Plexus (PLXS) Q3 2026 earnings call transcript

Good morning, and thank you for joining us today. Some of the statements made and information provided during our call today will be forward-looking statements, including without limitation. Those regarding revenue, gross margin, selling and administrative expense, operating margin, other income and expense, taxes, cash cycle, capital allocation, and future business outlook. Forward-looking statements are not guarantees since 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 factors that could cause actual results that differ materially from those discussed, please refer to the company's periodic SEC filings, particularly the risk factors in our form 10K file. For the fiscal year end, it's September 27th, 2025, and the Safe Harbor and Fair Distinguished Statement in our press release.

We encourage participants on the call this morning and access to live webcast and supporting materials at plexus' website at www. plexus. com, clicking on Investors at the top of that page. Joining me today are Todd Kelsey, President and Chief Executive Officer, and David Abel, Senior Vice President, Chief Financial Officer. Unfortunately, Oliver Mim, our Executive Vice President and Chief Operating Officer, is unexpectedly feeling unwell and could not make the call today. Oliver, join us on our fiscal fourth quarter call.

With today's earnings call, Todd will provide summary comments before turning the call over to Lee and David for further details. With that, let me turn the call over to Todd Kelsey, Todd.

Thank you, Sean. Good morning, everyone. Earlier this week, a devastating tornado struck near our corporate headquarters, causing significant damage to our local community.

Our thoughts and prayers go out to all of those impacted. Thankfully, no fatalities or missing persons were reported. There was no material impact to plexus' operations or our headquarters. Please advance to slide three.

Our differentiated value proposition, focused on unmatched quality and delivery, is creating customer success. Plexus generated record revenue in the fiscal third quarter by capturing strengthening end market demand and successfully launching numerous new programs.

As a result, we see plexus' position to deliver more than 20% revenue growth for fiscal 2026. We anticipate plexus will sustain this momentum and currently see the potential to generate fiscal 2027 revenue growth in excess of our 9 to 12% goal.

Furthermore, we expanded our funnel of qualified manufacturing opportunities to a record level, creating the potential to sustain strong long-term revenue growth.

We delivered solid operating performance with a robust 6.3% non-gap operating margin for our fiscal third quarter. We anticipate further strong operating results for our fiscal fourth quarter. Consequently, we expect our fiscal 2026 non-gap operating margin to exceed 6% and see the potential for continued operating margin expansion in fiscal 2027.

Finally, our working capital efficiency remains robust while supporting accelerated revenue growth. Fiscal third quarter cash cycle exceeded our expectations and was the best in more than five years.

We expect to sustain this performance into fiscal 2027 and anticipate a return to meaningful free cash flow generation. Please advance to slide four.

With all three of our market sectors contributing better than expected performance, fiscal third quarter revenue of $1.305 billion exceeded our guidance range, representing a 12% sequential and a 28% year-over-year increase.

Additionally, non-gap operating margin of 6.3% met the high end of guidance, increasing 30 basis points year-over-year on continued efficiency gains and revenue leverage.

Finally, non-gap EPS of $2.32 exceeded our guidance range. Please advance to slide five. Our go-to market team continued to drive strong performance.

For the third quarter, we secured 31 new manufacturing programs with $255 million in annualized revenue when fully ramped into production.

This result included an exciting new partnership in our industrial market sector supporting battery energy storage systems for data centers, as well as another robust contribution from our aerospace and defense market sector of $135 million.

Year to date, our $400 million of aerospace and defense wins represents a result more than two times our combined fiscal 2024 and 2025 performance. This positions us for long-term secular market outgrowth.

Furthermore, aerospace and defense engineering solutions wins were significant. Finally, our funnel of qualified manufacturing opportunities expanded to a record $4.5 billion in support of sustaining robust long-term revenue growth.

Please advance to slide six. At Plexus, we're committed to advancing sustainability through our value of innovating responsibly. Our customer partnerships are central to our strategy. During our fiscal third quarter, ASM honored Plexus with its supplier performance award for overall supplier excellence and Prism Sustainability Award for Circularity. These recognitions underscore our commitment to deep customer collaboration and advancing sustainable practices across our value chain.

