Plexus Corp (PLXS) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corp conference call regarding its second fiscal quarter 2010 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 Ms. Ginger Jones, Plexus' Vice President and Chief Financial Officer. Ms. Jones, you may begin.

Hello and thank you for joining us this morning. Normally Angela would open the conference call and present the Safe Harbor information, but he is currently on assignment in Penang assisting our team with the many initiatives we have in that region. So I will take his portion of the call for the next few quarters. 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, plan, 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 Form 10-K filing for the fiscal year ended October 3, 2009, 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 operation performance by eliminating infrequent or unusual charges. Similar non-GAAP financial measures, including return on invested capital, are used for internal management assessments because such measures 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 CEO, and Mike Buseman, Senior VP of Global Manufacturing Operations. We will begin today's call with Dean providing second quarter commentary about our market sector performance and outlook, our new business wins, capacity utilization and guidance for the third quarter of fiscal 2010. I will follow up with details about the second quarter financial performance and make some additional comments about the third quarter of fiscal 2010. Let me now turn the call over to Dean Foate. Dean.

Thank you, Ginger. Good morning, everyone. Last night we reported results for our second fiscal quarter of 2010. Revenues were $491 million with EPS of $0.51. Both revenue and EPS were near the top end of our guidance ranges. We anticipated an exceptional quarter when we provided guidance for our fiscal Q2 back in January. Revenues were up 14% quarter over quarter, while EPS grew approximately 16%. We experienced growth in all of our market sectors, both as a consequence of improving end market conditions and production ramps of manufacturing programs won over the past few quarters. Working capital management improved sequentially and helped drive return on invested capital to 18.7%, closer to our target of 20%. While the quarter was strong we experienced a number of puts and takes in production demand during the quarter, as many customers continue to struggle with their forecasts during the recovery.

In some cases the constrained supply chain is limiting our ability to service our customers' request for demand upside or accommodate product mix changes with the agility they desire. While this creates a near-term stress, it also provides the catalyst for some customers to adopt a more intelligent supply chain strategy designed specifically to provide them with the added flexibility and agility so that we can service their demand volatility with heightened predictability. We believe this ultimately plays to one of our competencies, creates competitive advantage for our customers and results in stickier relationships. If you want to learn more, there's an article published this month by AMR Research that discusses Plexus' supply chain solutions capability in detail. And we'll be happy to get you a copy of that report if you just contact Ginger.

Turning now to some comments on our sector performance in the fiscal second quarter and the current expectations for our third quarter of fiscal 2010. Our wireline/networking sector was up about 4% in Q2, slightly better than expectations when we established guidance, as demand improved during the quarter for the majority of our top ten customers. Additionally, we continue to ramp new programs won in recent quarters. Looking ahead to Q3, we currently expect sequential growth to continue in the low single-digit percentage range for our wireline/networking sector. Our wireless infrastructure sector was up strong in Q2, up approximately 42% sequentially due to strong yet lumpy demand from a newer significant customer. Additionally, we benefited from the start of production for a new customer won just last quarter. In Q3 our wireless infrastructure sector revenues are currently forecast to decline in the high single-digit percentage range.

We have a relatively short list of significant customers in this sector and we anticipate that their demand environment will remain lumpy over the coming quarters. Our medical sector revenues grew approximately 19% in Q2 consistent with our expectation as nine of our top ten accounts grew during the quarter. For now the CapEx environment for the healthcare industry appears to have stabilized and we are beginning to benefit from our efforts to diversify both our portfolio of customers and the healthcare technologies that we manufacture. We currently anticipate another strong quarter for our medical sector in Q3 with revenue growth in the high teen percentage range as newer programs ramp in production. Revenue in our industrial commercial sector was up approximately 26% in Q2, stronger than our earlier expectations. 12 of our top 15 accounts in the sector enjoyed improved end market demand during the quarter.

We expect Q3 to be another good quarter for the industrial commercial sector with revenue growth in the mid-20s percentage range driven by strong performance among our top 15 accounts and the early production ramp of the Coca-Cola programs. Our defense, security and aerospace sector was about flat quarter over quarter, a disappointment from our earlier expectations that indicated mid-teens growth. The majority of accounts in this sector missed their earlier forecasts. The outlook for Q3 appears better, as all of our top ten accounts are forecasting growth. Turning now to new business wins. During Q2 we won 18 significant manufacturing programs, which we currently estimate will deliver approximately $137 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 the ultimate realization of the forecast of revenues.

Our engineering services business continues to build a healthier backlog with $16 million in new program wins in Q2, about 70% of the engineering programs or the program revenue won this quarter was in the medical sector. We continue to modestly add engineering resources to support the improved business outlook. Addressing capacity utilization and global growth, our as-tooled capacity utilization in Q2 was approximately 84% overall for the Company. Utilization rates are trending toward improvement in all of our operating regions. Utilization rates in our A-Pac region are very high. While we can accommodate near-term growth in the A-Pac region with additional investments in people and equipment, we anticipate that we'll reach our theoretical maximum capacity as we approach the end of fiscal 2011.

