Plexus Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2025

Key Takeaways

  • Positive Sentiment: For Q3 FY25, Plexus reported $1.018 billion in revenue, achieved sequential growth, and met its guidance.
  • Positive Sentiment: They delivered a non-GAAP operating margin of 6%—hitting this target in three of the last four quarters—and posted non-GAAP EPS of $1.90, above expectations.
  • Positive Sentiment: Plexus generated $13.2 million in free cash flow, exceeded forecasts, maintained a net cash position, and accelerated share repurchases under a new $100 million authorization.
  • Negative Sentiment: Evolving program ramp timelines and tariff-related uncertainties offset order activity in certain industrial and European market sectors.
  • Positive Sentiment: For Q4 FY25, Plexus guides revenue of $1.025 billion–$1.065 billion, non-GAAP operating margin of 5.7%–6.1%, EPS of $1.82–$1.97 (implying 26% year-over-year growth), and approximately $100 million in free cash flow.
AI Generated. May Contain Errors.
Earnings Conference Call
Plexus Q3 2025
00:00 / 00:00

There are 8 speakers on the call.

Speaker 5

Ladies and gentlemen, thank you for joining us and welcome to the Q3 2025 Plexus earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed into today's call, please press Star nine to raise your hand and Star six to unmute. I will now hand the conference over to Shawn Harrison, Vice President of Investor Relations. Shawn, please go ahead.

Speaker 3

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, administrative expenses, operating margin, other income and expense, taxes, cash cycle, capital allocation, and future business outlook. 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, 2024, as supplemented by our Form 10-Q filings and the Safe Harbor and Fair Disclosure statement in our press release.

Speaker 3

We encourage participants on the call this morning to access a 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; Oliver Mihm, Executive Vice President and Chief Operating Officer; and Pat Jermain, Executive Vice President, Chief Financial Officer. With today's earnings call, Todd will provide summary comments before turning the call over to Oliver and Pat for further details. With that, let me now turn the call over to Todd Kelsey. Todd.

Speaker 6

Thank you, Shawn. Good morning, everyone. Please advance to Slide 3. Plexus continues to gain momentum as we design, manufacture, and service some of the world's most transformative products. For the fiscal third quarter, Plexus received national and regional recognition as a top workplace. We grew revenue sequentially. We generated solid new program wins, including opportunities supporting new customers with products aligned to exciting growth technologies. We delivered non-GAAP operating margin of 6%, matching our stated goal. We once again generated better than expected free cash flow, and finally, we reduced our debt while accelerating our share repurchase activity and concurrently increasing our share repurchase authorization. Through our commitment to enabling customer success, we are seeing ongoing strength in new program wins and opportunities to gain share in support of delivering growth outpacing our end markets.

Speaker 6

In addition, our ongoing strategic investments that drive organizational and operational efficiency are generating strong profitability and free cash flow in support of creating long-term shareholder value. Please advance to Slide 4. Revenue of $1.018 billion met our guidance. As the fiscal third quarter progressed, we saw improved order activity from some industrial and European customers. In addition, we observed early signs of increasing European defense sector activity, a market we are uniquely qualified and positioned to support. This offset the impact of evolving program ramp timelines and tariff-related uncertainties on our market sectors. Non-GAAP operating margin of 6.0% was near the high end of our guidance, increasing 30 basis points sequentially and meeting our stated goal of 6% or greater operating margin. We have now achieved this goal and delivered operating margin at or above 6% for three of the last four quarters.

Speaker 6

Continued strong performance from our engineering services and sustaining services, operational efficiencies, and volume leverage drove the sequential expansion. Non-GAAP EPS of $1.90 exceeded our guidance, benefiting from strong operating performance, lower than anticipated interest expense, and a favorable tax rate. Finally, we delivered $13.2 million of free cash flow, significantly better than our expectations entering the quarter as we continue to drive strong working capital management. Please advance to Slide 5. For the fiscal third quarter, we secured 41 new manufacturing programs worth $250 million in revenue annually when fully ramped into production. Included in these wins, which were well balanced across all of our market sectors, are share gains resulting from our sustained focus and zero defects in perfect delivery. We also added in each of our market sectors new customers with products aligned to exciting growth technologies.

