Plexus Corp

NASDAQ:PLXS

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome to the Plexus Corporation Conference Call regarding its fiscal fourth quarter 2020 earnings announcement. My name is Sarah, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I would like to turn the call over to Ms. Heather Beresford, Plexus' Senior Director of Communications and Investor Relations. Ms. Heather, you may begin.

[Heather Beresford, executive]

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 as they will not be limited to historical facts. The words believe, expect, intend, plan, anticipate and similar terms often identify 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 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, 2019, as supplemented by our Form 10-Q filings, and the safe harbor and fair disclosure statement in yesterday's press release.

Plexus provides non-GAAP supplemental information such as ROIC, economic return and free cash flow because those measures are used for internal management goals and decision-making and because they provide additional insight into financial performance. In addition, management uses these and other non-GAAP measures such as adjusted operating income, adjusted operating margin, adjusted net income and adjusted earnings per share to provide a better understanding of core performance for purposes of period-to-period comparison. 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 webcast and supporting materials at Plexus' website at www.plexus.com, clicking on Investors at the top of that page.

In light of the current situation with COVID-19, we are conducting this quarter's call virtually. Joining me today are Todd Kelsey, President and Chief Executive Officer; Steve Frisch, Executive Vice President and Chief Operating Officer; and Pat Jermain, Executive Vice President and Chief Financial Officer.

Consistent with prior earnings calls, Todd will provide summary comments before turning the call over to Steve and Pat for further details.

Let me now turn the call over to Todd Kelsey. Todd?

[Todd Kelsey, executive]

Thank you, Heather, and good morning, everyone. Please begin on Slide 3 with our fiscal fourth quarter results. I'm extremely proud of our global Plexus team as they continued to navigate through the complexities stemming from COVID-19 while delivering exceptional results. We produced record quarterly revenue of $913 million in the fiscal fourth quarter, an outcome that exceeded our guidance range.

The result represented 7% sequential growth and 13% growth from the fiscal fourth quarter of 2019. All of our sectors performed beyond expectations, with our Industrial/Commercial and Healthcare/Life Sciences sectors delivering outstanding results.

We delivered record GAAP diluted earnings per share of $1.26, including $0.23 of stock-based compensation expense. Our GAAP operating margin of 5.5% was our best quarterly margin performance in more than a decade and marks the second consecutive quarter in which we have exceeded 5%.

Please advance to Slide 4. Next, I will discuss additional accomplishments within fiscal 2020. I will start with our financial performance in relation to our goals. Despite a challenged fiscal second quarter, during the early stages of the COVID-19 pandemic, we delivered impressive results for the fiscal year. Through our commitment to operational excellence and customer service excellence, our teams delivered record revenue for the fiscal year of $3.4 billion, representing 7% year-over-year growth. This result included 28% year-over-year growth from our Industrial/Commercial sector.

We delivered adjusted operating margin of 4.7%. This result included GAAP operating margin of 5.4% in the second half of the fiscal year as the team successfully drove long-term productivity improvements. The strong growth coupled with robust operating margin led to record non-GAAP diluted EPS of $4.08 for the fiscal year, an increase of 19% from the previous fiscal year.

Our return on invested capital finished at 14%, representing an economic return of 520 basis points above our weighted average cost of capital of 8.8%. This economic return exceeds our enduring goal of 500 basis points. Finally, we generated record free cash flow of $160 million, a result that exceeded our net income.

Please advance to Slide 5. Over the longer term, our financial results are consistent with our industry-leading enduring goals, highlighting the success of our strategy focused on highly complex products and demanding regulatory environments. Our 3-year revenue CAGR of 10% is firmly within our 9% to 12% target range. Additionally, our average economic return is 5.3%, exceeding our 5% enduring goal and resulting in the creation of significant shareholder value.

Please advance to Slide 6. I would now like to highlight some of our nonfinancial accomplishments in fiscal 2020. 2020 has been a complex year. It has affected each of us as individuals and has impacted our families and our communities. It has also brought into focus the importance of camaraderie and collaboration. At Plexus, we're accelerating this new normal by continuing to do what is right for each other, our families, our customers and our communities.

At Plexus, we are committed to building a better world, a commitment that goes beyond the products that we partner with our customers to bring to market. At the heart of our efforts is our environmental, social and governance program, which has been recognized by the institutional shareholder services. We care for our employees, support our communities and commit ourselves to doing business responsibly, all while finding ways to improve the world. We do these things because they are core to our values.

Earlier this month, through an unsolicited survey, Plexus was named to Forbes list of the world's best employers of 2020. I am proud that our efforts as a company have made a positive impact on our team members around the world and are reflected in this esteemed award.

I'm incredibly proud of our global team and the contributions they make. To all of our Plexus employees, thank you. The strength and determination you have shown through this unusual landscape is remarkable. Through our efforts, we have been able to help fulfill our vision of creating the products that build a better world.

Advancing to our guidance for the fiscal first quarter of 2021 on Slide 7. In alignment with our prior projections, we expect demand to moderate in the fiscal first quarter of 2021 and are guiding revenue in the range of $810 million to $850 million. As anticipated, we are experiencing a reduction in demand for critical care health care products and certain industrial products. Aerospace demand has stabilized and we expect growth in the Aerospace and Defense sector from the previous quarter.

As a result of the efforts of our operations team in driving productivity gains, we are guiding GAAP operating margin in the range of 4.9% to 5.3%. With this strong operating performance, we anticipate delivering GAAP diluted earnings per share of $1.02 to $1.17, including $0.19 of stock-based compensation expense. Our guidance assumes that COVID-19 will not materially impact end markets or our operations beyond what has already occurred.

