Plexus Corp (PLXS) Q1 2021 Earnings Call Transcript

Image source: The Motley Fool.

Plexus Corp (PLXS -0.94%)
Q1 2021 Earnings Call
Jan 21, 2021, 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 First Quarter 2021 Earnings Announcement. My name is Sarah, and I'll be the operator for today's call. [Operator Instructions]

I would now like to turn the call over to Mr. Shawn Harrison, Plexus' Vice President of Communications and Investor Relations. Please go ahead.

Shawn Harrison -- President of Communications and Investor Relations

Thank you, Sarah.

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 October 3, 2020, as supplemented by our Form 10-Q filings and the Safe Harbor & 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 margin -- 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 comparisons. For a full reconciliation of non-GAAP supplemental information, please refer to yesterday's press release and our periodic SEC filings.

We encourage all 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 order to maintain appropriate social distancing, we are again 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 -- President and Chief Executive Officer

Thank you, Shawn, and good morning, everyone.

Please begin on slide 3. I will start with an introduction of recent changes impacting our Investor Relations team. First, you may have noticed a familiar name and voice introducing our call. I'm pleased to welcome Shawn Harrison to the Plexus team as our Vice President of Communications and Investor Relations. Shawn brings tremendous experience to Plexus as a well-respected sell side analyst previously with Loop Capital and Longbow Research. He has a 20-year history covering Plexus and knows us well. I'm very excited for Shawn to leverage his expertise in furthering Plexus' Investor Relations program.

Next, many of you have gotten to know and respect Heather Beresford over the last two and a half years for her leadership within our Investor Relations team. Heather has done a great job in taking our investor relations, corporate communications and branding to a new level. I'm pleased to inform you that as a result of her exceptional working capabilities, Heather has been promoted to Vice President of Aftermarket Services. I look forward to Heather leveraging her leadership to further our operational performance in this growing and differentiated service offering.

Please advance to slide 4 for a discussion of our fiscal first quarter results.

Our operations achieved strong results in the fiscal first quarter of 2021. We expanded our industry-leading GAAP operating margin to 5.6% through our focus on productivity improvements and expense management, along with solid performance from our engineering solutions team. This result includes 64 basis points of stock-based compensation expense and represents the third consecutive quarter of GAAP operating margin in excess of 5%. We achieved quarterly revenue of $830 million, which was in line with our expectations and at the midpoint of our guidance range.

Our Industrial sector exceeded our expectations entering the quarter primarily as a result of upside from semiconductor capital equipment customers. Our Healthcare/Life Sciences sector also exceeded expectations as we saw modest improvement in demand for equipment used for elective procedures. Finally, Aerospace and Defense underperformed to forecast due to the impact of COVID-19 on commercial aerospace and program ramp delays. Through this combination of strong operating performance and in-line revenue, we delivered GAAP diluted earnings per share of $1.23, including $0.18 of stock-based compensation expense, which was well above the top end of our guidance range. I'm extremely proud of our global Plexus team as they continued to deliver outstanding results while navigating the complexities stemming from COVID-19.

Please advance to slide 5. Next, I will discuss additional accomplishments within the fiscal first quarter of 2021 starting with the recent successes of our go-to-market team. While navigating the pandemic, our go-to-market team has successfully leveraged our reputation as the leader in highly complex products and demanding regulatory environments to produce several consecutive quarters of strong wins results. Our team delivered fiscal first quarter manufacturing wins of $223 million when fully ramped into production. The quarterly wins included six new logos, an uncommonly high number. This result highlights the success of our innovative virtual business development efforts, underscores the market recognition of our strong performance during the pandemic and provides significant opportunity for future growth. Our trailing four quarter manufacturing wins now exceed $1 billion for the first time in history.

In addition, we expanded Plexus' funnel of qualified manufacturing opportunities by nearly $600 million from the previous quarter as our teams were quite successful in moving leads into qualified opportunities. The end result is a record $3.3 billion funnel of opportunities that aligns well with our strategy. Further, our engineering funnel increased to its highest level in nearly two years. The engineering funnel is a good leading indicator for future manufacturing wins and additional margin expansion opportunities. Our healthy rate of new program wins and the considerable expansion in the funnel of qualified manufacturing and engineering opportunities should position us well to achieve our 9% to 12% revenue CAGR goal over the longer term.

Next, turning to some operational highlights.

Our engineering solutions' utilization strengthened considerably in the quarter as the team engaged in several revolutionary new product development efforts and product launches. Our customers recognize the value we provide through our differentiated service offering where we help create the products that build a better world. Our engineering solutions team remains a strong contributor to Plexus' profitability and manufacturing growth. Our manufacturing operations team continued their march toward their aspirational goal of zero defects and perfect delivery while achieving productivity improvements and driving effective cost management. The end result has been the delivery of customer service excellence and a sustained expansion of our industry-leading GAAP operating margin.

Finally, our aftermarket services team exceeded expectations delivering strong revenue and operating income during the fiscal first quarter. We view aftermarket services as a critical offering in order to provide value throughout the product lifecycle and create sustainable solutions for our customers as well as an opportunity to further expand margins.

Advancing to our guidance for the fiscal second quarter 2021 on slide 6. We anticipate a robust fiscal second quarter due to expected increases in medical equipment demand and near-term strengthening in our Industrial sector. The Healthcare/Life Sciences improvements are broad based with 17 of our top 20 customers increasing their fiscal second quarter forecasts from what we anticipated one quarter ago. While the semiconductor capital equipment sub-sector is a significant portion of the Industrial expansion, the sector is showing additional strength with 14 of our top 20 customers increasing their fiscal second quarter forecast during this cycle. Taking these circumstances into consideration, we are guiding revenue of $860 to $900 million.

