Plexus Corp. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended January 2, 2016. Plexus provides electronic manufacturing services, including product design, manufacturing, fulfillment, and sustaining services, across AMER, APAC, and EMEA. The comparable prior-year quarter ended January 3, 2015 and included 14 weeks, versus 13 weeks in the current quarter, limiting direct comparability.
Financial performance
| Metric | Q1 FY2016 | Prior-year quarter |
|---|---|---|
| Net sales | $616.7 million | $664.7 million |
| Gross profit / margin | $50.1 million / 8.1% | $61.4 million / 9.2% |
| Operating income / margin | $21.5 million / 3.5% | $28.8 million / 4.3% |
| Net income | $14.4 million | $23.1 million |
| Diluted EPS | $0.42 | $0.67 |
| Operating cash flow | $21.3 million | $(90.3) million |
| Capital expenditures / free cash flow | $11.8 million / $9.5 million | $9.6 million / $(99.9) million |
Sales fell 7.2% year over year; gross profit declined 18.5%, operating income 25.2%, and net income 37.4%. Lower sales, customer mix, and reduced fixed-cost absorption pressured gross margin. Lower S&A expenses partly offset the operating-income decline. Miscellaneous expense was $1.6 million, primarily reflecting increased foreign-exchange losses.
Balance sheet and liquidity
- At January 2, 2016, cash and cash equivalents were $354.7 million, total assets $1.652 billion, and shareholders’ equity $850.8 million.
- Debt and financing obligations totaled $262.2 million, including $75.0 million drawn on the revolving facility, $175.0 million of 5.20% senior notes due June 2018, and lease/other financing obligations. The revolving facility commitment was $265.0 million and expires in May 2019.
- Plexus was in compliance with its debt covenants. Approximately 87.2% of cash was held outside the U.S.; management intends to permanently reinvest funds held in certain foreign jurisdictions and notes that repatriation could incur additional tax.
- Operating cash flow improved substantially, primarily because of working-capital movements, including lower receivables and inventory-related cash needs. Cash decreased $2.4 million during the quarter.
Drivers, outlook, and risks
- Networking/communications sales decreased $76.9 million, mainly from lower demand at two customers and the loss of two programs. Healthcare/life sciences sales decreased $4.9 million. Industrial/commercial increased $24.8 million, and defense/security/aerospace increased $9.0 million.
- AMER and APAC sales and operating income declined. EMEA sales rose 49.9% to $42.1 million and its operating loss narrowed to $0.7 million, but the segment remained loss-making.
- Management estimated FY2016 capital expenditures of approximately $40 million and an effective tax rate of 11%–13%. Fiscal 2016 restructuring costs were expected to total $5 million–$7 million; $1.5 million was recorded in the quarter, primarily for the Fremont, California facility closure and partial closure of the Livingston, Scotland facility.
- Management’s stated long-term targets include 12% organic revenue growth, a 5.0% operating margin, and economic return of 5.0%. For the quarter, ROIC was 10.8% against an estimated 11.0% cost of capital, yielding economic return of negative 0.2% (both non-GAAP measures).
- Key risks cited include customer order delays, cancellations and forecast inaccuracies; demand and customer/program concentration; new-program execution and start-up costs; restructuring execution; excess or obsolete inventory; component shortages; foreign-exchange movements; and changing economic conditions. The company reported no material expected impact from ordinary-course litigation and was not under tax examination.
Important facts for investors to verify
- Assess whether the sales and margin decline reflects sustained end-market weakness or temporary customer/program transitions; account for the prior-year quarter’s extra week.
- Monitor demand, utilization, and mix in networking/communications and the recovery of AMER and APAC operating results; track EMEA’s progress toward profitability.
- Verify that working-capital-driven cash generation is sustainable and that inventory and customer deposits adequately mitigate excess and obsolete inventory exposure.
- Track completion, costs, and expected savings from the Fremont and Livingston restructuring actions, alongside FY2016 capital-spending and tax-rate estimates.
- Consider the geographic availability of cash, debt maturities and covenant headroom, and the potential earnings impact of foreign exchange; approximately $4.0 million of net-of-tax unrealized foreign-exchange hedge losses was expected to be reclassified into earnings over the next 12 months.