We are currently evaluating investment opportunities for additional brick and mortar to accommodate our long-term [overall] strategy. Turning now to guidance. Our current expectation is that our third fiscal quarter 2010 will be a strong quarter. We are establishing third quarter revenue guidance of $520 million to $545 million, with diluted EPS of $0.54 to $0.60 excluding any restructuring charges and including approximately $0.06 per share of stock-based compensation expense. We believe that the improving end market conditions in combination with new business wins that ramped during the quarter should result in quarter over quarter revenue growth of 8.5% at the midpoint of the guidance range with appropriate earnings leverage. Looking further ahead, we currently anticipate sequential revenue growth to continue in our fourth quarter suggesting full-year -- full fiscal year organic revenue growth could exceed 20%. I will now turn the call over to Ginger. Ginger.

Thank you, Dean. As Dean mentioned earlier, revenue and earnings were near the top end of the guidance range. The quarter unfolded largely as we expected, but I can share a bit more color on the results in the second quarter. Gross profit was 10.3% for the fiscal second quarter. This was in line with our expectations and consistent with the first fiscal quarter of 2010. Selling and administrative costs were $27.1 million, slightly higher than our expectations for the quarter and higher than spending in the fiscal first quarter of 2010. As we discussed in the January earnings call, the second fiscal quarter includes the impact of approximately $600,000 related to annual merit adjustments for employees. In addition, we also had additional share-based compensation expense in SG&A of approximately $900,000 during the quarter.

This was based on the timing of some equity awards and the increased share price during the quarter. Finally, we began make investments in staff and other support costs to support the high level of growth we are expecting in fiscal 2010. SG&A cost as a percentage of revenue decreased again this quarter to 5.5% and expected result as we obtain better leverage from the increased revenue during the second quarter. The last item for discussion on the income statement relates to our tax rate. The full year tax rate recorded in the second quarter was 2%, which was slightly higher than the 1% that was recorded in the first fiscal quarter. 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 mix of forecasted earnings between jurisdictions can have a significant impact quarter to quarter on our estimated annual tax rate. Earnings in our Asian locations benefit from negotiated tax holidays in both Malaysia and China, while US earnings are taxed at the full 38% federal and state tax rates. Although we don't usually comment on individual site performance on this call, I would like to acknowledge the management and employees of our site in Juarez, Mexico. This is a site that has worked hard to overcome a number of challenges. Just as the site completed significant upgrades to their equipment and added key new management members, they along with all of our other sites were negatively impacted by the recession in fiscal '09. I'm very pleased to say that this site generated profit in the second fiscal quarter and is expected to be in the black for fiscal 2010 in total. In particular I want to recognize our general manager at this site, Andy De La Torre, and his team for their hard work and dedication.

Moving on to the balance sheet and cash flow. The cash conversion cycle decreased by three days during the quarter to 66 days, a strong result given the increase in revenue in the second quarter, anticipated growth in the second half of the fiscal year and the challenges of a constrained supply chain environment. We consider this an excellent outcome and the result of hard work by our supply chain and customer management team. This was better than our original expectations for the quarter of 70 to 74 days. Days in receivables decreased by five days to 45 days. This included negotiated prepayments from several of our customers which accounted for three days of the reduction from the prior quarter. Days in inventory increased by one day to 89 days. The dollar value of inventory increased by about $58 million or about 16%.

This increase in inventory dollars was expected based on increasing revenues in the second half of the fiscal year and lengthening lead times for some component. About 40% of the increase to inventory dollars was for customers in the wireline/wireless sector that have seen significant recent improvements in demand. Finally, we have a total of $26 million of cash deposits on our balance sheet, equivalent to about six days of inventory which helps to mitigate our inventory risk. Accounts payable days decreased by one day to 68 days, in line with our expectations and recent performance. We have made significant improvement over the last several quarters in accounts payable days, increasing 18 days from the 50 days at the end of fiscal 2008. Free cash flow for the quarter was modestly negative in the amount of $4 million. We generated $15.3 million in cash from operations and spent $19.1 million in capital expenditures for the quarter, primarily for equipment to support new programs and increased customer demand.

I will now turn to some comments on the third quarter of fiscal 2010. We are happy that our second quarter results are trending closer to our long term 20/10/5 financial model. For those who are 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%. Gross margin should be consistent with our model and near 10%. This is slightly lower than the 10.3% that we recorded in the first half of fiscal 2010 and reflects investments in people, information systems and equipment that we're making to support the strong revenue growth that we currently anticipate. SG&A for the third quarter of 2010 will increase slightly and is expected to be in the range of $27 million to $27.5 million. As expected this is only a small increase in spending from the second quarter of 2010.

