Q1 2020 Earnings Call
Good morning, and welcome to the Plexus Corp Conference call regarding fiscal first quarter 2020 earnings announcement. My name is job your operator for today's call at this time all participants.
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.
Please note that this conference is being recorded.
And I would now like to turn the call over to Mr. Other Berisford plexus, senior director of Communications and Investor Relations Heather.
Good morning, and thank you for kinda like today.
The other thing I smoke and information provided during our call today well be forward looking statement as they will not be when it echostar.
Well Oh, you expect in pension plan anticipate it's been a lifetime often identify forward looking statement.
Forward looking statements are not guarantees.
Our inherent difficulties and critical predicting future Oracle and actual results could differ materially from those expressed or implied or like okay.
Factors that could cause actual results could differ materially kind of Erica.
Part of the company periodic ethic, B. Riley, particularly direct factory and our Form 10-K filing.
Well, you're I'm at September 22018, and the Safe Harbor in fairness partner and yesterday properly.
[laughter] <unk> non-GAAP supplemental information such as ROI theme economic return and free cash flow because it doesn't matter here for internal nursing home and decision, making and because they provide additional insight for financial performance.
In addition management uses these and other non-GAAP measures such as adjusted operating income adjusted operating margin adjusted net income and adjusted earnings per share to provide a better understanding of corporate Harman for purposes of period to period comparison.
For a full reconciliation of non-GAAP well, that's one Carlson please refer to yesterday's press release, and our periodic SEC filings.
We incurred that's on the call. According to App, that's a live webcast and supporting materials [laughter] website at Www Dot dot com clicking on investor appetite.
Joining me today, our talk helping president and Chief Executive Officer.
The fresh executive Vice President and Chief operating officer, and pattern on Executive Vice President and Chief Financial Officer.
Consistent with prior earnings call, Tom will provide summary comments before turning the call over in a fever Packer further detail.
Let me now turn the call over to talk healthy top.
Thank you Heather and good morning, everyone.
Please begin with their fiscal first quarter results on slide three.
After the close of the market yesterday evening, we reported results for our fiscal first quarter of 2020.
We achieved record quarterly revenue of $852 million, which exceeded the top end up or guidance range of $780 million to $820 million.
This revenue represents 11% growth over the comparable period in fiscal 2019 in 5% growth sequentially.
Our healthcare life sciences sector exceeded our expectations coming into the quarter as our team responded to increased demand from several customers.
In addition, our industrial commercial sector produced exceptional results as we capitalized on further strengthening in the semiconductor capital equipment market and brought improvements in demand throughout the remainder of the sector.
We delivered GAAP EPS of one dollar in three cents, including 17 cents of stock based compensation expense.
And non-GAAP EPS of one dollar.
Both exceeded our guidance range, which was 87 to 97 cents.
The non-GAAP results excluded a net three cents benefit due to special tax items.
Our global teams continue to prioritize operational excellence and through that focus deliberate fiscal first quarter operating margin of 4.7% at the midpoint of our guidance range and within our target range of 4.7% to 5%.
Please advance to slide four.
Next I will discuss additional accomplishments within the fiscal first quarter of 2020.
I will start with items associated with the balance sheet.
We continue to make progress on our working capital initiatives in the fiscal first quarter.
We ended the quarter at 87 days of inventory, representing an 18 day improvement from the first quarter of fiscal 2019.
Our inventory performance, coupled with improved receivables days and payables days led to a cash conversion cycle of 71 days.
Our cash cycle down 18 days over the past two quarters.
The end result was another exceptional quarter of free cash flow.
We delivered $61 million of free cash flow in the fiscal first quarter.
This follows the result of $92 million in the fiscal fourth quarter of 2019.
We created meaningful shareholder value and delivered return on invested capital or 14.7%.
This result represents an economic return of 590 basis points above our weighted average cost of capital of 8.8% it exceeds our target of 500 basis points.
Okay.
Next I will highlight accomplishments related to our revenue growth.
Despite having been impacted by award timing around the holidays, our teams delivered $167 million of manufacturing wins within the fiscal first quarter.
Our healthcare life Sciences team at another particularly strong quarter with $85 million in wins predominantly with existing customers do our capabilities and proficiency at delivering exceptional quality products.
