Plexus Corp (PLXS) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Plexus Corporation conference call regarding its fiscal fourth quarter 2012 earnings announcement. (Operator Instructions). The conference call is scheduled to last approximately one hour. I would now like to turn the call over to Mr. Angelo Ninivaggi, Plexus' Senior Vice President, General Counsel, and Secretary.

Good morning and thank you for joining us today. 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 [concern] 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 filings 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 will reference return on investment capital, non-GAAP financial measures including return on investment 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 Chief Executive Officer, Ginger Jones, Senior Vice President and Chief Financial Officer, Todd Kelsey, Executive Vice President of Global Customer Services, and Mike Busman, Executive Vice President of Global Manufacturing Operations. Let me now turn the call over to Dean Foate. Dean?

Thank you, Angelo, and good morning everyone. Last night we reported results for our fiscal fourth quarter of 2012. Revenues were down 2% sequentially to $595 million with EPS of $0.66, excluding the special charge related to deferred tax asset valuation allowance. The revenue result was below the mid-point of our guidance range, while our adjusted EPS result was at the high end of our guidance range, benefiting from lower than anticipated effective tax rate.

Now a few comments on fiscal 2012. For the year, we managed to grow revenues 3.4% to a record $2.3 billion, a disappointing result that was well below our enduring target and our expectations when we began the year. Throughout much of the year, macroeconomic challenges weighed on many of our customers and markets resulting in forecast erosion of our base business and muted or delayed new program ramps. Additionally, pricing pressure increased as the year unfolded, particularly in our Networking/Communications sector.

Despite these challenges we achieved return on invested capital performance of 15.5%, which is 300 basis points above our weighted average cost-to-capital, and we delivered a 43% year-over-year improvement in economic profit. Additionally, further improvements in our working capital management delivered strong free cash flow.

Another positive note, our new business wins performance was strong throughout the year with cumulative wins during the fiscal year of $956 million and despite the pricing challenges I mentioned, I want to highlight that in the aggregate, these new wins were price consistent with our financial model targets.

Turning now into some insight into the performance of our market sectors during the fiscal fourth quarter of 2012 and our expectations for Q1 of fiscal 2013. Our Networking/Communication sector was down 4% sequentially in fiscal Q4, weaker than our expectations when we set guidance for the quarter. While we experienced sequential revenue growth of the majority of our top ten customers in this sector, a couple of our accounts had a meaningful declines. Our fiscal first quarter of 2012 offers a negative forecast by us for the vast majority of our customers in our Network/Communitions sector as end markets have softened.

The broad-based forecast weakness for our customers should be offset in part by a couple of new program ramps resulting in overall performance that we currently anticipate will be sequentially flat to down.

Moving on to our Healthcare/Life Sciences sector formerly known as our Medical sector, the name change reflects our evolving strategy and enhanced capabilities to service an industry that continues to move toward holistic patient care. We believe Healthcare/Life Sciences reflects how our customers view themselves in this sector and better aligns with our strategies for long-term market sector growth.

Revenues in our Healthcare/Life Sciences sector were up 9% sequentially in fiscal Q4, stronger performance than expected as the majority of our top customers in this sector beat earlier forecasts. Looking ahead to Q1 of fiscal 2013, we currently anticipate revenues for our Healthcare/Life Sciences sector to be down in the mid-single digit percentage range as customer forecasts are indicating broad-based weakness with 12 of our 15 accounts forecasting sequential declines in revenue.

In our Industrial/Commercial sector was down sequentially about 15% in our fiscal Q4, in line with our expectations with 13 of our top 20 accounts sequentially flat or down for the quarter. We currently, anticipate that our fiscal Q1 will be another difficult quarter for the Industrial/Commercial sector. Current forecasts indicate that revenues will be down in the low to mid-teens percentage range as 15 of our top 20 customers are forecasting sequentially lower demand.

Our Defense, Security, and Aerospace sector was up about 21% in Q4. This strength was in line with our expectations and was driven primarily from new program wins. We currently expect Q1 to be up in the low to mid-single digit percentage range with mixed performance among customers in our DSA sector.

Turning now to new business wins. During the quarter, we won 28 new programs in our Manufacturing Solutions Group that we anticipate will generate approximately $234 million in annualized revenue when fully ramped into production, representing five quarters of new wins performance above our target of approximately $180 million. Our funnel of qualified business opportunities decreased slightly during the quarter to $2.1 billion, however continues to be robust given the high level of new program wins harvested from the funnel over the past few quarters. The current funnel includes nearly $800 million in opportunities for the Americas region, representing a good opportunity for longer-term growth in the region.

Turning now to our guidance, we're establishing fiscal first quarter 2013 revenue guidance of $550 million to $580 million. At that level of revenue we anticipate EPS of $0.50 to $0.55 excluding any unanticipated restructuring charges and including approximately $0.08 per share of stock-based compensation expense. The midpoint of this guidance range suggests that our fiscal first quarter revenue would be down 5% when compared to the fiscal fourth quarter reflecting weak demand in our customers' end markets.

