Plexus Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 29, 2013; comparisons are with the quarter ended June 30, 2012. Year-to-date figures cover the nine months ended on those dates. Plexus provides electronic manufacturing and product-realization services across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA).
Key financial metrics
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $571.9 million | $608.8 million | $1,660.3 million | $1,711.9 million |
| Gross profit / margin | $55.5 million / 9.7% | $57.4 million / 9.4% | $158.7 million / 9.6% | $163.7 million / 9.6% |
| Operating income / margin | $25.2 million / 4.4% | $27.3 million / 4.5% | $69.9 million / 4.2% | $76.8 million / 4.5% |
| Net income | $23.2 million | $23.5 million | $57.8 million | $61.4 million |
| Diluted EPS | $0.68 | $0.66 | $1.69 | $1.73 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $116.9 million | $116.8 million |
| Free cash flow | Not presented quarterly | Not presented quarterly | $32.6 million | $71.7 million |
At June 29, 2013, cash and cash equivalents were $285.6 million, versus $297.6 million at September 29, 2012. The company reported $75 million outstanding on its credit-facility term loan, $175 million of senior notes, and no revolving borrowings. It was in compliance with debt covenants. Approximately 90% of cash was held outside the United States; management said available cash, facilities and accessible foreign funds should meet U.S. liquidity needs for the next 12 months and beyond.
Material changes and operating trends
- Quarterly sales declined 6.1%; nine-month sales declined 3.0%. Management attributed the weakness principally to lower demand from a large industrial/commercial customer and reduced Juniper Networks business.
- Juniper, Plexus’s largest customer, represented 15% of Q3 sales, down from 16% a year earlier. Production ended at the close of Q3; certain inventory sales were expected to continue in Q4, with no material inventory adjustment anticipated. Plexus expects no Juniper revenue in fiscal 2014.
- By market sector, Q3 sales declined in networking/communications and industrial/commercial, while healthcare/life sciences and defense/security/aerospace grew. For the nine months, AMER sales fell 18.9%, APAC rose 7.6%, and EMEA rose 35.4%.
- Q3 gross margin improved to 9.7% from 9.4%, reflecting favorable customer mix despite lower sales. Nine-month operating margin fell to 4.2% from 4.5%, reflecting lower gross profit and higher selling and administrative expense.
- Q3 diluted EPS rose despite slightly lower net income, primarily because share repurchases reduced weighted-average shares. The company repurchased 1.4 million shares for about $36.0 million in the first nine months under a $50 million authorization.
- Nine-month operating cash flow was nearly flat year over year, but free cash flow fell to $32.6 million, mainly as capital expenditures rose to $84.3 million from $45.1 million. Cash used in investing was $83.7 million; cash used in financing was $45.6 million.
Outlook, commentary and notable items
- Management estimated fiscal 2013 capital expenditures of approximately $100 million. The Neenah, Wisconsin facility was on schedule for completion late in fiscal Q4; consolidating three existing facilities was expected to generate $4.0–$5.0 million of restructuring charges in the first half of fiscal 2014.
- Management expected the fiscal 2013 effective tax rate to be 5%–7%, subject to changes in the geographic mix of earnings. The Q3 tax benefit included a $2.0 million discrete benefit associated with the expiration of interest-rate swaps.
- Q3 included approximately $0.6 million of severance and asset-impairment costs related to Juniper’s disengagement; management expected no further related costs. An accrual of $0.8 million for property-related costs followed termination of an agreement for additional land in Hangzhou, China.
- At quarter-end, Plexus had about $5.0 million of receivables and inventory exposure to a financially troubled customer. It collected all past-due receivables after quarter-end, but retained a $0.7 million reserve for estimated probable losses related to inventory and open orders.
- Management cited risks including uncertain customer forecasts, delays or cancellations, customer concentration and Juniper’s exit, component availability, excess or obsolete inventory, start-up and facility costs, foreign-exchange movements, and economic and sector demand. The company reported disclosure controls were effective.
Important facts for investors to verify
- How quickly replacement programs and growth in healthcare/life sciences and defense/security/aerospace can offset Juniper’s departure and weaker industrial/commercial demand.
- Whether the customer deposit balance, including amounts associated with Juniper, is returned as expected and whether any inventory adjustments arise.
- Execution, completion costs and expected restructuring charges for the Neenah facility consolidation, alongside the elevated capital-spending and lower free-cash-flow trend.
- Whether the projected 5%–7% fiscal 2013 tax rate and benefits from APAC tax holidays remain sustainable; the filing notes tax rates vary with earnings mix.
- Liquidity accessibility given that about 90% of cash was held abroad, and continued compliance with credit-facility and senior-note covenants.