The continued strong winds performance positions or healthcare life sciences sector for an excellent fiscal 2021.
Our wins momentum, which we define as trailing four quarter wins divided by trailing four quarter revenue remains above our target of 25%.
This level sufficient to maintain solid growth within our differentiated markets.
In addition, our teams reported a funnel of qualified manufacturing opportunities of $2.5 billion, which is a reflection of the diligence and strategic focus of our global market sector teams.
We expect to leverage this funnel to deliver a strong winds result in the fiscal second quarter.
Our industrial commercial sector is exploding portfolio diversification program ramps and strengthening within the semiconductor capital equipment space to drive outstanding growth.
Our fiscal first quarter revenue was up 42% from the comparable period in fiscal 2019.
Our aerospace and defense sector continues to show signs of another exceptional growth here.
Our fiscal first quarter results represented 41% year over year revenue growth.
Our focus on zero defects in perfect delivery resonates with customers in these highly complex markets.
Please advance to slide five.
Okay.
Okay.
Our portfolio continues to differentiate plexus from our peers as we strengthened our leadership and highly complex products and demanding regulatory environments.
Within the fiscal first quarter, 93% of our revenue was generated from the combined healthcare life Sciences industrial commercial in aerospace and defense market sectors.
This position has increased from 79% just three years ago during a period of significant revenue growth.
Our focus in these complex markets provides advantages and operational efficiency and result in more consistent reliable performance for our customers.
Okay.
Advancing to our guidance for the fiscal second quarter 2020 on slide six.
Okay.
We expect revenue to moderate in the fiscal second quarter as we believe some of the fiscal first quarter strength is impacting current quarter demand, particularly in our healthcare life Sciences sector.
We expect continued strength in our industrial commercial and aerospace and defense business with revenue relatively flat within these sectors as compared to the strong results of the previous quarter.
As a result of these factors were guiding revenue in the range of $790 million to $830 million.
Our operating margin is being impacted by seasonal payroll costs, which we estimate at about 50 basis points in the positive two substantial programs and our engineering organization.
As such we are guiding operating margin in the range of 4.0% to 4.5%.
We anticipate revenue and operating margin at these levels lead the GAAP EPS in the range of 80 to 90 cents, including 21 cents of stock based compensation expense and excluding any nonrecurring charges.
Hello.
We are proactively responding to the engineering program pauses by strategically repositioning our Boulder design center to co locate with our existing manufacturing facility in Boise Idaho.
This opportunity will allow for the creation of an aerospace and defense Center of excellence.
This combination of engineering and manufacturing services will provide the synergies and cost advantages of a campus environment, while delivering a compelling service offering for our customers in the aerospace and defense sector.
Our Boise manufacturing facility is rapidly growing its aerospace and defense business and has also home to our micro electronics center of excellence.
Please advance to slide seven for few thoughts regarding fiscal 2020.
Our outlook for fiscal 2020 remains generally unchanged from previous expectations.
We anticipate sequentially increasing revenue during the second half of the fiscal year as we benefit from a recent wins performance largely stable end markets and improving semiconductor capital equipment demand, resulting in solid revenue growth for the fiscal year.
We are enthused with the outlook for our aerospace and defense and industrial commercial sectors, where we expect robust growth.
In addition, we anticipate fiscal 2020 revenue in the combined healthcare life Sciences, industrial commercial and aerospace and defense sectors to exceed 90% of our portfolio consistent with our fiscal first quarter results.
These sectors our programs with longer lifecycle in many cases 10 years or more.
We have achieved compounded annual growth rates in the teams within these markets. Our goal is to maintain these growth rates as we move beyond fiscal 2020.
Coupling the anticipated fiscal 2020 growth with our comprehensive service offerings focused on operational excellence aligned cost structure and talented workforce committed to delighting our customers. We expect solid operating performance with returned to operating margins within our target range of 4.7% to 5%.
In the second half of the year.
This level of performance would enable robust EPS expansion for the full fiscal year.
I'll now turn the call over to Steve for additional analysis of the performance of our market sectors and operations Steve.
Thank you Todd good morning.
Please advance to slide eight for review our performance by market sector for the fiscal first quarter of 2020 as well as our expectations for the sectors for the second fiscal quarter of 2020.