Speaker 6

Furthermore, similar to last quarter, the revenue contribution and diversification of the wins performance of our engineering services was strong. Finally, our funnel of qualified opportunities expanded sequentially once again with balanced diversification across our market sectors as well as a strong contribution from our sustaining services. Please advance to slide 6. At Plexus Corp., our commitment to advancing sustainability is aligned to our value of innovating responsibly. We boldly drive positive change and promote a sustainable future for and through our people, our solutions, and our operations, all of which is built on a foundation of trust and transparency. Our people are the heart of who we are and what we do. With that in mind, I'm incredibly proud to share that Newsweek listed Plexus Corp. as one of America's Greatest Workplaces in Manufacturing 2025.

Speaker 6

Further, our Chicago site was recognized as one of the 2025 Best and Brightest Companies to Work For nationally and regionally. 2025 marks the 18th consecutive year this site has received regional recognition and the third consecutive year receiving national recognition. Thank you to our incredible team members for living our values and enabling our success. Our people are also at the heart of strengthening our communities. In celebration of Earth Day, our teams around the globe participated in a number of local volunteer activities including community cleanup and recycling events. Here in Wisconsin, our team members recycled an amazing 8,000 pounds of electronics waste. In June, we released our 2024 sustainability report, Building Trust Through Transparency, and highlighting the many ways we're committed to doing something more for our customers, our team members, and the world.

Speaker 6

Finally, our commitment to customer success drove our historically strong customer satisfaction score to a seven-year high in our recently completed Customer Net Promoter Survey. We believe this positive customer sentiment is manifesting into share gains and expanded outsourcing opportunities across our market sectors. Please advance to Slide 7. For our fiscal fourth quarter, we are forecasting sequential revenue growth and expect to realize another strong quarterly financial performance. We anticipate delivering this revenue expansion through share gains, new program ramps and growth with new customers overcoming modest end-market demand, evolving new product ramp timelines and uncertainties created by tariffs. Our fiscal fourth quarter guidance is for revenue of $1.025 to $1.065 billion, non-GAAP operating margin of 5.7% to 6.1% inclusive of greater incentive compensation and the opening of our new facility in Penang, Malaysia, and non-GAAP EPS of $1.82 to $1.97.

Speaker 6

At the midpoint, our fiscal fourth quarter would result in impressive non-GAAP EPS growth of 26% for fiscal 2025. Additionally, we are now forecasting approximately $100 million of free cash flow for fiscal 2025, which would represent cumulative two-year free cash flow generation of nearly $450 million. As previously noted, in recognition of our robust free cash flow performance and our long-term value creation potential, we accelerated our share repurchase activity during the fiscal third quarter while also engaging with our Board of Directors to approve a follow-on authorization of $100 million, creating additional shareholder value. Finally, while early for fiscal 2026, we currently anticipate delivering healthy year-over-year revenue growth from each of our market sectors without assuming end-market demand improvement. We also anticipate sustaining our strong operating margin and free cash flow performance. In closing, we are committed to creating long-term shareholder value.

Speaker 6

Plexus continues to gain momentum through enabling customer success and through focused initiatives that drive organizational and operational efficiency. We're bullish on the growth opportunities our solutions in our market sectors provide. Our strategy is creating opportunities to sustain strong financial performance and gain share in support of delivering growth outpacing our end markets. I will now turn the call to Oliver for additional analysis of the performance of our market sectors. Oliver.

Speaker 2

Thank you, Todd. Good morning. I will begin with a review of the fiscal third quarter performance of each of our market sectors, our expectations for each sector for the fiscal fourth quarter, and some directional sector commentary for fiscal 2026. I will also review the annualized revenue contribution of our wins performance for each market sector and then provide an overview of our funnel of qualified manufacturing opportunities starting with our aerospace and defense sector on Slide 8. Revenue increased 6% sequentially in the fiscal third quarter, meeting our expectation of a mid single digit increase. New program ramps contributed to the performance. We expect revenue for the aerospace and defense sector to be flat in the fiscal fourth quarter as improving defense subsector demand and new program ramp revenue balances muted performance from the other subsectors.

