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Plexus (NASDAQ:PLXS)
Q2 2019 Earnings Call
April 18, 2019 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator 

Good morning and welcome to the Plexus Corp. conference call regarding its fiscal second-quarter 2019 earnings announcement. My name is Sylvia, and I'll be your operator for today's call. [Operator instructions] The conference call is scheduled to last approximately one hour.

Please note that this conference is being recorded. I would now turn the call over to Ms. Heather Beresford, Plexus senior director of communications and investor relations. Heather?

Heather Beresford -- Senior Director of Communications and Investor Relations

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 statement.

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 from the fiscal year ended September 29, 2018, 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 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's website at www.plexus.com, clicking on Investor Relations at the top of that page. Joining me today are Todd Kelsey, president and chief executive officer; Steve Frisch, executive vice president and chief financial 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 -- President and Chief Executive Officer

Thank you, Heather, and good morning, everyone. Please begin with our fiscal second-quarter results on Slide 3. Yesterday evening, after the close of the market, we reported results for our fiscal second quarter of 2019. We delivered record quarterly revenue of $789 million.

This result represented a 13% increase from the fiscal second quarter of 2018 and 3% growth from the previous quarter. Our industrial/commercial and aerospace and defense sectors were exceptionally strong in the quarter, both achieving double-digit percentage growth from the previous quarter. Industrial/commercial revenue was considerably above our expectations entering the quarter. Conversely, our communications sector substantially underperformed in the fiscal second quarter.

The end result was an unusually large mix shift within the quarter that created cost inefficiencies, stressing our operating performance. As a consequence, we delivered GAAP earnings per share of $0.79, an outcome that was slightly below our guidance range. The result included $0.16 of stock-based compensation expense. Please advance to Slide 4.

Next, I will highlight additional accomplishments within the fiscal second quarter. Our teams maintained their strong wins performance, achieving manufacturing wins of $247 million annualized when fully ramped into production, resulting in trailing four-quarter wins of $912 million. The wins consisted of a healthy mix of programs with new and existing customers and were representative of our differentiated portfolio focused on mid- to low-volume higher-complexity markets. The sustained wins performance enhances our confidence of future growth.

We continue to ramp production within our new healthcare/life sciences center of excellence in Penang, Malaysia. The facility contains a Class 10,000 clean room and will be producing single-use medical devices in addition to finished healthcare capital equipment. Our teams are driving an aggressive ramp of the facility. We expect to have over half a dozen customers launched in the site by the end of the fiscal third quarter and to achieve corporate profitability targets in the fiscal fourth quarter.

Our aerospace and defense sector continued its recent trend of exceptional performance, posting revenue of $140 million in the fiscal second quarter of 2019. This result represents 28% growth from the fiscal second quarter of 2018 and 15% sequential growth. In addition, the team expects another strong result in the fiscal third quarter. We're being recognized by our customers as a premium supplier in the highly complex aerospace and defense markets as a result of our focus on 0 defects, our utilization of leading edge technology and our advanced service offering.

We announced the expansion of our long-standing partnership with the Coca-Cola Company. We will be manufacturing and servicing the next generation of the Coca-Cola Freestyle, the 9100 fountain dispenser. In addition, we will be engaged in engineering, test and reliability solutions in support of Coca-Cola's sustainability priorities. We continue to generate meaningful shareholder value and delivered return on invested capital of 13.3%.

This result represents an economic return of 430 basis points above our weighted average cost of capital of 9%. Our efforts to reduce inventory are beginning to produce results. We reduced inventory by three days within the fiscal second quarter. In addition, we assigned a corporate executive, along with a dedicated team, to our inventory reduction efforts.

We expect sustained improvement as we progress through fiscal 2019 and into fiscal 2020. Finally, our engineering solutions team continued their exceptional performance with record revenue and wins within the quarter. As a result, we are positioned for over 20% growth in the service offering in the fiscal year, a truly remarkable result for a large professional services company. Given the strong alignment with manufacturing, these wins have the added benefit of driving future manufacturing growth.

