Plexus' (PLXS) CEO Dean Foate on Q3 2014 Results - Earnings Call Transcript

Jul.17.14 | About: Plexus Corp. (PLXS)

Plexus Corp. (NASDAQ:PLXS)

Q3 2014 Earnings Conference Call

July 17, 2014 08:30 AM ET

Executives

Angelo Ninivaggi - SVP, CAO and General Counsel

Dean Foate - Chairman, President and CEO

Todd Kelsey - EVP and COO

Pat Jermain - VP and CFO

Analysts

Shawn Harrison - Longbow Research

Amit Daryanani - RBC Capital Markets

Jim Suva - Citi

Sherri Scribner - Deutsche Bank

Steven Fox - Cross Research

Mark Delaney - Goldman Sachs

Todd Schwartzman - Sidoti & Company

Vamsi Mohan - Bank of America Merrill Lynch

Sean Hannan - Needham & Company

Operator

Good morning, ladies and gentleman and welcome to the Plexus Corporation Conference Call regarding its Fiscal Third Quarter 2014 Earnings Announcement. My name is Ellen and I will be the operator for today's call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open the conference call for questions. The conference call is scheduled to last approximately one hour.

I would now like to turn the call over to Mr. Angelo Ninivaggi, Plexus’ Senior Vice President, Chief Administrative Officer, and General Counsel. Angelo?

Angelo Ninivaggi

Thank you, Ellen, and good morning everyone and thank you for joining us today. Before we begin, I should remind everyone that statements made during our call today and information included in the supporting material that is not historical in nature, such as statements in the future tense and statements that include believes, expects, intend, plan, anticipate and similar terms and concepts are forward-looking statements.

Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of major factors that could cause actual results to differ materially from those discussed, please refer to the Company's periodic SEC filings, particularly the Risk Factors in our Form 10-K filing for the fiscal year ended September 28, 2013 and the Safe Harbor and Fair Disclosure Statement in yesterday's press release.

Plexus provides non-GAAP supplemental information such as earnings or margins excluding special items as well as ROIC and free cash. We presented information excluding special items because it provides the better indication of core performance for purposes of period-to-period comparisons. ROIC and free cash flow are used for internal management assessment because they provide additional insight into ongoing financial performance. In addition, we provide non-GAAP measures because we believe they offer insights into the metrics that are driving management decisions as well as management's performance under the test that it sets for itself. For a full reconciliation of non-GAAP supplemental information, please refer to yesterday's press release and our periodic SEC filings. We encourage participants on the call this morning to access the live Web cast and supporting materials on the Plexus’ Web site at www.plexus.com by clicking on Investor Relations at the top of the page and then Event Calendar.

Joining me today are Dean Foate, Chairman, President and Chief Executive Officer; Todd Kelsey, Executive Vice President and Chief Operating Officer; and Pat Jermain, Vice President and Chief Financial Officer.

Let me now turn the call over to Dean Foate. Dean?

Dean Foate

Thank you, Angelo and good morning everyone. Please advance to slide three. Yesterday after the close of the market, we reported results for our fiscal third quarter of 2014. Revenues were $621 million, an increase of 11% from the prior quarter setting a new record for the Company. Non-GAAP diluted EPS of $0.74 was also a strong result coming at and at the top of our guidance range.

Please advance to slide four for a few fiscal third quarter highlights. Our revenue performance was above the midpoint of our guidance with growth in all four of our market sectors. Our go-to-market teams delivered $282 million of new manufacturing solutions wins well above our target putting our trailing four quarter wins at $801 million. Our Engineering Solutions group experienced another strong quarter of new program wins with results at $23 million.

Our operating performance improved quarter over quarter. Operating margin advanced to 4.7%, a 20 basis point improvement. Our cash cycle improved by 5 days to 57 days, and help contribute to better than anticipated free cash flow. Return on invested capital improved to 14.6%, a 50 basis point improvement and is now 360 basis points above our weighted average cost of capital. Construction at our new facility in Guadalajara, Mexico is now complete and we are presently transitioning programs from Oras, Mexico.

Turning now to our guidance on slide five. We are establishing fiscal fourth quarter 2014 revenue guidance of $645 million to $675 million, suggesting our revenues will grow sequentially approximately 6% at the midpoint of our guidance range. We currently anticipate that our fiscal fourth quarter could be an episodically strong quarter as a consequence of the rapid ramp of new programs. While it is still too early to guide our fiscal first quarter 2015 with confidence or precision and our customers continue to refine their forecast as market conditions unfold, we believe it is prudent to inform you that our current visibility suggests that our revenues could contract in the zone of 3% sequentially from the midpoint of our guidance.

Consistent with our fiscal fourth quarter revenue expectations we are guiding diluted EPS in a range of $0.74 to $0.80. Our EPS guidance includes approximately $0.10 of stock based compensation expense but excludes any special charges. With that I will turn the call over to Todd for some further comments about our market sectors and our operating performance. Todd?