As a result of effective expense control and the efforts of our operations team in driving sustainable productivity gains, we are guiding GAAP operating margin in the range of 5% to 5.5%, including 73 basis points of stock-based compensation expense. With this strong performance, we anticipate delivering GAAP diluted earnings per share of $1.17 to $1.32, including $0.22 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.

I will close with a few thoughts regarding fiscal 2021. In the near term, we have seen demand strengthening across several of our end markets, resulting in an improved revenue outlook for the fiscal second quarter. Long-term visibility into end markets remains limited, yet our history of strong execution provides the opportunity to continue to capture any potential upside demand that may arise.

Looking to the second half of fiscal 2021, based off current customer forecast, we anticipate quarterly revenue relatively consistent with the fiscal second quarter guidance range and operating margin to moderate from the fiscal first quarter result. Our ability to manage changes in demand, our ongoing focus on productivity improvements and our robust first half outlook has positioned Plexus to drive strong EPS growth 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?

Steve Frisch -- Executive Vice President and Chief Operating Officer

Thank you, Todd.

Good morning.

I will start on slide 7 with a review of the performance of our market sectors for the fiscal first quarter of 2021 as well as our expectations for the fiscal second quarter of 2021.

Revenue within our Industrial sector decreased 12% for the fiscal first quarter. The result was better than our expectations of a low teens decline. Stronger demand from almost all of our semiconductor capital equipment customers drove the improvement. As we look at the fiscal second quarter, we are seeing double-digit forecast increases from several semiconductor capital equipment customers. In addition, there are pockets of growing demand within our energy management and industrial equipment subsectors, but the recent strength in our communication sub-sector is subsiding. The net result is that we anticipate a mid-single-digit increase for our Industrial sector in the fiscal second quarter.

Our Healthcare/Life Sciences revenue declined 7% in the fiscal first quarter. The result was slightly better than our expectations of a high-single-digit decrease. Looking at the fiscal second quarter, two recently ramped testers that can detect viruses, including COVID-19, are reaching full production rates. In addition, there has been a resurgence in demand for a critical care device used in the treatment for COVID-19 patients and modest forecast increases with some elective procedure products. As a result, we expect a high-single-digit increase for our Healthcare/Life Science sector in the fiscal second quarter.

Revenue in our Aerospace and Defense sector was down 6% in the fiscal first quarter. The result was meaningfully short of our expectations of a mid-single-digit increase. Production challenges with a ramping space program as well as further degradation in some commercial aerospace programs were the cause for the lower revenue. Looking at the fiscal second quarter, forecasting from customers within the sector varies significantly as they push and pull demand to meet changing end markets. However, our diversification dampens the overall volatility, and the net result is we are anticipating a low-single-digit increase for our Aerospace and Defense sector in the fiscal second quarter.

Please advance to slide 8 for an overview of our wins performance for the fiscal first quarter. We won 35 new manufacturing programs that we expect to generate $223 million in annualized revenue when fully ramped into production. The mix of wins between existing and new customers was well balanced within the quarter, with 21 of the wins coming from current customers and 14 as a result of new relationships. Included in the 14 new relationships are the addition of six new logos and the expansion into new divisions with eight of our customers. The continued strong wins performance drove our trailing four quarter wins to a record level in excess of $1 billion. At that magnitude, our wins momentum stands at a very robust 30%, which is above our 25% goal and supports our long-term growth strategy.

We can advance to slide 9 to review the manufacturing wins by region for the fiscal first quarter. The manufacturing wins were well balanced across all three regions, which allowed each of them to maintain or increase their trailing four quarter wins performance. The Americas region wins at $89 million maintains the region's trailing four quarter wins at a healthy $447 million. Wins of $93 million for the APAC region increased their trailing four quarter wins by 8% to close at $391 million, while the wins at EMEA at $41 million grew their trailing four quarter wins by 19% to reach $171 million. The balanced wins performance supports each of the regional growth goals over the long term.

Please advance to slide 10 for further insight into the manufacturing wins performance by market sector. The number of wins per sector was well distributed, and each sector had a healthy mix of wins between customers and new relationships. The Industrial sector matched their robust manufacturing wins performance from the previous quarter by securing another $108 million in the fiscal first quarter. The wins were generated from 13 opportunities, with eight coming from customers and five from new relationships.

Our Healthcare/Life Sciences team produced a healthy wins result of $81 million in the fiscal first quarter. The mix of the team's wins: 14 wins, with nine from customers and five from new relationships. The Aerospace and Defense sector captured eight manufacturing wins totaling $34 million in the fiscal first quarter. The wins were equally split between customers and new relationships. Looking at the fiscal second quarter, we believe the adjustments we have made to our business development process will continue to overcome the challenges that COVID-19 creates and will support continued healthy wins performance.

Please advance to slide 11 for further insight into some of the fiscal first quarter wins. Included in the Healthcare/Life Science wins is a Class III medical device that is used in the treatment of coronary heart disease. The device is being designed by our engineering solutions team and will be produced in our Penang, Malaysia, healthcare center facility. The Healthcare/Life Sciences team also won the manufacturing of an existing anesthesia program from a current customer. The production of the device will be transferred from a competitor to our facilities in Penang, Malaysia, and Guadalajara, Mexico. Our healthcare facility in Guadalajara will also be producing products for a new Healthcare/Life Sciences customer who was focused on allergy detection and management. We expect this product to start ramping this fiscal year.

