter. This estimate does not include any additional manufacturing building but does include equipment needs to support new customers in our existing locations and continued investment in equipment for our new manufacturing locations in Romania and Hangzhou, China. With the increase in revenue we are actively reviewing potential new footprint requirements particularly in the Asia Pacific region, but to date have not made final decisions about further investment. This forecast does include approximately $15 million for a new global headquarters building that is under construction in Neenah, Wisconsin.

Our full-year capital spending forecast will likely continue to vary during the year as we assess our customers' forecast and capacity needs based on the improving revenue picture. As always, we are balancing our spending, capital expenditures and working capital investments to support continued growth and current results to our shareholders. As we have demonstrated in the last few quarters, we have the ability to aggressively manage both our SG&A and investments in working capital to support our financial model and plans for continued growth. With that, I would like to open the call up for questions. We ask that you please limit yourself to one question and one follow-up.

(Operator Instructions) Your first question comes from Amit Daryanani with RBC Capital Markets.

Thanks. Good morning, guys. Good job on the quarter. I just had a quick question. When I look at the guide, you guys are talking about up 12% sequentially. I guess wireline probably accounts for a quarter of that on a sequential sales basis. Is the rest of it mostly end market driven in your perspective, or is it a lot more new ramp driven?

Well, first I'd like to point out that right now every one of our market sectors is expected to be up in the coming quarter, as is every region in which we operate. So we're seeing quite a bit of what I would consider to be very broad-based improvement in overall end market demand that's affecting a lot of our customers. And then, in addition to that what's driving some of the outside is revenue increases is just the number of new business wins that we accumulated during the later part of fiscal 2009 that are now starting to come to fruition. So we're starting to lever some of those new business wins into new revenues.

All right. But I guess even on an organic basis, existing comp programs that we have, you've seen a sequential up tick on those for the March quarter; is that fair?

That's fair, yes.

I think, Dean, you ed about seeing muted but still sequential growth for fiscal Q3 and Q4. Even if I use some very low numbers, looks like you will be pretty close, if not north of that eight, 15% to 18% target that you guys have, probably at the high end of it, for full year growth. Is that fair or am I missing something on that process?

You're not really missing anything other than rather than muted, I said modest. The sequential growth in the quarter is modest relative to Q2. It still is a decent growth rate.

Just finally from me, did you guys, on the component shortage issue, did you guys -- do you think you left any revenues on the table exiting the quarter and you're entering fiscal Q2 with a bit more stronger backlog because of that?

I'll let Mike-- Mike is global operations here. He can comment a little bit on what the supply chain may have done to us.

Yes. I guess at a high level, we certainly have seen some tightening, some extending of lead times out there in the supply chain. With that said, we work those very aggressively. Most of our solutions and specifically our supply chain solutions are designed to kind of accommodate the flexibility the customers are requiring right now, so I think we were very happy with what happened in quarter one.

We kind of baked in some of the risk into what we thought was going to happen in quarter one, and I would say we've taken the same approaches looking forward in quarter two. Challenge and risk, but I think we've appropriately baked those in.

So I think the summary is that I don't know that we have a whole bunch of demand that's flopping over from Q1 and Q2 as a result of the supply chain. There might be a little bit of it in there, but at this point it's a pretty clean Q2 in terms of real demand in the quarter.

Perfect. Thanks a lot.

You're welcome.

Your next question comes from Brian White with Ticonderoga.

Good morning. Dean, I'm wondering if you can talk a little more about the wireline networking area. I missed your comments. You said low single-digit growth, but then you provided some commentary on the customer trends in that area.

Brian, I did. Because really we saw, really a phenomenal demand improvement here n Q1 over what earlier forecasts coming into the quarter suggested. So we had anticipated a pretty strong quarter and it ended up much stronger based on this kind of drop in improvement in demand we saw unfold through the quarter. So maybe Todd could comment maybe at a higher level in terms of what we're seeing in terms of what elements of wireline are really causing some of the strength.

Sure. Thanks, Dean. So basically, Brian, what we're seeing is some demand really strengthening in the enterprise area of the wireline sector. So the demand in the service provider area has not really returned to previous levels yet, but we're seeing a lot of -- our customers' customers' IT departments really extend spending at this point. So as Dean mentioned, we're not expecting quite as strong a growth on the wireline sector in Q2, but we're still seeing continued strength as we move forward.

So it will grow, you're saying, low single digits sequentially?