We are anticipating modest increases in headcount and discretionary spending as we see higher revenue place additional demands on the organization. As a result, we expect to see leverage on the SG&A line as revenue increases during the year and hope to see SG&A at 5% of revenue by Q4 of F 10. Depreciation expense is expected to be approximately $10 million to $10.3 million in Q3, up from the $9.8 million in Q2. We continue to estimate that the effective tax rate for fiscal 2010 will be in the low single digits. As was demonstrated in recent quarters, the tax rate can vary 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 third quarter to support the planned increases in revenue.

Based on the forecasted levels of revenue, we expect these increases will result in higher cash cycle days. We currently expect cash cycle days of 68 to 72 days for the fiscal third quarter. This increase is the result of additional inventory for new program transitions, expected increases in accounts receivable, and a small decrease in days of payables based on the timing of inventory purchases during the quarter. Our capital spending forecast for fiscal 2010 has changed from the $65 million to $75 million we discussed in the conference call in January. As Dean mentioned earlier in the call, our current utilization is 84% of as-tooled capacity. This is not sustainable to support new programs and retain white space to show to potential new customers. As a result we're making plans to expand our footprint in close proximity to our existing location beginning in the A-Pac region.

We are also planning for additional equipment in our existing facilities. These growth plans result in a new capital expenditure forecast of $80 million to $90 million for fiscal 2010. This includes approximately $10 million of capital planned for a new site in the A-Pac region to be spent in the remainder of fiscal 2010. The balance of capital and initial equipment for that facility will be spent in the first half of fiscal 2011. Our financial model and targeted ROIC is designed to generate enough cash to support 15% to 18% revenue growth. In a year such as 2010 in which we will likely exceed that revenue growth rate, we would expect to use some of our excess cash to fund growth. Although we expect to generate enough cash from operations to fund the working capital requirement, we expect to be negative in free cash flow during fiscal 2010 to fund some of these capital expenditures. We calculate free cash flow as cash provided by operations less capital expenditures.

As a reminder, we generated $113 million of free cash in F '09 and we believe these ebbs and flows of cash are a normal part of the EMS business. We expect to fund these investments with our existing cash and have no plans at this time for additional borrowing. As a reminder, we do have a committed $100 million line of credit with our existing bank group that could be utilized if we have short-term cash needs. This period of strong revenue growth is an exciting time for Plexus and we are managing with our usual care and discipline. As a management team we are committed to making the right investments to support growth, while delivering our financial model and result to our shareholders. I am very pleased with the discipline in managing spending that we demonstrated during the recession and our ability to quickly return to our financial model during this recovery.

Before we take questions I want to remind everyone that we are planning an investor day on June 8, 2010, in Neenah, Wisconsin. We are planning to share an update on our strategy and review our defense, security, aerospace sector in more detail. In addition we will be offering tours of our Neenah design center and the manufacturing facility in Appleton, where we manufacture products for the Coca Cola Company. We look forward to seeing you here in the Fox City. With that I will open the call for questions. We ask that you please limit yourself to one question and one follow-up.

(Operator Instructions) Our first question comes from Reik Read from Robert Baird.

Hi, good morning.

Good morning.

Could you guys maybe spend a little bit more time on the healthcare side and talk a little bit about how the changes may be impacting you. And as part of that, Dean, you had mentioned, I think last quarter, expansion in a number of countries with some new medical business probably in the imaging area and just talk about how that may be gaining momentum. And then also the pipeline and conversion of some of the diagnostics and implantable business and how that's moving forward.

Yes, the healthcare market, as you are alluding to, is a little bit of a complex equation at this point. We're still trying to sort out what the overall impact is of the new healthcare legislation. Let me just say that the current market, as I suggested, appears to have stabilized at least from a CapEx standpoint and we're starting to see customers benefit from the need to replace their obsolete equipment in hospitals. So we're seeing some demand from that. We also are seeing some demand as a consequence of the Ukraine's investment in their healthcare delivery system. So we have a couple of customers now that are benefiting from that buildout. As far as the healthcare reform act, I think the bad news for the equipment makers is that there's expected to be an excise tax on certain medical devices and that is going to, of course, impact their business and, of course, there's expected to be some cost pressure that's going to flow down to everyone in the supply chain to participate in funding that tax.

I think on the good news side of it is that it's going to create a number of new patients and so we're going to expand coverage to a number of previously uncovered Americans who are going to have access now to the healthcare industry and that's anticipated to drive additional demand to the equipment makers as the healthcare industry expands to meet that increased demand. So it's kind of a mixed equation here in terms of what's going to unfold as a consequence of this. Just a couple other tidbits. I think generally speaking the ultrasound business of imaging is where we're seeing some of the improvement in strength. Currently CT, MR, some of those kinds of businesses are still under pressure. We're also benefiting quite nicely because we've diversified the business into the implantable kind of defibrillator space, pacemaker space with programmers and we have a number of customers now in that space.