Looking ahead, we anticipate that the macroeconomic will continue to be challenging making longer range growth projections exceptionally difficult. Our optimism about longer-term growth is anchored in our new wins performance over the past year. But that optimism is tempered by our customers end market outlook that appears to have deteriorated meaningfully in the past few week. This end market deterioration resulted in forecast reductions and impacted the final quarter of fiscal 2012, but more importantly impacted our fiscal first quarter of 2013 and dampened the forecast for the full fiscal year. Some of the forecast reductions swung our Americas region to a loss position prompting the valuation allowance against our deferred tax asset, Ginger will spend a more time on this topic as part of her comments.

With this difficult macro backdrop, we currently anticipate a challenging start to our fiscal year while we currently expect a better outlook in the second half. We have already initiated certain actions to adjust our cost structure to our near-term lower revenue outlook that Ginger will highlight. We will continue to evaluate further actions to protect our operating performance should the environment degrade further. And finally, I just want to go off script for just a moment and thank the nearly, 9600 employees of Plexus around the world who worked very, very hard this past year on behalf of Plexus and provided excellent services to our customers around the world. So a personal thank you to all of you, many of who would listen in on this call. So with that, Ginger?

Thank you, Dean. As Dean mentioned earlier, fourth quarter revenue was at the low end of our guidance range. Gross profit was 9.5% for the fiscal fourth quarter. This was in line with our expectations and slightly, above our fiscal third quarter results of 9.4%. Selling and Administrative costs were $28.9 million, slightly, below our expectations as a result of lower variable compensation expense.

SG&A costs as a percentage of revenue were 4.9% in the fiscal fourth quarter consistent with the fiscal third quarter. Operating margin was in line with our expectations at 4.6% and slightly, higher than our fiscal third quarter results of 4.5%. These results include approximately $2.2 million of severance expense. As we discussed we've seen reductions in the revenue forecast in the last several weeks and we moved quickly to the reduce costs where possible. I'll cover these reductions in more detail later in my prepared comments.

This recent deterioration of our forecast for fiscal 2013 impacted our forecasted profitability in the Americas region, prompting an assessment of the utilization of our US deferred tax assets. The accounting guidance on this topic is very rigid, and despite our confidence in the future profitability of the Americas region, the viability of these assets in the near term was in question. As a consequence we have established an evaluation allowance that resulted in an additional tax provision of approximately $23 million or $0.64 of EPS in the fiscal fourth quarter of 2012.

This is a non-cash charge that reduces the value of the net deferred tax assets on the balance sheet. The valuation allowance does not impact our ability to utilize these tax assets in the future. We fully intend to improve profitability in the Americas region and we believe that we will ultimately be able to utilize these assets to reduce future tax obligations in profitable periods. As a result of recording this non-cash charge we recognized EPS of $0.02 for the fiscal fourth quarter.

Excluding the impact of the valuation allowance, we recorded tax rate for fiscal 2012 of 7%, slightly below our earlier expectation of 9% and EPS of $0.66 at the top end of our guidance range. Return on invested capital was 15.5% for the fiscal fourth quarter and for the full year, 300 basis points above our weighted average cost of capital for fiscal 2012 of 12.5%, and improved from the fiscal third quarter.

On October 23, the Plexus Board of directors approved a new stock repurchase program under which the Company is authorized to repurchase up to $50 million of its common stock which is approximately 5% our current market capitalization. This program will be funded with existing cash. Although the timing is not certain, we expect to execute this program quarterly on a relatively consistent basis over fiscal 2013. We believe this creates a disciplined process to evaluate our cash requirements, cash balances and then return excess cash to shareholders. This program reflects our desire to return cash to shareholders in a disciplined way and our commitment to total shareholder return. We will continue to evaluate returning cash to shareholders during our annual strategic planning process.

Moving on to the balance sheet, our cash cycle is at 63 days, consistent with our results in the fiscal third quarter. This is a good result within our expected range of 62 to 64 days, and decrease of seven days in total from the end of fiscal 2011. I'll now (inaudible) the details by balance sheet line item. Days in receivables increased two days to 49 days. This increase was largely the result of a concentration of shipments in the last few week of the quarter as well as mix change to customers with less favorable receivables terms.

Days in inventory were 78 days, down three days from our results in the prior fiscal quarter and seven days from the end of fiscal 2011. The dollar value of inventory was down about $30 million from the prior quarter. This is a very good result considering the demand environment during the quarter. With revenues at the low end of the guidance range we had procured material for a higher level of revenue making a reduction in both days of inventory and dollars of inventory a good accomplishment.

Accounts payable days were 58 days, down one day from the prior fiscal quarter remaining at a more normal level for Plexus. Days of cash deposits were consistent with the prior fiscal quarter at six days, the dollar value of cash deposits increased by about $1 million to $36 million. These are deposits received from customers to offset the risk of inventory that we hold on their behalf. Free cash flows [were] generated during the quarter was again very strong at $22 million. This cash was generated largely from earnings during the quarter as [were] total working capital dollars were flat in the fiscal fourth quarter compared to the prior quarter. For the fiscal year we generated $94 million in the free cash flow with about $12 million of this generated from the reductions in working capital during the year, and the balance from operating earnings.

During the quarter we spent $19 million in capital expenditures with approximately $16 million of that for footprint expansion into Xiamen, China; Oradea, Romania; Neenah Wisconsin. For the fiscal year we spent $64 million in capital expenditures.