Our healthcare life Sciences revenue was flat in the fiscal first quarter. The result easily surpassed our expectations of a mid single digit decline.
Our customers forecasted natural seasonal strength as we ended the quarter. However, 15 of our top 20 customers in the sector increased forecast within the quarter to meet robust calendar year end demand.
The strong calendar year end shipments is impacting our fiscal second quarter projections.
We expect approximately a 10% decline for healthcare life sciences sector in the fiscal second quarter.
We believe this demand swing is a short term correction in the sector will rebound in the fiscal third quarter.
Revenue in our industrial commercial sector increased 17% for the fiscal first quarter. The result was significantly better than our expectations of a low single digit increase.
Although the largest revenue increases were led by our semiconductor capital equipment customers.
Greater demand from 11 of the top 12 customers and the remaining Subsectors contributed to the strong growth.
As we look at the fiscal second quarter, we expect that the semiconductor capital equipment sub sector will maintain that the increased level of demand. However, we see a modest pull back in some of the other sub sectors.
The net result, as we are anticipating revenue to be flat for industrial commercial sector in the fiscal second quarter.
We are in close communication with several of our semiconductor capital equipment customers. As there are indications that we may see additional upside to our current forecast for calendar 2020. The obvious questions. We're trying to answer is when and how much.
Our aerospace and Defense center sector was down 1% in the fiscal first quarter. The result was slightly lower than our expectations of a moderate increase.
Slightly for ramps up to program for the main reason for the lower revenue.
Looking at the fiscal second quarter, we expect growth with new program ramps to be offset by modest softness with three aerospace customers.
As a result, we're expecting flat revenue for our aerospace and defense sector and the fiscal second quarter.
We anticipate that the new program ramps will be largely complete within the quarter and that they will add provide meaningful growth for the sector in the fiscal third quarter.
Our communication sector declined 5% in the fiscal first quarter result that was below our expectations are flat revenue.
Weaker demand from four of our top five customers, where the costs for the decline.
As we look towards the fiscal second quarter, we see continuing softness from customers in the sector.
As a result, we're expecting a mid teens decline in our communication sector for the fiscal second quarter.
We expect to gain more visibility regarding the calendar 2020 outlook from our communication customers as we progress through this quarter.
Please advance to slide nine for an overview the wins performance of the fiscal first quarter.
We won 30, new manufacturing programs that we expect to generate $167 million in annualized revenue when fully ramped into production.
We experienced lower than typical decision, making during the holiday season, which had a negative impact on the wind result in the fiscal first quarter.
As we look at the fiscal second quarter. Our wins performance has started very strong and we anticipate a solid results for this quarter.
Our trailing four quarter the wins at almost $450 million yields a win momentum of 26%.
The result is above our goal and it continues to support our growth strategy.
Please move to slide 10 for further insight into the with results by region.
The Americas region had another strong quarter of wins at $89 million in the fiscal first quarter.
Our focus on the design and manufacturing of highly complex products and Dan demanding regulatory environment continues to fuel our growth.
The Americas wins in the quarter included two larger robotic assisted medical devices and winning these programs as a clear indication, but thats strategy is working.
The APAC region wins of $64 million are the result of diverse capabilities. The team has developed.
The wednesbury from a small single use medical device that wave a few ounces to a complex test system at ways over several hundred pounds.
These wins illustrate the vast range of expertise plexus has developed for our customers and the differentiated markets we serve.
The main reasons wins of $14 million highlights the importance of our commitment to operational excellence in the region.
Market share gains with a long term security customer as well as the addition of a new division from a transportation customer are indicators that the dividend from a great execution as growth with our customers.
Please advance to slide 11 for further insight into the manufacturing ones performance by market sector.
Our healthcare life Science team had solid wins result of $85 million in the fiscal first quarter that will enable sustained growth for the sector.
The robotic assisted medical devices in the new single use device program that I highlighted our expected start adding meaningful revenue in fiscal 2021.
The industrial commercial sector produced $44 million of manufacturing wins in the fiscal first quarter.
The wins included the addition of a new customer who delivers factory automation solutions to the use of robotics and artificial intelligence.
Alex This is ability to demonstrate our expertise in the manufacturing of complex electromechanical assemblies with a key differentiator and securing this win.
The aerospace and defense sector generated $17 million of new wins in the fiscal first quarter.