Our depth of expertise within engineering solutions continues to differentiate Plexus in industries with highly complex products and demanding regulatory environments. Advancing to our guidance for the fiscal third quarter of 2019 on Slide 5. As we look to the fiscal third quarter, our revenue outlook is mixed. Demand in our aerospace and defense and healthcare/life sciences sectors continues to be robust.

However, we have experienced a broad-based softening of communications sector demand, which we expect to offset the gains in these other two sectors. While most of the industrial/commercial sector is healthy, semiconductor capital equipment demand continues to be weak. As a result of all of these factors, we are guiding relatively flat revenue in the range of $760 million to $800 million. The mid point of this guidance range suggests 7% growth from the fiscal third quarter of 2018.

At this revenue level, we anticipate GAAP EPS in the range of $0.76 to $0.86, including $0.17 of stock-based compensation expense. This result would imply improved operating margins, modestly below our target range of 4.7% to 5%. Please advance to Slide 6. We remain confident in our fiscal 2019 revenue outlook and maintain our expectations of solid growth.

Demand remains robust in many of our end markets and, in particular, our healthcare/life sciences and aerospace and defense sectors. These sectors, where we have a highly differentiated service offering, represented 56% of our revenue in the fiscal second quarter. Interestingly, we expect our growth, exclusive of communication and semiconductor capital equipment, to approach 20% in fiscal 2019, highlighting the strength of our underlying business as well as the opportunity for significant growth tailwinds should these markets recover. In addition, our teams continue to achieve strong wins performance throughout our differentiated portfolio, providing the catalyst for further growth.

Despite delivering industry-leading operating margin, we are not satisfied in our near-term performance. In response, we are implementing productivity and cost-containment actions that, in conjunction with our current revenue expectations, are designed to support a return to our target operating margin range in the fiscal fourth quarter of 2019. We are committed to taking the necessary actions to consistently deliver within our target range of 4.7% to 5%. In summary, we remain optimistic in our ability to deliver strong results and create shareholder value in fiscal 2019 and beyond.

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

Steve Frisch -- Executive Vice President and Chief Financial Officer

Thank you, Todd. Good morning. Please advance to Slide 7 for a review of our market sector performance during the second quarter of fiscal 2019 as well as our expectations for the sectors in the fiscal third quarter of 2019. Our healthcare/life sciences sector revenue exceeded our expectations in the fiscal second quarter.

The flat revenue result was above our expectations of a low single-digit decline. Strength in new program ramps within the quarter offset seasonal softness with a large customer. As we look at the fiscal third quarter, we expect demand from existing programs and a new program ramp to provide growth. As a result, we anticipate a low single-digit increase in our healthcare/life sciences sector in the fiscal third quarter.

Our industrial/commercial sector was up 14% in the fiscal second quarter, which was significantly above our expectations of a mid-single-digit increase. Significant upside from a customer in the connectivity subsector, combined with growth associated with new program ramps enabled the strong result. Although the sector expects quarter-over-quarter growth in the base business, part of the fiscal second-quarter upside was a spike in demand on a single program that was fulfilled within the quarter. As a result, we anticipate a mid-single-digit decline in the fiscal third quarter as demand with that program returns to more typical level.

Our aerospace and defense sector grew 15% in the fiscal second quarter. The result exceeded our expectations of a low double-digit increase. Robust demand from existing programs and new program ramps with several customers fueled the strong growth. As we look toward the fiscal third quarter, the broad-based demand continues to be robust.

As a result, we are expecting a high single-digit increase for our aerospace and defense sector in the fiscal third quarter. Our communications sector declined 20% in the fiscal second quarter, a result that was meaningfully below our high single-digit decline expectations. During the quarter we experienced broad-based forecast declines that our customers mainly attribute to significant softening in their end market demand. We have aggressively worked with our customers to align our supply plan to their new forecast.

The result of that, we expect a low-teens decline in our communications sector for the fiscal third quarter. Please advance to Slide 8 for an overview of the strong wins performance of the second fiscal quarter. We won 36 new manufacturing programs that we expect to generate $247 million in annualized revenue when fully ramped into production. In addition to the magnitude of the wins, the balance was also very healthy, with 22 of the wins coming from existing customers and 14 of the wins coming from new engagements.