I will now turn to some comments on the fiscal first quarter of 2012. Gross margin is expected to be in the range of 9.2% to 9.4% down from our gross margin in the fiscal fourth quarter of 2012. This reduced gross margin is the result of reduced on the lower level of revenue expected in the quarter, pricing concessions to some of our customers in the Networking/Communications sector, and the challenges of achieving our target model when a significant portion of our revenue growth is coming from new program wins. We expect SG&A costs to be modestly higher in the fiscal first quarter, in the range of $29 million to $30 million. With the expected reduction in revenue, this will result in reduced leverage to approximately 5.2% SG&A as a percentage of revenue at the mid-point of our guidance range. This is an increase from the 4.9% we saw in the fiscal fourth quarter. Expected to be 12.5% in the fiscal and $12.3 million in the fiscal fourth quarter.

Depreciation expense is expected to be approximately $12.5 million in the fiscal first quarter, up slightly from the $12.3 million in the fiscal fourth quarter. This results in expected operating margin of 4.1% to 4.2%, a decrease from our results in the fiscal fourth quarter. We are estimating the effective tax rates for fiscal 2013 will be 6% to 8% consistent with the 7% we saw for fiscal 2012. Our expectations for the balance sheet are for working capital dollars, inventory accounts receivable and accounts payable to be down slightly from the fiscal fourth quarter. Based on the forecasted levels of revenue, we expect these changes will result in cash cycle days net of cash deposits of 62 to 64 days for the fiscal first quarter of 2013, similar to our results in the fiscal fourth quarter.

Our capital spending forecast for fiscal 2013 is approximately $100 million, an increase from the prior fiscal year. This estimate includes the completion of our announced investments, specifically our new footprint in Romania and the Neenah, Wisconsin consolidation footprint in the United States. Over the past several quarter we have improved utilization of our existing facilities and equipment to serve new customers. With these improvements the new capacity in Penang, Malaysia and the lower revenue in the fiscal fourth quarter, we were at 75% global as-tooled capacity in the fiscal fourth quarter. We recognize that our results in fiscal 2012 and our guidance in the first fiscal quarter of fiscal 2013 do not meet our targets of 5% operating margin, an ROIC of 500 basis points above our weighted average of cost-to-capital. The management team is focused on sizing the business to meet the current realities of lower revenue growth than we would like while still investing for future growth where we feel it is prudent.

We have taken a number of actions over the past several weeks including reductions in force completed or planned by the end of the calendar year of approximately 450 people or about 5% of our work force. This resulted in $2.2 million of severance recorded in the fiscal fourth quarter. Head count reductions were a mix of direct labor primarily in the Americas region, in recognition of the lower forecasted revenue, and the salaried employees in the site, regional and corporate functions.

We are working to reduce our fixed cost expense as much as possible to match the lower levels of forecasted revenue although that is not fully possible when revenue decreases as quickly as we have seen over the past several weeks. We are planning to delay our annual salary increases by one quarter until the fiscal third quarter, and have reduced or eliminated other components of compensation such as variable incentive compensation for some employees. Targets for improving the gross margin beyond the labor reductions described above with significant improvements expected beginning in the fiscal second quarter. These planned improvements are related to further efficiencies in our operations as well as expected improvement in materials profitability. We will complete the new footprint that is under way as the site in Romania is critical to our long-term growth in the EMEA region. And the facility in Neenah, Wisconsin will allow us to consolidate multiple sites into one location and reduce our operating costs beginning in fiscal 2014. We believe both are good long-term investments for future growth.

We expect that these actions will result in operating profit of 4.5% or better in the fiscal second quarter. As we said we think this is a reasonable level of operating profit in the current environment and it remains industry-leading operating margin. Optimizing our financial model relies on a balance mix of both modest and market growth and new program ramps where growing mature programs yield typically better operating margins and offset the production start-up costs we experience in the early phases on new programs. We believe that we are delivering significant value to shareholders due to a combination of revenue growth, industry leading operating margins and the shareholder value created by our ROIC of 300 basis points above our weighted average cost of capital.

With that I will open the call for questions. We ask that you please limit yourself to one question and one follow-up. Operator, please leave the line open for follow-up questions.

Thank you, and I'll begin the question and answer session. (Operator Instructions). First one from Craig Hettenbach from Goldman Sachs. Please go ahead.

Yes, thank you. Dean, can you follow up on the comments of pricing pressure and networking, how much you attribute that to just cyclical pressures in the industry versus any structural longer term concerns you have there.

It is hard to quantify precisely, I would just -- in my view, customers in that sector are under tremendous pressure to try to meet their financial targets and also maintain or global market share. And we saw a tremendous amount of requests coming from some of our bigger customers in that sector to try to help them out, to help them be more competitive. So we stepped up to the plate to get some help. I think from a structural standpoint at least the way we view it that some of it pressures our performance in the Americas region because some of this revenue is executed in the Americas region. And so we are at the request the customer, that was the strategy. What this is going to necessitate is that we get to a lower cost manufacturing solution for certain of these programs so that we can recover a better economic performance with these customers. Todd, happy to bounce to him, he's very close to the customer. If he's got anything to add...