Just as important as the size of the wins is that the duration of the programs.
One of the larger wins in the quarter includes a program for the C 130, Jay airframe that we expect to build for at least the next 10 years.
Highlight in the quarter was a visit by to see 130, Jay crews to our Neenah manufacturing facility.
Our teams had the opportunity to through the planes and speak with accrued as you can imagine the cruise appreciate our commitment to zero defect.
Finally, our communication sector wins of $21 million included a new customer provides products that support the infrastructure and wireless connectivity and high speed communications, including Fiveg applications.
Please advance to slide 12.
We ended the fiscal first quarter with a robust funnel qualified manufacturing opportunities.
A $2.5 billion, we have the pipeline of new opportunity required to support continued growth.
The healthcare life Sciences fall continues to be very healthy at $1.5 billion.
In addition to the size of the funnel the quality opportunities a strong.
We expect the funnel to support robust winds performance in the fiscal second quarter and beyond.
The industrial commercial sector increase or funnel to $404 million, while generating solid wins within the fiscal first quarter.
The resource investments we made in fiscal 2019 are starting to have a positive effect on the funnel and we expect that trend to continue in fiscal 2014.
The aerospace and defense sector grew at funnel by 9% in the fiscal first quarter.
And we feel we see momentum in the sector continuing to build.
In addition to having increased opportunities to gain more market share with our customers a pipeline of new activities that feeds the funnel is growing steadily.
A few final comments.
Todd highlighted our decision to relocate our Boulder design center to our manufacturing facility in Boise, Idaho.
In one regard it was a challenge to decision as I know some of the team will not be relocating.
For all his colleagues I want to thank you for your dedication and service to plexus. During your tenure.
For the colleagues, who will be moving to Boise, the prospect of creating a full value stream service offering at this site, especially for our aerospace and defense customers is exciting.
Plexus has a strong track record of creating differentiated service offerings I want to thank you for your willingness a commitment to support plexus, establishing this unique capability in Boise.
Ill now turn the call the Pat front end up review, our financial performance Pat.
Thank you, Steve and good morning, everyone. Our fiscal first quarter results are summarized on slide 13.
Revenue of $852 million was above the top end of our guidance, while gross margin of 9.3% was that our midpoint.
Selling and administrative expense of $39.3 million was above our guidance, primarily due to higher variable incentive compensation expense.
As a percentage of revenue SGN, a was 4.6% sequentially improved by 20 basis points and consistent with our expectation.
Operating margin of 4.7% was at the midpoint of our guidance and within our target operating margin range.
Included in this quarter's operating margin was approximately 60 basis points of stock based compensation expense.
Non operating expenses of $5.7 million were slightly above our guidance as a result of foreign exchange losses.
Our GAAP effective tax rate for the fiscal first quarter was 10%, which included a net benefit of $800000 related to special tax items recorded during the quarter.
Excluding these items, our non-GAAP effective tax rate was 12% slightly favorable to our guidance range of 13% to 15%.
GAAP diluted EPS of one dollar three included three cents per share related to the special tax items. Excluding these items non-GAAP diluted EPS of one dollar was above the top end of our guidance primarily due to the strong revenue results.
Turning now to the balance sheet and cash flow on slide 14.
During the quarter, we purchased approximately 91000 shares of our stock for $6.3 million at an average price of $69.82 per share.
At the end of the fiscal first quarter, we had approximately $40 million remaining under the authorization.
For the fiscal first quarter, we were pleased with our free cash flow results, we generated $75 million in cash from operations and spent $14 million on capital expenditures, resulting in free cash flow of $61 million.
We ended the quarter with a strong balance sheet cash of $255 million was sequentially higher by $29 million.
We also reduced debt under our revolving credit facility by $33 million.
Both improvements were prior primarily driven by strong cash flow generation.
At the beginning in the quarter, we adopted the new accounting standard for leases the balance sheet impact from adoption was a net addition of $46 million for leased assets and $47 million for lease liabilities.
In calculating our return on invested capital we are now, including the lease liability within average invested capital.
The impact from this inclusion is a detriment to ROI see of approximately 35 basis points.
Despite this detriment we were very pleased to deliver a 160 basis point improvement to our return on invested capital this quarter compared to our result in fiscal 2019.