Todd Kelsey

Thank you, Dean. Good morning. Please advance to slide six for insight into the performance of our market sectors during our fiscal third quarter of 2014 as well as our current expectations for Q4. Our Networking/Communications sector was up 25% sequentially in fiscal Q3 which was slightly above our expectations. Seven of our top 10 customers showed strong quarter-over-quarter growth. Within the top customer group, three considerably outperformed the expectations while three significantly underperformed to forecast.

Looking ahead to fiscal Q4, we anticipate continued strong performance for our Networking/Communications sector as aggressive new program ramp should help deliver sequential revenue growth in the mid-teens percentage point range for this sector. We anticipate Q4 to be a near-term revenue peak for the sector as our customers take advantage of favorable market conditions resulting from new product launches. Our Healthcare/Life Sciences sector was up 6% sequentially in Q3 on the high end of our expectations. This was driven by our top five customers where three significantly outperformed earlier forecast.

Looking ahead to fiscal Q4, we currently anticipate revenue growth in our Healthcare/Life Sciences sector in the low single-digits. We see modest improvement in end markets enhanced by new program ramps. Our Industrial/Commercial sector was up sequentially about 6% in our fiscal Q3, below our expectations of high single-digit growth. Several of our top customers weakened during the quarter offset by the strong performance from one of our larger customers. We currently anticipate that our Industrial/Commercial sector will be flat in fiscal Q4. We are seeing general market softening particularly in semiconductor capital equipment offset by new program ramps.

Our Defense, Security and Aerospace sector was up 4% in Q3, a result that was slightly below our expectations as shipments to a major aerospace customer were lower than anticipated. We currently expect Q4 to be up in the high single-digit percentage point range as we are seeing broad-based strengthening within aerospace and seasonal strength from the significant security customer. Turning now to new business wins on slide seven. During the quarter, we won 25 new programs in our manufacturing solutions groups that we anticipate will generate approximately $282 million in annualized revenue when fully ramped in production.

While from an absolute standpoint the wins were predominantly in the Americas and APAC regions, each of our regions had strong performance relative to current quarterly regional revenue. Our teams continue to drive for growth and improved utilization in each of our regions. On the sector basis, our networking/communications and healthcare/life sciences sectors had a particularly strong quarter. Our networking/communications wins included a significant expansion of business with one of our top customers. This business is ramping aggressively.

We also added a new networking communications customer in our AMER regions. Within our Healthcare/Life Sciences sector we added three new customers with substantial growth potential. Our Industrial/Commercial sector wins were predominantly programs from existing customers, however we added one significant new customer impacting both our manufacturing solutions and engineering solutions groups. Finally, while the magnitude of wins within our Defense/Security/Aerospace sector was small, we added three major aerospace OEMs with strong growth potential as new customers.

In addition, we had another outstanding quarter in engineering solutions with new program wins totaling approximately $23 million. While our engineering wins continued to our strong in our Healthcare/Life Sciences sector where we clearly differentiate in the marketplace, our Industrial/Commercial sector also performed beyond expectations and is developing a sound value proposition and blare within that space. Please advance to slide right, our manufacturing wins trend remain strong with our trailing four quarter performance as shown by the blue bars at $801 million, resulting in a trailing four quarter win ratio of 35%.

As a reminder, we believe trailing four quarter wins percentage at 28% of trailing four quarter revenues is sufficient to deliver growth consistent with our longer term target. Our wins performance in fiscal Q3, as shown by the overlay green bar was up sequentially from Q2 and is well beyond our quarterly target of approximately $160 million. Our funnel of new business opportunities pulled back to $2 billion versus the $2.1 billion last quarter as our teams harvested a number of key opportunities. Despite the reduction, a funnel of this magnitude is healthy and sufficient.

Our go-to market teams are focused on rebuilding the funnel. Turning now to facilities projects, during fiscal Q3, we completed our manufacturing facility in Guadalajara, Mexico shown on slide nine. This is a 265,000 square foot facility which will enable further penetration into the low cost Americas market. We are currently qualifying production processes and building initial production units in the facility. The transition of business from our Juarez facility will be well underway by the end of fiscal Q4. We will cease the operations in Juarez, Mexico in the first fiscal quarter. The demand for our Guadalajara facility is quite strong and we anticipate an aggressive ramp in revenue throughout fiscal 2015 with the expectation of positive operating profit in late fiscal 2015. We’re investing in resources ahead of the ramp in order to ensure success and build a strong brand for operational excellence within the facility.

Slide 10; I’d like to highlight the performance of our operations initiatives and the impact on our operating business. Our manufacturing solutions supply chain and go-to-market organizations have made significant strides in productivity initiatives. As a result we’re able to expand operating margins from 4.0% to 4.7% over the course of the past six quarters. This is includes an increase to 4.7% from 4.5% quarter-over-quarter. We expect further improvement approaching our 5% operating margin goal in fiscal Q4. It should be noted that while our operating margins have expanded over the past several quarters gross margins have been largely unchanged. This was a result of a conscious effort to invest at our sites and regions where our customers may be better served; and an expanded capability such as microelectronics and aftermarket services. In order to offset these investments we’re driving leverage at the corporate level.