The red bars represent our trailing four-quarter manufacturing wins. We finished the fiscal second quarter at a robust $912 million. The gray line represents the ratio of the trailing four-quarter's manufacturing wins to the trailing four quarter of sales. This ratio was our wins momentum and is a key indicator of future growth potential.

At 30% in the fiscal second quarter, our wins performance continues to support future growth. In addition to the strong manufacturing wins performance, the teams generated record engineering wins in excess of $40 million in the fiscal second quarter. With these wins, our engineering solutions backlog is exceptionally strong for the remainder of fiscal 2019. Please advance to Slide 9 for further insight into the wins results by region.

The Americas region benefited the most from the strong wins performance of the fiscal second quarter. Approximately one-half of the $154 million of Americas' wins is targeted for our Boise, Idaho facility, while approximately one-third is targeted to our healthcare/life sciences center of excellence in Chicago, Illinois. The APAC region also benefited significantly from the fiscal second-quarter wins performance. Most of the $77 million in manufacturing wins for the APAC region are targeted to our Penang, Malaysia campus.

With the opening of the Riverside East facility in early fiscal 2019, our Penang campus provided a unique full value stream solution in that region that's attracting new customers. The EMEA region's manufacturing wins of $16 million included a strategic new customer for our facility in Oradea, Romania. The team is executing our strategy to add a few select new customers to build upon the strong growth the region has been experiencing. Our wins performance highlights that our ability to provide a global solution across the three regions to the differentiated markets we serve continues to be a unique value proposition that our customers desire.

Please advance to Slide 10 for further insight into the manufacturing wins performance by market sector. The healthcare/life sciences, industrial/commercial, and aerospace and defense sectors, all had exceptionally strong results in the fiscal second quarter. The healthcare/life sciences sector generated a strong manufacturing wins of $89 million. The new programs cover a diverse range of products, including a robotic assisted medical device, a medium volume diabetes monitor and a single-use breathing system.

The industrial/commercial sector produced a robust $82 million of manufacturing wins. Included into the wins is a new relationship with an EMEA-based company, providing high-end industrial printing solutions. The aerospace and defense sector's healthy wins of $56 million were the result of growth with two customers within our aerospace subsector as well as the addition of a new customer in the defense subsector. Finally, the addition of a meaningful new customer who provide specialized networking solutions is the main highlights for the communications sector in the fiscal second quarter.

Please advance to slide 11. After the exceptionally strong wins performance of $247 million in the fiscal second quarter, the funnel of qualified manufacturing opportunities finished at a healthy $2.4 billion. With our healthcare/life sciences funnel at $1.4 billion and our aerospace and defense funnel at $468 million, these two diversified sectors have a substantial pipeline of opportunities to continue robust wins performance. With the trailing four quarters of manufacturing wins of excess of $300 million, our industrial/commercial team is reduce the most wins.

They have a solid funnel to support continued wins performance. In addition, they have a significant quantity of leads that can support the backfill of their funnel. Our communications sector is focused upon growing their hundred $60 million funnel. They have a robust quantity lead that are in the process of quality [Inaudible].

In a -- our go-to-market teams have compiled a strong track record of wins performance and we expect that streak to continue in the fiscal third quarter. Next, I would like to turn to operating performance on Slide 12. As Todd highlighted, we achieved record quarterly revenue of $789 million in the fiscal second quarter. The team did an outstanding job reacting to the significant demand in mix changes that occurred within the quarter to deliver for our customers.

They shipped approximately 50% of the total manufacturing revenue in the last month of the quarter. Unfortunately, the sizable mix changes created a significant operational efficiencies that we cannot address within the quarter. As a result, our operating margins at 4.2% were slightly below our expectations for fiscal second quarter. As we looked at the fiscal third quarter, we are adjusting our cost structure and driving productivity improvements that align with the new demand profile.