Cash cycle at the end of the first quarter was 71 days, a nine day improvement from the fiscal fourth quarter.
Over the past two quarters, we have improved our cash cycle by 18 days.
Please turn to slide 15 for details on our cash cycle.
The nine days sequential improvement was driven by reduction to our receivable days and an increase to our payable days.
Each improved by six days.
For receivable days, we experienced a better balance of shipments throughout the quarter compared to last quarter, where shipments were weighted more towards third month.
Also with a quarter ending January 4th we had the opportunity for additional collections from customers with a period close of December 30 Onest.
For payable days, we experienced a return to more normalized procurement activity.
Prior to the fiscal first quarter, we had a pullback and purchasing in order to improve our inventory management.
We have now we're through that impact.
As Todd is are already provide the revenue and EPS guidance for the fiscal second quarter I'll review, some additional details which are summarized on slide 16.
Fiscal second quarter gross margin is expected to be in the range of 8.8% to 9.2%.
At the midpoint of this guidance gross margin would be approximately 30 basis points lower than the fiscal first quarter.
Todd mentioned, the 50 basis point impact from seasonal compensation cost increases of this total 40 basis points will impact gross margin.
We also expect an impact on gross margin due to program pauses in engineering services.
Portion of these impacts is anticipated to be offset by lower health care costs in the second quarter compared to the fiscal first quarter.
With fiscal second quarter, we expect SGN a expense in the range of $38 million to $39 million.
At the midpoint of our revenue guidance anticipated SGN, a would be 4.75% of revenue sequentially up 15 basis points, primarily due to the seasonal compensation headwinds.
Fiscal second quarter operating margin is expected to be in the range of 4% to 4.5%, which includes 80 basis points of stock based compensation expense.
Operating margin guidance is exclusive of any restructuring charges related to the strategic repositioning of our Boulder design Center.
At this point, we are still formulating the details and overall charges associated with the plan.
A few other notes for the fiscal second quarter, depreciation and amortization expense is expected to be approximately $15 million slightly higher than the fiscal first quarter.
Non operating expenses are expected to be in the range of $4.6 million to $5 million.
At the midpoint of this guidance these expenses would be sequentially lower by $900000, primarily due to the absence of foreign exchange losses, which were experienced during the fiscal first quarter.
For the fiscal second quarter, we estimate in effective tax rate of 13% to 15% and diluted shares outstanding of approximately 30 million shares.
Our expectation for the balance sheet is for working capital dollars to increase as we ramp new programs during the quarter and begin procuring inventory later this quarter for the anticipated sequential increase in fiscal third quarter revenue.
Based on our revenue forecast, we expect this level working capital will result in cash cycle days of 75 to 79 days.
For the fiscal second quarter, we expect free cash flow around breakeven as we ramped new programs and build inventory.
We remain focused on sustaining inventory improvements and anticipate generating free cash flow in subsequent quarters.
For the full year, we continue to expect free cash flow in excess of $100 million.
Finally, our capital spending estimates for fiscal 2020 is expected to be in the range of $55 million to $70 million.
With that John Let's now open the call for questions.
Thank you will now begin the question and answer session. If you do have a question press Star then one on your Touchtone phone if you wish to be removed from the Q. Please press the pound sign or the hash key.
If using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question press Star then one on your Touchtone phone.
And our first question is from Shawn Harrison from Longbow Research.
Hi, good morning, everybody.
Morning, John Good morning.
Just I know, it's just small piece of the mix and so it's.
Probably not the biggest focus but within the communications I think the old goal was to have that business flat potentially for the fiscal year end with.
The underperformance last quarter and the decline this quarter, maybe if we could get into just.
What is the incremental weakness there I think to speaking was that had bottomed out but it clearly had and maybe what could the back half look like is there further deceleration in that business.
This is Steve I can I'll handle that one.
Looking at this quarter I think in as you probably know the msos are announcing their first quarter projections today and through the end of next week and I think we'll get a lot more visibility into what theyre spending is going to be.
So that people were hesitant to really start building product in advance of those announcements and so from an architectural standpoint, we do see distributed coming up a bit.
We see a little bit of upside in the more the centralize architecture and so I think people are really trying to figure out what is going to be though the winter for the architecture as we go into in the fiscal 2000, and I think that will dictate for us.