Finally, I will turn to our recent cash cycle performance on Slide 11. Our net cash cycle days for Q3 ended at 57 days significantly better than our guidance range. Through a coordinated effort across the organization we made substantial progress in our cash cycle metrics over the longer-term. We expect to exit FY14 with our cash cycle under 60 days and are focused on maintaining this performance in FY15.

With that I will turn the call to Pat for a more detailed review of our financial performance. Pat.

Patrick Jermain

Thank you Todd and good morning everyone. Our fiscal third quarter results are summarized on Slide 12. Third quarter revenue was a record $621 million above the midpoint of the guidance range for the quarter. Gross margin was 9.4% for the fiscal third quarter. This was in line with our expectations and slightly below the fiscal second quarter results of 9.5%. Gross margin was impacted by the startup of our Guadalajara, Mexico facility while we continue to service our customers during the transition period.

Selling and administrative expenses were $29.2 million in line with our expectations for the quarter while SG&A dollars increased compared to the fiscal second quarter, we saw a meaningful reduction in SG&A as a percentage of revenue. This percentage improved from 5% in the fiscal second quarter to 4.7% in the fiscal third quarter, as we experienced better leverage of operating expenses with our revenue growth.

Operating margin of 4.7% before special charges was in line with our guidance range. This was a nice improvement from the 4.5% in the fiscal second quarter and reflects the benefits of our operational initiatives. Diluted earnings per share of $0.71 includes the detriment of $0.03 per share as a result of restructuring charges in the amount of $1.2 million. These restructuring charges related primarily to the closure of our manufacturing facility in Juarez, Mexico that was announced last quarter. Excluding the $0.03 of restructuring non-GAAP earnings per share of $0.74 was at the top end of our expectations.

Turning now to the balance sheet on Slide 13. Return on invested capital was 14.6% for the fiscal third quarter a 50 basis point improvement from the prior quarter and 360 basis points above our 11% weighted average cost to capital for fiscal 2014. The improvement over both the prior quarter and the third quarter of fiscal 2013 was a result of higher earnings on a similar invested capital base.

During the quarter, we’ve repurchased 186,000 of our shares for approximately $7.7 million at a weighted average price of $41.52 per share. The shares were repurchased under the $30 million stock repurchase program authorized by the Board of Directors on August 19, 2013. The Company expects to complete the remaining authorized repurchases of approximately $7.4 million on a relatively consistent basis during the fourth quarter of fiscal 2014.

As Todd reviewed our cash cycle for the fiscal third quarter was 57 days which was better than our expectation and five days better than our results in the fiscal second quarter. During the quarter we generated $38 million in cash from operations and spent $28 million in capital expenditures. With approximately half of that capital for footprint expansion in Guadalajara, Mexico resulting free cash flow during the quarter was $10 million. As discussed in press release during the fiscal third quarter we amended our senior unsecured credit agreement to take advantage of what we believe are favorable rates. As a result of the amendment the credit facility was converted into a $235 million revolving credit facility.

In addition to the amendment, we extended the termination date of the credit facility from May 2017 to May 2019. As Dean has already provided the revenue and EPS guidance, I will now turn to some additional comments on the fiscal fourth quarter of 2014 which are summarized on Slide 14.

We expect restructuring cost of approximately 800,000 to 900,000 in the fiscal fourth quarter related to the Juarez, Guadalajara transition. These tasks are excluded from the guidance discussed today.

Gross margin is expected to be in the range of 9.3% to 9.6%. We expect SG&A cost to be slightly higher than the fiscal third quarter in the range of $29.5 million to %$30.5 million. At the midpoint of our revenue guidance range, SG&A will be approximately 4.6% of revenue, slightly better than the fiscal third quarter, this results in expected operating margin of approximately 4.7% to 5% for the fiscal fourth quarter. A few other notes; depreciation and amortization expense is expected to be approximately $12.9 million in the fiscal fourth quarter, up from $12.1 million in the fiscal third quarter. We continue to estimate a tax rate for the full fiscal year 2014 of 8% to 10%, which is above our fiscal 2013 tax rate of 3.2%.

Our expectation for the balance sheet is for working capital dollars to be up from the fiscal third quarter. Based on the forecasted levels of revenue, we expect these changes will result in cash cycle days of 56 to 58 days for the fiscal fourth quarter, consistent with the fiscal third quarter results. Our capital spending forecast remains at approximately $75 million for fiscal 2014, the majority of this capital is equipment to support new program ramps and leasehold improvements for our new facility in Guadalajara.

I'll now turn the call back to Dean for some wrap up comments.

Dean Foate

Thank you, Pat. And I just want to point out those who you’re following along on the slide deck we have just got annuity between the tax rate, Pat just mentioned and the tax rate on the slide will correct -- slide I believe Pat’s commentary of 8% to 10% is the correct tax rate.

Pat Jermain

And that’s for the full year.

Dean Foate

For the full year, all right. Okay. So before we turn the call over to questions, I’ll share with you a few near term focus items. Please direct your attention to slide 15. First, again analyst and investors should be mindful that our fourth quarter could be an episodically strong quarter. We will certainly manage accordingly.