I don't think so Dean.

All right.

Just to follow that in terms of (inaudible) manufacturing, is that something that you think you can achieve in North America or do you have to go elsewhere for that?

We can achieve it in the North America. It's a question that right now some of this product is manufactured here in Neenah, Wisconsin, some of the product, we could certainly transition that product to Mexico or we could transition more of the product over to Penang, Malaysia. We already have started to execute on some of the transitions to Penang Malaysia but given the end market and the agility of fulfillment into the end markets for North America that may not make sense for all the product mix or the product line, which is why the product is currently, manufactured here in the Wisconsin to begin with.

What's important to recognize is that when companies are in a high growth mode, and capturing market share depends on very fast response rate and agility to delivery in a direct order fulfillment model. Maybe a slightly higher cost in an effort to get that agility is important to customers. When the market is flat that level of agility is not valued as much and cost becomes more important. So right now the market conditions for many of our customers in that space is cost is more important than agility and speed of fulfillment, flexibility of fulfillment. It is change in that market with some of those customers and I think it's just a consequence of the low level of [DEP] growth and the pressures that these companies are under.

Our next question is from Brian Alexander from Raymond James. Please go ahead.

Hey, Dean, just to follow-up on that, we have seen two of your largest competitors lower their long-term margin outlook for that segment to less than 4% so it seems like to Craig's question some of these could be structural. I'm wondering if this may have some more permanence that could ultimately impact your confidence in returning to a 5% operating margin longer term for the whole company given that this is your largest segment, roughly 40% of revenue. Have you seen this before when this space turned down in past? Thanks.

We certainly, have seen it before when the space is turned down. I would say if you look at how we have been growing over the last several years we have actually had some outside growth in some of our other sectors and now we have a little bit of a setback here in the Industrial/Commercial sector for the time being. But we believe that we are going to continue to grow at a faster rate in some of our other sectors which will counter some of the more competitive challenges we think are in Network/Communications. I would also say that it's not every customer in that sector that is experiencing the equivalent stress and focus on costs. It is really some of our larger customers.

I think is also important to recognize that we drive the business on a return on capital employed basis internally which of course is a drive return on invested capital so part of this is about getting asset and loss (inaudible) for these customers to make sure we are creating economic profit. But certainly, it makes it more challenging but as we look at the mix of business going forward and the pricing that we have been able to win new business over the past five quarters or so, we don't think there is, at least at this point, anything permanently structural that makes it, that makes the 5% out of range.

And in fact, as we look forward in our current forecast now, even with the pricing reductions baked in, and of course with some assumptions about achieving some lower cost manufacturing solutions to get the cost basis down for some of these product lines we believe that we have a path to get back to the 5%. But a lot of that all depends on how, really more on the broader economy next year than it does specifically these customers.

What would be the implied operating margin assumption for the communication segment to get the Company back to 5%? Can the whole company be at 5% if the segment runs closer to 4%, or...

We don't guides individuals sectors in terms of margin performance, because it could be misleading because there is so variability among customers in any given sector. So you could move quite a bit based on which customers are stronger in the mix of customers. It is, on the margin, lower I would say at least for the moment. But I wouldn't suggest that we're looking at a 4% performance at this point.

Our next question is from Matt Sheerin from Stifel Nicolaus. Please go ahead

Yes, thanks and good morning. Just a question on your industrial segment and your commentary just in general about new programs being delayed somewhat. I did see that your industrial business was down in line with your expectations. Can you talk specifically about the Coca-Cola relationship. I know that has been fairly lumpy. That was basically front-end loaded in your fiscal year. How do you see that playing out in your next fiscal year?

Well we're trying to get a handle around Coca-Cola. I commented on the call, on last quarter's call, that Coca-Cola was going to recognize that they had far too much inventory built up. That they had us run at a much higher production rate than they were able to deploy the units. Part was a strategy on their part because they wanted to make sure they had lot of them on the shelf so to speak in anticipation of a stronger economic situation where the units would be deployed much quicker.

And at that point I think they didn't have confidence yet or didn't understand that we could flex manufacturing up and down in terms of rate with much more agility than what they had anticipated. They build up quite an inventory glut. They are working down that inventory now and so our production rate is lower than their deployment rate in an effort to reduce that inventory. But right now our production rate is down substantially from what it had been in earlier quarters in an effort for them to get the inventory adjusted to a proper level. And right now we are taking a very conservative approach in keeping it at very low rate and modeling it that way for the entire fiscal year for the moment, until we see some indications that deployment rates would meaningfully accelerate.

So you are assuming you are not going to keep much growth there in this fiscal year, then?

That is what we have modeled in right now.

Thanks very much.

You're welcome.

Our next question is from Wamsi Mohan from Bank of America.

Yes, thank you. Good morning. Ginger, just a clarification on the 4.5% margin target, I think you said fiscal 2Q. What revenue level is this predicated on or can you get there just from the cost actions that you alluded to at the current revenue levels?

Good morning, Wamsi. It is pretty close to our current revenue levels. Our current forecast does show that we'll be seeing some modest revenue growth through the year so I would say that we expect it to be up a little. Although frankly given the environment we are trying to make sure we have plans in place that we can hit those targets even if revenue stays flat what to we are expecting in the fiscal first quarter.

