Plexus Corp. — Q1 Fiscal 2024 Form 10-Q
Reporting period: Three months ended December 30, 2023 (13 weeks), compared with the three months ended December 31, 2022. Plexus provides design, supply-chain, manufacturing and related services to customers in Healthcare/Life Sciences, Industrial and Aerospace/Defense markets.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $982.6 million | $1,093.9 million | Down 10.2% |
| Gross profit / margin | $88.1 million / 9.0% | $101.2 million / 9.3% | Margin down 30 bps |
| Operating income / margin | $45.2 million / 4.6% | $57.3 million / 5.2% | Margin down 60 bps |
| Net income | $29.2 million | $42.2 million | Down 30.8% |
| Diluted EPS | $1.04 | $1.49 | Down 30.2% |
| Operating cash flow | $(3.0) million | $(48.8) million | Improved $45.8 million |
| Capital expenditures | $28.7 million | $23.1 million | Up $5.6 million |
| Free cash flow | $(31.7) million | $(71.9) million | Improved $40.2 million |
Interest expense was $7.6 million, versus $6.9 million; other expense was $10.3 million, versus $7.9 million. The effective tax rate was 16.2%, compared with 14.7%, primarily reflecting the geographic mix of pretax income. Management reported ROIC of 10.3% and economic return of 2.1%, versus 13.8% and 4.8%, respectively, in the prior-year quarter; these are non-GAAP measures.
Revenue mix and material year-over-year changes
- By region, AMER sales fell 14.4% to $333.7 million and APAC fell 13.9% to $552.5 million. EMEA increased 36.4% to $121.9 million, supported by new-customer and existing-product ramps.
- By market sector, Healthcare/Life Sciences revenue decreased 21.9% to $380.9 million; Industrial fell 7.9% to $434.6 million; Aerospace/Defense rose 24.8% to $167.1 million.
- Management attributed the overall sales decline mainly to softer customer end-market demand, customer inventory corrections and lower inflated component pricing. New program ramps and a positive customer mix partly offset the decline.
- Gross profit and operating income declined as lower sales and fixed costs supporting program ramps pressured margins. Lower selling and administrative expense, mainly reduced incentive compensation, provided a partial offset.
Cash, debt and liquidity
- At December 30, 2023, cash and cash equivalents were $232.0 million, plus $0.4 million of restricted cash. Total debt, finance lease and other financing obligations were $443.2 million, including $243.0 million drawn on the revolving credit facility. The filing reports $257 million of the $500 million revolving commitment available; expansion to $750 million would require mutual agreement with the bank.
- Current assets were $2.65 billion and current liabilities were $1.74 billion. Inventory was $1.58 billion, up from $1.56 billion at September 30, 2023; customer advances were $709.7 million, down from $760.4 million.
- Operating cash use improved year over year, principally due to working-capital timing, including supplier payments and slower inventory growth. Free cash flow remained negative. Management cited a 95-day annualized cash cycle, versus 83 days in the prior-year quarter.
- Plexus sold $223.6 million of receivables during the quarter for $221.0 million in cash proceeds under uncommitted receivables-sale programs. Receivables sold and still outstanding at quarter-end totaled $226.9 million.
- Management believes cash, operating cash flows, credit availability and leasing capacity should cover working-capital and capital needs for the next 12 months. Ninety percent of cash and cash equivalents was held outside the U.S. The company was in compliance with debt covenants.
Outlook, risks and unusual items
- Management expects customer inventory corrections and weaker demand in certain sectors to remain a near-term challenge, but expects these conditions to ease later in fiscal 2024. Prolonged weakness could affect future results.
- Fiscal 2024 capital expenditures are estimated at $100 million to $120 million. The expected annual effective tax rate is approximately 15% to 17%, assuming no tax-law changes.
- A global minimum tax is expected to materially and unfavorably affect existing tax holidays and the effective tax rate beginning in fiscal 2025.
- In January 2024, Plexus announced a further $50 million share-repurchase authorization, bringing combined available authority to $55.7 million; the new program begins after the existing program is completed.
- Also in January, Plexus committed to a restructuring plan and anticipated approximately $10 million of charges, primarily cash severance, in fiscal Q2 2024.
- Key risks cited include component shortages and long lead times, customer order delays or cancellations, excess or obsolete inventory, inflation and cost pressures, program-ramp execution, customer concentration, foreign-exchange exposure, interest costs, geopolitical and trade developments, and the placement of its Xiamen subsidiary on the BIS Unverified List. Management said ordinary-course litigation is not expected to have a material effect, while noting legal outcomes remain uncertain.
Important facts for investors to verify
- Whether customer inventory corrections and weaker Healthcare/Life Sciences and Industrial demand ease as management expects, and whether new program ramps generate profitable volume.
- Whether inventory levels, customer advances and the cash-cycle trend improve, and how much reliance on receivables sales is needed to support liquidity.
- Whether the $100 million to $120 million capital-expenditure plan and $10 million restructuring charges affect cash flow and margins as anticipated.
- How the global minimum tax and geographic earnings mix affect the effective tax rate, including from fiscal 2025.
- Whether borrowing needs, interest expense, foreign-currency exposure and customer or supply-chain risks change materially.