We also continue to take proactive steps to reduce our environmental footprint. Earlier in July, we were thrilled to receive the Gold Award for Renewable Energy at the Positive Impact Awards in Malaysia, highlighting our dedication to renewable energy adoption and sustainable manufacturing. As of fiscal 2026, all of our Penang facilities operate on 100% renewable energy through a combination of on-site generation and purchase renewable energy.

Finally, we continue to build trust through transparency. In June, we released our annual Sustainability Report that showcases our commitment to innovating responsibly and establishes our formal greenhouse gas emission reduction targets.

I'm grateful for the continued recognition by our customers and our communities of our global team members' efforts to live our values, deliver excellence, and create a lasting positive impact.

Please advance to slide seven. For our fiscal fourth quarter, we forecast continued revenue strength led by our industrial market sector. We are guiding revenue of $1.33 to $1.38 billion, representing 4% sequential and 28% year over year growth at the guidance midpoint. We're also guiding non-gap operating margin of 6.1 to 6.5% and non-gap EPS of $2.47 to $2.63.

Due to success in launching numerous new programs, market share gains, and supportive disruptive technologies, we're driving sustained momentum and revenue growth in excess of market growth.

As a result, we now anticipate generating greater than 20% revenue growth for fiscal 2026, with greater than 6% non-gap operating margin and discipline working capital efficiency.

Finally, our differentiated value proposition focused on providing unmatched quality and delivery as resulting in robust performance. This focus has positioned Plexus to sustain momentum for fiscal 2027 and beyond. For fiscal 2027, we currently see the potential to maintain quarterly sequential revenue expansion and generate revenue growth in excess of our 9 to 12% goal.

Supporting our bullish outlook is continued strong growth from our aerospace and defense and industrial markets, including semiconductor capital equipment, with continued growth in healthcare life sciences.

Finally, during fiscal 2027, we anticipate delivering operating margin expansion while continuing to make important investments in talents and technology and support a future growth in operational efficiency.

We also expect disciplined working capital efficiency, prudent capital expenditures, and a return to meaningful free cash flow generation. I will now turn the call over to Sean for additional analysis of the performance of our market sectors, Sean.

Thank you, Todd. For each of our market sectors, I will discuss our fiscal third quarter performance and our expectations for our fiscal fourth quarter, provide an updated fiscal 2026 growth outlook, review the annualized revenue contribution of our quarterly wins performance, and offer preliminary growth commentary for fiscal 2027. I will also provide an overview of our record funnel of qualified manufacturing opportunities.

Beginning with our aerospace defense sector on slide eight, following robust 19% sequential growth last quarter, fiscal third quarter revenue increased 10% sequentially.

Growth was better than our expectation of the mid-single-digit increase. The common theme for this quarter, of standing execution from our supply chain and operational teams, helped to accelerate the capture of robust demand for multiple customers.

For a fiscal fourth quarter following three consecutive quarters of strong sequential revenue growth, we expect revenue to be approximately flat versus our fiscal third quarter and to increase more than 30% year over year. We anticipate return to sequential revenue growth in our fiscal first quarter of 2027.

Finally, for fiscal 2026, we now expect our aerospace defense sector to deliver outstanding revenue growth in more than 20% played by our defense in non-manned sub-sectors.

Fiscal third quarter wins for the sector were a very strong $135 million. Our teams in Boise, Idaho, and Oradia Romania want to secure wireless communication system with a new defense and security customer. Our ability to provide dual-region support will ensure U. S. and EU regulatory compliance for the customer. Furthermore, the win helps in establishing our Oradia Romania site as our center of defense excellence in continental Europe. Our focus on superior customer service also led an existing customer to award our Boise team enable submarine electronics program.

As we look ahead to our fiscal 2027, we see the potential for continued robust revenue growth for our aerospace defense sector that should well exceed our 9 to 12% goal. We anticipate exceptional growth for our defense, unmanned security and space sub-sectors associated with program ramps, market share gains, the robust and market demand, as well as continued commercial aerospace demand improvement.

Please advance to slide nine. Health care life sciences market sector revenue increased 2% sequentially for our fiscal third quarter. The result exceeded our flat revenue growth forecast due to our successful support of program ramps and improved customer demand. For the fiscal fourth quarter, we expect approximately flat sequential revenue with delays in program ramps offsetting stronger customer demand.