And Ginger, did you see any benefit in the current quarter from these cost actions?

I would say very small benefit. We did make some of these actions beginning in September I would say. But I would say there was only a small benefit in the fiscal fourth quarter.

Okay, thanks and Dean really quick, to go back to this pricing commentary, can you help us think about whether this pricing pressure in this segment was pretty broad-based or was it from your largest customers, has this come on the wire line networking sides or the wireless infrastructure side? And if it is somewhat cyclical, what are we talking about in terms of recovery scenario here? Why should we really expect once the pricing has deteriorated to the level that it has that it will really come back. Thanks.

I won't say that it was broad-based. I would say that it's that our biggest customers have the most leverage and certain customers of course have more challenges from a cost standpoint. And so this was I would say, like to think about it in the interest of a strong partnership we are asked to step up to the plate. So it could be permanently structural with these customers. Then our ability to perform relative to our overall targets would be somewhat constrained by how much of that business we would take on in the future and what that would mean in terms of our overall mix of business. I think that when we look at price and competitiveness for new programs, generally speaking in that market sector, that market sector tends to be generally more competitive than other sectors from a pricing standpoint But I wouldn't say that pricing is such that we can't perform relative to our model.

So at least in, from a new program standpoint, the competitive marketplace is still -- it is challenging but it is not a marketplace that we think is not a good place for us to be. So my interest in calling out this pricing pressure was to inform the analysts and shareholders that we have a near-term challenge, that this was something that has come on quite strongly and recently and that it puts some pressure on that sector for us because it focussed so much on our larger customers in that sector, and it will take us some time to get to a more productive, lower cost manufacturing solution on order to recover better performance.

We are working with those customers, certain customers, to work through a transition where we manufacture these products and also the level of flexibility and agility that we provide for these kinds of products and of course flexibility and agility comes with cost. And if those kind of things are not valued then it is important for us to reduce the cost of manufacturing so that we can get more acceptable performance interest our standpoint. So it was really to let you know this was occurring but I would not try to read into it that it's permanently and structural across that entire market sector.

Our next question is from Amit Daryanani from RBC. Please go ahead.

Thanks a lots. Goods morning guys. Maybe to start off with, could you talk about -- maybe I missed this part -- why is SG&A tracking higher when single year [deferrence over incentive] (inaudible) increases? Could you tell why it's sequentially going higher? And the same with CapEx, why you are looking for a higher CapEx for fiscal 2013? And maybe if you could parse out and tell me how much the CapEx would (inaudible) consolidation and Romanian expansion. That would be helpful.

I can do that, Amit. On the SG&A question, it is only modestly higher. We finished the year with just under $29 million of SG&A, and our expectations will be slightly above that $29 million to $30 million. Most of the head count reductions I've talked about actually, hit at the site levels and so they drove lower operating costs as opposed to lower SG&A expense. So that is the big drive around SG&A. And we expect that SG&A number to stay at or pretty close to that level for the full fiscal year as we continue to manage costs and try to respond to the current environment.

Moving to the capital. When I think about that $100 million forecast for fiscal 2013, about $60 million of that is tied to finishing those two facilities that are underway. The facility in Romania we think is really critical to the long-term growth of that region and as we said the facility in Neenah is really an investment for future operational savings. We would be able to consolidate other manufacturing sites in the Fox cities into that site and reduce our operational costs. So we think both of those are good investments.

That makes sense. And then if I could ask a question (inaudible) your reaction to the pricing pressures, and you talked about moving some of the production lines from Neenah to potentially Mexico and Malaysia. Has that process actually started? If not when did it start? And then could you talk to us about how do we do we get comfort that transitioning large programs with large customers from one site to a different geography will not result in a whole set of new start up costs and margin inefficiencies as those transitions happen?

Let me say there has been some transition already from Neenah to Malaysia and Penang. And of course we have a significant part of one of our factories over there that is committed to this kind of production work already. So there wasn't significant start up costs. There certainly is always risk whenever you transition product. But we feel we are quite good at that. We have very disciplined transition processes, and particularly, when you are transitioning product from one of your facilities to the another, you have strong relationship with the customer, strong know-how, and of course you're controlling the supply chain. We were able to begin and effect those transitions fairly flawlessly.

There is other business that is far more sophisticated and more complex that should transition. We're going to have to be extremely careful in terms of the profits of that transition. But at this point, there no agreement yet from a strategy standpoint on what makes the most sense for that product. So as I said we stepped up, reduced pricing to give some relief and assistance to the customer, but we have not got to the point where we have agreement as to where we would transition that product in manufacturing given like I said earlier it was manufactured here for a reason. And the reasons were around the fulfillment of the marketplace and the agility of fulfillment to that marketplace. So it may not make sense for all the product to go across the ocean. It may make sense to do it in Mexico. And if that's the case, then that transition plan would have to be worked out over the next couple to few quarters. It not clear yet how we are going to get to the right solution yet. We are still working on it we have another meeting teed up her in another week or so to talk further and start mapping out a better strategy.

Our next question is from Jim Suva from Citi. Please go ahead.