Included in the Industrial wins is a new customer who produces instrumentation used in advanced manufacturing process control. The family of products will be manufactured in our Xiamen, China, facility. Our Industrial team also won the production of another air purification system. Our team in EMEA is assisting this new customer with commercialization of the product. We expect to start ramping the device in our Kelso, Scotland, facility later this year. Included in the Aerospace and Defense wins are two new drone programs from an existing customer. These products will be produced in our Penang, Malaysia, Aerospace Center of Excellence facility.

Finally, our aftermarket services team closed the first two opportunities from a Healthcare/Life Science customer who has decided to outsource the services portion of their business. The first two engagements are in the Americas and EMEA, but there is potential to expand the relationship into APAC as well.

We can proceed to slide 12 for highlights of our funnel of qualified manufacturing opportunities. Our sector teams expanded the funnel by an impressive $574 million during the fiscal first quarter. The 21% growth within the quarter increased the funnel to almost $3.3 billion. Contributing to the funnel's increase are two opportunities from customers who are shifting their manufacturing strategy from internal production to an outsourced model.

Our Industrial sector grew $271 million or 57% in the fiscal first quarter to close their funnel at $743 million. The resource investments in fiscal 2020 and the team's focus on advancing leads into qualified opportunities are driving the growth. The Healthcare/Life Sciences sector significantly expanded their funnel for the second straight quarter. The team increased the funnel by $262 million in the fiscal first quarter to close at almost $1.9 billion. Our team's ability to continue to deliver in spite of volatility that COVID-19 has created is being rewarded by our customers, providing us additional opportunities. Our Aerospace and Defense sector increased their funnel by $42 million in the fiscal first quarter to finish at $667 million. Their funnel has now grown to the largest it has been in four years.

Next, I would like to turn to operating performance on slide 13. As Todd highlighted, our team produced strong GAAP operating margin of 5.6% in the fiscal first quarter. Our manufacturing team's focus on operational efficiency provided the foundation for the robust performance. In the fiscal first quarter, two teams built on top of that solid foundation to deliver the outstanding result. Our aftermarket services team did an exceptional job of aligning investments with revenue growth, and our engineering solutions team worked tirelessly through the holiday season to meet customer demand. Both of these activities contributed to us outperforming our original operating margin expectations.

As we look to the fiscal second quarter, we expect our strong operational performance to overcome our typical seasonal headwinds to deliver strong GAAP operating margin in the range of 5% to 5.5%. The team delivering this result would mark the fourth straight quarter of GAAP operating margin in excess of 5%.

A few final comments. I talk regularly about the path to success being relentless focus on operational excellence and customer service excellence. There will always be opportunities for improvement, but I am proud of the Plexus team for pushing themselves and each other to fulfill on these commitments. It is their passion for excellence that produced the strong fiscal first quarter results and enable the healthy fiscal second quarter guidance. I would like to thank each of the Plexus employees for their dedication to continuous improvement. In addition to making Plexus a better company, you are truly making the world a better place. Thank you.

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

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Thank you, Steve, and good morning, everyone.

Our fiscal first quarter results are summarized on slide 14. First quarter revenue of $830 million was at the midpoint of our guidance while gross margin of 9.5% hit the top end of our guidance. Better-than-expected gross margin primarily related to an improvement in business mix and our focus on expense management. We delivered better performance from our higher-value-added services which include engineering and aftermarket services. Gross margin also improved due to lower-than-anticipated spending related to healthcare costs and travel expenses. Selling and administrative expenses of $32.4 million were favorable to our guidance and $6.4 million lower than the fiscal fourth quarter. The majority of the sequential decline related to a reduction in incentive compensation expense. In addition, we recovered $2.3 million of a previously reserved customer receivable. This recovery had been contemplated in our first quarter guidance.

Our GAAP operating margin of 5.6% was above our guidance due to a combination of improved gross margin and lower SG&A spending. This is the third consecutive quarter with operating margin above 5%. Non-operating expenses of $5.2 million were slightly above expectations as a result of foreign exchange losses.

GAAP diluted EPS of $1.23 was above the top end of our guidance range, primarily due to the strong operational performance.

Turning now to our cash flow and balance sheet on slide 15. As anticipated, for the fiscal first quarter, we made investments in working capital. We delivered $7 million in cash from operations and spent $16 million on capital expenditures, resulting in negative free cash flow of $9 million, which was in line with expectations.

During the fiscal first quarter, we purchased approximately 307,000 shares of our stock for $22.8 million at an average price of $74.16 per share. We completed the $50 million program authorized in 2019 and commenced purchasing shares under our new program authorized last year. This program totals $100 million and has approximately $83 million remaining under it. We expect to execute the repurchases on a consistent basis throughout fiscal 2021, while taking market conditions into consideration.

At quarter-end, cash totaled $357 million, sequentially lower by $31 million due in part to our investments in working capital, capital expenditures and our expanded share repurchase program. Total balance sheet debt of $337 million was consistent with last quarter. At quarter end, we had no outstanding borrowings under our revolving credit facility, therefore allowing us the full capacity of the $350 million committed facility.

