Plexus Corp. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 31, 2011; unaudited. Comparable quarter ended January 1, 2011. Plexus provides electronic manufacturing services across the Americas, Asia-Pacific, and Europe, Middle East and Africa.
Financial results
| Metric | Q1 FY2012 | Prior-year quarter |
|---|---|---|
| Net sales | $529.7 million | $565.8 million |
| Gross profit / margin | $51.7 million / 9.8% | $54.9 million / 9.7% |
| Operating income / margin | $23.8 million / 4.5% | $27.8 million / 4.9% |
| Net income | $17.9 million | $25.0 million |
| Diluted EPS | $0.51 | $0.61 |
| Operating cash flow | $29.8 million | $(21.1) million |
| Capital expenditures | $22.2 million | $13.3 million |
Cash was $248.3 million at quarter-end, up from $242.1 million at October 1, 2011. Current assets were $999.3 million and current liabilities $424.6 million. Long-term debt and capital lease obligations totaled $283.4 million, including $17.4 million current and $265.9 million non-current. The company had $93.8 million of term-loan borrowings and no revolving borrowings; $100 million of revolving capacity was available. It reported compliance with debt covenants.
Changes and management commentary
- Sales fell 6.4%, primarily reflecting weaker networking/communications demand and disengagement from two significant customers following acquisitions. Higher sales to Juniper and an industrial/commercial customer partly offset the decline.
- Gross margin edged up to 9.8%, but operating margin declined. Lower revenue and higher fixed costs from facility expansions weighed on gross profit; favorable inventory disposition and lower variable compensation partly offset those pressures.
- Net income declined $7.1 million. Higher interest expense, mainly related to $175 million of 5.20% senior notes issued in FY2011, contributed to the decrease. The effective tax rate rose to 9% from 3%, primarily due to the mix of forecasted earnings by jurisdiction.
- Segment sales declined in AMER, APAC, and EMEA. AMER operating income improved, while APAC operating income fell on lower sales and higher fixed costs; EMEA’s operating loss widened.
- Juniper represented 22% of sales versus 17% a year earlier; the top ten customers represented 63% versus 56%. Management expects top-ten concentration to be lower for full-year FY2012 if overall sales increase.
Liquidity, outlook, risks, and unusual items
- Management estimated FY2012 capital expenditures of $95–100 million, including investments in Malaysia and China and anticipated facility construction in Romania. It believed cash, operating cash flow, available credit, and leasing capacity would meet requirements for the next 12 months.
- Management expected a 9% effective tax rate for FY2012. It did not anticipate cash dividends, though it may consider repurchases or dividends as uses of excess cash.
- On January 18, 2012, after quarter-end, Plexus acquired Kontron’s Malaysia operations’ inventory and equipment for $35.2 million cash and hired substantially all employees. Kontron committed to approximately $100 million of incremental annual revenue for two years. Results are recorded from the closing date; purchase-price allocation remained to be completed.
- Key risks include weak order visibility, customer forecast changes and concentration, sector demand, supply constraints and component costs, inventory obsolescence, facility and program start-up costs, foreign exchange exposure, and the possibility that the Kontron arrangement may not deliver expected revenue or margins.
- A U.S. Customs and Border Protection import-compliance review remained pending final determination of duties and fees. The company had recorded a prior accrual it described as immaterial and did not expect a material adverse effect. Other ordinary-course litigation was also disclosed; management did not expect a material adverse effect.
Important facts for investors to verify
- Whether demand and customer program changes stabilize, particularly in networking/communications, and whether Juniper’s elevated sales share persists.
- Whether the Kontron arrangement delivers its stated incremental revenue and acceptable margins, and how the $35.2 million purchase is allocated and affects cash and capacity.
- Progress and returns on the planned $95–100 million FY2012 capital program and facility expansions.
- Debt covenant compliance, refinancing or repayment plans ahead of the credit facility’s April 2013 expiration, and liquidity after the Kontron cash payment.
- Outcome and potential financial effect of the pending customs review, and sustainability of the 9% tax-rate expectation given jurisdictional earnings mix and tax holidays.