Speaker 2

Our wins for the fiscal third quarter for the aerospace and defense sector were $51 million, the best in more than two years and nearly a record result. Our reputation for customer service excellence and our highly collaborative engagement yielded a substantial award with a new customer in the space subsector for our facility in Kelso, Scotland. Strength of execution yielded a number of follow on awards and new programs with existing customers in our defense and space subsectors. Our robust growth outlook for fiscal 2026 is supported by a combination of new program ramps, new customer additions, and modest market growth that collectively drive strong defense sector growth and a return to growth in commercial aerospace. Please advance to Slide 9. Revenue in our Healthcare Life Sciences market sector was up 2% sequentially for the fiscal third quarter, below our expectation of a mid single digit increase.

Speaker 2

This variance was due to a customer design update that resulted in a temporary production delay for their program for the fiscal fourth quarter. We expect the Healthcare Life Sciences market sector to be up low single digits, driven by multiple ongoing program ramps. Fiscal third quarter Healthcare Life Sciences sector wins of $116 million included a substantial follow on award from an existing customer for the global rollout of a platform that treats atrial fibrillation. Our historical strength of execution with both new product launches and ongoing production for the device for its U.S. rollout enabled the win. This program will be built in our Chicago facility. We also want to work with a new customer for our sustaining services organization. Our work will support a cardiovascular platform and be performed in our Guadalajara, Mexico facility.

Speaker 2

Our Neenah, Wisconsin facility won a substantial award with a new customer for a surgical generator product used in a novel new cancer treatment. Our ability to effectively collaborate and develop trust during the quoting process contributed to the win as we look to the next fiscal year. Revenue contributions from both ongoing and new program ramps support our strong growth outlook. Advancing to the Industrial sector on slide 10, revenue was up 4% sequentially in the fiscal third quarter. The result was in line with our expectation of a low single digit increase inside the quarter. Demand increases in the broadband communications and energy markets offset demand pushouts in our semi-cap subsector.

Speaker 2

Our fiscal fourth quarter outlook for the industrial sector of a low single digit increase is supported by strength of orders for legacy equipment in the broadband communications subsector and new program ramp revenue in both the semi-cap and energy subsectors. The industrial market sector wins for the fiscal third quarter were strong at $83 million. This marks a five quarter high for the sector. Continued strength of execution and our ability to redesign for cost reduction yielded wins with three of our top semi-cap customers. These products will be built in our Penang, Malaysia and Guadalajara, Mexico campuses. Wins also include a substantial award from a new customer for an automated vehicle inspection system. This product will be assembled in our Guadalajara, Mexico facility.

Speaker 2

Our positive fiscal 2026 growth outlook is supported by the better than market growth rate we anticipate in the energy and semi-cap subsectors as a result of continued share gains and new program ramps. Please advance to slide 11 for a review of our funnel of qualified manufacturing opportunities. The funnel of qualified manufacturing opportunities is up 4% sequentially and robust at $3.6 billion. I'm pleased with the increasing breadth of opportunities we are seeing in our funnel across engineering, manufacturing and sustaining services. In summary, our focus on delivering excellence and creating customer success continues to contribute to strong wins performance. Our new program ramps, share gains, and new customer additions are contributing to a healthy outlook for our growth in the coming fiscal year. As Todd previously noted, this sentiment is without assuming improvements in the current end-market environment. I will now turn the call over to Pat.

Operator

Pat, thank you, Oliver, and good morning, everyone. Our fiscal third quarter results are summarized on slide 12. While revenue was at the midpoint of our guidance, gross margin of 10.1% was slightly above the midpoint due to a favorable mix of service offerings and better fixed cost leverage. Productivity improvements associated with our operational efficiency initiatives continue to benefit our manufacturing sites. Selling and administrative expense of $50 million was at the low end of our guidance and consistent with expectations as a percentage of revenue. Non-GAAP operating margin of 6% was toward the top end of our guidance due to strength in gross margin. Non-operating expense of $3.8 million was favorable to expectations due to lower than anticipated interest expense. Non-GAAP diluted EPS of $1.90 exceeded our guidance due to the items mentioned and a favorable tax rate.