To ensure no product supply disruptions to our customers; we are currently working to flow to execute the program transitions from Oras, Mexico to a new facility in Guadalajara, Mexico; much carefully mange the growth momentum of our EMEA region to deliver operating profit and performance improvements in fiscal 2015; we expect the successful outcome at the Aerospace & Defense Dedication Event at our new facility in Neenah, Wisconsin this quarter.

At this point our operating cycle we are focused on completing our 2015 annual operating plan and our strategy deployment initiatives for the year. Operator, with that we’ll take questions.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) Your first question is from Shawn Harrison with Longbow Research. Please go ahead.

Shawn Harrison - Longbow Research

Good morning Dean. Good morning Pat. I guess I was hoping to get a little bit more detail on why you think the revenue jump this quarter is going to be episodic and that it couldn’t spill into the following quarter? And then also just a little bit more detail on the win pipeline given probably the best number we’ve seen in eight quarters or something like that. Is there anything out there of similar size?

Dean Foate

I am going to let Pat take the question on episodic revenue and I’ll add into quarter fiscal in time.

Pat Jermain

Sure. So Shawn with respect to the quarter I mean basically what we’re seeing is we have a few new programs that are ramping very aggressively right now. And we know our customers are taking advantages on favorable market conditions and the process of these program ramps so we believe the revenue level is not sustainable. Although, we don’t necessarily have good visibility as we go out beyond our Q4 as to what the revenue trend will look like.

Dean Foate

So just to add to that, there is just a lot of volatility with these programs when they first ramp up and we just really mindful of [indiscernible] has got us and we don’t wanted to get ahead of us here and take the Q4 result which we think maybe a bit of a peak quarter here for a little bit and start to carry that forward. So if you think about the midpoint of Q4 where we guided and I suggest that we can be down as much as 3% and 4% if that 3% number if it occurs for Q1 would still be meaningfully above Q3 the quarter we just completed. So it’s just one of these kinds of difficult investor relations issues we’re going to have a bit of a take an anomaly here now. Again this is based on our current visibility; customer in this case because of the success of the product launch continues to refine their forecast frequently. So, we’re just trying to suggest that we should be a little bit cautious here before we carry those numbers forward.

Shawn Harrison - Longbow Research

Okay. And then just on the win dynamic being $282 million number, it’s the best out there in a while. I know you harvested the pipeline a bit. But maybe just talk about the success and kind of are there other opportunities of that magnitude out there, is it going -- do you think it normalizes down over the next couple of quarters.

Dean Foate

Yes. So what I would say Shawn, is first of all I wouldn’t expect any win approaching this level in the near term, I mean certainly not in next quarter. I would expect to be a normalized number next question that’s really what our teams are looking at. They just had an exceptionally strong quarter and there was one very significant win again that’s ramping quite aggressively a bit a typical of what the ramp rate is for our normal program that we bring in. So that is having a pretty significant impact to the wins number.

Operator

The next question is from Amit Daryanani with RBC Capital Markets. Please go ahead.

Amit Daryanani - RBC Capital Markets

If I just may be follow-up on that question, episodic program, it sounds like just one program is that correct or the multiple ones and if you just talk about what end market is that occurring and that would be helpful?

Dean Foate

But it’s multiple programs that are ramping up this quarter, but certainly one of them is tending to dominate, this was an existing customer which is part of the reason why we’re able to ramp it as aggressively as we are. Again, we’re not suggesting that the program is going to be a one hit wonder over the short term; we’re just suggesting it’s going to be episodically strong. We believe it will be episodically strong in this quarter that could change, but that’s the visibility that we have but we do expect revenue from that program going forward into fiscal ‘15. We’re trying to be cautions here with our customers, it’s obviously sensitive information so I am going to stay away from naming the sector at this point.

Amit Daryanani - RBC Capital Markets

That is fine. But I guess, Dean, just to understand, this is not like the ramps you have had in the past in the defense or industrial side where a big ramp happens and it just goes to zero pretty quickly after that. That is not the episodic nature of this one, this is just a big ramp and then in normalizes after that?

Dean Foate

That’s correct.

Amit Daryanani - RBC Capital Markets

Fair enough. And then if I can just maybe follow-up on your cash cycle because obviously you had some good success here over the last couple of quarters. It looks like it is primarily driven by accounts payable though right now. So could you just maybe talk about have you changed the way you have your term set up with your suppliers that is helping you extend payables in the high 60s and is that sustainable as we go forward? Do we expect that to roll back to the mid-50s the way it used to be in the past?

Todd Kelsey

So Amit, this is Todd I’ll take that one. So with respect first of all to the accounts payable, I would say we are driving more aggressive terms with our suppliers, now whether we can sustain it in a high 60s, probably not, but I do expect that we will achieve inventory improvements as well. So we have enormous amount of effort into reducing our inventory base right now and that will be a big focus for fiscal 15 so we believe we can take inventory base down on a meaningful amount to focus on demand planning where we are launching a new master production schedule process and tools and supply chain programs, but with that being said there certainly are reasons that the inventories are up in the current quarter as we prepare for the new program ramps. And as we really look on servicing our customers through enhance safety stocks and comp bonds, but we will drive that number down.