We ended the quarter with a conservative gross debt to EBITDA ratio of 1.4 times, slightly improved from last quarter. With our exceptional operating performance, we delivered return on invested capital of 16.3%, sequentially improved by 230 basis points and the highest return delivered in more than three years. This result generated economic return of 820 basis points above our weighted average cost of capital, creating substantial shareholder value. At quarter-end, we were pleased with our cash cycle, which came in at the low end of our guidance, with the result of 80 days. Our cash cycle was sequentially higher by 11 days.

Please turn to slide 16 for details on our cash cycle. While inventory dollars were essentially flat compared to last quarter, inventory days rose by 8. The increase in days primarily related to reduced fiscal first quarter revenue. In addition, we procured inventory toward quarter-end as we prepared for higher revenue anticipated in the fiscal second quarter. Days in receivables were 53 days, sequentially higher by 5 days. The increase was primarily due to a few delays in customer payments and a reduction in receivables sold under our customer factoring program. Partially offsetting the higher inventory and receivable days were modest improvements in both our payable days and customer deposit days.

As Todd has already provided the revenue and EPS guidance for the fiscal second quarter, I'll review some additional details which are summarized on slide 17. Fiscal second quarter gross margin is expected to be in the range of 9.5% to 10%. At the midpoint of this guidance, gross margin would be approximately 20 basis points higher than the fiscal first quarter. Seasonal compensation cost increases as well as the reset of payroll taxes for US employees will negatively impact gross margin by approximately 50 basis points. However, we expect to more than offset this impact through continued operational productivity and better leverage of expenses with the anticipated higher revenue.

For the fiscal second quarter, we expect SG&A expense in the range of $38 million to $39 million. At the midpoint of our revenue guidance, anticipated SG&A would be sequentially higher by approximately $6 million. As a percentage of revenue, SG&A would be 4.4%, which is 50 basis points higher than the fiscal first quarter. Several factors are contributing to the sequential increase in SG&A, including the seasonal compensation headwinds which total about $1 million. With improving operational performance, we anticipate higher incentive compensation expense this quarter, and, as I mentioned earlier, last quarter's SG&A benefited from the $2.3 million customer bad debt recovery.

Fiscal second quarter GAAP operating margin is expected to be in the range of 5% to 5.5%, which includes 73 basis points of stock-based compensation expense.

A few other notes for the fiscal second quarter: Depreciation and amortization expense is expected to be approximately $15 million, which is consistent with the fiscal first quarter. Non-operating expenses are expected to be in the range of $4.6 million to $5 million. At the midpoint of this guidance, these expenses would be approximately $400,000 lower than last quarter, primarily due to the expectation of reduced foreign exchange losses. We are estimating an effective tax rate of 12% to 14% and diluted shares outstanding of approximately 29.5 million shares. Our expectation for the balance sheet is that working capital investments will remain relatively consistent with the fiscal first quarter. Based on our revenue forecast, we expect this level of working capital will result in cash cycle days of 74 to 78 days. At the midpoint of this guidance, cash cycle would improve 4 days compared to the fiscal first quarter.

Finally, our capital spending estimate for fiscal 2021 is expected to be in the range of $70 million to $85 million, which includes approximately $24 million related to our expansion in Thailand. For the full year, we continue to expect free cash flow generation of approximately $100 million.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jim Ricchiuti with Needham & Company. Your line is now open.

Jim Ricchiuti -- Needham & Company -- Analyst

Hi. Thank you. Good morning. A couple of questions. I was wondering if you might be able to expand on the six new logos you added, if there is any color you can provide, either on verticals or type of customer or program.

Todd Kelsey -- President and Chief Executive Officer

Yeah. So, Jim, this is Todd. I'll get us started in I'll have Steve provide some of the details around the sectors and the opportunities. But the one thing I wanted to highlight about the new program wins that I think is significant and I hope that people take away from this is, if you look at our business development approach is really to grow with existing customers, to find the right customers and then grow with those customers. And I talked about six new logos, and Steve talked about 14 new relationships. So that includes the six logos, plus eight new divisions of existing logos. So when you look at this, we get a new logo in, we transition it, we potentially add additional divisions and we grow with each of those, the original division or logo as well as the expanded relationship that we have with the other division. So I wanted to point that out. And then I want to turn it over to Steve to get into a bit more detail.

Steve Frisch -- Executive Vice President and Chief Operating Officer

Sure, Jim. In terms of color, they were equally split across the sector. So there was two in Industrials, two in Healthcare/Life Sciences and two in Aerospace. And some of the wins details I went into highlighted some of them. The anesthesia program that I talked about in Healthcare was one of them. The device that's used for advanced manufacturing process control was one of them, as well as the air purification system. And so that gives a little bit more insight into -- it was a pretty good mix across all three of the sectors.

Jim Ricchiuti -- Needham & Company -- Analyst

That's it. Thanks. Thanks for that color. And by the way, I think you gave some -- some good color on how we should be thinking about the second half of the year. But I wanted to go to that target that you're talking about for revenue of 9% to 12% growth. Clearly, last year was impacted unquestionably by COVID, and this year, you've got some moving parts as well. But I'm trying to get a sense, what's giving you that confidence about that 9% to 12% revenue growth? It sounds like it's the -- the wins that are coming in -- it's a question of when do you potentially see that conversion. It's obviously not going to I think happen this year.

Todd Kelsey -- President and Chief Executive Officer

Yeah. So I think, Jim, you're right on with your assessment about this year as that -- the 9% to 12% would be difficult in this year. And kind of the way I've characterized it in the release and in the script here is that, if you do the math, that wouldn't add up to the 9% to 12%. But there's a number of things that give us confidence that 9% to 12% is a realistic and very achievable goal. And first of all, if we look backward looking over the period of '18 to '20, we were at 10%. So our sectors and our markets have shown that they can support that level of growth. Then, if we look -- and that includes last year with the pandemic in that number as well.

