Plexus Corp. — Q1 FY2011 Form 10-Q
Business context and period. Plexus provides electronics manufacturing and product-realization services, focused on mid-to-lower-volume, higher-complexity products. This unaudited quarter ended January 1, 2011; the comparable quarter ended January 2, 2010. Both periods contained 91 days. Unless noted, amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $565.8 | $430.4 | +31.5% |
| Gross profit / margin | $54.9 / 9.7% | $44.5 / 10.3% | Profit +23.3%; margin down 0.6 percentage points |
| Selling and administrative expense | $27.1 | $24.3 | +11.3%; 4.8% of sales versus 5.7% |
| Operating income / margin | $27.8 / 4.9% | $20.2 / 4.7% | +37.7% |
| Net income | $25.0 | $17.8 | +40.3% |
| Diluted EPS | $0.61 | $0.44 | +$0.17 |
| Operating cash flow | $(21.1) | $(10.3) | Cash use increased |
| Capital expenditures | $13.3 | $12.3 | Increased |
Sales growth reflected stronger demand from existing customers across sectors and new customer programs. APAC sales rose 41.1% and AMER sales rose 24.0%; EMEA remained loss-making but narrowed its operating loss. Juniper represented 17% of sales in both periods; the top ten customers accounted for 56%, down from 62%.
Cash and cash equivalents were $149.5 at January 1, versus $188.2 at October 2, 2010. Current assets were $1,027.7 and current liabilities $478.4. Inventory was $521.4, up from $492.4 at fiscal year-end; inventory turns declined to 3.9 from 4.1, and days in inventory increased to 93 from 90. Management attributed operating cash use mainly to higher inventory and receivables and lower payables and accrued liabilities.
Term-loan borrowings were $108.8, with no revolver borrowings; the company also reported capital lease obligations. Its unsecured facility provided $100 of revolving availability and was scheduled to expire April 4, 2013. The company was in compliance with its debt covenants. The filing states that available cash, projected operating cash flows, credit availability and leasing capacity should meet requirements for the next 12 months. It estimated FY2011 capital expenditures at approximately $100, including planned facilities in Malaysia and China.
Material changes and unusual items
- Sales increased substantially, while gross margin declined year over year. The prior-year quarter included a $3.2 litigation settlement recorded in cost of sales; excluding that benefit, management said gross margin would have increased slightly, supported by higher sales and customer mix but partly offset by higher fixed costs.
- Current-quarter S&A included a $0.8 supplier-dispute recovery. Higher headcount and stock-based compensation partly offset this recovery and lower incentive compensation.
- Management changed to regional reporting in Q1 FY2011: Americas (AMER), Asia Pacific (APAC), and Europe, Middle East and Africa (EMEA). Prior-period segment data was conformed.
- Operating cash flow was negative despite higher earnings, reflecting working-capital investment. Inventory included items for new customer ramps, variable demand and products delayed from shipment by component shortages.
Outlook, risks and contingencies
Management forecast FY2011 revenue growth of 10%–13% over FY2010, while warning of volatility and particular challenges in Q3. The cited factors were the planned wind-down of two customer programs following customer acquisitions, broadly reduced customer forecasts, and a significant production delay in two Coca-Cola programs. For Q2 FY2011, management expected sales of $540–$570 and diluted EPS of $0.53–$0.58 before restructuring and impairment costs, conditional on sales within that range and subject to actual orders and production. The FY2011 effective tax rate was expected to be 3%.
Key risks include weak order visibility and customer forecast changes, customer and sector concentration, program transitions and start-up costs, component shortages and cost fluctuations, excess or obsolete inventory, international and currency exposures, and execution of planned capacity expansions. A U.S. Customs and Border Protection review of import activity remained pending; the company was awaiting a final determination of duties and fees and said it did not expect a material adverse effect. Other ordinary-course lawsuits were not expected by management to have a material adverse effect. The company disclosed $2.0 of auction-rate securities maturing in 2042 and noted possible impairment if credit quality deteriorates. Management reported disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether customer demand, Q2 sales and EPS, and the 10%–13% full-year growth outlook were achieved, especially given the Coca-Cola delay and exiting programs.
- Whether inventory levels and working capital convert into cash, and whether component shortages or forecast changes cause further shipment delays or inventory exposure.
- Whether gross margins recover after the prior-year litigation benefit and as higher staffing and capacity costs are absorbed.
- Whether planned FY2011 capital spending, facility expansions and related funding remain consistent with cash generation and liquidity.
- Final CBP duties, fees or penalties, and any changes in customer concentration, tax assumptions or the company’s covenant position.