Plexus Corp. (PLXS) Earnings

Management highlights

- Overall Company Performance: * Generated record total fiscal third quarter revenue of $1.305 billion, a 12% sequential and 28% year-over-year increase that exceeded prior guidance. * Delivered a 6.3% non-GAAP operating margin, hitting the high end of guidance and increasing 30 basis points year-over-year from efficiency gains and revenue leverage. * Non-GAAP diluted EPS of $2.32 exceeded the guidance range, and the 62-day cash cycle was the best quarterly result in over five years, with strong improvements in inventory management. * Secured 31 new manufacturing programs in Q3 totaling $255 million in annualized revenue when fully ramped, expanding the total qualified manufacturing opportunity funnel to a record $4.5 billion, up 12% sequentially and 23% year-over-year. * No material operational impact from a tornado near corporate headquarters earlier in the week. - New Business Wins: * Aerospace and Defense secured $135 million in Q3 wins, including a new secure wireless communication program for a defense customer that establishes the Oradea, Romania site as the firm's European defense excellence center, and a new Naval Submarine Electronics Program award. Year-to-date aerospace and defense wins total $400 million, more than double the combined 2024 and 2025 performance. * Healthcare Life Sciences secured $53 million in Q3 wins, including a surgical robotics instrument prototype build, a next-generation ultrasound production award driven by global support capabilities, and a follow-on patient monitoring device production award. * Industrial secured $67 million in Q3 wins, highlighted by a new partnership to produce battery energy storage systems for data centers with production already underway, and a follow-on vehicle imaging and inspection system award. - Sustainability and Recognition: * Earned ASM's Supplier Performance Award for overall excellence and Prism Sustainability Award for circularity, and received the Gold Award for Renewable Energy at the Positive Impact Awards in Malaysia. * All Penang, Malaysia facilities now operate on 100% renewable energy, and the firm released its annual sustainability report with formal greenhouse gas emission reduction targets. - Financial Health: * Ended Q3 with a net cash position, $320 million available under the revolving credit facility, and a return on invested capital of 14.9%, the highest in several years and 590 basis points above the weighted average cost of capital. * Repurchased $20.6 million of shares in Q3, with $21 million remaining on the current repurchase authorization; a new authorization will be discussed with the board in August.

Guidance

- Fiscal Fourth Quarter 2026: * Revenue is guided to $1.33 to $1.38 billion, representing 4% sequential growth and 28% year-over-year growth at the midpoint. Aerospace and Defense revenue is expected to be flat sequentially, Healthcare Life Sciences revenue is expected to be flat sequentially, and Industrial revenue is expected to grow 8% to 10% sequentially. * Gross margin is guided to 10% to 10.3%, selling and administrative expense to $57.5 to $58.5 million, non-GAAP operating margin to 6.1% to 6.5%, and non-GAAP diluted EPS to $2.47 to $2.63. * Free cash flow is expected to be breakeven or have slight cash usage; full year 2026 capital expenditure guidance remains unchanged at $100 to $120 million, and full year non-GAAP effective tax rate is expected to be 15% to 17%. * Full fiscal 2026 is now expected to deliver greater than 20% total revenue growth and greater than 6% non-GAAP operating margin, an upward revision from prior outlooks. - Fiscal 2027: * Total revenue growth is expected to exceed the company's long-term target of 9% to 12%, with the potential for sustained quarterly sequential revenue expansion. Aerospace and Defense and Industrial are both projected to grow well above the 9% to 12% target, while Healthcare Life Sciences is projected to grow at mid-single digits with short-term moderation after 2026's strong new product launch cycle. * Non-GAAP operating margin is expected to expand from 20026 levels, even with continued strategic investments in talent, technology, and capacity. * Capital expenditures are expected to remain in the range of 2% to 3% of revenue, even with the planned expansion of the Penang, Malaysia facility. Free cash flow generation is expected to return to meaningful levels exceeding $100 million, supported by strong profitability, disciplined capital spending, and ongoing working capital efficiency. Cash cycle days are expected to remain in the low to mid 60s. * The non-GAAP effective tax rate is projected to be between 16% and 18%.