We're seeing decent demand there and of course that demand is not tied as tightly to hospital CapEx budget. So it's somewhat independent of that. And we're also seeing some growth in our business now in life sciences and diagnostics. Hopefully that provides you with a little bit of color on the healthcare space.

Our next question comes from Jim Suva from Citi.

Thank you very much and congratulations. I believe several months ago, or quarters ago, you had -- it had been pretty well-known that there were some software issues associated with some of your mechatronics business win and buildout. I was wondering can you update us on kind of the progress of that, the ramping of that and help us feel a little bit more comfortable about the amount of capital you're committed compared to the progress and what we expect to see from that type of new business venture you're going into?

Sure, we'll let Mike take a swing at this and thanks for the congrats, Jim.

Hi, Jim. I guess the quick comments I would share with you specifically on the mechatronics customer and I presume you're talking about our relationship with Coca-Cola. I guess the quick comments I would share is that that project is pretty much right on the path we anticipated it to be for the year. We've talked all along about it being a second half of the year ramp into production and I'm happy to say that's exactly where we're at. We had an exec review with the Coke team over the last couple weeks. Certainly revolutionary product. There's been challenges along the way, but we're all very optimistic right now.

Relative to the investments in CapEx, Ginger do you want -- ?

Yes, Jim, I'd say that our investments for this program have been in line with what we would do for other customers, so I would say nothing unusual. Many of those investments were made a year or two back as we began preparing for this ramp that we're seeing now. So we would expect no unusual impact on our model as we ramp Coca-Cola.

Our next question comes from William Stein from Credit Suisse.

Thanks. Just first a housekeeping question, guys. Can you repeat what the outlook in the industrial/commercial segment is in Q3? I think Coke is expected to ramp in the coming quarter, yes?

Yes, I think I said it was going to be up in the mid-20%ish range overall the industrial/commercial sector and of course the Coca-Cola program is part of that.

Great, thanks. And then I'm wondering also, Dean or Ginger, whoever is, whoever can handle this one on inventories. You spoke a bit about shortages and supply chain challenges. Was there any -- should we think of this as some money being left on the table in the quarter from perhaps incomplete kits in inventory and how do you see that resolving itself over the next few quarters?

Yes, this is Mike. I guess I would comment, we certainly had more than our share of challenges during the quarter. I would frame it more, though, that they were timing within the quarter rather than we left anything very significant on the table during the quarter. Probably showed up more in operational efficiencies that we had to work maybe a little harder on cycle time through a factory. Certainly had a challenging month three of the quarter. But I don't think there was anything I'll say significant or material that we really left on the quarter. I think we come into quarter three with a pretty solid picture of real quarter three demand versus a rolling backlog, if you will, if that helps.

Our next question comes from Sherri Scribner from Deutsche Bank.

I thank you. I was hoping you could flesh out the CapEx a little bit more. You talked about expanding in Asia. The press release mentioned Europe. Just trying to get a sense is the primary focus going to be Asia? Do you also plan to expand in Europe? And I know you mentioned other -- adding capacity in your existing facility so that also suggests you might do something in North America. And then thinking about the CapEx longer term, what are your expectations about the CapEx as a percentage of sales going forward? We're somewhere around 4% this quarter. Is that a sustainable number going forward or is that maybe closer to 3.5%? Thanks.

Okay, Sherri. Let me just take part of this and then I'll -- it's a multi-part question here, so we'll let Ginger weigh in. I just want to be, clarify a little bit on Europe. First, the press release, I think, was alluding to the investment that we would like to make in engineering services in Europe. We think it's a very important part of our product realization model to go to market with our strong engineering services. Now, we already have capability in engineering services in Livingston, Scotland. Our hope is that we can build something in or invest in an opportunity in Continental Europe to augment that capability that we already have. Now, any additional investment in Europe would be beyond. And of course the engineering services is not substantial from a CapEx kind of investment, it's more around human capital.

From a CapEx standpoint, the next investment would likely take place in Oradea, Rumania, where we currently have a leased twin pair of facilities there that we're, if successful, hope to grow out of and we are going to need to get a more permanent location in very close proximity, which was the plan all along. So that is on deck, but it's probably a little bit out yet in front of us as we're still in the early stages of developing the business at our current Oradea facility. Now relative to Asia, I think we're going to be a little bit cagey, perhaps, on exactly the size of investment and where in the A-Pac region. We certainly believe strongly in our capability in Penang, Malaysia, and look probably first there. But we're also working on other alternatives in China and in the future out in Thailand and we're trying to understand where the best incentives are going to be for us to invest and so we are in active dialogue with the appropriate people in each of those places to determine which is going to be the appropriate investment for us to make. Now, Ginger, do you want to talk a little bit in terms of CapEx relative to, any relative to revenue or whatever metric you like?