Please advance to Slide 8. Our vision to help create the products that build a better world continues to resonate with our customers and is central to the decisions we make as an organization. Our vision also aligns with the values of our passionate Plexus team and provides a commitment to both our current and future talent as we position Plexus as an employer of choice.

As reflected in our mission, we look to leverage our expertise in and focus on highly complex products in demanding regulatory environments to provide advantages in operational efficiency and a globally consistent platform for our customers.

Please advance to Slide 9. Over the course of the past decade, we have made a conscious effort with great success to align our portfolio around highly complex products in demanding regulatory environments. During fiscal 2020, over 90% of our revenue was comprised from programs in the Healthcare/Life Sciences, Industrial/Commercial and Aerospace and Defense market sectors.

Through this transformation, Communications has become an opportunistic market in the search for new logos, managed by our Industrial/Commercial team. Given this reality, in the fiscal first quarter of 2020, we are creating our Industrial market sector. The Industrial market sector includes our Industrial/Commercial business and now encompasses Communications as a subsector. We will continue to provide visibility into the significant subsectors within the Industrial market as we move forward.

Please advance to Slide 10 for a breakdown of our newly branded Industrial market sector. This can be seen from the pie chart in the lower right. The largest subsector is semiconductor capital equipment, comprising about 1/3 of the sector revenue. Communications is the third largest subsector at 14% of sector revenue. We remain focused on expanding our business with existing Communications customers and will take an opportunistic approach when engaging potential customers.

Our subsectors within Industrial are primarily focused on high complexity, electromechanical products, leveraging our skill set and extensive capabilities.

Please advance to Slide 11. Our portfolio continues to differentiate Plexus from our peers as we strengthen our leadership in highly complex products in demanding regulatory environments. We have delivered consistent growth above 10% annually and well beyond EMS market growth rates in each of our 3 market sectors of Healthcare/Life Sciences, Industrial and Aerospace and Defense. As we move forward, these markets support our 9% to 12% revenue growth goal.

Please advance to Slide 12. I will close with a few thoughts regarding fiscal 2021. As stated earlier, we are observing a moderation in demand for critical care health care products and certain industrial products as we enter 2021. However, we anticipate quarterly sequential revenue growth by the second half of fiscal 2021 as we benefit from new program ramps due to our strong fiscal 2020 manufacturing wins performance, which finished at $952 million annualized when fully ramped in production.

We are particularly excited about the ramp and potential of point-of-care COVID-19 testers such as the Quidel Sofia2, a partnership we announced this past quarter. When considering the overall demand environment and the potential for new program ramps, we expect fiscal 2021 to be a growth year. We anticipate continued strong operating performance throughout the year despite the expected impacts related to COVID-19.

Our goal is to consistently deliver operating margin within or above our target range of 4.7% to 5% in the fiscal year. We believe our differentiated portfolio, advanced service offering, superior execution, talented workforce and focus on operational efficiency support this goal. The combination of revenue growth and robust operating performance should lead to solid EPS expansion and free cash flow generation for fiscal 2021.

I will now turn the call over to Steve for additional analysis of the performance of our market sectors and operations. Steve?

[Steven Frisch, executive]

Thank you, Todd. Good morning. I will start on Slide 13 with a review of the fiscal fourth quarter and the full fiscal year performance of our market sectors for 2020 as well as our expectations for the sectors for the first fiscal quarter of 2021.

Our Healthcare/Life Sciences revenue grew 5% in the fiscal fourth quarter. The result was better than our expectations of a low single-digit increase. For the full year of fiscal 2020, the sector grew 3%. The growth in both the fiscal fourth quarter and full fiscal year was a result of strong demand for products used to diagnose and treat COVID-19, which overcame weaker demand for equipment used in elective procedures.

Looking at the fiscal first quarter, the demand for some, but not all, COVID-related products is tempering, while the forecast for equipment used in elective procedures remain subdued. As a result, we expect a high single-digit decline for our Healthcare/Life Sciences sector in the fiscal first quarter.

Revenue in our Industrial/Commercial sector increased to 7% for the fiscal fourth quarter, which was meaningfully better than our expectations of a low single-digit increase. Stronger demand from several semiconductor capital equipment customers drove the growth. For the full year of fiscal 2020, the sector had an exceptional growth of 28%. Robust ramps with a few programs in our transportation and energy management subsectors combined with overall strength in the semiconductor capital equipment subsector fueled the growth in fiscal 2020.

Our Communications sector increased 25% in the fiscal fourth quarter, a result that exceeded our expectations of a high teens growth. Similar to the fiscal third quarter, 8 of the top 10 customers in the sector had double-digit increases. Strong demand for Internet connectivity products drove the robust growth. As Todd highlighted, starting in fiscal 2021, our Communications sector will be reported as a subsector within our new Industrial sector.

As we look at the first fiscal quarter of 2021, we see demand moderating in several subsectors, including semiconductor capital equipment and Communications. The result is that we anticipate a low-teens decrease for our Industrial sector in the fiscal first quarter.

Revenue in our Aerospace and Defense sector was flat in the fiscal fourth quarter. The result was better than our expectations of a low single-digit decline. Robust demand from programs in our security subsector and from our space subsector yielded better-than-anticipated result.

For the full year of fiscal 2020, significant growth with defense, security and space programs overcame depressed commercial aerospace demand to generate 4% growth. Looking at the fiscal first quarter, the sector's healthy diversification is supporting additional growth as we continue to see continued strength with some defense and space programs, which offset softness in commercial aerospace. The net result is that we are anticipating a mid- single-digit increase for our Aerospace and Defense sector in the fiscal first quarter.