We expect to realize improvements in the fiscal third quarter, so we are guiding operating margins in the range of 4.3% to 4.7% for the fiscal third quarter. We anticipate the improvement to be largely complete within the quarter to enable us to return to our targeted operating margin in the range of 4.7% to 5% in the fiscal fourth quarter. In addition to operating margin, we are continuing our focus on inventory improvements. Our days of inventory in the fiscal second quarter finish at 102 days a 3-day sequential reduction from the fiscal first quarter.

We are implementing additional initiatives that we believe will generate meaningful improvements by the end of calendar 2019. A few final comments. The team could have used the mix changes in the fiscal second quarter as an excuse to not deliver for our customers. Instead, they followed our culture of customer service excellence and delivered record revenue.

In a similar fashion, they're following our culture of operational excellence to drive improvement. Instead of using the mix changes in an excuse, they're using as an opportunity to make Plexus stronger. It's rewarding to see the team's to our core values as well as their commitment to a strong second half of fiscal 2019. I will now turn the call to Pat for an in-depth review of our financial performance.

Pat?

Pat Jermain -- Executive Vice President and Chief Financial Officer

Thank you, Steve, and good morning, everyone. Our fiscal second-quarter results are summarized on 13. Second-quarter revenue at $789 million was above the mid point of our guidance, while gross margin of 9% was at the lower end of guidance. Customer mix and the under-absorption of fixed costs across all of our region, led to the lower gross margin.

Selling and administrative expense of approximately $37.5 million was slightly above guidance. However, as a percentage of revenue, SG&A was consistent with our expectations at 4.7%. Impacted by lower gross margin, operating margin of 4.2% was slightly below our quarterly guidance. Included in this quarter's operating margin is approximately 65 basis points of stock-based compensation expense.

Non-operating expenses of $4.5 million in our effective tax rate of 13.7% were both in line with our fiscal second-quarter guidance. GAAP-diluted EPS of $0.79 was $0.01 below our guidance range, while the number of diluted shares outstanding was slightly favorable to guidance due to elevated share repurchase activity. Turning now to the balance sheet and cash flow on Slide 14. During the quarter, we continued our cash repatriation strategy by bringing back approximately $28 million of offshore cash.

Since the enactment of U.S. Tax Reform last year, we have brought back close to $480 million. During the quarter, we purchased close to 1 million shares of our stock for $56 million, at an average price of $56.72 per share. At the end of the fiscal second quarter, we had approximately $73 million remaining under the authorization.

For the fiscal second quarter, we used $1 million in cash for operations and spend $30 million on capital expenditures, resulting in negative free cash flow of $31 million, lower than our expectation due to the timing of working capital requirements. At the end of the fiscal second quarter, our cash balance was $184 million, slightly lower than last quarter. Cash cycle at the end of the second quarter was 86 days, one day above guidance and three days higher than our results in the fiscal first quarter. Please turn to Slide 15 for details on our cash cycle.

With regard to inventory availability, we are seeing improvement in the component market and reductions in lead times. However, still well above lead times we experienced before last year's supply chain constraints. Sequentially, inventory days improved three days, primarily due to our concerted efforts around the inventory management. Corresponding to the reduced inventory, payable days were sequentially lower by seven days.

Customer deposit days sequentially improved by one day as we continue to work with customers to cover higher inventory balances. Sequentially, days and receivables were flat at 51 days, however, two days unfavorable to our forecast. Customer mix negatively impacted days outstanding. In addition, second-quarter shipments were weighted more toward the last month of the quarter compared to our expectation.

Relative to our forecast, the higher receivable balance primarily drove the negative free cash flow for the quarter. We continue to expect to $40 million to $60 million in free cash flow for fiscal 2019 as we believe the second-quarter shipping pattern was unique to the quarter and not expected to impact full-year results. As Todd has already provided the revenue and EPS guidance for the fiscal third quarter, I will share some additional details, which are summarized on Slide 16. Fiscal third quarter gross margin is expected to be in the range of 9.2% to 9.5%.

At the mid point of this guidance, gross margin would be approximately 40 basis points higher than the fiscal second quarter. Improved customer mix, better fixed cost utilization and the initiation of cost containment actions are contributing to the anticipated higher gross margin. For the fiscal third quarter, we expect SG&A expense in the range of $37.5 million to $38.5 million. At the mid point of our revenue guidance, anticipated SG&A would be 4.9% of revenue, sequentially up 20 basis points.