I know, as we go through our planning process, and we do a bit of a bottoms up planning. Our teams -- again, their results support our revenue growth goals. But there is really four factors that I think serve as catalysts for us as we go into -- go through fiscal '21 and into fiscal '22. First of all, we have the margin expansion -- the sustainable margin expansion, which I think we're doing a nice job of showing that that's very achievable. Second, we've got the recovery of elective -- of medical equipment used for elective procedures. And we're starting to see the -- a hint of a sign of that right now, but I wouldn't say it's a recovery by any means. So there is great opportunity with that as we move forward. And there is also the increase in demand that we expect to see from commercial aerospace as we see travel upticks post the COVID vaccine rollout. So that may be an early '22 type event is what we're expecting.

And then we have the new program ramps. And you saw the win success that we've had, the over $1 billion trailing four quarter funnel that we have. We've talked about some of the exciting new programs that have been long-term ramps within our Healthcare/Life Sciences sector. These all come to fruition in the F '22-ish type timeframe here. So we've got a number of catalysts that are looking really good for us as we -- as we get beyond -- or go through fiscal '21 and get into fiscal '22.

Jim Ricchiuti -- Needham & Company -- Analyst

Got it. Just on commercial aer, could you just remind us what that's representing right now of A&D or maybe just historically what it was then? And then I'll jump back in the queue. Thank you.

Todd Kelsey -- President and Chief Executive Officer

Yeah. It's above -- let me get the number. I think it's in the mid-30s right now, but I'm going to verify that. Yeah, it's kind of low 30s is about where it's at right now. And it had been probably a little bit over 40% to even 45% at one point.

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Yeah, that's of Plexus. Of the sector, it's about roughly a third.

Jim Ricchiuti -- Needham & Company -- Analyst

Got it. Thanks very much. And congrats on the quarter.

Todd Kelsey -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Adam Tindle with Raymond James. Your line is now open.

Adam Tyler Tindle -- Raymond James & Associates -- Analyst

Okay. Thanks. Good morning. And congrats to Shawn and Heather. Todd, I just wanted to start with some questions around the second half comments where revenues relatively consistent with the fiscal 2Q guide. Just maybe the biggest drivers of why we would see effectively flat sequential trends in Q3 and Q4? Because we normally expect a buildup each quarter, see it up sequentially on a seasonal basis. It sounds like toward the end of the quarter, medical and industrial saw recent strength, you've got new customers coming on. So what would be the offsets that I'm missing to make Q3 and Q4 effectively a below normal seasonality?

Todd Kelsey -- President and Chief Executive Officer

Yeah. I think the issue, Adam, is that the visibility is just fairly limited right now. So, I would say it's more of a situation is we're just not sure, we just don't know. And if you think back to a quarter ago when we had our call, we expected Q2 to be flat to Q1. I mean, obviously it's not; it's up substantially on the order of about $50 million. So we saw a lot of upside demand come in, particularly around the healthcare and in the Industrial sector. So as we -- as our customers brought up forecasts, they just brought them up in the near term and not necessarily further out. So I'd say there's a lot of uncertainty to us as whether we're going to see something similar as we move through the rest of the year or whether we won't. But based on the visibility we have right now, it looks more like flat at this time. But I think in some sense, we're a little bit of a victim of our success from an execution standpoint because there are -- our customers feel comfortable that they can drop in demand, and we'll execute on it.

Adam Tyler Tindle -- Raymond James & Associates -- Analyst

Right. That's understandable. And just to clarify, does that also mean that operating margin would kind of stick in that 5% to 5.5% range that was guided to Q2?

Todd Kelsey -- President and Chief Executive Officer

Yeah, it's a little -- it's a bit uncertain. I mean, I think, obviously, we're targeting to be above the 5% range, but it's a bit uncertain based on the revenue and the leverage that we get. So it's a little too early to call that one.

Adam Tyler Tindle -- Raymond James & Associates -- Analyst

Okay. And just maybe a longer-term question. You talked about the record -- over $3 billion funnel, talked about committed to the 9% to 12% long-term revenue growth. Just trying to understand, does that imply potentially a super-sized growth year in fiscal '22 such that the average of '21 and '22 can be in the 9% to 12% range. So maybe just help us with expectations on timing and magnitude of what seems like a pretty big growth uptick upcoming.

Steve Frisch -- Executive Vice President and Chief Operating Officer

Sure. This is Steve. I'll try to handle that one. Obviously, trying to give guidance out to '22 would be a bit challenging, but looking at the market dynamics of where we're at, which gives us some optimism, is, we look at commercial aerospace, we're strong in there, we've gained market share. We've talked about the fact that we even bounced around the bottom, and we see this down. And so, we see that as a catalyst for growth in terms of what could happen into '22 as things start to recover.

We've talked about the elective procedures in Healthcare/Life Sciences. We believe we're continuing to take market share. We're winning new logos, and we think there's a catalyst there to help accelerate some growth as we -- as things start to recover post COVID. And then, we've talked -- for the last couple of calls, talking about Industrial team in semi cap and -- with semiconductor capital equipment, the signals are out there that demand for semiconductor equipment -- equipment and devices is only going to increase over time. And looking at our forecast and Todd's kind of comments, we see these flattish kind of forecasts and then we see the short-term drop-ins, and I think at some point there is a potential for that to turn into real forecast demand.