Please advance to Slide 14 for an overview of our robust wins performance for the fiscal fourth quarter. We won 44 new manufacturing programs that we expect to generate $286 million in annualized revenue when fully ramped into production. The mix of wins between existing and new customers was well balanced in the quarter, with 32 of the wins coming from current customers and 12 as a result of new relationships.

The teams have been successful balancing in-person meetings with virtual sessions to effectively present our differentiated solution to customers. As a result, the team has produced $952 million in wins in fiscal 2020. This 4-quarter wins total yielded a very healthy 28% wins momentum, which continues to support our growth strategy as we start fiscal 2021.

We can advance to Slide 15 to review the manufacturing wins by region for the fiscal fourth quarter. The Americas region had another quarter of substantial wins at $136 million. Included in their fiscal fourth quarter result is another diagnostic tester that can be used to detect COVID-19. Our engineering team has been aggressively working with the customer on the final design of this device, which we anticipate to start ramping in the fiscal second quarter.

The APAC region had their largest manufacturing wins of fiscal 2020 at $105 million in the fiscal fourth quarter. The highlights include a single-use device used for respiratory care that we are actively ramping in Penang, Malaysia as well as several health care imaging assemblies that will be produced by our team in China.

The EMEA region solid manufacturing wins of $45 million included 2 meaningful life science programs for our Oradea, Romania facility. One of the devices is a complex electro mechanic assembly that automates repetitive laboratory processes that is being co-designed by our engineering team in Darmstadt, Germany. We expect to start ramping the product within fiscal 2021.

Please advance to Slide 16 for further insight into the manufacturing wins performance by market sector. Our Healthcare/Life Sciences team had very healthy wins of $119 million in the fiscal fourth quarter. The wins include further expansion in several modalities, including COVID-19 testers, diabetes monitoring and imaging products. Our operations team's ability to find creative solutions and deliver products in the midst of a pandemic aided the sector in winning a total of $453 million in fiscal 2020.

The Industrial/Commercial sector consistently increased their quarterly manufacturing wins throughout fiscal 2020. With the strong finish of $93 million of wins in the fiscal fourth quarter, the team's total for fiscal 2020 closed at $277 million. The fiscal fourth quarter wins included the addition of a customer who specialized in air purification products as well as further market share gains with some of our semiconductor capital equipment customers.

The Aerospace and Defense sector captured $59 million of new manufacturing wins in the fiscal fourth quarter. A significant opportunity with a new defense customer and additional growth with a space customer are the highlights for the quarter. The wins pushed the sector's fiscal 2020 wins total to $156 million. The resilient wins performance in the midst of the commercial aerospace market turmoil is a testament to the well-diversified portfolio the team has built.

We can proceed to Slide 17 for highlights of our funnel of qualified manufacturing opportunities. Our sector teams expanded the funnel by $230 million during the fiscal fourth quarter. At $2.7 billion, the funnel is the strongest it has been in 3 years. The sector teams under the leadership of our Senior Vice President of Global Customer Solutions, Andy Hyatt, produced outstanding results in fiscal 2020. Even with qualified manufacturing wins in excess of $950 million during the fiscal year, the funnel finished $150 million higher than it was at the start of the fiscal year.

The Healthcare/Life Sciences funnel jumped over $300 million in the fiscal fourth quarter to finish exceptionally strong at $1.6 billion. Four significant opportunities, including a single-use surgical device, were added to the funnel within the quarter.

Industrial/Commercial and Communication opportunities are going to be part of the new Industrial sector funnel. Starting in the fiscal first quarter, the funnel will be at $472 million. The internal team has been aligned under this new structure throughout fiscal 2020. The change in how we report the sector marks the end of the transition, not the beginning. As such, the Industrial sector team is well positioned to expand the funnel as we start fiscal 2021.

Our Aerospace and Defense sector increased their funnel by $50 million in the fiscal fourth quarter to finish at $626 million. A sizable new program within our defense subsector was the main contributor to the growth of the funnel.

Next, I would like to turn to operating performance on Slide 18. As Todd highlighted, we achieved record quarterly revenue of $913 million in the fiscal fourth quarter and a record $3.4 billion for fiscal 2020. The team's dedication to deliver products for our customers in the midst of a pandemic highlights the focus they have on customer service excellence. The team's ability to also deliver 5.5% operating margin in the fiscal fourth quarter demonstrates their passion for operational excellence.

As we look to the fiscal 2021, sustained operational efficiency remains a focus for the organization as demonstrated by our operating margin guidance in the range of 4.9% to 5.3% for the fiscal first quarter.

Please advance to Slide 19 for an overview of a new strategic investment. To support our long-term growth projections in Southeast Asia that is supported by interest from our customers, we are finalizing the plans for a new manufacturing facility that will be built on the land we already own outside of Bangkok, Thailand. Based upon current market demand, we anticipate to start construction of the approximately 400,000 square foot facility at the end of the fiscal second quarter of this year. Our expectation is that the facility would be operational in the fiscal third quarter of fiscal 2022.

A few final comments. Fiscal 2020 was a comprehensive exam, where all facets of the business were tested by the problems COVID-19 created. If you measure success by revenue and EPS growth, the team passed. However, it's the team's ability to remain focused on our differentiated strategy and to drive continuous improvement while being tested that puts them at the top of the class for me. It is also what makes investments like Thailand possible. I want to thank each Plexus employee for their dedication and commitment as it is your efforts that enabled the continued success of Plexus.

