Plexus Corp. — Q3 FY2012 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2012; comparisons are to the quarter and nine months ended July 2, 2011. Amounts are in U.S. dollars.
Business context and performance
Plexus provides electronic manufacturing and product-realization services across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA). Its end markets include networking/communications, industrial/commercial, medical, and defense/security/aerospace. The company notes that it generally lacks firm, long-term customer purchase commitments and depends substantially on a relatively small group of customers.
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $608.8 million | $559.2 million | $1,711.9 million | $1,693.1 million |
| Gross profit | $57.4 million | $54.1 million | $163.7 million | $164.5 million |
| Gross margin | 9.4% | 9.7% | 9.6% | 9.7% |
| Operating income | $27.3 million | $24.9 million | $76.8 million | $79.1 million |
| Operating margin | 4.5% | 4.5% | 4.5% | 4.7% |
| Net income | $23.5 million | $22.0 million | $61.4 million | $70.9 million |
| Diluted EPS | $0.66 | $0.58 | $1.73 | $1.78 |
Financial position, cash flow, and debt
- At June 30, 2012, cash and cash equivalents were $277.9 million, versus $242.1 million at October 1, 2011. About two-thirds of cash was held outside the U.S.; repatriation could incur additional taxes.
- For the nine months, operating cash flow was $116.8 million, compared with $64.0 million a year earlier. Capital expenditures were $45.1 million; company-defined free cash flow was $71.7 million, versus $19.8 million.
- Investing cash outflow was $74.5 million, including the Kontron asset purchase; financing cash outflow was $6.4 million. Cash increased by $35.8 million during the nine-month period.
- Total assets were $1.411 billion and shareholders’ equity was $638.6 million. Current assets were $1.109 billion and current liabilities $492.6 million.
- Debt and capital lease obligations on the balance sheet totaled about $274.7 million, including $13.8 million current and $260.8 million long-term. The company also reported $175 million of 5.20% Senior Notes due June 2018 and $86.3 million of term-loan borrowings under its new credit facility; it had no revolver borrowings.
- On May 15, 2012, Plexus refinanced its prior facility with a five-year, $250 million senior unsecured facility, comprising a $160 million revolver and a $90 million term loan. An additional $100 million revolver increase is subject to conditions. Plexus reported compliance with all debt covenants at June 30.
Material changes versus comparable periods
- Quarterly sales rose 8.9%, supported by an industrial/commercial customer ramp, the Kontron arrangement, and other customer program ramps. Growth was partly offset by weaker networking/communications demand and prior customer disengagements.
- Nine-month sales increased 1.1%, but net income fell 13.4% and diluted EPS declined from $1.78 to $1.73. Lower margins, higher taxes, and greater interest expense contributed to the earnings decline.
- Industrial/commercial sales increased $57.1 million for the quarter and $140.2 million for the nine months. Networking/communications sales declined $21.5 million and $140.0 million, respectively.
- Quarterly gross margin declined 0.3 percentage points, reflecting higher staffing and Kontron transition costs, higher variable compensation, and less favorable customer mix. Nine-month operating margin fell from 4.7% to 4.5%.
- APAC nine-month operating income declined to $72.6 million from $92.9 million, while AMER operating income increased to $73.4 million from $52.8 million. EMEA continued to report an operating loss.
- The effective tax rate was 8% for the quarter and 9% for the nine months, compared with 3% in both prior-year periods, primarily due to a greater share of earnings in the U.S. Plexus cited Malaysian and Chinese tax holidays as ongoing tax benefits.
- Juniper Networks represented 16% of quarterly sales and 17% of nine-month sales. The top ten customers accounted for 60% and 62%, respectively, versus 53% in each prior-year period.
Outlook, risks, and unusual items
- The filing gives no clear consolidated revenue or earnings guidance. Management estimated a 9% effective tax rate for full-year FY2012 and expected FY2012 capital expenditures of approximately $70–75 million; $45.1 million had been spent through Q3.
- Management’s stated financial model includes goals of 10% gross margin, 5% operating margin, and return on invested capital (ROIC) 500 basis points above weighted average cost of capital. These are targets, not near-term guidance. Nine-month ROIC was 15.0%, versus 16.2% a year earlier; estimated FY2012 WACC was 12.5%.
- The Kontron arrangement involved a $35.2 million initial purchase price for inventory and equipment and hiring substantially all of the acquired operation’s employees. Kontron committed to approximately $100 million of incremental annual revenue for two years. Plexus cautioned that expected revenue or margins may not be achieved; transition costs were already affecting results.
- Key risks include customer concentration and order volatility, weak end-market demand, program delays or cancellations, new-program start-up costs, customer mix and margin pressure, component supply and inventory exposure, foreign-exchange movements, and the ability to execute facility expansions.
- A U.S. Customs and Border Protection assessment of historical import activity was awaiting final determination of duties and fees. Plexus said the matter was not expected to have a material adverse effect; the related recorded accrual was not material. Other ordinary-course litigation was also not expected to be material.
- Plexus revised prior-period balance-sheet and cash-flow classifications for upfront land-use-right payments, moving them from property and equipment/investing activities to other long-term assets/operating activities. The company concluded the errors were not material; there was no effect on statements of operations.
- Disclosure controls were assessed as effective, and the filing reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Kontron revenue commitment converts into durable revenue and acceptable margins after transition costs.
- How customer concentration and the ongoing weakness in networking/communications affect sales, utilization, and margins.
- Whether working-capital improvements and operating cash generation continue, particularly as inventory and customer demand fluctuate.
- Cash accessibility and potential tax cost of repatriating funds held by foreign subsidiaries.
- Progress and spending on the Neenah and Oradea facilities, as well as the stated capital expenditure outlook.
- Final resolution of the CBP import assessment and any changes to tax positions following U.S. tax examinations.