That's correct.

Will the service provider business grow sequentially?

We don't necessarily break it down to that level in our internal numbers, but we are seeing some recovery in the service provider area.

And I'm just -- on the -- I'm curious, on the enterprise networking area, are you -- are you winning new programs with existing customers, or are those programs that you've been involved with in the past?

Yes, we are winning a number of significant new programs that impact enterprise. And we're looking good looking forward.

Okay. And those are with existing customers?

Correct.

Great, thank you.

Thank you.

Next question comes from Shawn Harrison with Longbow Research.

Good morning, everyone. First question is focused in on Coca-Cola. Maybe if you could provide a little bit more detail on the ramp time line, if that's possible at all. And then within that, the crew-serve program, if you had won that by yourself would it be a top ten or top five customer in fiscal '11 if it reached its full ramp rate?

Sure. Sean this is Todd, I will take that question as well. Dean is giving me the look that that's okay. So basically, first of all on the ramp-- we can't give a lot of specifics on the ramp due to the customer confidentiality issues, but what I can tell you is it's a modest impact to Q1 through Q3 of F10.

It has a bit more of an impact into Q4 but it is certainly very early in the ramp stages in Q4. As we look into F11, that's where we see the true ramp on both of these programs with the crew-serve maybe slightly behind. Now, with respect to the size of this, the crew-serve program, we can't give you exact specifics, but it would certainly classify as top ten on its own.

Okay. And then as a follow-up, the past two quarters, new program win rate has been good, maybe just not what you saw in the first half of 2009. I was wondering if that's just maybe a little bit more timing, or is something else going on where you just won significant amounts of share in the early and middle parts of 2009?

Well, it depends on how you're going to look at the numbers, because we have separated out all the activity here with Coca-Cola. So if you fold that back into it, it's actually been well above the average.

I guess if we back out Coca-Cola, because I think the average was something like $150 million, $175 million a quarter.

that's right. I'm telling you, we're well above the average with that new program.

Okay. I guess without that is it just more timing, things falling out? Is the pipeline getting bigger that you're seeing out there?

In terms of the business, the pipeline is actually really healthy, and, I don't -- I'm not sensing any sort of concern at all relative to the opportunities that are available to us for growth. So I'm not concerned at all about where we're headed from a new business win standpoint and the pace of new business wins. It's a very good situation at this point, and a very healthy set of opportunities out in front of us.

Thank you. Congrats on the guide.

Thank you.

Your next question comes from William Stein with Credit Suisse.

Thanks. Good morning. First, just to clarify, on the Coke program, would you expect, Dean, to be the only manufacturer, or the only supplier for this project now that it's so big? I think you've said the original program would be a top ten and the crew-serve stand alone would be a top ten. Would we expect that kind of business to be had by Plexus and unshared with another EMS?

Right now we're not aware of any dialog about splitting this business with another EMS company.

Okay, great. Maybe turning to the financial model a bit. If we look at the operating margin you delivered this quarter, and what's implied by the next quarter guidance, and you start to fold in Coca-Cola, it seems to me it's likely that you could exceed the 5% operating margin target that's part of the financial goal. Maybe you could comment as to whether that's correct or if there are additional costs where we might see less than the expected contribution margin as revenues grow in this part of the up cycle.

Thanks for the question, Will. This is Ginger. I think that in the long run Plexus thinks about delivering our model which accommodates growth. Our long-term goals are to grow this business 15% year-over-year, then to deliver an ROIC 500 basis points above our weighted average cost of capital. As we look at all of that supporting that growth, supporting that ROIC, the financial model we think that does that best is pretty close to a 5% operating model.

Even as we see revenue increasing, we are going to manage our business to that 5%, because that allows us to invest in new facilities, in new people, in the working capital to support that top-line revenue growth. So our message has always been consistently, we measure the business on the way up and the way down to try to hit that 20/10/5 model. Clearly we're pleased to be back approaching that level now, but I would not recommend investors to build in better than that model in the future, because we absolutely do make investments that support that revenue, and we'll be doing that in the future.

So in other words, as we grow beyond the March quarter, and as we get to these higher levels of revenue, perhaps the contribution margin is lower than what we might see in the near term. Fair to say?

Well, I think there is short-term leverage. That's one of the benefits of our model is that we expect that in periods where revenue comes up, and we've done such a good job of managing our costs that there is going to be modest leverage, but I would expect that to be short term, and I wouldn't expect anyone to build that into a longer term model.