Operator

The next question is from Jim Suva with Citi. Please go ahead.

Jim Suva - Citi

Thank you and congratulation to you and your team there at Plexus’s for good results and outlook. My question is focused on the win rate which was extremely high both the number as well as the amount of revenues, was there anything like a unique couple of win numbers like really drove that number much higher was it did you hire a lot more sales people engineers in that and could we actually see this win rate continue going forward. And the characteristics of it, are those wins kind of consistent with Plexus’ operating margins or higher or lower or how should we think about the characteristics of those wins, in those segments? Thank you.

Dean Foate

Look Jim, I certainly don’t think that should start the model win in that level, I think that, we think it can be, it can ebb and flow quarter-to-quarter in this case there was one win that was in their program that was North of $100 million, even that in that out would have been a pretty decent quarter for a new wins, but certainly there was a pretty significant one and of course as we stated and that was an existing customer win which allowed us to really get after from a ramp standpoint. In terms of the returns associated with these win, it’s a competitive environment that we are operating in but we still feel that the margin place, supports our value proposition and the pricing and the financial model that we have consistently stated. So I feel pretty good about the balance that wins across the sector in the modeling that we have from an economic standpoint associate with those wins. Todd, do you have something to add?

Todd Kelsey

Yes. Just one thing to add here Jim, one of the things that really and getting at the quarterly to not focus too much on that number on its own is that we really look at the trialing four quarters, because we know some quarter are going to be better than others, I mean this happen to be an exceptionally good quarter, but we really focus on that trailing four quarters number and making sure that it stays greater than 25% of the trailing four quarter revenues. So right now the team is doing great job of that and we believe they’re doing really well, but we wouldn’t expect another $282 million quarter next quarter.

Dean Foate

No, I would just follow-up, if I remember Jim also ask about resources, we haven’t added meaningfully large numbers of additional resources but we have been attracting some very talented people to the company and like all areas of our company where it’s been continuous improvement and making sure that we upgrade our talent and I just believe we just have a very talented team of people and we have improved our processes and our go-to market strategy. So, I think it’s just continues to bear fruit by just getting better at representing our value to customers.

Operator

The next question is from Sherri Scribner with Deutsche Bank. Please go ahead.

Sherri Scribner - Deutsche Bank

Hi, thanks. Good morning gentlemen. I wanted to ask about go back to the episodic quarter question and I think Dean in your suggestions you suggested the business will be down about 3% in the first quarter but that’s still meaningfully above where the street is and suggest about 20% year-over-year growth in the December quarter. So, I wanted to get a sense of is that right? And what type of growth rate should we think about given the strength in the first quarter for fiscal ‘15?

Pat Jermain

You know I am out there. Yes, your math is right, Sherri, I mean thinking about the right way. I agonized over even giving Q1 guidance or direction but I just felt like add to given that that we thought that Q4 can be so tough or strong. Clear the opportunity for us in fiscal ’15, there is an opportunity for us to get into double-digit percentage growth territory. Now when that will unfold, it’s just so early to tell. I will tell you that the dynamic from our customers is they have a tendency now to lift forecast near-term but not do much with the out quarters. And so it’s our sense that there still is not a lot of long-term confidence in growth across the globe but our customers just based on their current behavior. So, I think the street is hesitant in reasonable success territory right now, shape of it might be a little bit different, could be a little bit light on the revenue front. But I just caution about getting too much out in front of us based on the current near quarters until we get a better sense of how economies are starting to develop around the world and when we start to see a little bit more confidence from our customers in the out quarters.

Sherri Scribner - Deutsche Bank

Okay, that’s really helpful. So, it sounds like customers are still very cautious at this point.

Dean Foate

Yes, they absolutely are.

Sherri Scribner - Deutsche Bank

Okay and then just may be a question for Pat, thinking about the operating margins. You guys are going to get close to the 5% in the fourth quarter, should we think about a 5% operating margin at some point in fiscal ‘15?

Patrick Jermain

Yes, I think that’s reasonable, Sherri. We have got some headwinds ahead of us for this quarter in Q1 as we do the transition from Juarez to Guadalajara, so that will impact us. Our March quarter traditionally has the salary increases and payroll reset, so we will be impacted by that but I think later in the year we could see that. And again remember that we view that as kind of our upper limit that we try and strive towards and we will continue to keep that as our target.

Dean Foate

I think just to piece it together a little better. Pat talked about the view that Guadalajara will turn into positive profit territory later in F15. We also as I commented, I didn’t spend a lot of time on it but in my wrap up I talked about the need to keep focused on EMEA and start to deliver returns in that region we are seeing getting good traction now with our overall platform in Europe between the investments that we made in the UK, a new facility in Livingston with our design center there and rapid prototyping. We have gotten good traction now at our facility in Darmstadt where there is an engineering center which is challenging to build particularly in the market where we are attracting talented resources.