For fiscal 2026, we now anticipate revenue to increase in the high teens year over year. An excellent result that well ahead of our estimate of mid-single digit healthcare life sciences market growth.

We generate fiscal third quarter wins of $53 million. Our team in Nina Wisconsin won a prototype build of instruments utilized in the customer's surgical robotics platform that flexes currently supports.

Next, our team's in hiding China in a variety of Romania won the production of a next generation ultrasound platform. Our long-standing relationship with this leading healthcare customer and our ability to provide global support through the market share gain.

Finally, our strong engineering relationship and long-term records superior execution resulted in the follow-on award for our team in Penangolasia to produce a market leading patient monitoring device.

As we consider fiscal 2027 for our healthcare life sciences sector, we see the potential to achieve at least mid-single digit revenue growth against the market estimated to again grow in the mid-single digits. We expect to continue to benefit from program ramps and strong demand for surgical robotics and therapeutic and monitoring solutions. However, we expect short-term growth moderation as activity normalizes following a year of tremendous success in helping numerous customers launch new products.

Advancing to the industrial sector on slide 10, fiscal third quarter revenue increased 23% sequentially, well ahead of our forecast for low-double-digit growth. Our team's ongoing delivery of operational and supply chain excellence in support of expanding demand in our semicamp and other industrial sub-sectors throughout the outperformance. For the fiscal fourth quarter, we expect high-single digit to low-double-digit sequential revenue growth associated with strengthening and market demand and program ramps.

As a result, we now anticipate revenue for fiscal 2026 to increase by a very strong 20 plus percent. The market sector generates $67 million and wins for the fiscal third quarter. The wins included a new partnership to build battery energy storage systems used by data centers. In awarding the program to our Bangkok Thailand team, the customer value engagement by Plexus leadership are transparent communication and expert technical insects.

Initial production for this program is already underway. Our team in Guadalajara, Mexico also won a follow-on award for an innovative vehicle imaging and inspection system. Lastly, we see the potential for a very strong fiscal 2027 from our industrial sector with the revenue growth that you will exceed a 9 to 12 percent goal. We expect another year of robust growth from our semicaps sub-sector along with strong demand for industrial automation and robotics, testing measurement and energy management and storage solutions.

Please advance the slight elevener for you of our funnel qualified manufacturing opportunities. The funnel reached another record this quarter. For a fiscal third quarter, our funnel was $4.5 billion, an increase of 12 percent sequentially and 23 percent year over year or growth of more than $800 million.

Within this performance, our aerospace defense and industrial market sectors also achieved record files. Our differentiated value proposition, which is focused on providing unmatched quality and delivery continues to create opportunities in support of sustaining a strong and durable long-term revenue growth trajectory.

I will now turn the caller over to David. David.

Thank you, Sean, and good morning, everyone. Our fiscal third quarter results are summarized on slide 12. Gross margin of 10.1 percent was in line with our guidance. Benefits from revenue leverage and continued operational productivity gains, more than offset inflationary pressures and other cost increases.

Selling an administrative expense of $70.1 million was in line with guidance and included typical stock-based compensation expenses, as well as those related to executive retirement. Excluding these expenses, we gain nearly 50 basis points of leverage compared to our fiscal second quarter.

Our non-gab operating margin of 6.3 percent met the top end of our guidance, benefiting from leverage on revenue growth, operational efficiencies, and continued cost discipline.

Non-operating expense of $4.8 million was favorable to expectations during buy additional interest income. Non-gab diluted EPS of $2.32 exceeded the top end of our guidance due to higher revenue and the other items mentioned, partially upset by a tax rate at the upper end of our guidance.

Turn to our cash loan balance sheet on slide 13. For the fiscal third quarter, we delivered $25.9 million in cash from operations and spent $26.6 million on capital expenditures, resulting in a better than expected free cash flow usage of just under $1 million.

We were purchased $20.6 million of our stock in the quarter and we have approximately $21 million remaining on the current repurchase authorization.

As we continue to invest in our growth trajectory, we will also return cash to shareholders through our repurchase program. We will discuss our next share repurchase authorization with our board in August.

We ended the third quarter in a net cash position and we had $172 million outstanding under our revolving credit facility with over $320 million available to borrow.