Kind of what 20 looks like as I look towards the back half of the year.
We do see some strengthening and even in Q3 the forecast now.
Our basically holding with what we thought but again I think until we see what comes out from the most owns and our spending patterns in our customers adjust their forecast, where we truly understand with the back half of 20 looks like.
One of the things that add Sean is that.
And our expectations for the longer term had been for comps or save plan I think for 20, we always expected to be.
Down because we face are really really big headwind.
From from some of the demand Thats dropped from us a significant customer within that space going into it.
Steven mentioned regarding we have a couple of program ramps I could.
Turn the trajectory of the revenue in a different direction in the back half of the year, but we'd still expected to be a single digit sector for us.
Okay.
And then as a follow up I mean defense Aerospace grew 40% in the December quarter. It looks like you have really bullish outlook for 20 still are you seeing any impact from the production stoppages 737, Max or is it just that you've got so many diversified wins at that stoppages, not really impacting the business.
Yes, I think it's the latter Sean I mean, it's we have a very diversified portfolio within aerospace I mean, the indications on our six or 737 Max program is there's been no impact as of yet, but even if there is.
It'll be negligible to our aerospace and defense revenue you won't notice it.
Hi, great Congrats on the results.
Thank you thanks.
Our next question comes from Matt Sheerin from Stifel.
Yes, thanks, and good morning.
A question regarding your operating margin guidance for.
The coming quarter and for the year.
You're still looking out for 7% to 5% range for the second half.
But you did.
Originally guide for the full year, our use is that still something that you could achieve or is that at this point.
It really dependent on how the year shapes out.
Yes, I would say, it's a bit dependent right now I mean, we see the back half of the year as being four seven to five with pretty strong.
Likelihood, but for the full year I think it remains a little bit as to how we come through this quarter because this quarter's a bit more challenge than we had anticipated, but we should be right in that area for the full fiscal year.
And you're looking for pretty significant growth based on your wins in the second half is from some of these sectors and I know in the past with some of these programs there's costs related to that which is always.
A little bit of a squeeze on margins is that factored into your guidance in terms of expectations. Because you have visibility on those Ram. So you can manage those better.
It is yes it is.
Okay and then on the.
On the inventory side pretty strong reduction it sounds like youre going to start to build some inventory.
Backup are you seeing any signs of a component constraints like you have in previous quarters are you able that run.
Relatively lean here.
Yes, Matt This is Steve we're not seeing the component constraints, we saw in the past I mean, there's always an issue here there that will continue to chase, but nothing compared to what was in previous quarters.
Okay. Okay. Thank you very much.
Thank you.
Our next question is from Jim recovery from Needham and company.
Hi, Good morning, just question on.
Some of the strength you're seeing in the semi cap.
Part of the industrial business, you seem to be suggesting that there maybe some upsides in that area of the business looking out over the balance to the year is that's coming from from multiple customers and I assume that's better margin business is that correct.
So the answer first for your questions of Stephens.
Yes, we see a potential for upside in the coming quarters took the question is in this kind of how I stated as how much and when I.
I think.
Generally speaking across all the customer they do we expect to see upside.
In the coming quarters, it's really been hard to predict when that's going to hit and so obviously this quarter with strong that spread who is continuing into this quarter.
But when we see more in the back half of the year is what we're working through so we're working very closely with customers.
To make sure that from a capacity standpoint in an inventory standpoint.
We have the right things in place and then terms or margin profile.
Varies by customer and by program.
It's in line with were packed with expectations are.
So we'll.
Yes, Jim This is Pat I think when we see increase volumes from customers. We can gain some fixed cost leverage but to Steve's point. It doesnt necessarily mean, the margins are stronger by customer.
Got it and just.
Just looking at the.
What you saw the in the healthcare life science vertical.
Just trying to understand where there's some.
Was there some potential unexpected Poland's of business that you might have been anticipating in fiscal second quarter that benefited you in Q1.
Yes, we did see some pull in that appears to be Q1 demand are capped first calendar quarter demand shifting into the fourth calendar quarter. So our Q2 shifting into Q1.
We hadn't seen that as we entered the quarter didnt appear that our customers.
We're going to show any any end of calendar year strength, but that changed over the course of the quarter and we do expect it to have an impact on our current quarter.