Operator

The lower tax rate was primarily attributed to a state tax law change that allowed for the release of a valuation allowance against deferred tax assets. Turning to our cash flow and balance sheet on slide 13, as shown across these financial metrics, we continue to improve our performance and liquidity. As a result, we delivered $27 million in cash from operations and spent $14 million on capital expenditures, generating free cash flow of approximately $13 million. This performance exceeded expectations and positions us well to meet our increased fiscal 2025 free cash flow projection of approximately $100 million. During the quarter, we continued to return cash to shareholders through our share repurchase program by acquiring approximately 143,000 shares of our stock for $18.4 million.

Operator

As of today, we have completed the fiscal 2025 authorization of $50 million and have now begun executing upon the $100 million authorization approved by our board last quarter. Similar to the prior quarter, we ended the fiscal third quarter in the net cash position. We had $45 million outstanding under our revolving credit facility with $455 million available to borrow. As we had anticipated, our strong balance sheet position allowed us to use excess cash and minimal borrowing under the Revolver to repay the $100 million of private placement notes which matured last month. For the fiscal third quarter, we delivered return on invested capital of 14.1%, which was 520 basis points above our weighted average cost of capital. Our invested capital base is significantly lower than the prior year due to our efforts to drive sustained improvement in working capital.

Operator

This, combined with improved operating performance, drove the expansion of ROIC over the prior year and represents the highest ROIC in nearly four years. Cash cycle at the end of the fiscal third quarter was 69 days, consistent with expectations and one day higher than the fiscal second quarter. Please turn to Slide 14 for details on our cash cycle. Along with the sixth consecutive quarterly reduction in gross inventory dollars, we experienced a four day improvement in inventory days. This is another quarter of our team demonstrating the relentless focus on driving working capital initiatives for days in advance payments. We experienced a four day reduction with a net of $19 million being returned to customers during the quarter. As Todd has already provided the revenue and EPS guidance for the fiscal fourth quarter, I'll review some additional details which are summarized on Slide 15.

Operator

Fiscal fourth quarter gross margin is expected to be in the range of 9.8% to 10.1%. At the midpoint, gross margin would be slightly lower than last quarter while gaining fixed cost leverage on anticipated sequential revenue growth. Some additional variable incentive compensation expense is expected along with a slight margin drag from the startup of our new Malaysian facility. We expect selling and administrative expense in the range of $50 million to $51 million, which is fairly consistent with prior quarter. Note that this estimate is inclusive of approximately $6.3 million of stock based compensation expense. Fiscal fourth quarter non-GAAP operating margin is expected to be in the range of 5.7% to 6.1%. Exclusive of stock based compensation expense, non-operating expense is anticipated to be approximately $4.5 million, a reduction of nearly 50% from the prior year.

Speaker 6

Fiscal fourth quarter as we have shared.

Operator

Before, our strong cash flow has resulted in much lower debt levels and associated interest expense. Since last year's fiscal third quarter, we have reduced our total debt by over $200 million. For the fiscal fourth quarter, we are expecting to release additional tax reserves following the closure of the statute of limitations for certain tax years. As such, we are estimating an effective tax rate between 8% and 10%. While our fiscal 2025 effective tax rate will be lower due to reserve releases, a more normalized rate for us moving forward is in the upper teens. Diluted shares outstanding are expected to be 27.5 million. Our expectation for the balance sheet is that working capital investments will slightly reduce compared to the fiscal third quarter. With this improvement combined with our anticipated sequential revenue growth, we expect our cash cycle days to improve compared to the fiscal third quarter.

Operator

Hence, we are guiding a cash cycle range of 64 to 68 days. Fiscal 2025 capital spending is expected to be in the range of $80 to $100 million, lower than our previous guidance, as certain payments related to our new facility in Malaysia will now be made early in fiscal 2026. Once again, given our improved performance through the first three quarters of the fiscal year, we now anticipate generating approximately $100 million of free cash flow for fiscal 2025. With that, Nicole, let's now open the call for questions.

Speaker 5

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please raise your hand now. If you have dialed into today's call, please press Star 9 to raise your hand and Star 6 to unmute. Please stand by while we compile the Q&A roster. Your first question comes from the line of David Williams with The Benchmark Company. Your line is open. Please go ahead.