And so, the optimism of the 9% to 12% is driven by those types of factors combined with the fact that we continue to win decent amounts of new business. And so, I think there is a -- so while we're optimistic about the growth, could it outperform, I think if the economy takes off and all these things start to recover post COVID, I think there's a real chance that demand from our customers continues to increase at a pretty good clip with it.

Adam Tyler Tindle -- Raymond James & Associates -- Analyst

That's helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of David Williams with New Capital. Your line is now open.

David Williams -- New Capital -- Analyst

Great. Thanks for letting me ask the question. And first, congrats to Shawn for the transition. First, I wanted to ask maybe about the 2Q demand. And do you think that we're seeing any pull-in maybe from some of the second-half demand or is it -- is this mainly just the drop in the early demand or the short-term demand?

Todd Kelsey -- President and Chief Executive Officer

Yeah -- go ahead, Steve.

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah, I mean, specifically with the Q2 upside, it is upside that's not robbing from future quarters. So, our forward-looking quarters have stayed consistent and actually have come up a bit. And so it is upside demand and it's not stealing from future quarters. And as Todd kind of highlighted, one of the things we're looking at is are we going to see this as a trend as we go through Q2, Q3 and Q4. It's just something we're watching.

David Williams -- New Capital -- Analyst

Okay. Great. And then just kind of thinking about the COVID-related tailwinds, the shorter-term [Indecipherable] how much of your business I guess in healthcare [Indecipherable] shorter-term COVID tailwinds that could potentially [Indecipherable] next year or year after?

Todd Kelsey -- President and Chief Executive Officer

Yeah. So, right now, there is not a lot beyond testing, and point of care testing, that I would call a true COVID tailwind where the demand is up as a result of COVID. Now, we see that demand is progressing or continuing, at least through calendar 2021, and even our customers are talking about it going beyond that and through '22. And one thing to point out too, and when we call them COVID testers a lot, but what they are is, they're testers that can be used for COVID, so they can test many other things as well too. But that's the only thing I would say is a true COVID increase that's in our forecast right now other than the small amount of upside that Steve talked about on the one critical care product.

David Williams -- New Capital -- Analyst

Great. Thanks for the color. And one last, if I can, real quick. Just kind of any thoughts you might have on the transition [Technical Issues]?

Todd Kelsey -- President and Chief Executive Officer

Yeah. So -- I mean, the one thing we're looking at is on the demand side, I would say there is a few different opportunities that could come up as a result of the proposed stimulus that's out there. We have some heavy equipment business. I think some of the COVID products could increase even further from a demand standpoint. Certainly, I think it bodes well for semi cap as well too. The other thing we're looking at on the other side of the equation is what happens with the tax landscape and does that have any impact.

David Williams -- New Capital -- Analyst

Great. Thanks so much. Best of luck.

Todd Kelsey -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Matt Sheerin with Stifel. Your line is now open.

Matthew John Sheerin -- Stifel, Nicolaus & Company -- Analyst

Yes. Thanks. Good morning, everyone. Just a question regarding the product or the component and supply chain environment right now. I mean, you talked about inventory days up, Pat. We're hearing across the board of supply constraints in -- certain semiconductors, in some passive components. Are you seeing that yet? And are your customers asking you to build inventory?

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah. So, Matt, this is Steve, I'll take that one. First of all, there's a lot of news out there about the automotive market having shutdown -- shutdowns due to semiconductor shortages. And I just want to remind everybody. We don't do automotive. So in terms of our end market impact, there is nothing there. Specifically, what's causing those challenges in automotive is a tightening in semiconductor components, and we are seeing some of that. We don't foresee any issues here in the fiscal second quarter or from an inventory standpoint, and that we feel pretty comfortable where we're at. We do start to see lead times start to extend, a little pricing pressure here and there. So it's definitely real from our perspective. I feel actually pretty comfortable. Our teams definitely have to work harder through these periods. But it's -- at these times is when our teams have outperformed. And so I'm pretty optimistic in terms of what our teams will be able to do.

The one part that I get a little nervous on is looking at those forecasts as we go into the back half of the year, if our customers start dropping in big demand, our ability to react and bring things in is really kind of the bigger challenge. And so, we have been talking to our customers about inventory levels and what we're comfortable storing. And keep in mind, our customers are responsible for the inventory levels. Plexus doesn't speculate. So, from our standpoint, it's really just working through with our customers where they need to be. And we do have some -- we do have some customers that have increased raw component inventories to be able to respond to upside demand in the back half of the year. And so -- again, it's a mix with each customer. But it is -- we do see it coming a bit more, but I think we're responding appropriately, and at this point the teams are handling it really well.

Patrick Jermain -- Executive Vice President and Chief Financial Officer

I might add -- this is Pat. On the balance sheet, I just want to comment, for the second quarter we do expect a slight build in inventory dollars to the tune of about $20 million. But I had guided the midpoint of our cash cycle being down compared to the fiscal first quarter, and some of that's driven by inventory days just because of the increase in revenue we expect in the second quarter.