Return on invested capital was 14.9% in the fiscal third quarter, which was the highest in several years and 590 basis points above our weighted average cost of capital. Despite an increase in invested capital to support our robust revenue growth, we continue to generate healthy ROIC.

Not turning to cash cycle days on slide 14. We delivered a 62 day cash cycle in the fiscal third quarter with the best, which is the best quarterly result in over five years. Our team continues to drive improvements across all areas of working capital, including notable progress in days of inventory.

Now let me turn to our guidance for the fiscal fourth quarter summarized on slide 15. As Todd has already provided the revenue and EPS guidance, I will review some additional details.

Fiscal fourth quarter, gross margin, is expected to be in a range of 10 to 10.3%. At the midpoint, gross margin will be modestly higher than the fiscal third quarter. As we expect ongoing productivity improvements and leverage from higher revenue to offset investments in capabilities and IT as well as other cost increases.

Our outlook for selling and administrative expense for the fiscal fourth quarter is in a range of 57.5 to 58.5 million dollars. We expect to gain leverage versus the prior quarter on higher revenue.

Fiscal fourth quarter non-gap operating margin is expected to be in a range of 6.1 to 6.5%, exclusive of stock-based compensation expense. At the midpoint, Plexus would demonstrate another quarter of good progress toward our goal of consistently delivering non-gap operating margin at or above 6%. We also anticipate meeting this goal for fiscal 2026. As we consider fiscal 2027, we anticipate expansion and operating margin to accompany our robust revenue growth outlook.

We continue to benefit from leverage on higher revenue and our prior investments in operational efficiency while concurrently making strategic investments in incremental operational efficiency, expanding our competitive mode, especially in aerospace and defense, and investing in our people. We will discuss more about our fiscal 2027 outlook, including future expectations for operating margin with our fiscal fourth quarter earnings call.

Non-operating expense in the fiscal fourth quarter is anticipated to be approximately 6.3 million dollars, up sequentially primarily due to higher interest expense.

And for fiscal 2027, we would expect the quarterly run rate to be slightly higher due to higher interest expense.

We are estimating a non-gap effective tax rate of between 12% and 14% for the fiscal fourth quarter, bringing the full fiscal year 2026 rate to between 15% and 17%. For our fiscal 2027, our preliminary view is a non-gap effective tax rate between 16 and 18%.

In support of our accelerating revenue momentum, we continue to strategically increase our working capital investments. Yet through our focus on working capital efficiency, we still expect to end the fiscal year with cash cycle days in the low to mid 60s. We would expect to sustain this performance during fiscal 2027.

Additionally, given our robust revenue outlook, we've made the decision to expand production capacity at one of our sites in Malaysia. Because of our ability to expand existing facilities, we expect to be able to deliver incremental capacity and maintain fiscal 2027 capital expenditures in a range of 2% to 3% of revenue. Per fiscal 2026, our capital expenditures forecast is unchanged at $100 to $120 million.

As a result of these factors and the timing of our working capital investments, we are now forecasting free cash flow in the fiscal fourth quarter to be break even or a slight usage of cash. However, we would expect to return to meaningful free cash flow generation in excess of $100 million for fiscal 2027, benefiting from our sustained robust profitability, prudent capital expenditures, and our focus on working capital efficiency.

Yeah, I would say first of all, our confidence level and our growth trajectory that we put out there is high.

Our supply chain team and we take into account we're mindful of the tightness of the supply chain right now and as we provide projections, whether it be for Q4 or for fiscal 2027, that has that in mind. Our teams doing a great job of managing through those as you saw with our Q3 results and the reason why we got upside was the job that our supply chain team did in managing through that.

And with respect to capacity, I mean, given the substantial growth, we're certainly pulling in our expansion plans, as David mentioned, we'll be adding additional capacity to our new site in Penang, Malaysia, which we're able to do rather efficiently. And we're, I guess, being thoughtful about other regions, about when and if we need to expand within those regions.

Probably the final category with regards to expansion is around people and making sure we have the right people in place. Now, our efforts around efficiency have helped us in that area, in that we don't need to add as many people as we would have previously needed to to support the revenue growth, but we continue to add people. And as of right now, everything looks fine from that perspective as well too. So I would say we feel good about the projections of exceeding our 9 to 12% revenue growth target for 27.