Thank you and congratulation to you and your team at Plexus. One thing that I found kind of interesting was your amount of sales to your top customer did decline quarter-over-quarter and in the past it was a little bit more stable. So the question is are there some share shifts going on there or the orders with that customer, because I wasn't expecting it to decline as much. Just a question on that. Thank you.

I'm going to let Todd take some of this but I would just comment, I have seen numbers that were 20-some percent plus in terms of sequential decline and number today was about 17%. I think part of this was because of the chainsaw math and rounding that goes on with percentages in terms of how we talk about this customer. So our numbers say it came down about 17% and when you look at the revenue performance that we had it was about equivalent to what we did in our fiscal Q2, so we had a very strong Q3. Now let Todd take that a little bit further.

Sure. So you asked about share, Jim. And the short answer is no, that share is not shifting in any meaningful way. There are two programs that involved us where Juniper had essentially decided to consolidate similar businesses and we were the winner on one of those pieces. And we transitioned it from a legacy supplier and one piece transitioned out to a different legacy supplier, so the net was pretty much a wash from a share standpoint. In a lot of ways you can look at the performance as being really a mix issue, is what we are seeing right now. So certain programs we have are performing very well, others ones are not. They talked a lot about the security business being way up; that tends to be a lower-end product where we don't participate much. Also their service business was up substantially, so that is how I could explain that.

Great And as an additional question, last year there were some share shifts that went on with your customers, mostly driven by M&A if I believe, that were outside of Plexus' control. Dean and Ginger as you look forward to this next fiscal year, are there any other share shifts or customers changes in materiality that we should be aware of modeling perspective. Whether it be outgoing or share shifts incoming? Thank you and congratulations again.

I'll let Todd talk to the how we look at customer risk and acquisition and it's important to recognize that sometimes we win on those deals and sometimes we are on the losing ends.

Yes, what I would say we're winning more than we're losing from a share shift and an M&A standpoint. There is a couple that I would consider as outgoing but nowhere near the magnitude that we had talked about in the case of Avocent and Starent. So really not material as we look at how do we model the business going forward?

Our next question is from Sherrie Scribner from Deutsche Bank. Please go ahead.

Hi, thanks. Ginger, I was hoping you could give us a little more detail on your expectations for operating margins as we move through the year. I think you said 4.5% in the March quarter which suggests a pretty significant increase versus the December quarter which I think you guided to somewhere in the low 4%. How do you improve that margin sequentially on probably, relatively flat revenue? And then as we move through the year are there additional levers that help you move closer to that 5% and is there revenue level you need to hit that 5%? Thanks.

There certainly are a lot of actions going on internally to help us get to that 4.5% in the March quarter, and I shared some of those so there will be some additional head count reductions. We also are working very hard on improving our operations efficiency and working with our supply chain partners to make sure we get the very best pricing possible. And we think all of that, we have what we think is a very clear path to getting back to 4.5%. I would say that we also have a path to getting to 5% with some revenue growth in the second half of the year and our forecast currently supports that and we are certainly driving towards that internally, and that's our hope, that we'll continue to see that path to 5% by the end of the fiscal year.

Also, I wanted to touch on the loss in the Americas. Trying to understand the tax adjustments that you made. If I look through the past filings you guys haven't had a loss in the Americas. I think you made about $24 million last quarter. So how did that swing so quickly to a loss, and can you help me understand what is going on there a little bit more? Thanks.

From a tax return standpoint we actually have had losses in the US in the 2009, 2010 and 2011 tax years and we did have significant earnings in this year in the US. But the rule, the accounting guidance is pretty clear here. That if you have a three year cumulative loss that is pretty strong evidence there is concern about those deferred tax assets. When we looked forward we are currently projecting a loss in fiscal 2013 in the Americas as well. Now although we hope to improve that and we certainly have a path toward doing that the accounting guidance got us to this decision that we needed to book evaluation allowance.

Primarily based on the fact that as of today, when we look back three years we have a cumulative loss in the US from a tax standpoint. As, you know, this is a non-cash charge, it doesn't impact our cash position or our ability to use these assets in the future. And my best guess is that as we improve the operations in the Americas at some point in the future we'll reinstate these tax assets. Just as a little bit of history, Plexus has been down this path before. In 2004, we impaired these tax assets, we booked evaluation allowance, and then two years later we were able to reinstate them.

Our next question is from Shawn Harrison from Longbow Research. Please go ahead.

Hi, good morning. I wanted to talk about the pipeline in the program win environment. It was another good one this quarter. As you look into that pipeline how long do you think that you could sustain a number of wins say above $180 million? Is there any potential to get that pipeline a little bit bigger?

Well, Todd, want to take that one? (laughter) Or should I commit you to something?

Sure. I guess first of all what I'd say is we feel good about the pipeline we feel good about the funnel. There is number of really good opportunities in the funnel, yet it's way too early to commit what we're going to do in Q1, though. But I think we see a path that continues strong performance from a program win standpoint.

Is there an end market overlay that seems to have the most opportunities?

No, I would say pretty broad-based across three, or all four of our market sectors and all four of our teams.

Okay and the pricing on that is still very good?