And how that was that was from from from multiple customers multiple customers yes.
15 of the top 20 had upside in the quarter.
Yes.
Got it and it's just.
So you're not giving guidance specific guidance looking after the to the.
Fiscal second half but.
Is it seems like the.
Theres the potential that your SGN a expense going forward is going to be.
At a slightly higher level.
Is that.
Also.
Partly due to.
Some of the mix changes you're seeing in the business.
Not necessarily Jim I think we can hold our SG in a typical levels there I had.
This past quarter was higher because of higher incentive compensation and that was a combination of the strong revenue and the return on invested capital.
That's what was driving that higher we do have the merit increases this quarter, but we typically work through those through productivity improvements so.
I want to an expected to be any higher than what we're looking at in Q2.
Okay.
And then you alluded to.
Some pause and the in engineering programs I Wonder if you could just give us provide a little bit more color on that.
Yes, what we saw a couple of significant programs that paused and that would column for different reasons and I wouldnt call them.
Indications of any market softening there they are pausing because of of issues around the customers are one was with a more significant.
Health care, OEM and Theyre basically taking a closer look at the business case balancing features versus.
Development effort within that program, so thats, causing the step back for a bit and others with a more early stage customer that is really looking at there.
Our overall business model. So we think the there's reasonable likelihood that that Bowlful go forward at some point.
But right now, it's it's having a near term impact for us.
Got it and at that early stage.
Customers that also health care or is that your yes.
Vectors.
It is healthcare.
So.
Thank you.
Our next question is from Paul Coster from JP Morgan.
Yes, thanks for taking my questions.
Restructuring women's chain needs being salute slightly down over the course last few quarters.
He said called pigmented skin rebounds, and pretty quickly and Im just wondering what you think the unblind colds won't be as a.
Trade on suit and see a good.
Disruptions to supply chain. So is this some will be received through we've recently trend.
Pending undergoes soon.
Yes. This is Steve I'll handle that one and actually I think I misspoke in the beginning I think thats at our trailing four quarters with $450 million, it's actually $850 million and so quick correction on that one but from up from a trend standpoint, I think one of the things that we're analyzing and looking at as we look at the trailing four quarters.
The healthcare life Sciences, and aerospace defense sectors, those trailing four quarters.
The revenue levels for both quarters have been the highest they've done in the last couple of years and so those programs that are bit smaller, but as we're trying to talk about here. The durational things are significantly longer and as we've basically deemphasized and we see the communications numbers coming down those were historically higher numbers, but their program durations are much smaller.
And so as we look forward, we're confident as we're growing in these diversified sectors and Todd talked about that over 90, 90% of a revenue is going to be in the diversified sectors that we are generating the wins that we needed to continue to grow and so I think one of the things we need to do take a look at the metrics that reusing and make sure that now that we have this different portfolio.
The size of the wins that we need we believe are supporting the business and we'll have to make sure that our metrics are measuring the right thing.
Mccain in Q.
You said 15 of goods swing C. healthcare life Sciences customers.
Forwards.
The underlying trends to explain that.
From my perspective, if you looked at the beginning of the quarter, we actually talked about the fact that we had historically in the past seen some seasonal upside in our fiscal Q1 related with year end demand our customers are not forecasted that as significant as they had in the past.
And so we didn't know quite frankly, if there were going to be softer demand in.
In the Q1 and our Q1.
But as we came through the quarter realizes that demand would really there and customers needed to pull it in and so we did that for them. So.
I don't know there's much more of a can read into it.
I think the demand was strong at the year end, our customers than anticipated we reacted to it and again I think as we look at a forecast going into Q3.
I think it's going to rebound back to normal level. So.
We do see I, just wanted to quarter kind of fluctuation.
Last question, so assuming number.
I'm pleased to use space following youll script today, they choose to TMT, salt, which true product cycle business. We both small business in focus will move loan product slowing cool.
Accruals.
And also we'll see some pricing discipline.
Do you can say good issues.
Rational pricing happening.
In your industry momentum huggies play out.
Cool Cetone.
Yes.
From our perspective, there is rational pricing in the industry right now from a competitive standpoint, though we don't see things as being.
Significantly different I mean has always been competitive and our spaces. We have us kind of competed with the same people.
It looks rather similar but the pricing situation is I would call a decent right now so.