I will now turn the call to Pat for an in-depth review of our financial performance. Pat?

[Patrick Jermain, executive]

Thank you, Steve, and good morning, everyone. Our fiscal fourth quarter results are summarized on Slide 20. Fourth quarter revenue of $913 million was above the top end of our guidance and sequentially higher by $56 million. Gross margin of 9.8% was also above our guidance range and sequentially improved 10 basis points.

For the fiscal fourth quarter, we continued to experience fixed cost leverage as revenue increased 7%, while fixed manufacturing expenses increased at a lower percentage compared to the fiscal third quarter. Selling and administrative expense of $38.8 million was slightly above our expectations, primarily due to higher variable incentive compensation expense linked to the exceptional performance. As a percentage of revenue, SG&A was 4.3%, which was consistent with expectations and the fiscal third quarter.

Our GAAP operating margin of 5.5% was 20 basis points higher than the fiscal third quarter and the second consecutive quarter above 5%. Included in this quarter's operating margin was approximately 75 basis points of stock-based compensation expense. Nonoperating expenses of $5 million were consistent with expectations.

Record diluted EPS of $1.26 was above the top end of our guidance range, primarily due to the strong revenue results and operational performance.

Turning now to our cash flow and balance sheet on Slide 21. For the fiscal fourth quarter, we were extremely pleased with our free cash flow results. We delivered $118 million in cash from operations and spent $9 million on capital expenditures, resulting in free cash flow of $109 million. For the fiscal year, we delivered $210 million in cash from operations and spent $50 million on capital expenditures, generating record free cash flow of $160 million, a result significantly above our fiscal 2020 net income.

During the fiscal fourth quarter, we resumed our share repurchase activity by purchasing approximately 295,000 shares of our stock for $21.9 million at an average price of $74.34 per share. At the end of the fiscal year, we had approximately $5 million remaining under the authorization. Once this program is completed, we will commence purchasing shares under the $50 million program authorized during the fiscal fourth quarter.

We ended the year with a strong balance sheet. Cash totaled $388 million, sequentially higher by $88 million due in part to strong cash flow generation. Total balance sheet debt was $335 million and our gross debt-to-EBITDA ratio was a conservative 1.5x.

At the end of the fiscal fourth quarter, we had no outstanding borrowings under our revolving credit facility, therefore, allowing us the full capacity of the $350 million committed facility.

For the fiscal year, we delivered a return on invested capital of 14%. This generated an economic return of 520 basis points above our weighted average cost of capital, creating solid shareholder value. A combination of exceptional operating performance and lower working capital led to 110 basis point improvement over fiscal 2019 and a return above our 500 basis point target.

Each year, we recalculate our weighted average cost of capital by using a consistent methodology. With less relative volatility in our stock price over the past few years and a more attractive capital structure, our cost of capital for fiscal 2021 will be reduced from 8.8% to 8.1%.

Cash cycle at the end of the fourth quarter was 69 days, a sequential improvement of 10 days and the best result in the past 10 quarters.

Please turn to Slide 22 for details on our cash cycle. Sequentially, inventory days improved 12 days, primarily due to increased fiscal fourth quarter shipments and continued efforts around inventory management. We were pleased to see our team's commitment to drive a $56 million sequential reduction in inventory.

Sequentially, days in receivables improved 7 days due to the timing of shipments and payments along with increased activity under our receivables factoring program. Our payable days were sequentially lower by 8 days. This was primarily a result of our procurement activity moderating in the fiscal fourth quarter as we appropriately adjusted to the fiscal first quarter revenue outlook. Customer deposits were down $13 million or 2 days as we returned certain deposits linked to inventory shipped during the quarter.

As Todd has already provided the revenue and EPS guidance for the fiscal first quarter, I'll review some additional details, which are summarized on Slide 23. Fiscal first quarter gross margin is expected to be in the range of 9.1% to 9.5%. At the midpoint of this guidance, gross margin would be approximately 50 basis points lower than the fiscal fourth quarter. While we expect fixed manufacturing expenses to remain consistent with the prior quarter, the forecasted revenue reduction for the fiscal first quarter will lower our fixed cost leverage and absorption.

For the fiscal first quarter, we expect SG&A expense in the range of $34 million to $35 million. At the midpoint of our revenue guidance, anticipated SG&A would be sequentially lower by $4.3 million. This reduction is mainly driven by lower variable incentive compensation expense. As a percentage of revenue, SG&A would be 4.2%, a 10 basis point improvement from the fiscal fourth quarter.

Fiscal first quarter operating margin is expected to be in the range of 4.9% to 5.3%. This guidance includes 65 basis points of stock-based compensation expense. A few other notes for the fiscal first quarter. Depreciation and amortization expense is expected to be approximately $14 million, which is consistent with the fiscal fourth quarter. Nonoperating expenses are expected to be in the range of $4.5 to $4.9 million. At the midpoint of this guidance, these expenses would be slightly lower than last quarter.

We are estimating an effective tax rate of 13% to 15% and diluted shares outstanding of approximately 29.7 million shares. Our expectation for the balance sheet is for working capital investments to increase. While receivables and inventory balances are anticipated to stay consistent with the fiscal fourth quarter, we expect reductions in accounts payables and customer deposits.

Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 80 to 84 days. As we move through fiscal 2021, we expect sequential improvements each quarter to our cash cycle.