I will. Sherri, as we look forward, you're right that it's about 4% of revenue for fiscal 2010 and given the strong growth we're seeing we believe it could be in that range for next year as well. So my initial thoughts about F 2011 would, it could be between 3%and 4% of revenue for fiscal 2011.

Our next question comes from Brian Alexander from Raymond James.

Thanks. Just a question on the new business wins, $137 million strong, although off the record levels from a year ago. Just could you comment based on the funnel of opportunities that you're seeing out there and your anticipated conversion rate? Do you think you can maintain new wins around this level or just help us think about the pace of new wins going forward.

Yes, I think this is a reasonable pace for us. Of course, as the business gets bigger, if we're going to continue this long-term growth rate of 15% on a compounded basis or that number is going to continue to get bigger over time. From a funnel standpoint, consistently seems to run in the $1.8 billion to $2 billion range. Currently it's at about $1.8 billion in terms of overall opportunities. Right now about 40% or so plus of those opportunities are in the medical space and about 20% in wireless and wireline combined, another 30% of them or so in industrial commercial, and then the balance in defense, security and aerospace. So pretty, from our perspective a pretty balanced funnel and a good number of those opportunities fall very nicely into our sweet spot in terms of program sizes that are in that up to $50 million range that we like to compete on and compete very well for and fit our model.

So we feel very good about the sector base go to market strategy, about the hunter/gatherer approach that we use for developing our business, the conversion of programs particularly with our existing customer base, and the high rate of conversion that we see on a quarterly basis in terms of expanding share. So I feel very good about our, the sustainability here, at least out on to the horizon, visible horizon here that we feel about growing our business over the next three to five years.

Our next question comes from Shawn Harrison from Longbow Research.

Hi, good morning. Good morning. Just a follow-up to Jim's question on Coca-Cola. Given that there was a review with them recently, has anything changed in terms of the revenue potential long-term into FY 2011, and just maybe the thoughts on the ramp schedule with the program there.

Nothing has really changed as of the last review that we had with the Coca-Cola executives related to the ramp-up in F 2011. There is talk about where this program could go next from a regional standpoint and derivatives of the program that might be appropriate for other market places, but that's all still very early dialogue. And I think one of the things the Coca-Cola team is doing and doing very well is trying to stay very disciplined and very focused on the core market and getting the products out into their, into this core and first market and being very successful at that launch.

And I think that in our experience customers that do that tend to be the ones that are most successful, stay focused, get it accepted into the marketplace, get the pipeline of the disposable part of, the consumable part of this thing ramped up and ramped up appropriately, get the service and repair support structure in place and then go from there. So at this point I think they have a very, in my opinion, they have a very good plan and I think that we're ready to really take on the ramp up with this thing as it unfolds here in the later part of F 2010 and on through F 2011. We haven't really adjusted at all our thinking in terms of revenues at this point.

Our next question comes from Sean Hannan from Needham & Company.

Yes, good morning. Congratulations.

Thank you.

So if I could follow-up on some of the discussions you have had around the momentum you are seeing. When you look at 2010 some of your businesses are already showing some major growth in terms of the rebound and new wins.Others have a little bit more momentum, such as industrial, we are going to see some more momentum there with the addition of Coke. So if you can step back and share some color topically. When you look at your segments what appears to have the most sustained legs, not just next quarter and I am not looking for explicit guidance for the rest of the calendar year, but just topically when we look at the remainder of 2010 what in your mind now would you see having better legs than some of your other groups and are you then really attributing this much more to wins versus the impact of a rebound starting to lessen?

This is a tough question. I think because the business in each of our market sectors is quite diverse, but I would say a couple of things. One is that the goal here is that we try to build a sustainable growth business in each of our end market sectors. And that's why we've aligned ourselves as a team and why we work really hard to go to market that way. Now I would say that if you look back here a little bit, clearly we benefited in the down cycle by being a Company that did a few things well. I think that we took the cost out we needed to quickly and adjusted our cost structure to the down revenues in anticipation and through the recession in a very quick fashion and a very effective fashion. That allowed us to stay financially very strong. We had great execution on behalf of our customers and had great momentum with those customers coming into the recession and a great strengthening of our brand. And I think through the recession we did not get caught up in having to take out a whole bunch of factories and reduce capacity and do all these things that really upset customers.

We were actually able to go out there and expand our relationships with our existing customers as they were being displaced, perhaps from some of our competitors or they were seeing poor execution in the marketplace competitively. We also saw a number of OEMs that we were doing business with that decided to shut down facilities and so we benefited from the exiting of some OEM manufacturing capacity that moved into our facilities and then, of course, we had a good win rate with new customers as well through that period because of our financial strength and the stability of our footprint and our reputation for execution and building of the brand, quite frankly. So all of this kind of built to my opinion that really gave us some strong momentum into recovery. Now we're seeing the benefit of the new programs ramping up. We're seeing the benefit of the programs that were, came out of the OEMs that were under end market pressure because of recession. We're seeing the recovery of those revenues and of course we are seeing the recovery of revenues generally speaking now across all of the end markets in which we're participating in.