Certainly a positive for for all of US I think if we if we have good pricing discipline and.
Drive to get value out of the services that were providing.
And Paul and some of these complex sectors that we operate within there is higher working capital requirements and so we've got to make sure the margins.
Support that higher working capital and I think our competitors are thinking the same and focusing on the return on invested capital side.
And ensuring those margins are high enough.
Thank you.
Thank you.
Our next question is from under Sodastream from Sidoti.
And your line is open.
Hello.
Yep.
Yes, hi, everyone, Hi, congratulations great quarter and.
I wanted to test is already.
Hello.
I wanted to contract wins and.
Well.
Can you back at that.
Our winning from existing customers elsewhere.
Winning an attachment and customers from enhanced production then Meanwhile.
Alright, okay.
So if I understood. Your question correctly. This as we look at our wins in our funnel.
We are traditionally fall from 60 70 customers with 30 40 target.
Split both in wins as well as the funnel.
And our focus varies by sector for example, in our healthcare life Sciences sector, we believe.
The number of logos and the customers that we have theres a lot of opportunity to continue to harvest from them and support the growth that we need.
Again, we're always looking at adding new customers, but again they believe they have a strong customer base as we looked at industrial commercial through fiscal 2019, one of things, we recognize that we needed to add.
New customers to the portfolio into a focus that sector focused heavily on doing that and made great progress doing and so we do look at it by sector, but we think that that roughly.
70, 30, 60, 40 split from customers to targets is a very healthy path forward with us obviously growing with customers as much easier.
Quicker than it does with targets so we like that mix.
Okay. Thank you I'll tell you mentioned that you're living that shifting in today Dan.
90% over 90% their revenue in healthcare life Sciences, and aerospace and defense and industrial and commercial.
And then there are much longer Egypt.
Remind us how does compare to the communications.
With regard to communications.
Yes, sure we tend to think of that communications is being about a three to five year lifecycle on programs and whereas we look at aerospace and defense being in the mid to mid teens, Stephen 20 year lifecycle, and health care and industrial tending to be closer to a 10 year lifecycle. So.
So it's quite a difference in ammonia, providing solid execution, maintaining the business and the amount.
Of churn thats in the portfolio in the amount of business such need to win.
Okay. Thank you.
And they're altra left that lastly, halfway done the do it on the cash.
Good question.
So we will continue the buyback we expect to execute that remaining portion of the buyback. This year and we are paying down some of our debt and will continue to do those two things and then reevaluate.
We continue to see that level of free cash flow moving forward will look at our alternatives around future buyback or consider the merits of a dividend too.
Okay. Thank you available for me.
You're welcome.
And we have follow up question from Jim Macquarie from Needham and company.
Sure AG said the repositioning of the of the Boulder design centers, who Boise I assume that that's something that has been.
Under consideration in the works for a bit.
It's been under consideration for a bit because we saw the advantages strategically of having an aerospace and defense center of excellence as we see aerospace and defense as a great growth opportunity for our engineering solutions organization co locating those two facilities.
A lot of sense strategically.
But really the.
The positives in the engineering programs, I guess, where the impetus to be able to.
To move forward with it so.
So while we had considered it.
It's a bit collected it's taking.
Or looking at the situation that we have in front of us and addressing it.
We have started our Boulder design center before Boise operations, and if you didn't reverse you do exactly what we're doing now which having that center of excellence with the co location and the full value stream.
As a significantly bigger value add for our customers and so as Todd said, taking advantage of the situation.
Making better long term strategic alignment is is the right way to go for us.
Got it and maybe you guys. If you could maybe just remind us as you think about 70 or other verticals.
And to what extent.
Have you adopted this kind of the strategy and some of the other verticals with these centers of excellence.
Well it hasn't necessarily been.
Pegged as centers of excellence, but there's a great deal of co location between our engineering facilities in our manufacturing facilities and we found that to be very effective.
Okay.
Got it thats it for me Thanks, a lot sure.
And we have no further questions at this time I'll now turn it back over to CEO .
Kelcy for closing remarks.
Alright, Thank you John and just wanted to close briefly by thanking everyone who joined our call today. We appreciate your support we appreciate your interest in plexus.
And thank you ladies and gentlemen that concludes today's conference. Thank you participating in you may now disconnect.