Speaker 1

Hey, good morning, everyone. Can you hear me?

Speaker 6

Okay, we can. David, good morning.

Speaker 1

Good morning. Thank you. Maybe first, the execution has been very strong financially. I guess my question is on the semi-cap. You talked about some of those push outs there. Can you provide maybe a little more color there? Is that more on maybe a demand side or forecast changes, or is that more driven by maybe changes to that product ramp or the product itself?

Speaker 2

David, this is Oliver. I'll take that. That had to do with just some idiosyncrasies specific to those programs. I think it's important to note that that push out is just moving the revenue to the right. It's not perishable demand. From an overall subsector perspective, we also noted that our Q4 is buoyed by a number of new program ramps in the semi-cap subsector. That's how we do that.

Speaker 1

Great, thanks so much. Maybe just on the aerospace and defense side, typically when you see the semi-cap that has these push and pulls, you're able to offset that through the strength in other segments. I'm just kind of curious what you're seeing on the defense side, excuse me, the aerospace side. Are you seeing the pull in from those, the aerospace customers, as you would have anticipated?

Speaker 6

Yeah, we're still not seeing, David, the pull in from Boeing or Airbus for the increased production ramps. We'd expect that to happen at some point as we move forward, but the demand just hasn't flown through yet to us. We are seeing strong demand within our defense and our space subsectors, particularly defense. As I mentioned in the prepared comments as well, we're starting to see signs of increased European defense demand as well, which we view as a great opportunity for us moving forward.

Speaker 3

David and Shawn, just one thing to be clear. Our preliminary outlook into fiscal 2026 does not include a recovery in production from current rates from Boeing and Airbus and the impact to our end customers. It is steady state. If that were to change, that would positively affect our view into 2026.

Speaker 1

Appreciate the color there. Thanks so much. I'll get back in the queue.

Speaker 5

Your next question comes from the line of James Ricchiuti with Needham & Company. Your line is open. Please go.

Speaker 6

I.

Speaker 4

Can you hear me okay?

Speaker 6

Yeah, now we can hear you, Jim.

Speaker 4

Terrific, thanks. Thanks a lot. A couple of questions. Just as we think about the industrial business, you know, it sounds like at least as we went through most of the first nine months of the year, you were seeing pretty healthy demand in semi-cap. I'm curious, your implied guidance for Q4, what does that kind of assume for semi-cap in fiscal 2025? Just given that that is a big part of the industrial business, isn't it.

Speaker 6

is a big part. It's close to half of our industrial business now. We have seen the forecast weaken a bit from a quarter ago. While we had been talking about revenue growth in the mid teens for semi-cap for fiscal 2025, it's looking like it'll be low double digits right now. We had some of the push outs that Oliver had talked about in some of the semi-cap business that we have now. Within the broader industrial, we are starting to see some signs of demand recovery in certain subsectors. Energy is one that we've highlighted in particular, and we've got a real strong position there and good growth prospects as we move forward.

Speaker 4

Got it. That's helpful, Todd. Thanks. Hey Pat, maybe I wanted to just turn to Malaysia. You talked about some of the startup expense, the potential for some of that to be a drag in Q4. I'm wondering if you can give us a sense or help us size that and how you see that going forward in the early part of fiscal 2026.

Operator

Yeah, it's going to be a pretty minimal drag in Q4, and what we've seen in the past when we've started up facilities, especially in Malaysia, is how quickly we can bring those sites to profitability. Part of it is the campus environment we've got where we can move programs pretty easily into new sites. I think it's a four quarter period to get us to profitability and closer to our corporate average.

Speaker 6

Yeah, just to add a little bit of additional color to that, Jim, we have that site seeded with a significant amount of new business already. The ramp to profitability will be quick, I think, in terms of a small number of quarters, and even to get to corporate targeted profitability levels, wouldn't expect it to take very long.

Speaker 4

Could you just remind us what the focus is, if there's a sector focus, market sector focus for this site?

Speaker 6

Yeah, the initial focus is going to be semi-cap, but it'll be broad based, so we'll quickly move on to healthcare within that site, and in the future it could take on other sectors as well.