Just one quick one on the tax rate. I think you said that in the back half of the year, there might -- it might go up from the 1% to the mid single digits. Did I get that right? And then longer term, what do you think is the right rate for us to think about as we model out fiscal '11?

I think F10 is low single digits. And, as you know, the accounting guidance now is that we estimate the full year, then we use that throughout all the quarters of the year. So, our best estimate for F10 is low single digits. I think a longer term perspective, F11 and 12 would be similar, kind of low single digits to 5% tax rate.

Thank you very much.

Thank you.

Your next question comes from Sherri Scribner with Deutsche Bank.

Hi, thank you. I just wanted to get a sense of the gross margin trends and also SG&A as we move through fiscal 2010. Ginger, I think your comments were that you being near the 10% targeted gross margin in the second quarter, it sounded like in past calls we wouldn't be near that 10%, so we've seen an improvement. Would you expect that 10% to carry through into the second half of the fiscal year? And also would you expect SG&A to continue to rise, or do you think this is about the level that we should see through the fiscal year?

Yes, Sherri, we're happy to say that we are seeing better performance in both gross profit and operating profit than we expected a quarter ago based on the strengthening revenue. So I would expect the Q2 gross margin to hold through the balance of the year. And when I said near that could be a bit above or a bit below. So I was not trying to guide below the model there.

We also believe that the SG&A levels will be largely in line with what we saw in the second quarter with modest increases as we make modest increases in headcount and spending. We are going to continue to be very disciplined about how we spend, but given the strong revenue increase we see this year, there will be some increases in SG&A. So I'd say no more step function increases in SG&A that we saw in the first two quarters from incentive compensation and merit increases, but small sequential growth.

So the merit increases at this point have been fully baked into the numbers?

Correct.

And then can you give us any detail on the legal settlement? What is that related to?

Hi this is Angelo Ninivaggi; I'm the general counsel of the company. I'd prefer not to disclose the specific nature of the settlement, but you should really think of it as a one-time event and not impacting future periods.

Okay. Thank you.

Thank you, Sherri.

Your next question is from Jim Suva with Citi.

Great, thank you and congratulations, everyone. I have a question for Dean and then a follow-up question for Ginger. Dean, when we look at your guidance, which is absolutely very strong, and compare it to a few months ago when you had your investor day, you had mentioned consensus was at 4% to 5% for the full year, but you guys see the potential where you hope to get it closer to 20%.

Now looking at your run rate, it's looking like you're actually going to come closer to that 20%. So congratulations on that. How do we connect the points of how you are quite a bit more cautious? Was it the overall economy? Was it some of these big megatronics wins that just weren't certain that they would be booked? Or how do we connect about the confidence and posting the results that were spectacular today, versus just simply a couple months ago?

Well, I think, Jim, clearly the economic recovery was far from a certainty as you go back even just a few months ago. And I would say even now the recovery is what I would consider to be somewhat choppy in that we are seeing recovery with many of our customers, but there also are some challenges out there with some others. So we're not seeing it lift all boats even yet.

But the other thing, Jim, this gives me an opportunity to remind folks that, Jim, you have got your own kind of multiple phases of EMS kind of theory here. And I would suggest that for us, a significant phase for us, in terms of setting the stage for 2010 started to happen in fiscal 2008 when we had a very strong year.

We really, I think, worked really hard to define ourselves uniquely in the marketplace around mid to low volume higher complexity, and we developed a substantial momentum with that brand as we entered fiscal 2009. Then, of course, as you know, the recession really started to hit the industry hard. We started to feel that in November of calendar '08, and we saw it kind of bottom out in that April time frame.

Now, I believe that our system of management, our decision tools, the level of accountability we have throughout the company, and our organic growth model had set us up to be able to execute on some very fast surgical actions around cost containment. And we did a very quick adjustment to our cost structure. We did take out some headcount. That was certainly painful. But at the same time, we kept our folks whole, in terms of compensation and benefits and all those things. So the folks that were still here, we kept the morale up quite high. And so -- and we weren't in the situation where we were having a fire drill trying to look at shutting down facilities all over the world.