Segment performance

Aerospace and Defense: Fiscal third quarter revenue increased 10% sequentially, outperforming expectations of good single-digit growth. For full fiscal 2026, the sector is expected to deliver over 20% year-over-year revenue growth. Fiscal third quarter new program wins were $135 million in annualized revenue, contributing 52.9% of total quarterly new wins. For 2027, the sector is projected to deliver robust growth well exceeding the 9% to 12% company target. It makes up approximately one third of Plexus's total revenue. Healthcare Life Sciences: Fiscal third quarter revenue increased 2% sequentially, exceeding the forecast of flat growth. Full fiscal 2026 revenue is expected to grow in the high teens year-over-year, outpacing the mid-single-digit market growth forecast. Fiscal third quarter new program wins were $53 million in annualized revenue, contributing 20.8% of total quarterly new wins. For 2027, the sector is projected to achieve at least mid-single-digit revenue growth, with short-term moderation following a year of heavy new product launches. It makes up less than 40% of total revenue. Industrial: Fiscal third quarter revenue increased 23% sequentially, outperforming the forecast of low double-digit growth, driven by strength in the semiconductor capital equipment (SemiCap) subsector. Full fiscal 2026 revenue is expected to grow over 20% year-over-year. Fiscal third quarter new program wins were $67 million in annualized revenue, contributing 26.3% of total quarterly new wins. For 2027, the sector is projected to deliver strong growth well exceeding the 9% to 12% company target, led by ongoing SemiCap expansion and growth in automation, energy storage, and test and measurement. Combined with Aerospace and Defense, the two segments make up over 60% of total revenue.

Risks & headwinds

- Tightening component supply chains and extended lead times for semiconductors create potential execution risk, though management reports their teams began proactively addressing tightening supply nine months in advance of the current demand growth. - Inflationary cost pressures could pressure margins, though management notes revenue leverage and operational productivity gains have offset these impacts to date. - Sustained above-target revenue growth requires incremental capacity and talent expansion, creating execution risk around timely expansion that does not erode margins.

Analyst Q&A

• Q: Given your strong 20027 growth outlook, what is your capacity to meet rising demand, and do you need additional capacity expansion beyond what has been announced? /

  A: Management notes their 20027 projections already account for current supply chain tightness, and Q3 outperformance demonstrates their team can manage these constraints. They are accelerating expansion plans, starting with incremental capacity at the existing Penang, Malaysia site, which can be added efficiently. Efficiency improvements have reduced the number of new staff needed to support revenue growth, and current capacity and hiring plans are sufficient to support projected growth above the 9-12% target.

• Q: As Plexus grows toward a $10 billion revenue run rate over the next several years, what structural changes to operations, footprint, or services are needed to support this scale? /

  A: Management has been preparing for this scale for 2-3 years, already rolling out updated internal processes for sales inventory planning and new product introduction standardization across global sites. They favor a campus model that expands existing sites rather than building new greenfield locations, which is more capital efficient. Recent internal operational improvements have increased equipment effectiveness by over 10% in some areas, unlocking significant existing capacity without new construction.

• Q: How is tightening component supply and pre-placement of inventory impacting your cash cycle and cash conversion? /

  A: While supply chains are tightening, supply chain teams began proactive planning and customer alignment nine months ago to secure needed components. Even with advance inventory placement for long lead time parts, Q3 delivered a 62-day cash cycle, the best in five years, with sequential improvement in days of inventory on hand. Most pre-placed inventory is funded by customers, so the impact on Plexus's working capital is limited, and management expects to sustain low-mid 60s cash cycle going forward.

• Q: Can you share details on the timeline, impact, and size of the announced Penang capacity expansion, and how it will affect 20027 margins? /

  A: The expansion is already underway and will add over $500 million in incremental production capacity. Since it expands an existing profitable facility rather than building a new site, capital expenditures will remain in the 2-3% of revenue target range for 20027, and no meaningful negative impact to margins is expected. This expansion adds needed capacity to meet strong existing customer demand while leveraging Plexus's existing campus footprint strategy.