Speaker 3

Thank you.

Speaker 5

As a reminder, if you would like to ask a question, please raise your hand or press star 9. Your next question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is open. Please go ahead.

Speaker 6

Hi, good morning. This is Jacob Moore for Steve Barger today. Thanks for taking the questions. Thank you, Jacob. Hey, just first from us, knowing that you're ramping that new facility in Malaysia, can you just comment on current capacity and utilization across the business? You know, where does utilization stand today, and roughly what sort of revenue run rate could you hit if you're at your target utilization?

Speaker 2

Yeah, sure. From an overall utilization perspective, the way we look at our capacity is that if we fill that up, we will be able to execute in excess of $5 billion. I would say that utilization rate relative to where we are at today.

Speaker 3

Is pretty consistent across all of our regions.

Speaker 2

Understood.

Speaker 6

That's helpful. Thank you. The second one from us, you mentioned that engineering services did well. Can you just sort of expand on your strategy for that part of your business and maybe provide a little bit of basic info for it? You know, like what size is it today, where do you want it to be, and what's the relative margin profile look like? Sure. Where I'd start with engineering is the first thing I'd say is we view it as one of the most significant differentiators for Plexus Corp. I mean, historically we've had engineering and product development and been well versed in it throughout our history. In fact, I even started in our engineering over 30 years ago. It gives you an idea of the longevity of that business, something that we consider strategically important.

Speaker 6

About a third of the revenue that we have in manufacturing, we've had a direct impact on through our engineering services. Right now, that business is in excess of $100 million. We don't give a lot of specifics about it, but excess $100 million, having a really excellent year from a standpoint of both growth and profitability within the business. One of the other real keys to our engineering business that's been exciting over the course of this past fiscal year in particular has been the diversification we've achieved throughout the business. Historically, we've had a strong focus within our healthcare business. In particular, we've seen this expand, continue into aerospace and defense, industrial, semi-cap, as well as life sciences over the course of the past year in more meaningful ways. The diversification is particularly exciting. Yeah.

Operator

From a margin standpoint, we can typically see double the manufacturing margin.

Speaker 3

Very profitable business for us.

Speaker 6

Understood. Thank you very much.

Speaker 3

Thank you.

Speaker 5

Your next question comes from the line of Anja Soderstrom with Needham & Company. Your line is open. Please go ahead, Anja. Just as a reminder to unmute, you can press star six.

Speaker 6

Yes, we can now, Anja.

Speaker 7

Okay, sorry. It's a new system that I'm not used to. I'm just curious with the Malaysia, when that's fully ramped, the margins there, is that above corporate average or how do the margins compare to the rest of the business?

Speaker 6

Yeah, generally our Malaysia sites perform quite well. Okay.

Speaker 7

You haven't really touched on the tariffs. What are you sort of seeing there? Have you seen any sort of headwinds to orders or what can we expect?

Speaker 6

Yeah, there hasn't been a lot of change from the previous call or the previous quarter with respect to tariffs. We're still seeing customers in a wait and see mode. Again, just remind everybody on the call we pass tariff costs onto our customers and we haven't gotten pushback on that front. We think we're really well positioned to help our customers with a lot of strength in our trade compliance organization. We've invested heavily in there in people and process and tools. From a standpoint of demand, we've only seen maybe one customer pull in any demand and we've seen pretty limited push outs of demand. Demand isn't really moving much because of the tariffs as of this point. One of the things that we have done is within our Mexico operations there's been a big push to drive for USMCA compliance for our customers' products.

Speaker 6

We're north of 80% right now, which we think is really an excellent number that we have on that front.

Speaker 7

Okay, I'm just going to squeeze in one more about the cash cycle days. Are you still expect that to come down to the low 60s eventually?

Speaker 6

Yeah.

Operator

Yeah. That's kind of where we're guiding Q4, mid-60s. I think there's opportunity as we move into fiscal 2026 with efforts we're doing around inventory, we'll see gross inventory days I think still come down. There will be a return of deposits associated with some of those reductions. I think Anja, being in the mid to low 60s is very realistic for us.

Speaker 7

Okay, thank you. I'll get back in the queue.