And maybe just on the city cap equipment space and maybe the broader industrial, it sounds like everything there is improving, even maybe broadening out a bit on the demand side. How do you think about the semi-cap equipment and as you look and talk to your customers, are your forecast and visibility, is that expanding or contracting? How do you think about maybe that semi-cap equipment specifically and maybe the broader industrial as well?

Morning, David, it's Sean. So semi-cap equipment, we're delivering robust growth this fiscal year, we anticipate robust growth next fiscal year. I think we've been pretty straightforward that we expect to outgrow WFP as we have historically based upon additional customer acquisitions as well as just market share gains that we had during the last up cycle as well as the time period that cycle flattened out. So really strong growth, visibility has improved in the fiscal 2027 as well, which does help give us that confidence and allows us to make sure that we're getting materials in place to support that growth. So doing extremely well in that market subsector, outperforming the market. In broader industrials, the market is getting a little bit healthier.

We had a long period of inventory digestion, but I think that the key for us is we're expanding our customer base, expanding into technologies where we didn't play previously. Last quarter, you heard about power into the data center. This quarter, you're hearing about energy storage outside the data center, but adding new and exciting customers in addition to the market health is giving us confidence for growth in 2027.

Yeah, Ruben, it's interesting because we've been really starting to think about that growth trajectory probably two to three years ago. So a lot of the energy we've been putting in is thinking about what do we need to do to scale to be this eight, 10 plus billion dollar company. So some of the internal processes that we put in place, like our sales inventory operations planning process, for instance, some efforts that we put in around driving consistency through the NPI process across the globe and driving stronger performance in that area have played into that. We've also done some things from an organizational standpoint with the way we've aligned the organization.

We think from a standpoint of services, we're in pretty good shape right now from what we can see. And what we like about footprint is we like this whole idea of the campus model. So I think you'll continue to see us for the most part expand in areas where we're already located because we think that works really well from an efficiency standpoint as well.

But we're taking a number of steps to make sure that we're prepared for that level of growth.

Yeah, and Ruben, this is David in good morning. Maybe just a quick build. On our last call, we talked about the efficiency that our teams are driving in operations. And as Todd mentioned, we've done this journey of preparedness for a little while. And in the last 12 months, our teams have been able to improve our operating equipment effectiveness tremendously in some areas over 10%. And that's unleashing capacity and we're not done yet. Even on our internal footprint, much less the additions we're talking about to our campuses. So we like where the dots are on the map, so to speak, from a manufacturing standpoint.

And we're able to add ample capacity to our existing sites through either turning on a cold shell and warming that up or even expanding the throughput on existing sites we're really pleased with.

Yeah, thanks, Ruben, and morning. So you're correct, we're going to need strong growth from aerospace and defense. I'll let you do the math to back into what the percentage must be to get us above 12% for next fiscal year, but it's going to be very, very strong growth. Within industrial and specifically semi-cap, we would expect to outgrow WFE again next year, so that could help you triangulate a little bit the growth profile there.

Within our industrial markets, I mentioned earlier that it is getting healthier, but we are adding new customers that are amplifying that growth profile. Within aerospace and defense, the one-sector, sub-sector that still isn't fully growing rapidly is commercial aerospace. We still think there's upside for that sub-sector. In fiscal 2027, it is Boeing and Airbus continue to get healthier, and that was around a third of that market sector. And so there's some upside there, but just tremendous growth in defense, unmanned security and space. We have clear leadership positions. Todd mentioned $400 million of wins year to date. Some of those actually will ramp in fiscal 2027, amplifying that growth outlook.

And in addition to just the markets there, in particular in defense and unmanned are quite strong, but our leadership is exemplifying that growth. And then finally in healthcare, we would expect to get back to our normal growth algorithm after fiscal 2027. We had a tremendous year this year in launching new products, substantially outgrowing the market, growing in the high teens. And typically when you launch new products, there's a little bit of a digestion period, and we'll see that in fiscal 2027 before growth gets on track, but we do expect that that's set there to again, grow the 9 to 12% long term. So hopefully answered all the questions, I know there's a lot to cover.