Fiscal third quarter operating margin is expected to be in the range of 4.3% to 4.7%, which includes approximately 70 basis points of stock-based compensation expense. A few other notes, depreciation and amortization expense for the fiscal third quarter is expected to be approximately $13 million, slightly higher than the fiscal second quarter. Non-operating expenses for the fiscal third quarter are expected to be in the range of $5.1 million to $5.5 million. At the mid point of this guidance, these expenses would be sequentially higher by $800,000.

This increase is primarily related to additional interest expense from increased borrowing under our revolving credit facility and a full quarter of interest expense related to the capital lease for our new facility in Guadalajara, Mexico. In future quarters, we would expect to see a reduction in interest expense as we generate cash from working capital reductions, specifically inventory. We estimate an effective tax rate of 13% to 15% for both the fiscal third quarter and full year. Continuing our share repurchase activity during the fiscal third quarter, we estimate diluted weighted average shares outstanding to be in the range of 30.7 to 31.1 million shares.

Our expectation for the balance sheet is a reduction in working capital requirements. Based on forecasted levels of revenue we expect the lower working capital will result in cash cycle days of 81 to 85 days for the fiscal third quarter. At the mid point of this guidance, cash cycle days would sequentially improved three days. There have been no changes in our capital spending estimate for fiscal 2019.

We still expect spending in the range of $70 million to $90 million. With that, I will now open the call for questions. Sylvia? 

Questions and Answers:

Operator

[Operator instructions] And our first question comes from Shawn Harrison from Longbow Research.

Shawn Harrison -- Longbow Research -- Analyst

Good morning, everybody. I guess coming as no surprise, I want to dig into the comm weakness. I think the implication is that this business will be down 30% from where it was in the December quarter. And so I'm wondering, was there any feedback on is this is a customer-specific issue or customer-specific issues? Is it market share losses with your customers? Does it continue to decline into the end of the year because it looks like this business is now on track to be, I don't know, around 10% of sales, which would be an all-time low in terms of the past five or 10 years.

Todd Kelsey -- President and Chief Executive Officer

Hey, good morning, Shawn. This is Todd. So if we look at -- I mean, you highlighted it, we're down about 30% if you take Q1 actuals versus Q3 guide. And the interesting thing is it doesn't have to do at all with share losses.

In fact, we're gaining share. And we don't believe it has anything to do with specific customers. I know what we saw was a broad decline in Q2 and further broad weakness in Q3, and that was across wireless broadband as well as cable. So it was, like I say, broad-based, more than we had anticipated and something that we didn't anticipate coming into the quarter in any way, shape or form.

So...

Shawn Harrison -- Longbow Research -- Analyst

Does it continue to weaken, I mean, throughout the year, knowing that you probably -- it's difficult to trust the forecast you're getting at this point in time, but is the June quarter the bottom? Or is your further risk into the back half of the calendar year?

Todd Kelsey -- President and Chief Executive Officer

Yeah, we think we're near the bottom in this June quarter. And we could potentially be bouncing around the bottom for a quarter. Our expectations are beyond that. And if you looked at the new program wins for the comms sectors, they've been strong.

We're adding about roughly five new customers that we're ramping right now. So those new ramps should begin to overtake the weakness in the sector as we enter into F '20.

Shawn Harrison -- Longbow Research -- Analyst

Gotcha. And then just on the semi cap the business, I know, last quarter, or I guess, coming into the March quarter, you're caught off guard a bit by some forecast reductions. Have you now seen stability in that business, and so we're at a bottom and it will recover at some point in time from here?

Todd Kelsey -- President and Chief Executive Officer

Yes, we're seeing it right at the bottom now. And it's been consistent for probably three quarters now. Right now, our outlook looks like about early calendar 2020 for the recovery, although some customers are more bullish than others, I would say. Some sees being a little bit earlier than that, some a little bit later.

Shawn Harrison -- Longbow Research -- Analyst

OK. Perfect. Helpful. Thank you.