Matthew John Sheerin -- Stifel, Nicolaus & Company -- Analyst

Got it. Okay. Thanks for that. And then, I did want to follow up on the previous question just regarding your guidance for next quarter and then for the year. As you said, a little bit different than you saw a quarter ago. But when I add the numbers, the revenue -- I don't think consensus for fiscal '21 is going to change much. And you're going to be looking at obviously tougher comps at the back half when you had a really, really strong last September quarter, but sounds like the setup for 2022, as Adam indicated, is good. I guess my question is, should we start thinking about a return to that 9% to 11% revenue growth target? And in terms of margins, I know that in the past when you've had some really big ramp-ups quarter to quarter, there has been some cost and some -- some margin headwinds. So how should we think about growth versus the margin in the mix of the business?

Todd Kelsey -- President and Chief Executive Officer

Yeah, I think -- maybe I'll start with '22 and then there's a couple of other topics I want to hit as well. But, I mean, certainly too early to talk about '22 and give any sort of a guide or color, but I think it's setting up to be a really good year. When you look at the -- the factors and the catalysts that I talked about earlier, I think that's quite good. I mean, kind of backing up to '21, I mean, I would say, while it's not 9% to 12%, it doesn't -- it still sets up to be a pretty good year -- a growth year from a revenue standpoint. But the EPS leverage -- I mean, you start to do -- the math on that looks pretty good. So I think that's a compelling story for -- for fiscal '21.

Patrick Jermain -- Executive Vice President and Chief Financial Officer

And Matt, you mentioned margin headwinds with transitions. We always have those transitions going on. So I wouldn't say that's necessarily impacting margins. We do have the Thailand facility that's going to be ramping up, and it typically takes a few quarters before a new site reaches corporate averages. And then, the other item we're watching is travel expenses. They've been obviously very depressed, and we expect some return at some point, but I don't think we'll get back to the levels we were at pre-COVID. So monitoring that -- that could be a slight headwind for us.

Matthew John Sheerin -- Stifel, Nicolaus & Company -- Analyst

Okay. Great. And just -- just last quick question, just regarding costs. Pat, you didn't call out a COVID related cost. Is that just sort of embedded in your model now or do you see any changes there?

Patrick Jermain -- Executive Vice President and Chief Financial Officer

So, for the first quarter, it was around $2 million. So it's starting to taper down. We do expect expenses in the latter quarters probably to the tune of $1 million to $1.5 million. When you look year-over-year, last year, fiscal '20, we had about $10 million. This year, we would think that's about $6 million. So about $4 million lower there. On another area of cost, our healthcare cost, internal, were depressed with last year with elective procedures being down. We expect those to be up. And that pretty much offsets the benefit we're seeing from COVID expense reduction. We expect healthcare costs to be up about $4 million this year. So net-net, those are pretty flat.

Matthew John Sheerin -- Stifel, Nicolaus & Company -- Analyst

Okay. That's helpful. Okay. Thanks a lot.

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Sure.

Operator

Thank you. Our next question comes from the line of Steven Fox with Fox Advisors. Your line is now open.

Steven Fox -- Fox Advisors -- Analyst

Thanks. Good morning. Just two questions from me, if I could. First one on the funnel expansion. You mentioned some decisions by some customers to move to outsourcing. Could you just expand on what drove that decision, whether it was something that was already in the works or maybe there was a change in thinking due to circumstances? And then I had a follow-up.

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah. This is Steve. In some of these challenging times, I think customers do question their supply chain strategies more. And so I think the conversations we're having right now are things that customers were considering, but I think the COVID situation is pushing them to -- to move a little bit quicker. So, not a big strategic shift on -- I mean, a big strategic shift on their part, but I think the timing of COVID is just helping expedite things.

Steven Fox -- Fox Advisors -- Analyst

And those shifts would be done with -- like, their current facilities will be utilized by the customer, you'd be outsourcing into your existing facilities? Like their strategy around their own plant and equipment is what?

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yes. They would exit their facilities, and we would do that one of two ways. One is either to this move the facility entirely at the moment that they exit it or do what we call a manage in place as -- where we manage it for 18 months, 24 months and then transfer it. Under a rare circumstance, if there is a strategic alignment, would we consider a facility? Yes, but that would be under a very strategic decision.

Steven Fox -- Fox Advisors -- Analyst

Thank you. And then just on the new logo wins. Can you just talk about the competitive environment around those six wins, how much of it was due to just sort of where you guys play versus maybe seeing competition from small or large EMS providers?

Steve Frisch -- Executive Vice President and Chief Operating Officer

Yeah. The competitive environment is about the same. I mean, we run into the big guys all the time and there is always smaller players involved as well. And so I don't think with these situations or with COVID, there has been a big fundamental shift in -- in the competitive landscape, although we are seeing a little bit more, I'd say, pricing diligence and a little bit discipline. And so, that's refreshing to see.

Steven Fox -- Fox Advisors -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Paul Coster with JP Morgan. Your line is now open.

Paul Coster -- JPMorgan Chase & Co. -- Analyst

Yeah. A couple of quick ones. It sounds like the sales team -- the biz dev team are working pretty well in the virtual world. Do you see that changing as we come out back end of the pandemic? Are you going to get back into a T&E mode or do you think you've found a new way of developing the business without that expense? And I had a quick follow-on.

Todd Kelsey -- President and Chief Executive Officer

I think -- I mean, certainly, our business development people, Paul, are looking to get out on the road and looking to get out in front of customers. I mean, to be candid, I'm looking to get out in front of customers more myself. So I think you're going to see travel go up. But I do also think that there is -- I don't think it's going to go up quite at the same level than it had been in the past. I think people are feeling, are understanding that there are -- there are things that can get done virtually, can be effective virtually.