It is difficult because of the employment level of engineers is so high and the ability to bring people in takes time and we are starting to see Darmstadt turn into positive territory in terms of contributing to profitability of the company and now the Raleigh site is really starting to get some momentum behind it. So, we can start to see our broader EMEA platform start to contribute to the business as well after a long period of investment here as we come through ‘15 as well. So, we are starting to get some things aligned I think that really put us in better territory. But as Pat said, we got to manage through this whereas closure and transition we didn’t contemplate that at the beginning of the year. We made that decision during the year, so we are going to take that on and we are taking that on now. Ultimately we will get the pay back because we will get all that revenues into Gualala and some additional revenues but we are going through a few things that we got to just manage through during the near term.

Still I don’t think we are not going to have good margins, we are still going to have very good margins relative to the industry through this process.

Operator

The next question is from Steven Fox with Cross Research. Please go ahead.

Steven Fox - Cross Research

Thanks. Good morning guys. Two questions from me, first of all, it sounded like Guadalajara is going to ramp up little quickly than you thought originally. Can you just sort of gauge the risk of maybe it’s more of a profit drag over next 12 months and may be you’re originally thought I know you said it’s going to turn profitable in the few quarters. But is there risk that you are now bringing a little more business into it in a short amount of time and what that does to profits? And then secondly, just listening to your comments on new wins, it seems like there is a larger number than usual amount of new customers mentioned. And I was curious if one of those observations is correct? And two what do you think is striving that and how that could affect both revenues and profits over the next few quarters?

Todd Kelsey

Sure so this is Todd, I’ll start with the Guadalajara question. So with respect to Guadalajara I would say one of things that we’re seeing is beyond Juarez transition is a bit more aggressive ramp of other business than we had initially anticipated. So I mean what we’re doing in the nearer term is we’re bringing on resources sooner, so that’s of course having some level of impact on our overall operating profit margins. But we think it’s prudent to invest in that facility to make sure it has a brand for operational excellence and to make sure that we’re positioned well for the transition of the new business.

So if we looked at Guadalajara over the next several quarters as to really how it’s going to progress. Right now we’re very much in the initial production build. So we’re building essentially first units for one of our customers that’s transitioning. We’ll transition the Juarez business over the Q4 to Q1 timeframe and then really in Q2 and beyond we’ll be launching some of this initial new business that we expect to launch within the facility. So the impact that that has is really a few quarters of what you consider investment. But we really believe we should be able to exit fiscal ‘15 with a very strong run rate on the order of maybe $150 million to $200 million in that facility and we should be able to generate decent profitability as we get to the back end of fiscal ‘15.

There was one more question, it was about whether there was a more than typical number of new customer wins? And whether that was a trend and whether it would have a significant impact? I would say probably there is a bit more this quarter and I don’t know that is considered a trend, much like I wouldn’t consider the $282 million a trend, it’s just the way it felt this quarter. And I think the way our overall customer mix or win mix between targets and customers is falling out across the company and across the last several quarters. I wouldn’t expect that to have a significant impact on operating profit margins as we move forward.

Operator

The next question is from Mark Delaney with Goldman Sachs. Please go ahead.

Mark Delaney - Goldman Sachs

I was hoping you could talk a little bit more on the industrial land market. I think this is maybe one area with an industrial was strong and then some other areas started to weaken and if you just elaborate a little bit more on where you saw the strength? And then when you started to see some weakness in other areas?

Dean Foate

So Mark one of the things I’d say where we’re seeing a little bit of softening as I mentioned in the prepared comments is in the semiconductor capital equipment. I wouldn’t call it across the board, but right now we’re seeing significantly more customers down and up within that space, within our customer base. But I would say right now it’s just a general market softening that we’re seeing within our industrial, commercial customer base as well to or so. Things as you are aware we’re a little bit light, our projections for Q3 and forecasts have come down a little bit for Q4 from what we had initially anticipated or what we had anticipated a quarter ago, relative to that basis.

Mark Delaney - Goldman Sachs

And then maybe if you could also just update us on your plans for cash and in the past a lot of that has been overseas and your ability to repurchase stock but there has been thoughts maybe doing some things to increase the U.S. cash balance on what the plan is there?

Patrick Jermain

This is Pat, during the quarter we did return $40 million to the U.S. through paying off some inter-company loans from our foreign operations. And we’re planning to do another $30 million in the first quarter of fiscal 2015. And at that level I think we’ll be pretty comfortable with the level of cash overseas. Keep in mind that the balance as you see at the end of quarter are typically higher than the average cash balance during the quarter because of some of payment terms we got with suppliers. So I am comfortable with that level that we will have after bringing this cash back. However, if the cash continues to be well received, we’ll obviously look at opportunities for investment overseas and our ability to bring any of that cash back tax efficiently.

And then maybe I’ll just mentioned Mark that we’re right now in the planning cycle for our annual plan for next year and we’ll be looking at the cash generation in the U.S. to see if we can support a buyback for next year but that decision hasn’t been made, we’ll go to our board in next month to discuss and determined we’ll do a buyback next year.

Operator

The next question is from Todd Schwartzman with Sidoti & Company. Please go ahead.