Clearly the whole communications space we think we're well positioned there. There's a number of things that are driving demand on the wired and the wireless infrastructure and we think that we are well positioned there. We think that we're going to continue to see a strong business going forward there. Medical now we've repositioned ourselves. Where we were so dependent upon imaging to other technologies now. So even though that is an uncertain marketplace from a legislative standpoint, there are also opportunities in the marketplace because of the change in the legislation and we feel that now that we finally have turned the corner in medical and are starting to see some great momentum here in our healthcare portfolio. And industrial commercial is really just, generally speaking, picking up across the board. Of course the semiconductor capital equipment folks now are in a good cycle. We are seeing quite a bit of uptick there. And then we have the Coca-Cola programs now laying on top of that. So I see a pretty good outcome here as I look forward, certainly through F 2010 and into F 2011, that is pretty well balanced.

Defense, security and aerospace is still early and I think right now any kind of real strength that we are going to see there is going to be probably more dependent on the aerospace segment and we are gaining some nice share in that segment. And of course Honeywell is a very important customer for us. We get tremendous amount of share with Honeywell through the downturn and we're benefiting from that consolidation of business. And as the spend associated with aerospace starts to pick up again, we think we're going to be in a real good spot with their business as well as some of our other customers that fall into that sector. So long-winded answer, but it's a complicated question when you have a business that is as diverse as ours is. Next question.

Our next question comes from Brian White from Ticonderoga.

Dean, on the 18 new manufacturing wins can you maybe go through what are some of the larger markets where the wins were segmented and also if you had any new customers in that 18.

Let me address the last part of your question first here. The 18 wins were all with our existing customer base, so this was all new share that we gained with them. Some of them, quite frankly, were -- we had won some smaller pieces of business in earlier quarters now where we've got the bigger chunks of business now coming in. Just to give you a little bit of breakdown, I will give it to you in kind of percent of the revenues of the $137 million. The highest percentage, about a little better than half of it, was in the wireline and wireless sectors combined. About 25% of it or so was in the medical space and then the bulk of the remainder of it was in industrial/commercial. So it was, I think, a pretty nice quarter from a balance of the wins.

Next question comes from Alex Blanton from Ingalls & Snyder.

Good morning.

Hi, Alex.

I'm going to ask my questions at the beginning because I notice that you've probably instructed the moderator to cut people off during your answer, because I notice that nobody is saying thank you throughout this call. There were cut off.

I don't know that we did instruct, but that's the way it is working this morning.

That's the way it is working and it sort of cuts off the dialogue between the analyst and the management when you do that. So first, you said at that the beginning that some customers were struggling with demand during the quarter. Could you characterize what kind of customers those were? Second, if you annualize the new wins for the quarter and annualize for sales, comes out to about 27%, the annualized rate of new wins to the sales. But then, of course, you've got programs that are going end of life at the same time, so what's the net effect? If you were to continue to get new wins at this rate, what would be the net effect in terms of growth? And I'm not really talking about this year's 20%, because that's kind of off a depressed base, but something that can be sustained going forward given a normal economy. Those are the basically the two questions.

Alex, this is Ginger, I'll start. When we think about how new wins impact our future business we think of that in three kind of areas. First, you're right, new programs will ramp in the future. We generally think new programs take three to four quarters to ramp. As you also said, we have business that goes away, end of life programs or through cost-downs. As you know, our customers aggressively want us to reduce both the cost of the supply chain components and of our manufacturing, so we -- there are cost-downs on a regular basis with our customers. And then the last piece of that equation is what the end markets do for the existing programs, are they up or are they down. And as we saw in F '09 when end market demand came down across all of the sectors and almost all of the customers, that can be a big part of the end result. In F 2010 we're seeing both. We are seeing both end market demand recovery and we are seeing the benefit of the new programs that we won in F 09. So I would say that there is no magic number to that equation, but that's how we encourage investors to think about those pieces of our business.

I know Alex had some other elements to his question. Let me just clarify as well, the $137 million is the annualized number. So it is not the quarterly -- .

It is the annually.

That is correct.

Yes, but that's a quarter, one quarter's orders, so if you have four of those, it's over $500 million. See what I'm saying? That's just one quarter's orders annualized. That's the way I looked at it.

Okay. What I'm trying to say is $137 million at fully ramped, so that's four quarters worth of revenue.

Right, but if you get another $137 million the next quarter and the next quarter and the next quarter -- .