Yeah, I'm Melissa, there's a David in good morning. Yeah, so to your point, the supply chain is tightening, and yet we're very pleased, as Todd said, at how our supply chain teams are managing through that. And there are some components where we're working very closely with our customers on the forecast, on which components we need to get ahead of. And so we've been taking action on that. And so hence you're seeing our ability to unlock revenue growth in a rapid sense. But there are tight spots, we're not going to gloss over that.

And yet we're also very pleased with the discipline that our teams are using to approach this, our sales inventory and operating plan, process that Todd alluded to as well as really paying dividends for us. And so we're pleased to see that overall cash cycle days are in the end to low to mid 60s. And honestly, a result that we're super pleased within the quarter at 62 days, the best we've done in five years.

And then include a great improvement in inventory and days of inventory on hand, improving even sequentially versus last quarter. So I'd say there are issues, Melissa, we're getting ahead of, but it's nothing that's insurmountable. And cash cycle days are in a really good spot at the moment.

Yeah, one of the things that we add and what it says is that typically in situations like this, we're pre-placing inventory, well, we're always working with our customers on those decisions and they're typically funding those replacements.

And Melissa, Chai, because I feel like I want to chime in as well. Our supply chain team started this process last fall. And so they started seeing tightening in certain components and they stepped up with leadership and engaging with our customers nine months ago or even longer than that to make sure that we were able to support this really strong growth that we're delivering this year.

Yeah, so this is Sean again. As I mentioned, commercial aerospace is about a third of the portfolio. Defense and unmanned is about the same size. That business will more than double in revenue versus where it was two years ago. And then the remainder of the portfolio is going to be equally split between security and commercial space. Now, we're seeing rapid growth in all of those, but just the even more rapid growth we're seeing in defense and unmanned isn't changing the split. We're really happy with our clear leadership in commercial space.

It's our market sector leader there, likes to say we have more electronics in orbit than any other EMS provider. And that leadership gets us to create additional opportunities. So it's growing, it's growing rapidly, but our defense and unmanned businesses is growing even more rapidly, which is exciting.

Thanks Melissa.

Yeah, so it's already underway the expansion and it would be somewhere north of a half a billion dollars of additional capacity we would add through this. And we wouldn't expect it to have a meaningful impact to margin because it's part of an existing facility that's already profitable.

Yeah, and Jacob maybe a builder as well, we're able to do this and maintain our capitals of expansion as a percent of revenue between two to 3%. So that's true as a fiscal 25, 26, we're looking at 2027 and we think we can maintain that same range while we add this capacity just given the campus approach. It's not a new dot on the map, which would require more capital intensive work.

So we're pleased to be able to keep capital expenditures in that range as we go through here.

And Jacob and Sean, we can do is the revenue lands in the right place close to six billion of revenue today. And so we do have upside potential in terms of our sites, depending upon where the revenue lands and this incremental capacity is to ensure we meet the strong demand we see from our customers.

I would say a small pickup, but our non-semi-cap industrial is a cross-section of technologies we support from industrial automation robotics to energy management and storage to broadband communications and test and measurement. So some pick up in the traditional industrial markets, but for us, it's a cross-section of technologies and we're generally seeing stronger trends there. I wouldn't just tie it solely to industrial production, but I think just the cross-section of technologies we support as well as I mentioned earlier, just the new customers and new technologies that we've been adding over the past few years.

Thank you, Jacob.

Are you with us, Ruben?

Sure, sure. So Ruben, it is part of a broader data center strategy. Now, the areas of focus for us in the data center are our power, and that could be power inside the data center or power external to the data center, as is the case of the win this quarter, and thermal management. So we have a number of active opportunities, well, a number of active programs to begin with.

And beyond the ones we've announced, there's a few that are in very early stages of pilot type production right now, but we call them free win stage right now. Then we have the two active ones that we've announced, and we have an overall funnel that's conservatively somewhere around a half a billion dollars right now.

All right, thanks.

All right, thank you, Dara. Thank you to the shareholders, investors, analysts, and Plexus team members who joined the call this morning. In closing, as we leverage our differentiated value proposition, fiscal 2026 will be a great year for Plexus with exceptional revenue growth, solid operating margin, and robust return on invested capital. We're also well positioned for strong results in fiscal 2027 with revenue growth exceeding our 9 to 12% goal, expanding operating margin, meaningful free cash flow, and outstanding return on invested capital.

Have a nice day.