Plexus Corp. — Fiscal 2023 Second-Quarter Form 10-Q
Reporting period: Quarter ended April 1, 2023 (13 weeks); comparisons are with the quarter ended April 2, 2022. Six-month figures cover the first half of fiscal 2023. Plexus provides electronic manufacturing services across Industrial, Healthcare/Life Sciences, and Aerospace/Defense markets.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Net sales | $1,070.8 million | $888.7 million | $2,164.7 million | $1,706.2 million |
| Gross margin | 9.6% | 8.6% | 9.4% | 8.6% |
| Operating income / margin | $56.9 million / 5.3% | $35.8 million / 4.0% | $114.3 million / 5.3% | $66.3 million / 3.9% |
| Net income | $40.8 million | $26.9 million | $83.0 million | $50.3 million |
| Diluted EPS | $1.45 | $0.95 | $2.94 | $1.76 |
| Operating cash flow | Not separately reported for the quarter | $57.2 million | $(4.7) million | |
| Free cash flow (non-GAAP) | Not separately reported for the quarter | $7.7 million | $(68.8) million |
Q2 sales grew 20.5% year over year; first-half sales grew 26.9%. Healthcare/Life Sciences was the largest Q2 market sector at $487.4 million, followed by Industrial at $439.3 million and Aerospace/Defense at $144.2 million. Growth reflected higher demand, new-product ramps, partial easing of supply constraints, and pricing increases associated with component inflation. Q2 gross margin improved 100 basis points, with higher sales and a favorable customer mix partly offset by component, labor, and fixed-cost inflation.
Liquidity, debt, and capital allocation
- At April 1, 2023, cash and restricted cash totaled $270.4 million. Debt, finance leases, and other financing obligations totaled $482.7 million, including $284.0 million drawn on the credit facility. The $500 million facility had $216 million available; the commitment may be expanded to $750 million by mutual agreement with the bank. Plexus reported compliance with debt covenants.
- Six-month capital expenditures were $49.5 million. Management estimated fiscal 2023 capital expenditures of approximately $110 million to $130 million, excluding site expansions.
- Six-month share repurchases totaled $23.9 million; $22.6 million remained under the $50 million authorization at quarter end.
- Inventory was $1,649.7 million, up from $1,602.8 million at fiscal year-end. Customer deposits were $531.7 million, including $516.7 million related to inventory. Management cited long component lead times, program ramps, demand volatility, and inflation as drivers of inventory investment.
- The company sold $411.3 million of receivables through uncommitted programs during the first half, receiving $406.5 million in cash proceeds. Such sales are recorded as operating cash flows and carry discounts.
Material changes and management commentary
- Operating income rose 58.9% in Q2 and 72.4% in the first half. Net income increased 51.7% and 65.0%, respectively. Higher operating income drove gains, partly offset by higher interest and tax expense.
- Interest expense increased $4.9 million in Q2 and $8.8 million in the first half, principally because of higher average borrowing and interest rates. The credit-facility borrowing rate was SOFR plus 1.10% at quarter end.
- First-half operating cash flow improved year over year, chiefly reflecting a smaller inventory-related cash investment and higher earnings. The annualized cash cycle was 104 days, versus 98 days a year earlier.
- Management said it expects supply-chain constraints, component and labor-cost inflation, and labor-related pressures to continue in the near term. Contractual customer pricing recoveries have largely mitigated inflation, but may dilute operating margins.
- Management expected a fiscal 2023 annual effective tax rate of approximately 14%–16%, assuming no tax-law changes. It estimated $110 million–$130 million in fiscal 2023 capital expenditures. The filing does not provide a clear revenue or earnings forecast.
Risks, contingencies, and unusual items
- In April 2023, after quarter end, Plexus committed to a restructuring plan and anticipated approximately $9 million of restructuring and other non-recurring costs in fiscal Q3. No restructuring charges were recorded in the reported quarter.
- Key exposures include component shortages and delays, excess or obsolete inventory, customer forecast changes or cancellations, inflation and margin pressure, demand volatility, and operating disruption or costs associated with new programs and facility transitions.
- Management cited demand volatility for some customers related to U.S. export controls on China. Foreign-exchange exposure, rising interest costs, tax-law changes, and geopolitical or economic developments are additional risks.
- Plexus is involved in ordinary-course litigation and a foreign tax audit. Management did not expect these matters to have a material effect; the filing notes that legal outcomes remain uncertain. Certain uncertain tax positions may be settled within 12 months, with no material effect expected.
Investor verification points
- Track whether revenue growth and improved margins persist as customer demand, product mix, and pricing recoveries change.
- Monitor inventory, customer deposits, cash-cycle days, and operating cash generation for evidence that working-capital needs are easing.
- Verify the timing and total cost of the announced restructuring against the approximately $9 million estimate.
- Assess exposure to variable-rate borrowing, receivable-sale discounts, and the availability of uncommitted receivables facilities.
- Review capital spending against management’s estimate and watch for updates to the tax-rate outlook and material supply-chain, customer-demand, or geopolitical risks.