For the fiscal first quarter, free cash flow is expected to be slightly negative given the working capital investments. We anticipate generating free cash flow as we move through subsequent quarters and expect to deliver free cash flow of approximately $100 million for fiscal 2021.

Finally, our capital spending estimate for fiscal 2021 is expected to be in the range of $70 million to $90 million, which includes approximately $30 million related to our expansion in Thailand.

With that, Sarah, let's now open the call for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Mr. Mike Cikos from Needham & Company.

[Michael Cikos, analyst]

First thing I wanted to touch on was the revenues. So if I'm thinking about -- it sounds like every sector or main vertical delivered upside for you guys during Q4, especially that Health and Life Sciences and the Industrial, Communications. Curious what went right for you this quarter? And then I know we're talking about some moderation in fiscal Q1, but can you discuss some of the puts and takes there as well, please?

[Todd Kelsey, executive]

Yes. So Mike, this is Todd. I'll start on this, and then Steve can provide a little bit more details. But if we look at Q4, really, everything came together during the course of the quarter and we finished strong in 3 of the 4 sectors from a growth standpoint, Healthcare, Industrial as well as Communications. In Aerospace and Defense, while it was flat on the quarter, actually improved over the course of the quarter as we saw stronger demand particularly around the space area.

But as we look ahead to Q1, some of the differences that we're seeing right now is -- within Healthcare, we're seeing critical care product demand start to reduce. So while elective demand had been soft, critical care is also going soft, too. Now COVID test is still quite strong. So that's the one area of Healthcare that's strong.

And then Industrial we had, I would call it, maybe a little bit of unusual circumstances. We had -- one of our customers had a major order that pulled in to this current quarter, which -- and it essentially came out of Q1. So that makes the comparable a little bit tough on Industrial. And then, I would call it, just a modest downtick with some of our semiconductor customers. But semi cap still looks pretty strong.

So maybe, Steve, you want to provide a little bit more detail.

[Steven Frisch, executive]

Yes. Maybe I'll just give you 2 examples that maybe help illustrate what Todd talked about. So like on critical care products, for example, might be an infusion pump, there's a steady-state production that we expect to see throughout the course whether it's COVID related or not. However, COVID caused a significant spike in those types of products, and what we're seeing is those things coming back down to kind of a more normal level. However, as Todd highlighted, COVID testers are continuing to ramp. So that's kind of a little bit of color in that sector.

Very similar in Communications. As the MSOs needed to increase capacity, I think they looked at their architectures and just invested in whatever was the shortest path to increasing capacity. And now that they've done that, we're starting to see them get a little bit more strategic with their buying, back to looking at what is the long-term strategy for themselves. So hopefully, that helps give you a little bit visibility.

[Michael Cikos, analyst]

That's great. Yes. And then just a follow-up on that. So when we're talking about that, I guess, more unique circumstance with that Industrial customer pulling forward some orders from Q1 to Q4, can you guys give us a size for what that pull in actually was? And then the follow-up that I had was regarding the Q1 -- or I guess the commentary that we'll expect sequential growth to come back in the second half of fiscal '21. So the expectation then that fiscal Q2 is going to be relatively flat to down from fiscal Q1 levels? Is that what we should be thinking more?

[Todd Kelsey, executive]

Yes. So Mike, I'm going to start with the discussion around fiscal '21, and I'm going to pass it off to Steve to what the Q1 impact looks like. So if we look at '21 -- and maybe I'll talk about our quarterly expectations and then get to what the full year might look like. But if we were to project out today based off of what we see, Q2 looks similar to Q1. We could see some modest growth. It could be flat in general. So that's why we hedged a little bit around whether we would see growth in Q2.

Now as we get into Q3 and Q4, we expect more substantial growth, driven primarily at this point by new program ramps. Now I do think there is some opportunity should markets rebound, particularly around Healthcare with elective procedures in particular, and then also around Aerospace and Defense. If we see stronger aerospace demand, there's some opportunity to move up from that point.

But then if we looked at '21 as a whole, we're expecting it to be a growth year, although a bit more modest of a growth year and below our 9% to 12% range that we talk about.

And then one other thing I'd like to highlight, though, on top of that is we do expect continued strong operating performance. We've talked in the past about this 4.7% to 5% target range. We're seeing a path to be able to continue to have quarters where we expand beyond that the way we did in Q3 and Q4 and the way we're projecting in the first quarter of fiscal '21, ballpark to be at or above the top end of the target range. So you combine the 2 together, revenue growth, strong operating performance, it should result in some good cash generation, as Pat highlighted, as well as some strong EPS expansion within the fiscal year.

[Steven Frisch, executive]

And then just a little bit of color on the opportunity that Todd talked about. It was a strong quarter for the customer even without this, but they pulled in between $9 million and $10 million upside for us in the quarter.

[Operator]

The next question comes from the line of Shawn Harrison from Loop Capital.

[Shawn Harrison, analyst]

My Congrats on the really strong finish to the year. Wanted to dig into the capacity expansion. It's been a little while since one has been in place. I know you've telegraphed this expansion. But if you could just talk about the total capital outlay for this, and then also just kind of maybe the initial dilution and how this facility would ramp, because if I remember correctly the last big expansion was kind of adjacent to where you already had existing sites and maybe it smoothed the transition of customers into that site and some of the dilution as you ramped it?

[Patrick Jermain, executive]

Yes. Shawn, this is Pat. I'll start with the investment piece and then hand it off to Steve. From a cost perspective, we're thinking it will be about $35 million to $40 million to build the building, and then we'll seed it with equipment after that. And so for my guide for capital spending for '21, I've included $30 million, which is pretty much back-end loaded, and some will fall into 2022 to complete it and then we'll start seeding it with equipment after that. And then, Steve?