Right. All right. And then the final was relative to the puts and takes during the quarter. I don't know that I could characterize it as any particular type of customer. I think just generally speaking customers have, are participating in the marketplace. They are hesitant or were hesitant in prior quarters to give us kind of any kind of strength of a strong looking, forward-looking forecast. So what they're doing is responding or trying to respond or have us respond quickly with up side within the component lead times. And so as they're moving through the quarter we have customers that say, we want to increase our demand, for example, by another 20% because we have some opportunities and then it's really an issue where we have to scramble around and try to see if we can find the parts and plan the production capacity to try to make it happen.

Now, when we came into this quarter we anticipated this because we knew the supply chain was tightening and we knew customers were struggling somewhat to forecast with any kind of visibility out in time and so we were somewhat cautious when we guided and it appears that we guided appropriately relative to what was possible to execute within a given quarter. And that's just one of the challenges of recovery and as customers gain more confidence in their end markets, we think we'll get a little bit better visibility and more stability in the longer range forecast.

Yes and if I'm still connected could I just add one final question and that is how many of these new wins, if any, came from competitors rather than from new business outsourcing?

There are -- I'm just looking quickly at the list, I know at least two of these came as a consequence of us taking business away from competitors.

Okay, thank you.

Thank you.

Our next question comes from William Stein from Credit Suisse.

Thanks. Quick follow-up. One of your big customers in the wireless segment has been acquired as of a couple quarters ago by a Company that's known to rationalize the supply chain pretty quickly, but it looks like so far you are holding onto that customer. Can you give us an outlook there?

Yes, you're referring to Cisco acquiring Starent. Yes. And we have been quite open about this that this represents both a threat and the opportunity. Of course, we are working hard to turn it into an opportunity to potentially expand our business relationship overall long-term with Cisco. Now there's no certainty to that at all, although we are currently engaged in meetings and dialogue and site visits, not only of the site that we executed the Starent business, but also other sites within the Plexus portfolio have been visited by the Cisco folks. All the right things are happening, but at this point because we're quite conservative people, in our longer term forecast right now as we look out into fiscal 2011 we're assuming that that business will ramp down in what we view to be a fairly aggressive yet orderly fashion and we're going to work hard to try to make that, turn that around and make it an opportunity. So it's still uncertain at this point.

Great. And then one more, if I can. No discussion of Juniper this quarter, obviously your biggest customer. It was 15% of revenue this quarter, typically more like 20%. As you grow with Coca-Cola and all the other new wins start ramping, should we think of this 15% as maybe the new level or would you expect that customer to kind of snap back to a higher portion of revenue?

Well, it's hard to predict yet how that's going to unfold. Certainly Juniper, our overall revenues with Juniper this year are likely to be kind of flat to down a little bit. I think that's a consequence of the recession and the product mix that we happen to have. However, we've won a number of new programs with Juniper and including programs this, significant programs again this quarter that are embedded in this 18. And we're expecting a growth year again with Juniper next year. It's just we're still working on what the longer range forecast is going to be for next year and trying to refine that, so it's hard to say whether that's going to result in a 15ish or a stronger number. It really depends upon how Juniper does with the new programs that we won in their end markets next year.

Thanks, Dean.

Thank you.

Our next question comes from Sherri Scribner from Deutsche Bank.

Hi, thanks. I just-- .

You got back in.

I have a quick follow-up. I got cut off before. I just wanted to follow up on the inventory. Clearly the issues with the supply chain have been pretty well telegraphed in terms of component availability. But if I look at your inventory levels, they increased about 16% this quarter, about 16% last quarter. Even though you've had very strong revenue growth, your forecasts are for about 8% growth next quarter, so there's some disconnect between the revenue growth that you're seeing and the amount of inventory that you're bringing on. I was hoping to get some additional detail on what you are seeing there. Are you building inventory because the supply chain is tight? What are you thinking about, and what should we expect for that going forward?

Mike is probably going to weigh in this, but I want to make it clear that we don't build additional inventory trying to hedge against a tight supply chain. And so we're really not trying to speculate on inventory. Now, it doesn't mean a few customers aren't going to drive us potentially harder to bring in a little extra just in case, because they believe we're going to trend toward the higher end of their forecast. We try to manage that quite carefully because we really -- Plexus will not speculate on the inventory. If there's any overdrive, then that's on the customer's nickel and we expect to have appropriate financial coverage for that.

Are you making deals with customers so that you bring on a little extra capacity for them in case they have some up side?

In his cases --.

That they will pay for.

In some cases that is correct and in some cases there's a deposit on the balance sheet against that additional inventory position.

Okay.