Yes. As Dean had mentioned earlier we really worked very hard to price business so that it fit our model long-term and we feel that we accomplished that in light of some of the other challenges that are going in from a pricing standpoint.

Yes, I think you used the words "the pricing is very good." I guess I don't know that I have ever seen very good pricing in the interest market. (laughter)

I'm speaking on relative basis.

That's fair then.

Just as follow-up Ginger the buy-back, is that included, is any buy-back included in the guidance and if so how much?

Yes, the buy-back is included in the guidance, and so our expectation is we're going to do that buy-back over the four quarters of fiscal 2013. So we're not going to try to time it and pick a perfect point, and pull the trigger on $50 million of that. Because we think historically it is really difficult for management teams to time the market. We are going to buy shares back in relatively consistent amounts over the four quarters and that has an EPS impact of about a $0.01 for the first fiscal quarter.

Our next question is from Steven Fox from Cross Research.

Thanks. Good morning. Two questions. First of all being in terms of the pace of change in your customers' orders. You're describing a situation that is more rapidly declining than other companies have and suggests more of a recessionary atmosphere than maybe others are willing to admit. Can you provide some more color around what is going on? Are -orders coming off the book versus, say, push-outs? And is there anything else that you could relate it to besides just the economy deteriorating than we understand? And then secondly I was wondering if you could you talk a little bit more about the Healthcare/Life Sciences business from an investment standpoint. One of your competitors talked about making -- needing to make more investments in that area in order to stay competitive and win new business and this is hurting their margins. Do you see the same dynamic playing out in your own business over next year? Thanks.

Let me take the second question -- part of the question first and then maybe I'll let Todd comment on how we forecast our model, though I want to make a comment there as well. In terms of Healthcare/Life Sciences, I don't know that we have to make any significant or specific investments. This has been a markets place that we have participated in for a long time and in terms of it being Healthcare/Life Sciences, we have businesses that we think fits that description of the marketplace. And so we think it's just do more of what we have been doing, and continue to drive what we think has been one of the most successful company in the space, in the health care, life sciences marketplace. And even again this past quarter we had strong performance in terms of business wins in that market. We had a very good quarter of engineering wins in Healthcare/Life Sciences. So we think we're positioned really well to continue to take advantage of opportunities there.

Back to your question about the outlook and what this means. To give you some sense of how this unfolded for us, last quarter on the call I was talking about double digit growth that we thought was achievable in the fiscal 2013 based on new wins and based on forecasts for customers. And that while the year -- fiscal 2012 was certainly -- had some turbulence at certain points during the year, throughout most of the middle of year and even coming in through the end of August and on into mid-September we had what I would consider to be relatively stable forecasts, that still supported a strong growth here in fiscal 2013.

When we started to work the forecast in anticipation of this call and get our quarterly update really fine tuned as we came through the later part of September and into October we saw a very significant and broad-based downdraft in customer forecasts. That was quite alarming and really required us to take some actions fairly immediately that Ginger talked about relative to reducing costs, but certainly, didn't give us the opportunity to continue to completely rework the cost structure in anticipation of potentially much lower revenues.

So you can say what others are suggesting in the marketplace. I would say that, like it or not, we have been pretty darn accurate in terms of our guidance. I don't think that we have missed a guidance window now -- I might be getting us in trouble for staying this in terms of the future, but I don't think we have missed a guidance window going back five years. And so I think our forecasting process is quite robust and what we're seeing now is troubling relative to the economy for sure. If our current forecasts were to hold at the level that we see today

Todd, who does a tremendous amount work on this, his -- it would suggest that you would back into a GDP growth that would be somewhere in the 1.4% to 1.6% neighborhood for next year. That is what our forecast would suggest that the GDP rate would be based on what we -- the way we see our correlation to GDP. Now when we were back in the July it was a suggested GDP of 2% or maybe even a little bit better. Which is not obviously a good number, it is moving sideways, but right now our forecast is foretelling a much a bleaker picture for next year. I hope that it is just an over reaction among customers and concern about all the uncertainty in the near term about the election and tax rates and the fiscal cliff and all that. And they got collectively, conservative. But it's not a pretty picture at the moment.

Our next question is from Brian White from Topeka.

Wondering if you could compare this to the slow down that we saw the second half of last year, and I think it was the summer before that you saw a sharp slowdown right ahead of an analyst day. If you could just put that into perspective, this slowdown versus what you saw at those two other times.

It has been so many of these (laughter) slowdowns. I think this is not dissimilar. Right now it came down a lot and it came down quick and it came down across a broad set of the customers. It has got me quite concerned that we may be in for either dramatically slower growth next year, and didn't they say that without (inaudible) we continue to look at our business broadly and say our [beta] rel - has typically been higher. And so we're much more sensitive to what you see in the marketplace and I think that Todd's work in terms of our correlation to GDP and our ability to grow in terms of the new business wins that we need in different GDP environments tells us that we're in for a tough year next year if this continues to hold up the way it suggests it is going to go.

And Dean, I missed the comments on networking for the December quarter what did you say on the networking?

In terms of the forward view?

Yes.

What did I say about networking? I said that we saw a majority of our customers had a negative bias on their revenues, but we were also ramping a couple of pretty decent programs. So overall net-net, we thought it was going to be flat to down slightly.