So for us, to me, that entered the next phase, which was midyear '09 where we started to recognize that, hey, the recession was creating a real opportunity for us, and that it was time for us to shift to more of an offensive mode. So we went out and grabbed some great talent in the industry. We started to add share, from our customers, current customers that had business that maybe EMS companies that weren't well suited for them, smaller ones in some cases, larger ones in some cases. We added some customers where they were exiting manufacturing plants in an effort to adjust their cost structures on a more permanent basis.

We were able to invest in growth. So we added some physical capacity in various parts of the world. We attained really high levels of customer satisfaction throughout, so as a consequence in '09 our revenues were down just 12% for the year while many of our competitors were seeing 20% to 30% declines. And we had a stable and growing footprint and very strong brand, very strong financial strength. Of course, execution was great, and so we just really started to attract some customer retention and new business in the company.

And that really set the stage for what we're seeing now, where we're seeing the economy pick up, we're benefiting from the current customers and maintain that really strong customer relationship, the additional share that we gained with them, and the leverage on the new programs that were added. So a lot of this we've been talking about for quite some time. We think we really set the table for a very strong 2010. We just weren't bold enough to go out and say we're certain that the economy is going to recover and everything is going to be glorious. But clearly we're starting to see the benefits of all the hard work. It's kind of a beautiful thing, frankly, when a plan comes together, and we're starting to see it now.

Great. A question for Ginger. Ginger, can you help us understand a little bit more on the tax rate is there any foreseeable future when you think you're going pay a more normalized tax rate? We think about the mix and some tax holidays in your various Asia jurisdictions, but 1% tax rate just seems like-- for the industry an extremely low tax rate. Can you help us better understand, are you on tax-free holidays in Penang? Just seems like 1% would be as if nothing is happening in [Needham] (sic - see Neenah), Wisconsin, or the US, and I just simply know that that's not true, as far as nothing happening in North America. I know you guys are very busy in North America.

Yes, that's true. So a couple of pieces that will help with this. A, you're right that in Malaysia, where we have a significant amount of our Asian manufacturing, is on a negotiated full tax holiday that continues for at least five years through the future. So there's a significant portion of our earnings that, based on our agreements with the Malaysian government, pays no tax. We have tax holidays in China, where we also have operations.

Now, those are not full tax holidays, but they are certainly a favorable tax rates. And that is an increasing portion of our business. So as you think about our growth in the future we've always said that our growth will be -- we hope to grow in all of our regions, but the fastest growth over the last three or four years has been in Asia, and we expect that will continue.

I would agree that low single digits is not sustainable tax rate forever. I think it's a reasonable expectation in the next kind of mid to near term, and over the longer term, I think there is probably a higher tax rate. But the longer term is probably four to five years in the future.

Thank you and congratulations, everyone.

Thank you.

Your next question is from Reik Read with Robert Baird & Company.

Hey, good morning. Could you guys spend a little time talking the about the medical business, and I guess the growth as it relates to the life sciences and the implantables, how that has come up, and talk about the relative stability of where imaging sits today.

Go ahead, Todd.

Sure, thanks, Dean. Thanks, Reik. Good morning.

Good morning.

So with respect to our medical sector it's an interesting set of circumstances that are happening right now. As Dean mentioned earlier, we're expecting -- we achieved some pretty strong growth in Q1 and are expecting a very strong Q2 as well, too. So we're seeing an increase in demand across the board, although it's really mixed as to how this is occurring.

You mentioned the imaging market. We're seeing improvements in the imaging market, particularly ultrasound, but we really don't expect that to ever reach the historical levels that it had in the past. It's clearly going to continue to remain depressed.

For instance, in the CT market we're still seeing that as down -- and this is industry wide, not just Plexus wide, but 20% down in CT, about 15% down in MR. And we don't really see that coming up, because the reimbursements and the other situations involving those procedures is not likely to recover. Now, you asked about diagnostics and implantables. In that area we are certainly seeing strength in demand.

And, we have added-- one of the things we've talked about at previous investor days and on past calls is really diversifying the customer base into that area, and we're starting to reap the rewards of that diversification, and we're seeing a lot of strength in those areas of the medical sector. So as we look at this going forward, we feel good about the customer base. There's still a lot of uncertainty and probably even more uncertainty around national healthcare, the US healthcare and that's going to have an impact on spending and devices in the medical sector. But we feel good about the customer base that we've built over the last several years.

And with respect to the CT and the MR business being down by those amounts industry-wide, when would you see that kind of stabilizing and at least flattening out?

It's a bit unclear. It may be stable right now, and it may just stay down at these levels, because, again, the reimbursement environment for those procedures is diminishing quite heavily.