Sherri, it's Mike. I guess I would maybe just add a couple comments. I think we continue to be very disciplined in an overall working capital management approach. So the scenario you just mentioned in certain circumstances we may bring on some material. But we'll work with our customers, try to do it in an appropriate working capital neutral approach. In other words they may pay for us to do that. I think a combination of things are going on right now. The revenue trajectory over the last couple quarters and what we're alluding to here for quarter three drive a lot of the inventory. Certainly some of the constraints in the supply chain create some challenges. And again, I think the third thing that Dean mentioned earlier, again, some of the forecast volatility, especially the load and chase or drop inside a lead time all contribute. But again, I'd probably close with we have a very robust set of systems and controls and our whole goal is to strike the appropriate balance between customer satisfaction but also making good decisions on working capital risk.

Okay, great, thank you.

Thank you.

Our next question comes from Shawn Harrison from Longbow Research.

Hi, two brief follow-ups. You also had another customer that was acquired recently. If could you just provide an update there, maybe similar thinking, I guess, to Starent. Ad then also just within the wireless business, do you think you have won enough new programs over the past few quarters to maybe take some of the lumpiness out of it, out of that business in fiscal 2011 that you're at least seeing in the short-term? Thanks.

The other customer that was acquired was Avocent and they were acquired by Emerson. The characteristics of that situation are somewhat different than the Starent Cisco characteristics. I think the Emerson Avocent relationship could sustain itself over the long run and could become a broader opportunity for us. It is just a matter of working through whatever the kind of commercial terms that need to be established to have a healthy relationship over the long run. So we're -- at this point don't see that as a significant business threat, although it could get to that point depending upon the commercial terms of the long-term relationship over time. So we're still working through that. Relative to wireless, we've had some nice wins in the wireless space, one of which was in the prior quarter and we began to ramp that up this quarter. So we have begun to diversify our business portfolio there some.

But these customers tend to have end markets that can be quite lumpy, frankly, and so when they win big buildouts for some of the higher bandwidth communications in wireless, these buildouts tend to happen in big chunks and the demand tends to swing quite dramatically. So I don't think we've gotten to the point where we have a smooth, ongoing demand profile yet in wireless. I think that's going to take some time with additional diversification before we're going achieve that. I think you are just going to have to bear with us here as we ebb and flow here on the high bandwidth buildout that's occurring, not only in the United States but other markets around the world.

Our next question comes from Sean Hannan from Needham & Company.

Yes, thank you. Hi, Dean. Greetings again. Quickly, some of your competitors have been a lot more active in programs that are ramping with clean technologies or smart grid solutions, whether it be solar or smart meter network solutions. Can you provide a little bit of color or commentary around your level of participation here and then the extent you could possibly ramp one or more programs to be a top five or potentially ten customer.

I think we have a number of opportunities in that space, some of which have been won in the last few quarters and one in particular that I will highlight is over in our facility in Hangzhou, China and is in the inverted space that relates directly to some of the more clean tech. We also have some opportunities here with GE in their quest to gain a leadership position in some of the clean technology space. I don't know that I could highlight anything beyond the inverted space here that is over in Hangzhou that necessarily is going to be tremendously exciting here in the short run.

Now, what about on the wireless communication side? Is there any activity that you have in terms of the -- some of the networks that are being built out there?

Yes, we're participating in the 4G network buildout with a couple of different of our suppliers which is, of course, leading to some of this lumpiness that we're seeing in wireless.

Sorry, I'm sorry, Dean, relevant to smart grid applications.

Oh, relative to smart grid in particular. Yes, there is a smaller piece of the business that relates to that, but nothing that I would point to as being significant from a revenue standpoint at this time. It's interesting technology, but it's a little bit early yet.

Okay, terrific. Thanks very much.

Our next question comes from Brian Alexander from Raymond James.

Yes, just a quick follow-up at the risk of maybe being too nuanced here. Dean, you commented that growth for the year could be over 20%. It would just seem that even if you achieved the low end of your June guidance and hold September flat with June, which seems conservative with Coca-Cola kicking in, that you would certainly be north of 20%. I'm just wondering if you are being conservative with that comment or is there something you see that gives you more caution beyond the June quarter?

I was wondering if someone was going to do that arithmetic and pin me down on that one. It is kind of like obviously, right, looks to be like things would have to go quite wrong not to be over 20% at this point.

Yes.

Any other questions?

I'm not showing any other questions at this time.

All right. Well, I want to thank everyone for the questions. I apologize, we'll work with our service provider to make sure that everybody has kind of equal opportunity in terms of the calls, but I guess we did give instructions for just one question, I guess, and one follow-up. But we'll work on that protocol. Again, thanks for the questions, thanks for the support of Plexus, and thanks for all the employees who really worked hard to just really tremendous growth quarter and of course with that growth comes a ton of hard work to keep the customer satisfied. A lot of them are looking for more out of us at this point or we're doing our best to make sure that we provide our customers with the product that they're looking for with the demand profile that we're looking for and it is a bit of a challenging time from that regard, but at the same time these are all great challenges to have versus the challenge we had just a year ago. So thanks, everyone.

Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.