Todd Schwartzman - Sidoti & Company

Dean just a follow up on your view Q1 relative to Q4. In normal years nothing reaching end of life, what would expect to see the sequential revenue delta from Q4 to Q1?

Dean Foate

That’s a tough question because it’s again not sure what a normal year is. I would just say from a market sector standpoint I would say that it is not atypical for us to see strength in healthcare we have one particularly large customer that is enjoy the very strong December quarter. So we see a little bit of seasonal strength there and then that easy comes down somewhat into Q2 perhaps that’s we done and given at seasonal. Also it seems to be a bit of a patter for us to see the industrial commercial sector lighten up in our December quarter as well. Not again it’s difficult to tie it out to seasonality but this has been our experience I think more often than not on an annual basis.

Networking communications though can sometimes you can see some strength there is some budget flush for capital spend. So we’ll just have to see how this plays out. DSAs we really don’t see of a lot of seasonality it’s going to a smaller sector for us growing rapidly but the pace of the build and the deployment of that technology doesn’t necessarily seem to at least in our experience follow any sort of the slight and we kind of cycle related to an annual cycle it’s a more a longer cycle of how aircraft platform get deployed in the field.

Todd Schwartzman - Sidoti & Company

Got it. And Pat I am listening to you speak about the Guadalajara transition, it sounds as though the gross margin impact dissipates or goes away backhalf of the year at some point. I don’t know if that’s Q3 or Q4 event or does it is really in early fiscal ’15 before we see that as a thing of the past?

Pat Jermain

Yes, Todd, we will see a drag in our first quarter, so our December quarter we would continue to see a drag before we see maybe a more breakeven in the March quarter next year.

Todd Schwartzman - Sidoti & Company

So when the plant is fully up and running on an annual basis, can you give us some color as far as what you expect annual production to be at Guadalajara?

Todd Kelsey

Yes, this is Todd. As I stated a little bit earlier we look to about $150 million to $200 million run rate as we exit fiscal ’15 and we would expect it to grow from there. The funnel in Guadalajara is quite strong, it’s one of our stronger site funnels within the company right now with a really good customer base and we’re launching it with a good customer base. So, we’re very excited about the opportunity in Guadalajara for the longer term. Of course we need to get through the transitions in the near term but we’ll do that, and we’ll do that successfully and then beyond the back half of ’15 we should be able to ramp revenue pretty aggressively.

Operator

The next question is from Sean Hannan with Needham & Company. Please go ahead.

Sean Hannan - Needham & Company

So I actually have a, if I can, quick questions for each Dean, Pat and Todd. The first thing I want to say though is I want to congratulate you guys on a record revenue quarter given that this is only a year after finishing that Juniper disengagement. So, it’s nice execution there. So, first Dean, so, it’s funny, it sounds I just keeps hearing this cautioning and carefulness especially when we look to in that December quarter. But sequentially down 3% quarter it really implies about a 640 million last quarter that still certainly above consensus. So just wanted to double check this caution is really in managing us in not getting far too aggressive in the estimate trajectory. Is that accurate?

Dean Foate

That is accurate.

Sean Hannan - Needham & Company

Okay, all right. And then for Pat, in terms of gross margins, you mentioned investments in new programs and that really kind of driving some of that flattish result we’ve seen in gross margins. Are you also referring to inefficiencies with the new ramps as a part of that or how does that factor today and how does the magnitude of that awfully start to abate and when can we expect that?

Pat Jermain

Yes, maybe I’ll start and Todd can join in. I think the Guadalajara transition we’re seeing build up in cost at Guadalajara while we’re still trying to maintain some of the cost structure and whereas to serve as our customers. So that’s where I think we’re seeing this drag in gross margin from my perspective and why we’ll continue to see that in the first fourth quarter and continuing in to the early part of fiscal ’15. But Todd...

Todd Kelsey

Yes, what I would add is with the rapid ramp rate of some of these programs that are occurring there is certainly inefficiencies that are occurring. And then they’re having some level of impact as we just really had sent the message out to the teams really across the board do the right thing for the customers, so that we’re positioned well for the long term. So there is some inefficiencies resulting from that as well too.

Operator

The next question is from [indiscernible] Chaudhary with Longbow Research. Please go ahead.

Unidentified Analyst

Good morning. I just have some follow-ups for Shawn. Regarding the Guadalajara drag, I was wondering if you could quantify how much do you see during the third quarter and then what were you expecting for the fourth quarter?

Dean Foate

Yes, the third quarter I would was about 10 basis points of a drag and moving into Q4 and Q1 of next year it could be anywhere from 20 to 25 basis points.

Unidentified Analyst

Just one more. Regarding the $282 million in wins, you had mentioned that there was one significant win. I'm wondering if that win is one of the ones that you are expecting to ramp huge this quarter.

Dean Foate

Yes it is.

Operator

The next question is from Vamsi Mohan with Bank of America Merrill Lynch. Please go ahead.