So the down numbers you're talking about are year-over-year and sequentially it's flattening out?

Yes.

I think one little nugget of interest is that we are seeing some demand improvement that relates to specific countries retooling their medical systems. So for instance, I think we saw some demand that was generated out of the Ukraine as their government is trying to tool up their medical systems there.

So it's kind of like these one-off kind of events that are driving some, perhaps choppier demand with some of those technologies. But clearly the strength of US demand that had carried many of those big ticket imaging technologies for the past several years I think our sense is that that is perhaps fully built out, and we're just not going to see the level of spend.

Another area, Reik, where we're seeing some increased demand is in the China market. But that's for lower cost items that are specifically designed for that market.

Okay. Thanks for the color on that. And then just one question on Asia. You talked about the growth there and potential expansion. What would be the earliest that expansion might occur?

Mike, you want to take that?

Yes. This is Mike. I'd say we've got multiple phases we're looking at. Quite honestly, globally, but Asia specifically, and I think Dean touched on this on the last call, the first step that we see ahead of us is probably in some incremental expansion in Penang, where a majority of our footprint is. We have our Asia technology center.

I guess I'd frame that now, we're pretty far down the path about it's the right thing to do. We're looking at right addresses, right form factor, right footprint. So I think, decision-wise probably in the next quarter or two, I think real -- incremental space there. Think about it more in probably the 12 to 14-month kind of a time frame probably the best case is how I'd frame it.

Okay. Great. Thank you, guys.

You're welcome.

Your next question is from Brian Alexander with Raymond James.

Thanks. Can you hear me?

Yes.

Just on the quarter you just reported, I just wanted to understand a little bit better why the gross margin didn't rise more sequentially. I think they were flat, ex the legal settlement. I know you had additional incentive comp that was recorded in cost of goods sold, so maybe that explains part of it, but you also had better utilization. So if you could just talk about other factors like end market mix and whether this load and chase inefficiency environment limited further improvement in gross margins in the quarter you just had.

Thanks, Brian. I would say the quarter was, as we expected it, flat to the fourth fiscal quarter, and we had said that we didn't expect to be back to 10% until we got north of $450 million of revenue. So the 9.6% we thought was a good achievement given the level of revenue and that we had just not reached the leverage point where we're going to be back to our financial model.

We don't really believe that the supply chain had much of an impact on the quarter. We had had modest puts and takes, which we shared with you, including the legal settlement, but I'd say overall there were no other big trends in the quarter. We think it was a very good result.

Great. Then just on the CapEx plans for Asia, those aren't in your numbers that you talked about earlier for FY 10, and we just got a little bit more color on the timing, can you also provide a little bit more color on kind of range of expectations on what that investment may ultimately look like? Are we talking tens of millions of dollars or not that significant?

Brent, I think that the way to think about this I think that CapEx in a year where we're growing is going to be somewhere in the range of $60 million to $70 million. We've spent, historically, over the last couple years, around $60 million. I think in years where we put up new footprint it could be towards the high end of the range at $70 million. I honestly don't see it being much higher than that in any year so I think your long-term CapEx modeling should be in that $60 million to $70 million range.

Great. Then finally on working capital, the expectation is the trade cycle is going to creep above 70 days in the next quarter. I'm just wondering if and when we might see that normalize back below 70 days, or is the mix of business changing such that working capital is going to be permanently higher?

I think that's a good question. I don't know that we completely have the answer to that yet. We are happy with the results where they are now in the high 60s, low 70s. And I would say that that delivers an exceptional ROIC, which is our benchmark at the end of the day. So as long as we're delivering that ROIC that inventory allows us to meet our customers' expectations and deliver excellent service. So I don't know that we have longer term plans to get below that. We obviously continue to challenge the team to improve working capital wherever we can, but I think high 60s, low 70s is probably a good spot for us in the model for now.

Finally, the clarification on the 20% ROIC target, that assumes low single-digit tax rate as opposed to maybe a higher tax rate that you might see longer term?

I think we try to manage our model to cover all of that. We have hit 20% when we had a higher tax rate; not too long ago we had a 20% tax rate because we had more North American business. So I'd say that we -- the biggest drivers of that target will be our -- thinking about our weighted average cost of capital, which currently we estimate at 15%, and then our commitment to deliver that 500 basis points above it.

Great, thank you, and nice job.