[Steven Frisch, executive]

Yes, sure. A little visibility on our philosophy of our footprints in Asia in general. So we're really in 2 geographies today. One is in China and one is in Malaysia. Given the situation in China, we believe that we need to have another footprint or another dot on the map, so to speak, in Southeast Asia to continue to support our growth and to manage our concentration in Malaysia.

In Malaysia, we have 5 facilities, roughly 1.5 million square feet. Utilization in the facilities is roughly 61%. But it's very misleading in that if you look at those facilities, one is completely full -- one is about 90% full and one is about 80% full. The remaining 2, ones at 40% and the last one is at 30%. But the last one I talk about is that new facility you mentioned, which we call Riverside East, which is our Healthcare/Life Sciences facility. And as you see in the funnel, we expect that to continue to fill quite nicely. And so we believe it's prudent and time is right to add another facility in the Southeast Asia.

Thailand, we happen to own a land there. We have roughly 13 acres. We're going to start with a facility that's roughly 4,000 square feet. But we have the ability to expand that facility on that property. So we really see a strategy here of building a campus in that location.

As you look at kind of the demand for customers, there is a demand from customers asking us about Thailand or geographies outside of Malaysia. And so our strategy here is while we're building the building, we're actually going to be ramping products with a team of people producing them in Malaysia and our strategy is to transfer that with -- working with the customer to transfer that to Thailand with some people once the facility is open to really give it a quick start. So again, really I think it's a -- overall from a strategy standpoint, it's the right time to go ahead and do it.

[Shawn Harrison, analyst]

That's really helpful. Then the other part I wanted to look at, and maybe this is the one thing that stood out to me a little bit was just the size of Industrial and kind of the broader funnel seems like it's shrunk a little bit over time. And I don't know if that's a function of just timing issues or maybe having to expand the lens within the funnel for Industrial, because really big numbers in Aerospace, Defense, really big numbers in Healthcare, but Industrial while it's a big segment of revenues right now, the portion of the funnel seems down a little bit. And if you could speak to kind of just that dynamic.

[Todd Kelsey, executive]

Yes, I would -- I agree with your assessment. That's the one funnel that we probably look at the most right now in terms of the growth of it. I'd say internally the team has been realigned. And really kind of in my script, I wanted to highlight the fact that the alignment is done. And so that team is off and running. So I'm quite optimistic in terms of what they're going to be able to do in fiscal '21. We've also added a couple of resources to the team from a business development standpoint.

So again, it's not a significant concern for us, but it is -- in terms of the funnel, that is the one that does need a little bit more focus for growth for us.

[Operator]

Your next question comes from the line of Adam Tindle from Raymond James.

[Adam Tindle, analyst]

Congrats on a strong finish to fiscal '20. Todd, I just wanted to start on the discussion on the shape of fiscal '21. I've got just a question on the near-term for the first half, and then I'll do a follow-up on the back half. So for the first half, you talked about returning to sequential revenue growth by back half of fiscal '21, and the implication is that you would be -- revenue would be down sequentially in Q2. Trying to understand the magnitude of that. I think earlier you said Q2 would be similar to Q1. Do you mean that it's going to be down high single digits sequentially like Q1? And what that means for operating margin as you absorb that decline?

[Todd Kelsey, executive]

No, I mean, sequentially flat to Q1 is what we're projecting. We're just -- it's just too tight to call it a growth quarter. It may end up being a sequential growth from Q1.

[Adam Tindle, analyst]

Okay. Okay. Got it. That's helpful clarification. And so…

[Todd Kelsey, executive]

Yes. So if we were going to guide Q2 today, it would look pretty similar to Q1 guide.

[Adam Tindle, analyst]

From a revenue and margins standpoint?

[Todd Kelsey, executive]

Simplest way to put it. Not necessarily margin. Q2 is a little more challenging because of the [indiscernible] and the cost.

[Adam Tindle, analyst]

Got it. Okay. And then, I guess, maybe, importantly, on the back half that return to sequential revenue growth by the back half. How steep are you thinking on that recovery from a revenue and operating margin standpoint and just the key drivers? I know it's hard to go that far out in this business. So what gives you the confidence to talk about that?

[Todd Kelsey, executive]

Well, yes, I can't -- I'm not going to go into too many specifics because a lot can change. I mean we're seeing resurgence of COVID. We have an election here, I had heard, next week, but at least rumor has it. But it's enough to say -- to feel that we should be in a growth mode. So I mean -- so that's probably where I would end it. So if you do the math, our expectations are we're going to see growth in fiscal '21 over fiscal '20.

[Adam Tindle, analyst]

Okay. Understood. Maybe just one last follow-up…

[Patrick Jermain, executive]

Yes. From a margin standpoint, as we said, we're going to try and stay within that range of 4.7% to 5% with the opportunity of maybe even getting above that. But that would be the goal for '21.

[Adam Tindle, analyst]

Understood, Pat. I wanted to ask you maybe one last follow-up on SG&A. I think if we were to look at the Q1 guidance, it implies kind of the, I think, lowest percent of revenue in many years. Maybe just the drivers on what's going on, how you're operating so efficiently? Are there aspects of maybe temporary benefits from T&E or something like that? And how to think about that line as the year progresses?

[Patrick Jermain, executive]

Sure. Well, the big driver is -- sequentially from Q4 to Q1, it's the incentive compensation. We ended the year very strong and so the incentive compensation was much higher in Q4 compared to the fiscal first quarter. And you may recall, one of the big drivers behind our incentive comp plan is around revenue growth. So ending the year last year at 7% growth, with it being a little more moderated in '21, that's impacting that expense.