I'm sorry.

Todd Kelsey -- President and Chief Executive Officer

One of the things to point out, too, Sean -- I mean you hear that, certainly, the two areas of weakness within our business right now, the communications and the semi cap, so the comms sectors, the semi cap subsector. And the reality is that sub-25% of our business. And the remaining 75%, which is the balance of industrial/commercial, the healthcare/life sciences business and the aerospace and defense businesses is quite robust right now. And as I highlighted in the script, we're showing about high teens, maybe even approaching 20% growth within that balance of the business within the fiscal year.

So even though we're seeing this weakness in comms and industrial/commercial, we think we can -- I should say comms and semi-cap, excuse me, we think we can more than overcome it and the rest of the business and deliver good growth.

Shawn Harrison -- Longbow Research -- Analyst

And Todd, to that point, maybe just quickly, if you separate semi cap and the rest of industrial, what is the non semi cap industrial business going to grow this year, potentially?

Todd Kelsey -- President and Chief Executive Officer

Potentially 30%, right in that range. So the team has done a great job of diversifying that portfolio. So that's where -- I mean I'm excited from the standpoint that if we -- if these markets recover, should they recover, there's some real tailwinds.

Operator

[Operator instructions] We have no further questions at this time.

Todd Kelsey -- President and Chief Executive Officer

All right, thank you. Thanks, Sylvia. One of the things I'd like to do before exiting the call is I'd like to remind the analysts who joined us today that we're hosting an analyst day near our Wisconsin headquarters on June 5, 2019. During the event, we'll be highlighting our differentiated strategies and capabilities.

Invitations were recently mailed. But if you didn't receive your invitation, please contact Heather. And we see there's another caller in the queue, so we will take further questions at this point before I wrap up formally.

Operator

We have Matt Sheerin from Stifel.

Matt Sheeri -- Stifel Financial Corp. -- Analyst

Yes. Thanks for fitting me in. I just wanted to just follow up on Shawn's questions regarding the communications sector. How concentrated is your customer mix there? And I know one of your customers is going through a big merger.

Any disruptions from that and efforts to diversify within that sector?

Steve Frisch -- Executive Vice President and Chief Financial Officer

Matt, this is Steve. We talked in the past and actually demonstrated, I think, some of the recent wins that the team has been working on, focused on diversifying across that sector. And so, from a mix standpoint and a concentration standpoint, we think we're headed in the right direction. Specifically as it relates to the customers that are in that thing, I think Todd kind of hit it from a weakness standpoint.

It's pretty broad-based across the spectrum of the customers that we have there. So I won't attribute the downside due to our concentration mix at all because it's really a broad-based problem that we experienced.

Todd Kelsey -- President and Chief Executive Officer

Yes. The one thing I'd add on that, Matt, too, you asked about the recent merger within that space that impacted one of our customers. And from our standpoint now, it looks like business as usual. I mean there's been some press releases on what's been going on with some of the senior management there, and that management has been integrated.

We're viewed as a strategic supplier to that company and we continue to build executive level relationships or have executive level relationships with the one company and our working toward it with the others as well too. So we don't see any more significant risk than would be normal in that merger that's going on.

Matt Sheeri -- Stifel Financial Corp. -- Analyst

OK. Thank you. And on the cost-containment actions you're taking to improve margins here, could you elaborate maybe, Pat, a little bit on that? Is there a number behind that? Is there any charges behind that as well?

Steve Frisch -- Executive Vice President and Chief Financial Officer

So, this is Steve. Maybe I'll hit it first, and if Pat wants to add on, he can. As I look at the upside business that we had and the inefficiencies with that, I would have expected, at a normal run rate, 10 or 15 basis points better margin with that business. As I look at the downside business and the facilities and the factories that were executing that, they should have been able to do better by 20 to 25 basis points in a normal mode of operation.

So my expectation, as I look to Q3 here, is a 25- to 35-basis-points improvement from those as well as looking at additional things in that same range as we go into Q4. And, Pat, I don't know if you want to add anything.