Thank you.

Your next question comes from Sean Hannan with Needham & Company.

Yes, thank you, good morning.

Good morning.

So just to separate some of the forecasts from the linearity of demand is there a way, perhaps, if you can provide a little bit of color, as we look to the months within the quarter, what was that linearity of demand and actual product pulls, and were there segments where the trend lines were a little bit more pronounced, maybe something that may not have been as obvious as where your segment performance actually was sequentially on the quarter?

Well, Sean, I can start on the linearity within the quarter. Our quarters are traditionally pretty back end loaded to the last month of the quarter, and this quarter was no different. It was about 45% to 46% of our revenue comes in the last month of the quarter. I don't know what other commentary we'd offer on the sectors, unless Dean wants to add anything else.

I would just generally speaking, we tend to see the customers that are in the configure to order demand pull environment tend to be the ones that load the quarter toward the back end, and so typically those are more of the communications, wireline, wireless kinds of customers as they were the ones that pioneered moving to that model earlier than others, even though we are seeing that model adopted more and more by customers, more broadly speaking, across the industry sectors. But I don't know if there's a great take away from the numbers in terms of end market demand, picking up quickly at the end of the quarter for any particular sector that you could really kind of use as anything informative at this point.

Okay. That's helpful. Engineering, did I miss what the wins were for that business? And then is there a way if you can break down or provide a little color around how much was medical?

I'm so glad you brought that up, because it occurs to me I didn't put anything in the script about engineering, which is a miss on my part. Actually, the engineering organization, as we've reported at the end of fiscal year '09 had a record number of new business wins, a record volume of new business wins. This quarter was a little bit softer, but not too far from their average. I think not unusual, given that you get a little bit of decision paralysis on big development programs around the holidays, that sort of thing. And we've seen the pace now pick up again as we started into the second quarter. So all in all, we're quite bullish on the engineering services part of our business, the backlog is very strong.

They're back into a hiring mode for new talent, and I think this is not unlike past economic cycles where in the recovery, customers start to recognize they have to get a lot of stuff done, bring new products to the marketplace, and they're a little more interested in trying to take their engineering capability and move to what is a bit of a variable cost model, which means engaging outsourced engineering and product development. Of course, we think we're the best in the industry at this, broadly speaking. So we're really bullish on the engineering services part of the company at this point.

Okay, Dean is there a way to provide a number in terms of what the wins were, or -- in terms of the bias of how much of that was medical?

There is. I think the wins number was right around $9 million, $10 million of engineering services work and the bias was heavily toward medical again this quarter.

50% was medical.

Terrific. Thanks so much.

Thank you.

Thanks, Sean.

Your next question comes from Alex Blanton with Ingalls & Snyder.

Good morning. I'd like to ask you -- if you have any information about the ultimate market, because you mentioned that you saw an increase in demand, for example, in the wireline at the enterprise level. But based on what's been going on in the economy and in capital spending, I'm not sure that that reflects an actual increase in expenditures for capital expansion by those companies. It may reflect simply the fact that last year, they reduced their inventory of the products that you're making, so that this year you have to supply more just to maintain their production. I mean, what information do you have on that?

Yeah, that's pretty easy. The products that we build are not shipped to our customers; they're shipped to our customers' customers. Direct order fulfillment model. So any demand that we are seeing is demand that's being generated by the end customer.

Well, but do they represent installations?

They are the businesses that will utilize the equipment, so yes.

But do they have any inventory out there of the products you're making, or do they simply get from you whatever they are installing on a custom basis? Is there any inventory in the pipeline out ahead of you that is causing some of the demand fluctuation is what I'm asking.

Not for the products we manufacture in this space.

In which space?

In the wireline networking space.

Okay. So the demand that you are seeing reflects actual increases in capital spending going into the economy?

Yes.

Okay, good, thank you.

You're welcome.

Thank you, Alex.

(Operator Instructions). There are no further questions at this time.

All right, well, I just want to thank everyone for joining us this morning. Some great questions, and I always appreciate the probing because it gives us an opportunity to really talk more about the business. I also want to thank the nearly 8,000 Plexus employees around the world that really just did an awesome job this quarter, and, of course, you know what's out in front of us here in Q2, and, of course, I've got absolute confidence that we're going to do another great job this coming quarter. So thanks to all of you. With that, we will call it a day. Thank you.

Thank you for participating in today's conference call. You may now disconnect.