But to your other point, yes, we are seeing a benefit in the near-term around -- travel expenses are pretty nonexistent. We do expect some of that returning in the back half of fiscal '21. And then health care costs, we've talked about in the past. We are seeing some return of our claims and costs related to health care. I think those will increase as we go through the year again as people get more comfortable with elective procedures.

So to answer your original question, we are at a very low point for SG&A as a percentage of revenue in this fiscal first quarter. I think going out in future quarters, we could see that getting closer to 4.3%, 4.4%, maybe even 4.5% as a percentage of revenue. So returning more to a consistent percentage level as we've seen in the past, but still pretty low.

[Operator]

Your next question comes from the line of Anja Soderstrom from Sidoti.

[Anja Soderstrom, analyst]

Congratulations on the great quarter again. So can you just give us a little bit color on what you see in the Aerospace and when you anticipate that to come back? Or if you see anything at all?

[Todd Kelsey, executive]

Sure. Aerospace, I think it's a pretty complex market right now. As we look at whether it's the MRO or the new aircraft, we don't foresee new aircraft coming back anytime soon. And if you listen to all the other announcements out there, really kind of don't anticipate -- see a big rebound there.

One thing we are seeing is that on the freight side, with freight flights increasing significantly, the MRO on that side has picked up a bit. So the other dynamic that we're looking at is how many aircraft are going to get retired here as a result of what's happening and when new aircraft orders turn back on what will we see there.

So the short-term answer is we expect it to be relatively muted here for quite some time with a few pockets of pickup, again, like things associated with freight, MRO. But long term, we're positioned well. I think it's a solid sector for us and it is going to return. It's just a matter of when.

[Patrick Jermain, executive]

So I'd like to add just a bit on this, Anja. I mean one of the things -- so we talk -- we tend to shorten it to Aerospace a lot, but our sector is Aerospace and Defense and it includes space as well, too. So while Aerospace is down considerably, the gains we're making in Defense and space should more than overcome it. And we're expecting F'21 to be a growth year for the sector, for the Aerospace and Defense sector.

[Anja Soderstrom, analyst]

Okay. And then you mentioned you added 12 new logos to your manufacturing wins?

[Steven Frisch, executive]

Not necessarily all new logos. They could be new divisions of existing customers. But yes, that was the number I gave you.

[Anja Soderstrom, analyst]

Okay. I just wanted to -- so they are already existing customers. Sort of -- what do you -- for the new logos you added, what's the sort of potential there and can you give a little bit of color on those?

[Steven Frisch, executive]

Yes, I don't have great specifics for you on each of the 12 logos. What I would tell you is that the logos are brand name logos and they are PTAM, as we call it, which is potential available market, for us is meaningful to continue to grow. And specifically, one example that I gave you is -- we were talking about one of the testers that we had won last quarter. We won another tester from them in this quarter, a different -- usually kind of served for a different market. And so it's difficult to give you an exact number in terms of what the long-term potential is, but we do see growth with all these customers. They're not start-ups.

[Operator]

Your next question comes from the line of Matt Sheerin from Stifel.

[Matthew Sheerin, analyst]

Steve, I was hoping that you could elaborate on your comments about the semiconductor capital equipment market. Sounding like it's beginning to weaken a bit here, and I know you've had several strong quarters of growth and so have your peers. So is that a sign that things are peaking cyclically or anything else going on there that you could share?

[Steven Frisch, executive]

Yes. This is a little bit more of my belief necessary than absolute data. As you look at the semi cap market for us, I would say it has flattened a little bit kind of quarter-over-quarter. We obviously see a little bit of a downtick here. But for us, the customers' expectations as we go through fiscal '21, we are still talking to customers about growth in some markets and some areas. And so we have brought in inventory to support potential drop-ins and upside for them.

So I think the message is, I think the semiconductor market for us we expect to see growth in the coming quarters. The question is, is that 1, 2, 3 quarters or is it going to be a little further out given the COVID situation. I wouldn't say it's a significant decline that we're expecting. Again, it's more of a -- a little bit of a fluctuation here is where we're at.

[Todd Kelsey, executive]

Yes. This is Todd. I think I might have made that comment, too, and I didn't intend to suggest that semi cap was going into any significant decline. I mean what we're seeing is we saw a little bit of a peak in Q3, Q4, and we talked a bit about that. And we're coming off that peak just a hair. But '21 looks like a solid year for semi cap.

[Matthew Sheerin, analyst]

Okay. Great. That's helpful. And then just a question on the inventory. I know your inventory days were down. I think it's the lowest level in a few quarters. How much of that is related to the guiding and just the expectation for lower revenue in the December quarter versus maybe the supply chain being more efficient, lead times coming in, availability, that sort of thing?

[Steven Frisch, executive]

We definitely benefited in the quarter from the higher revenue, so we burned through a bit more inventory in the quarter. I would say our teams, though, are getting much better at managing through the expectations of the customers on inventory levels.

Where we have customers that are driving excess inventory, specifically like in our semiconductor capital customer areas, where they want us to procure additional inventory beyond forecast. We are working with them on deposits. So you'll also see deposits coming up.

So from that standpoint, it's more related to us managing it than it is necessarily any kind of end market conditions. The only thing that we're really kind of seeing in the supply chain that's a little constraint is tantalum capacitors are still -- got a little bit of an issue associated with some of the COVID shutdowns. But the rest of them -- the rest of the commodities are doing fine for us.