Pat Jermain -- Executive Vice President and Chief Financial Officer

Yes. So we mentioned getting back to our target range in Q4 of 4.7% to 5%. In Q3, we could have some initial costs that are offsetting the benefits just as we execute some of these initiatives and actions. So we'll see more of the benefits flowing through in Q4 where we expect to return to that target margin range.

Todd Kelsey -- President and Chief Executive Officer

I would add, though, Matt, you asked about charges, and we don't anticipate any charges at this point. That would be just -- that would be built right into our guidance here that we have today.

Matt Sheeri -- Stifel Financial Corp. -- Analyst

OK. Great. And my last question regarding the working capital reduction plans, inventory. I think you mentioned the lead times are improving, meaning, easier to get parts.

But could you elaborate on that? Or is it pretty much, at this point, more of a buyer's market than a seller's market, given that we're seeing some inventory correction going on? Or is there still some problems?

Steve Frisch -- Executive Vice President and Chief Financial Officer

Yes. I'd say it's pretty -- this is Steve. I'll say it's pretty sporadic. For example, if you look at large package MLCCs, those continue to be a challenge.

And if anything, there's a little bit of pressure on the price of those. And if you look at more commoditized MLCCs, those have definitely, from a lead time standpoint, reduced and we're seeing a little relief on the price. And so if you look at it by -- commodity by commodity, there is definitely more freeing up than there is that's basically presenting to be a challenge for us. So going forward, we expect that to continue to improve with maybe pockets of things that we need to continue to drive and manage.

But overall, we're feeling much more comfortable with where the pricing of the components are going and the reliability of them.

Matt Sheeri -- Stifel Financial Corp. -- Analyst

OK. Thanks, and thank you very much.

Operator

And we have Shawn Harrison from Longbow Research on line with a question.

Shawn Harrison -- Longbow Research -- Analyst

I had two follow-ups. I think, Steve, you mentioned that 50% of the business was shipped out in the final month of this quarter. What's typically normal? I know that most quarters are back-end loaded, but how much of that -- how different was that than what you would typically see?

Steve Frisch -- Executive Vice President and Chief Financial Officer

There was 30 million to 40 million more shipped in the last month of the quarter than what's typical for us.

Shawn Harrison -- Longbow Research -- Analyst

OK. And then, Pat, I can't remember if last quarter or not if you had a target cash cycle exiting the fiscal year. But do you have a new target cash cycle for fiscal 2019 to exit the year?

Pat Jermain -- Executive Vice President and Chief Financial Officer

Yes. I think we can get into the kind of mid- to high-70s by the fourth quarter, fiscal fourth quarter. By the calendar fourth quarter, I'd like to see us back in the lower 70s.

Shawn Harrison -- Longbow Research -- Analyst

And how much of that is -- is it still the inventory? Or is there a little bit work that you have to do on the AR and AP side?

Pat Jermain -- Executive Vice President and Chief Financial Officer

Some of its AR, just because of what we were just talking about, the timing of shipments. And even more so, not just in the third month of the quarter, but the last 10 days of the quarter, where we saw significant shipments. So I think there is going to be more level loading, we'll see as we go through the year. So there is an element of receivables that we see improvement, but the majority is going to be around inventory.

And Todd mentioned the dedicated team and our executives that is driving that initiative, so that's driving the improvement.

Shawn Harrison -- Longbow Research -- Analyst

All right. Great. Thank you.

Pat Jermain -- Executive Vice President and Chief Financial Officer

Sure.

Operator

No further question at this time.

Todd Kelsey -- President and Chief Executive Officer

All right. Well, I'd like to thank everybody who joined us on our call today. And we certainly appreciate your support and your interest in Plexus. Have a nice day.

Duration: 38 minutes

Call Participants:

Heather Beresford -- Senior Director of Communications and Investor Relations

Todd Kelsey -- President and Chief Executive Officer

Steve Frisch -- Executive Vice President and Chief Financial Officer

Pat Jermain -- Executive Vice President and Chief Financial Officer

Shawn Harrison -- Longbow Research -- Analyst

Matt Sheeri -- Stifel Financial Corp. -- Analyst

More PLXS analysis

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