Vamsi Mohan - Bank of America Merrill Lynch

Yes. Thanks for taking my question. Dean, you mentioned the $100 million win that is obviously pushing up some of the revenue in the near term as well. Such ramps typically depress the margins as well in the near term. So can you quantify any such drag in margin from the ramp of this program that you are contemplating in the guidance which would turn into a tailwind going into the December quarter? Then I have a follow-up.

Dean Foate

I think the drive can be hardly variable given the nature and complexity of the program was as a new customer and existing customer. Fortunately for us this is an existing customer and is being built in a plant that is already building products for this customer. So we have the team in place. So we don’t have I would say the kind of drag that you would have, we had a brand new customer employees new equipment, we’re training new people to build very different product for the big mix. So this one is actually which is why we’re able to sign up quite frankly for the steep ramp is because we’re very capable of doing this assuming the supply chain can totally support the rate of the ramp through the next couple of quarters.

This is a little bit why we’re being cautious as well, on Q1 even this quarter, we’re just into this now, right. So getting all the material here, getting this thing ramped up there is some uncertainty in risk associated with pulling it off. So I think that’s why we’re being little bit cautious and trying to get you guys not to get to far from this. But we shouldn’t really see significant margin drag associated with it.

Vamsi Mohan - Bank of America Merrill Lynch

And then as a follow up, how would you say the demand environment looks at this point versus the same point last year excluding the Juniper disengagement. If you could talk in terms of the volatility of the orders and sort of the variability as you look through the back half of year. Thanks.

Dean Foate

Yes, I would say on balance I would say it’s a better environment. But again it’s still more near-term focus. I think if you go back a year ago the buyers and customers up or down and their forecast was pretty balanced and you can see both directions. I think when you look at near-term forecast the likelihood for forecast adjustments is bias towards to the upside. And so we’re seeing that sort of near-term quarters coming up. As I tried to characterize earlier out quarters the customers just kind of leave and sit. And so we’re not seeing a lot of the near-term demand translates a long-term confidence with the out quarters.

Operator

(Operator Instructions). We have a follow up from Todd Schwartzman with Sidoti & Company. Please go ahead.

Todd Schwartzman - Sidoti & Company

I just wanted to see if you can provide some color on the contents of the miscellaneous income line the 1.3 million what lived in there?

Dean Foate

Todd I can take that. It was made up of two pieces related to the Guadalajara start up; we had some tax incentives that flowed through that line of about $400,000. And then we had a land return over in Asia and China where we had previously paid a penalty and we were able to successfully have a refund on that and that was 800,000.

Operator

The next question comes from Sean Hannan with Needham & Company. Please go ahead.

Sean Hannan - Needham & Company

So Todd I think we’re on the point of inefficiencies before. Just want to clarify, it sounds like the magnitude of these new ramps for working through that’s creating some inefficiencies today sounds like perhaps that starts to abate maybe later in the first quarter into the second fiscal quarter. How should we think about that? Is that fair?

Todd Kelsey

Yes it’s very fair. I mean I think it should be largely behind us as we get through this quarter. I’d just like to make the point that the ramps -- we'll see a little bit if inefficiency but the bigger impact I think to our performance here in limiting our ability to get to complete 5% perhaps and the drag in Q1 is more associated with the transition from Juarez to Guadalajara. We made the decision to close Juarez kind if mid during the fiscal year here. And so we got both sides operating right now. And we’re going through this process of qualifying production in Guad, so we have two teams of people essentially set up for our customers. And then as soon as we get the products qualified we’ll start to move those product lines over to Guadalajara. And we anticipate most of that work is going to be done during this quarter and should be largely completed as we get into Q1. So that’s the movement from Juarez to Guad. Then we’ll begin to bring in other programs into Guadalajara and ramp them up.

So I think it’s more of a Guadalajara Juarez management team. And then as Pat pointed out in our March quarter, you get a little bit of seasonal cost, so we have the payroll reset and salary increases and some of those things but otherwise you can just strip that out, the performance of the business is very stronger.

Sean Hannan - Needham & Company

Sure, Dean. That’s help, crystal clear. Thank you. That’s very good. Then last one here, Todd, I think you have mentioned early in your comments there were three notable customers that beat and three that missed estimates, I think it might have been in communications. Didn’t know if you can may be elaborate on sub-segments and what might have occurred there?

Dean Foate

It was really across the board Shawn. It’s hard to really give a lot of color around it particularly around the misses. On the areas of the beats, I mean a lot of it had to do with the cable markets, so that’s really we are seeing as a stronger sub-segment of our networking/communications sector right now but the misses were across the board.

Operator

We have reached the end of the question-and-answer session. I would like to turn the call back over to Dean Foate for closing remarks.

Dean Foate

Just a few quick comments and first I want to thank the analysts and investors of course for their questions and they are always very thoughtful, so I appreciate that. Second, I want to thank the folks at Plexus, they really pulled it together here in terms of our performance and getting past what was a big challenge in terms of loss of a significant customer and so we are well on our way now to getting ourselves back to good organic growth and performance and really focused on improving our performance on behalf of our customers. And finally, I want to congratulate Pat on his first quarter as a CFO of Plexus. So, with that thank you everyone.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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