Okay, and what do you think of Juniper? It seems like a little bit more of a decline than I would have expected sequentially even with noise that is sometimes in those numbers. Do you think Juniper will grow with you in dollars in fiscal 2013 or no?

Well that's a good question. At this point it is not certain how we are going to end up with Juniper. Todd might have a better read on where we think it is going to go for the year. It really depends on how Juniper does in their end markets and how that unfolds. If GDP stays 2% or better and Juniper is successful with some of the new products that they are bringing into the market, and more successful, then we'll grow. But in terms of our -- really in terms of our business mix that we have with them, the programs we have, the belief that we're going to continue to be a good, strong partner for Juniper, just all depends on how they perform in their markets and right now it - there is just no clarity.

Do you think as a percentage though it would stay where it is if it's 13% or would it decline? On even footings with the rest of the back (multiple speakers)

I would have to say Brian, it is really unclear. We feel good about the product portfolio and the product mix we have with Juniper. It is nicely balanced and certainly has some of the growth products that they have, but a lot of it depends on end markets within that space.

That particular sector tends to be more volatile than others when you go into the economic dislocations.

Our next question from Shawn Hannan from Needham & Co. Please go ahead.

Yes, thank you. Dean you folks have won a lot of business over the last 12 month. You called this out within the release as well as in the call today. The new wins not as supportive of the factor [herein] in the December guidance. You talked to mutedness and delays. Can you provide a little more color around what is happening with new program ramps? Do you expect or suspect any of this mutedness or delays could perhaps be more temporary in nature due to your reference earlier around the election, fiscal cliff. Are there any reduced enthusiasms around the programs? And would it be appropriate to discount back any of the dollar win opportunities you reported over the past few quarters? How do we think about this and how this should materialize here?

Good question. You won a whole bunch of business, where the heck is it? And Todd is prepared to at least try to answer some of that. There's a lot of complications as to how our model plays out, but let me have him give you a few bullet points here.

Yes, Shawn, Dean's been asking me the same question quite a bit lately. Where's all the new business? So a couple of thoughts here. First of all, we've done some pretty significant tracking of the new wins we reported and whether they materialized. And the first thing I would say is that about 95% of the programs that we reported as wins materialized. The reality is what we're reporting does come through and does translate into volume production.

Now Dean had also referenced around program ramps that there are certain programs that we're seeing delayed or muted ramps and I would say that that is true. Typically, we think of business transitioning or ramping over about a one year period on average. Now it varies greatly, it could be anywhere from 3 month to maybe multiple years in the case of a medical program that requires regulatory, approval. We are seeing that push out to where that average is a little bit longer and there are various reasons around it, around the timing. But we believe that what is reported there is a reasonably accurate number. One of other things I would point out as we project wins or as we announce wins, there is certain component of that business about 30% that we call replacement business. So it's business that we go out, we competitively bid against our competition. It's new programs and we need to win the programs because it's out to the competition. But it is likely to negatively impact revenue that we currently have in-house.

Beyond that, the bigger question is around the broader economy, and that's where, if you look at where did all the wins go? It is around the broader economy. We did a lot of the refinement to our wins model over the course of the past year, really trying to understand better the impact of the economy. And if you look at our model it's built around a typical economy. And you can think of our business as being a 60% USN market-type business and so we looked at the correlation to the US GDP, and if you average it out over the last 40 years, it's 3% US GDP growth. So our model has been centered around that.

Now the reality is over the last four years we had the great recession followed by three successive years of, call it 2% or less GDP growth. Current projections are somewhere around 2%, though I have seen projections as low as .8% in some current data that is out there right now. When we correlated Plexus revenue to US GDP, the impact was significant. So basically, a 1% change in US GDP over a ten year period was correlated to approximately a 5% change in Plexus revenue. So some of the -- as Dean had alluded to earlier, some of the forecast drop that we're seeing would suggest that the economy is weaker than it is being represented right now.

Quite a bit of complicated model obviously. What we're going to try to do somehow is create some content for the analysts so they can better understand this in some form because there is a lot of complication as to how this works. But I think it is insightful and helps you better correlate our new wins percentage, GDP growth, base business of Plexus and how that impacts future growth for the business.

(Operator Instructions) We have a follow-up from Shawn Hannan from Needham. Please go ahead.

Thanks. I didn't get my initial follow-up. So just going off those last comments, it sounded like, Dean and Ginger, you talked about rev improvements through 2013. Perhaps March could be flattish. A little bit more color around that for how much new programs are the factor there being offset by demand as either you see it today or is there any further deterioration in your base business that you are considering when you talk about that contextual improvement that you hope for through fiscal 2013? Any prospective beyond December would be helpful.

Go ahead, Todd, take a swing at it.

So what I would say is any growth that we're seeing in fiscal 2013 really is reflective of new program wins. So the base business is deteriorating in a reasonably meaningful way.

Okay thank you.

You're welcome.

And at this time I'm showing no further questions.

I notice that we are gone long past the time allotted so I would like to thank everyone for calls and I think they with right on point on what is going on in the business and I want to thank all the investors that are listening on the call for their report of Plexus, so thank you very much.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect at this time.