Our branding and communications team just did an excellent job of creating a great virtual business development environment that I think is -- is really unique that's helping us. But there's still nothing like having a customer in your site, to see it first-hand. So I'm sure -- certain that there'll be more movement once it becomes a better environment with the vaccine rollout and such. But maybe not now.

Paul Coster -- JPMorgan Chase & Co. -- Analyst

And then is there any -- yeah, no, got it. Is there anything in the change in the administration in Washington, DC, that changes anything for you?

Todd Kelsey -- President and Chief Executive Officer

Yeah. When we talked about -- there is -- maybe I'll talk about markets and then Pat can talk a little bit more about other factors. But markets, there is a few, and I think it kind of comes back to what happens around stimulus and where is the focus of where dollars are spent. So I think our heavy equipment business in our Industrial sector could benefit, our energy business in our Industrial sector could benefit. I think that COVID, particularly around test, could benefit from a market standpoint, and semi cap is potentially only going to get stronger. So maybe I'll pass now to Pat too for some comments.

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Sure. I mean, from a tax perspective, Paul, we're watching that closely. Obviously, there has been discussion around increasing the corporate rate and also the offshore earnings tax rate, which would impact us. But we want to understand if there is any potential credits that could mitigate some of that increase. Our tax team is closely monitoring it. So we'll just have to see where it falls in our priority with the new administration.

Paul Coster -- JPMorgan Chase & Co. -- Analyst

Got it. Thank you very much.

Operator

Thank you. Our next question comes from the line of Anja Soderstrom with Sidoti & Company. Your line is now open.

Anja Marie Theresa Soderstrom -- Sidoti & Company, -- Analyst

Hi. Thank you for taking my question. And congrats on a great quarter, and congrats, Shawn and Heather. A lot of good questions asked already, but I just wanted to get a sense more of your revenue guidance for the second half. You said it's sort of going to be in line with the fiscal second quarter expectations. Does that assume that elective still stays sort of suppressed or that could be a surprise upside in the second half that comes back more fully?

Todd Kelsey -- President and Chief Executive Officer

Yeah, it does. I mean, basically, it looks that the environment has been more or less what it -- what it is today. Perhaps even -- maybe call it a little softer than what we're seeing for the fiscal second quarter because we saw a lot of drop in upside demand that impacted the second quarter that doesn't necessarily impact Q3 and Q4 at this point. So there is a lot of potential I think for -- for opportunities within the second half. It's just our visibility says it's flat to Q2 right now, more or less.

Anja Marie Theresa Soderstrom -- Sidoti & Company, -- Analyst

Okay. Thank you. And I think there is a little bit about the gross margin and ramping new projects might be pressing that because you're guiding to quite -- you had a good performance this quarter, and you're guiding for the second quarter to remain relatively high. So how should we think about that going forward?

Todd Kelsey -- President and Chief Executive Officer

Yeah -- go ahead, Pat.

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Yeah, well, I was going to say, as Todd said, I mean, we're -- from an operating margin standpoint, we've been really pleased with the last three quarters. So hitting 5% or above would be our target. Expenses we're kind of monitoring, Anja, would be travel expenses and healthcare costs. Those are things that could be potential headwinds for us. But trying to achieve that 5% or above would be our target.

Todd Kelsey -- President and Chief Executive Officer

Yeah. And we don't see really a significant drag from new program ramps in the future. I mean, we're somewhat always ramping new programs. And I think the leverage we can get from the other business can offset the costs or the inefficiencies of new program ramps.

Anja Marie Theresa Soderstrom -- Sidoti & Company, -- Analyst

Okay. Thank you. And then lastly, in the army and defense this quarter, you alluded to some issues with ramping new programs causing the shortfall there. Can you just elaborate on that and talk about how that's going to shape in the coming quarters?

Todd Kelsey -- President and Chief Executive Officer

Sure. The space program I mentioned had some delays in the ramping. As you can imagine, programs that are going into outer space, there is a lot of stringent requirements, and from a manufacturing process standpoint, we're working with the customer on some strengthening of those requirements and that slowed down production. We believe we've worked through those and have alignment with the customer on what the requirements are. And so I won't expect it to impact it going forward.

Anja Marie Theresa Soderstrom -- Sidoti & Company, -- Analyst

Okay. Thank you. That was all from me. Thank you.

Operator

Thank you. There are no further questions at this time. I would now like to turn the call back to Mr. Todd Kelsey, CEO, for closing remarks.

Todd Kelsey -- President and Chief Executive Officer

All right. Thank you, Sarah. I'd like to just start by giving a shout out to our Plexus team members globally and thank them for all their hard work. They continue to perform exceptionally well despite challenging circumstances that are around us today. And again, thank you to everybody who joined our call today. We certainly appreciate your support and your interest in Plexus.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Shawn Harrison -- President of Communications and Investor Relations

Todd Kelsey -- President and Chief Executive Officer

Steve Frisch -- Executive Vice President and Chief Operating Officer

Patrick Jermain -- Executive Vice President and Chief Financial Officer

Jim Ricchiuti -- Needham & Company -- Analyst

Adam Tyler Tindle -- Raymond James & Associates -- Analyst

David Williams -- New Capital -- Analyst

Matthew John Sheerin -- Stifel, Nicolaus & Company -- Analyst

Steven Fox -- Fox Advisors -- Analyst

Paul Coster -- JPMorgan Chase & Co. -- Analyst

Anja Marie Theresa Soderstrom -- Sidoti & Company, -- Analyst

More PLXS analysis

All earnings call transcripts