Speaker 5

If you would like to ask a follow up question at this time, please raise your hand or press Star nine. We have a follow up question from David Williams at The Benchmark Company. David, your line is open. Please go ahead.

Speaker 1

Hey, thanks for letting me jump back in here. Maybe Todd, just wanted to ask on, or Pat, on the new tax legislation. Is there anything there that changes your point of view on maybe the CapEx? I know you're pushing some of that, sounds like more for timing on Malaysia, but does that change anything from maybe on the tax side of things in terms of CapEx or the way you're thinking about the business in any way?

Operator

Not from a CapEx standpoint. Obviously, there's a lot of strategies we're looking at to minimize the effect of the global minimum tax, but not necessarily anything we're seeing around capital spending at this point.

Speaker 6

One of the things, David, that we are looking at more from a market standpoint or maybe a couple of things is with the expensing of R&D, there may be some potential that could have some positive pull through for our engineering solutions. We believe there's also some components of the bill that are around rural health and providing rural health as well as potentially some pull forward of clean energy demand given some of those credits going away in the future, and not to mention the increased defense budget that's out there. There are some reasonable market inputs that could be positive. We haven't seen any of that flow through as of yet though. Great.

Speaker 1

Thanks so much for the help.

Speaker 5

We have a follow-up question from James Ricchiuti with Needham & Company. James, your line is open. Please go ahead.

Speaker 4

Yep, thanks. Just a question on the healthcare/life sciences part of the business, it sounds like you're looking at fiscal 2026. You're optimistic of a pickup in growth. That's been a more difficult part of the business to forecast, hasn't it been? It seems this is not just you, we're hearing this from other players as well, including the OEMs. I'm trying to get a sense as to what gives you the confidence about fiscal 2026.

Speaker 2

Yeah, Jim, I'll offer and refer back to my prepared remarks that the strength of ongoing and new program ramps gives us a contributes to our Q4 outlook. Also, that carries into F26. Two other things I'll mention is two new customers added this quarter, so that's expected to provide us some additional tailwind as we work through F26. The other thing I'll talk about is we talked earlier about our engineering design services, and they typically act as a leading indicator for us. While we had seen, if I reference back to a few quarters ago in the inventory correction that that sector went through, healthcare kind of got out ahead of life sciences. More recently, we've seen increase in activity and discussion with both new customers and existing customers with our engineering design services relative to life sciences.

Speaker 2

Given that the leading indicator, that gives us further optimism as we anticipate strong growth in F26.

Speaker 4

Thanks, Oliver. That's helpful. Maybe one quick follow up. You alluded to the potential for stronger defense in Europe. What are you seeing there? How big is that in terms of the defense business overall? As you look at fiscal 2026, do you see that as a bigger driver?

Speaker 2

Yeah, I'll just start by what we're seeing. There is certainly an increase in activity and interest, and then also highlight back to the fact that we just added a new customer in that sector, I guess specifically space. Whenever I was talking earlier and contributing to our optimism that we're going to see additional activity in Europe and defense.

Speaker 3

Jim and Shawn, a couple things. We do defense and aggregate is maybe a little more than a third of that sector. European defense is a smaller component of the mix. We do forecast in 2026 really robust growth overall for our defense exposure. Our team just came back from the Paris Air Show a couple weeks ago. There were significantly more conversations about how we can support European defense companies with our strong footprint in region. As we mentioned, some good initial gains here. We think there's a significant amount of opportunities. There are different TAMs out there that have been discussed, but given how we play and where our footprint is in that market, we think we're strongly positioned to capture market share and support the upside potential out there. Thank you.

Speaker 5

There are no further questions at this time. I will now hand the call back over to Todd Kelsey, President and CEO, for closing remarks.

Speaker 6

All right, thank you, Nicole. I'd like to thank the shareholders, investors, analysts, and our Plexus team members who joined the call this morning. In closing, I'd like to reiterate that we're poised for a solid finish to fiscal 2025. With quarterly sequential revenue growth in the back half of the year, strong operating and free cash flow performance, as well as exceptional EPS growth, we're positioned to carry this momentum into fiscal 2026 and anticipate another good year. Thank you again and have a nice day.

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