PLEXUS CORP. — Q2 FY2018 Form 10-Q
Reporting period: Quarter ended March 31, 2018; fiscal year-to-date covers the six months ended March 31, 2018. Plexus provides electronics manufacturing services across AMER, APAC and EMEA and serves Healthcare/Life Sciences, Industrial/Commercial, Communications and Aerospace/Defense markets. Figures below are in U.S. dollars.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $698.7 million | $604.3 million | $1,375.9 million | $1,239.4 million |
| Gross margin | 7.6% | 10.6% | 8.5% | 10.3% |
| Operating income | $17.3 million | $32.6 million | $48.9 million | $66.5 million |
| Operating margin | 2.5% | 5.4% | 3.6% | 5.4% |
| Net income (loss) | $12.3 million | $29.3 million | $(86.2) million | $57.5 million |
| Diluted EPS | $0.36 | $0.84 | $(2.57) | $1.66 |
Q2 revenue rose 15.6% year over year, but gross margin fell 300 basis points and operating income declined by $15.3 million. Management attributed margin pressure to a one-time $13.5 million employee bonus (including $12.6 million in cost of sales), higher fixed labor and overhead to support program ramps, and unfavorable customer mix. Higher sales were driven largely by new-product ramps and end-market demand; Communications was the only sector with lower Q2 sales.
Six-month net loss principally reflects a $124.5 million provisional tax expense from U.S. Tax Reform, recorded in the prior quarter. Excluding Tax Reform and the employee bonus, management reported an adjusted six-month effective tax rate of 10.1%; this is a non-GAAP presentation. Reported six-month effective tax rate was 297.0%.
Cash, liquidity and debt
- Cash and restricted cash totaled $403.3 million at March 31, 2018, down from $569.3 million at September 30, 2017; approximately 80% of cash was held outside the U.S.
- Six-month operating cash flow was $2.8 million, versus $105.6 million a year earlier. Capital expenditures were $29.1 million, resulting in reported free cash flow of $(26.3) million, compared with $91.0 million in the prior-year period.
- Total debt and capital lease obligations were $208.0 million, including $175.0 million of 5.20% senior notes due June 15, 2018. No credit-facility borrowings were outstanding at quarter-end; the revolving facility commitment was $300 million and expires in July 2021. The company reported compliance with debt covenants.
- Current assets were $1.54 billion and current liabilities $833.2 million. Inventory was $701.7 million, up from $654.6 million at fiscal year-end. The cash cycle increased to 76 days from 73 days a year earlier.
- Tax Reform liabilities totaled $121.8 million at quarter-end. The company estimated $100 million of federal repatriation tax payable in installments over fiscal 2019–2026, in addition to foreign withholding and state tax liabilities.
Outlook, commentary and risks
- Management expected fiscal 2018 capital expenditures of approximately $80–$90 million, principally for a Penang building purchase, program ramps and equipment. It stated projected operating cash flows, available cash, credit-facility capacity and planned refinancing should cover working and fixed capital needs for the next 12 months.
- The company planned to repay $25 million and refinance the remaining $150 million of notes maturing in June 2018. It reported an agreement in principle on pricing and maturities but had not executed definitive agreements; completion and terms were not assured.
- Management intended to use the remaining $74.7 million under its 2016 repurchase plan during fiscal 2018, then repurchase up to an additional $200 million under a new plan through fiscal 2019. No purchases had yet been made under the new plan.
- Management’s stated targets include 12% organic revenue growth, a 4.7%–5.0% operating margin and economic return of 5.0%. These are targets, not a specific near-term revenue or earnings forecast. Fiscal 2018 effective tax rate was estimated at 122%–130%, or 10%–12% excluding Tax Reform and the employee bonus.
- Principal disclosed risks include customer order changes or cancellations, customer and sector concentration, new-program execution and ramp costs, component shortages and longer lead times, excess or obsolete inventory, pricing and mix pressure, foreign-exchange movements, tax uncertainty, and refinancing execution. The company also reported ordinary-course litigation, with management not expecting a material adverse effect.
- Topic 606 was expected to change revenue timing for a significant portion of sales from recognition at delivery to recognition over time as products are produced. The company expected a material financial-statement impact on adoption in fiscal 2019, including increased contract assets and reduced finished goods and work-in-process inventory.
Important facts for investors to verify
- Whether the planned refinancing of the $175 million notes closed on the expected timetable and on what final terms.
- How operating margins and cash generation developed after the bonus and program-ramp costs, and whether new-product ramps generated expected profitability.
- Actual cash payments and final tax effects of Tax Reform, including any revisions to the provisional $124.5 million expense and $121.8 million remaining liability.
- Progress against capital spending, repurchase plans and management’s growth and margin targets, while accounting for the weak six-month operating cash flow and negative free cash flow.
- The effects of component availability, inventory growth, receivables factoring and Topic 606 adoption on working capital and reported revenue.