[Operator]

Your next question comes from the line of Paul Coster from JPMorgan.

[Paul Coster, analyst]

Just a little bit of color, please, regarding your strategy on the Comms business. It looks to me like you're sort of intentionally culling some business and being very selective moving forward. What are the criteria for that sort of selectivity?

[Todd Kelsey, executive]

Yes. So I would say we're actually not culling business, Paul. We're very committed to our customers within that space and are looking to grow those customers. We think we have a good customer base that fits our model well. We're just reacting to the reality that Comms is a pretty volatile market and when you get to some of the -- certain customers, the pricing model that people are willing to do the business for is not what we believe is an effective pricing model.

So we're taking it a bit more opportunistically when we look at new logos, but we're absolutely committed to our customers in that space in growing that business. And this is a path we've really been down for about 18 to 24 months now of really merging that into a single sector team and merging our business here. So as Steve mentioned, this is -- our external reporting is really the end, not the beginning. So there's not like a restructuring here or anything like that. We've done all the actions and all the activities there.

But we're very committed to the business there. We'll continue to look at it as it comes in. But our customers, we're very committed to them.

[Steven Frisch, executive]

And if I add a little bit -- well, if I can just add a little bit for you. If you look at the industrial sector, some interesting dynamics have been happening, which is that sector has been getting a bit of overlap with communication type products. And so when you start looking at energy meters that are connected via WiFi and you start looking at smart business controls and industry 4.0 stuff, we found our industrial sector really and our communications sectors debating and discussing which product does that belong in, which sector does it belong in, Industrial/Commercial or it belongs in Communications.

And so it's kind of been almost a natural evolution for us a little bit on a technology standpoint where it's gone, and we think it's going to continue to go that way. So as the teams continue to work more and more closely together on opportunities, it actually became more of a natural fit for us as well.

[Paul Coster, analyst]

Got you. And well, that leads to my follow-up question, which is, as you look at this big funnel, it seems pretty robust still. Are there any sort of macro themes you can call out from that activity, whether it's in terms of the end customers' use of contract manufacturers and electronic manufacturing service companies or in terms of technology themes?

[Steven Frisch, executive]

I don't know that I could call out a specific technology or a trend. I think from an outsourcing standpoint, I think there is a continued push for customers looking for ways to convert things from fixed to variable costs for themselves. That's been a trend that's going on for a while. I don't think it's ending.

To be honest with you, my personal opinion is I really give credits to the operations teams inside of Plexus. What our teams have been able to do on quality levels and delivery performance over the last few years, the improvements they have made is really, quite frankly, I think, attracting and winning more business for us and bringing more opportunities to the funnel. So I have to give a lot of credit to just our team's ability to execute.

[Paul Coster, analyst]

In other words, they're sort of winning trust from those customers and the customers, therefore, increasing their outsourcing?

[Steven Frisch, executive]

Yes. I think as you go through economic cycles and you look at things that -- sometimes customers are focused on cost and sometimes they're focused on delivery and quality. And I think going back here, in my opinion, in the last 3 to 4, 5 years, there's been an industry shift really focused -- whereas before it was all about cost, and now there is significant considerations about what the cost of quality and what the cost of poor delivery performance does for you.

And again, I think our teams are exceptional at living through the commitments. We continue to push. It's why I think you hear Todd and I talk a lot about customer service excellence and operational excellence. We do believe these are differentiators. And I think the Plexus teams are doing a really well -- good job with them.

[Operator]

Your last question comes from the line of Mike Cikos from Needham & Company.

[Michael Cikos, analyst]

I just wanted to ask a follow-up here. Recording these enduring targets that you guys have for the 9% to 12% year-on-year revenue growth, of 4.7% to 5.0% operating margin targets. So this -- I guess, if we're looking at fiscal '21, this is going to be the second year now where we're falling short of that revenue target. But obviously, if we look at the last 2 quarters, you guys are outperforming the margin bogey that you have out there. Should we be thinking -- or is there any reason to think that those targets may be shifting as you guys are, obviously, improving your profitability? And then what helps you guys, in your view, continue to think that, that 9% to 12% bogey on the revenue is a worthy target to have out there?

[Patrick Jermain, executive]

Yes. We look at the 9% to 12% as being a CAGR. And when we look at the 3-year CAGR, we're at 10. So we do fall within the range. And I mean, the question was around do we -- are we looking to reduce that target. I would say at this point no, because our sector leaders and as we look at our long range plans, we believe they're realistic yet. Now as we look at -- we don't necessarily call the 4.7% to 5% operating margin an enduring goal.

We're more focused around our return on invested capital and having that 500 basis point spread above our WACC. And typically, it's been the 4.7% to 5% that has driven that spread. But we do think we can continue to expand margins right now. So we're trying to talk less about the 4.7% to 5% because we think the potential to be 5% plus is there right now and we've done it the last few quarters. So that's the way we're looking at the goals right now. We think 9% to 12% is realistic. We think we can expand margins from where we're at and continue to drive strong return on invested capital.

[Operator]

I am showing no further question at this time. I would now like to turn the conference back to CEO Todd Kelsey for closing remarks.

[Todd Kelsey, executive]

Yes, thank you, Sarah. And I'd certainly like to thank everybody who joined our call today. I thought there were a lot of great questions today. We certainly appreciate your support and interest in Plexus. And again, I'd like to thank our Plexus team globally because it's all their efforts that drive these results and make it all possible. So thank you very much.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and have a wonderful day. You may all disconnect.