Plexus Corp. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2015, ended July 4, 2015. Comparisons are to the corresponding periods ended June 28, 2014, except balance-sheet comparisons, which are to September 27, 2014. Plexus provides electronic manufacturing services, with operations reported in the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA).
Financial performance
| Metric | Three months ended July 4, 2015 | Year-over-year change | Nine months ended July 4, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $669.6 million | +7.9% | $1,985.6 million | +16.0% |
| Gross profit / margin | $59.1 million / 8.8% | +$0.5 million; margin down 0.6 percentage points | $180.3 million / 9.1% | +$17.4 million; margin down 0.4 percentage points |
| Operating income / margin | $28.6 million / 4.3% | +$0.4 million; margin down 0.2 points | $86.9 million / 4.4% | +$17.9 million; margin up 0.4 points |
| Net income | $23.8 million | Down 3.3% | $70.5 million | Up 16.0% |
| Diluted EPS | $0.69 | Down from $0.71 | $2.05 | Up from $1.75 |
| Operating cash flow | Not separately presented for the quarter | $55.6 million | Down from $57.7 million | |
| Free cash flow (non-GAAP) | Not separately presented for the quarter | $28.7 million | Up from negative $0.6 million |
Balance sheet and liquidity: Cash and cash equivalents were $354.8 million, up from $346.6 million at fiscal year-end; current assets were $1,325.6 million and current liabilities $580.3 million. Total debt, capital leases and other financing were $263.6 million, including $175.0 million of 5.20% senior notes due 2018 and $75.0 million drawn on a $235.0 million revolving facility. The company reported compliance with debt covenants. About 84.5% of cash was held by foreign subsidiaries; management intends to permanently reinvest those funds and noted potential tax costs if repatriated.
Changes and operating drivers
- Quarterly sales growth reflected networking/communications and industrial/commercial program ramps, including $17.2 million from a new industrial/commercial customer. Growth was partly offset by customer losses and disengagements.
- Nine-month sales growth was led by networking/communications, with additional contributions from healthcare/life sciences and industrial/commercial. Sales increased in all four market sectors reported: networking/communications, healthcare/life sciences, industrial/commercial, and defense/security/aerospace.
- Gross margin declined in both comparisons, which management attributed to operational inefficiencies while investing in sites and production constraints at a defense/security/aerospace focus factory. Quarterly S&A expense also rose, mainly from employee compensation.
- APAC generated $119.9 million of nine-month segment operating income, up from $102.1 million. AMER generated $55.5 million, up from $53.7 million. EMEA remained loss-making, with an $8.1 million nine-month operating loss versus $7.5 million.
- Working capital absorbed cash: receivables increased by $28.4 million and inventories by $65.6 million in the nine-month cash-flow statement. The cash cycle was 62 days, five days longer year over year.
Outlook, risks and unusual items
- Management estimated a fiscal 2015 effective tax rate of 10%–12% and approximately $40 million of funded capital expenditures; $26.9 million had been funded through the third quarter. Capital spending was expected to support capabilities and program ramps and replace or refresh equipment.
- The company’s stated strategic goals include 12% organic revenue growth, a 5% operating margin, and economic return five percentage points above its estimated 11% weighted average cost of capital. Nine-month operating margin was 4.4%; economic return was 3.1%.
- Restructuring charges were $1.7 million for the first nine months, related mainly to moving manufacturing from Juarez to Guadalajara, Mexico; none were recorded in the quarter. The comparable prior-year nine-month charge was $10.9 million.
- The prior-year nine-month tax result included a $3.8 million discrete benefit, largely related to completed U.S. tax audits. The filing attributes the higher 2015 effective rate partly to the absence of that benefit and the geographic distribution of earnings.
- Key stated risks include customer order delays, cancellations and forecast changes; customer and program concentration; launch and transition costs; supply shortages; excess or obsolete inventory; operational constraints; foreign-exchange movements; economic weakness; and execution at the Guadalajara facility. Management said ordinary-course litigation was not expected to materially affect results or financial position.
- The filing provides no specific revenue or earnings forecast. Management said projected operating cash flow, available cash, potential revolver borrowings and leasing capacity should meet working-capital and fixed-capital needs for the next twelve months.
Important facts for investors to verify
- Whether margin pressure and the defense/security/aerospace production constraints improve, and whether new program ramps deliver expected revenue and profitability.
- Whether inventory growth and the 62-day cash cycle convert into stronger operating cash flow; customer deposits partly offset inventory-obsolescence exposure.
- Cash availability and potential tax implications of the substantial cash balance held outside the United States.
- Execution and costs associated with the Juarez-to-Guadalajara transition, planned capital expenditures, and the remaining fiscal 2015 share-repurchase authorization.
- How tax rates, foreign-exchange hedge losses, and customer or end-market changes affect reported earnings. The company estimated $3.8 million of net unrealized derivative losses would be reclassified from accumulated other comprehensive income into earnings over the next twelve months.