Plexus Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 28, 2014; comparisons are with the quarter ended June 29, 2013. The statements are unaudited. Plexus provides electronics manufacturing and product-realization services across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA).
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $620.5 million | $571.9 million | $1,712.0 million | $1,660.3 million |
| Gross profit | $58.6 million | $55.5 million | $162.9 million | $158.7 million |
| Gross margin | 9.4% | 9.7% | 9.5% | 9.6% |
| Operating income | $28.2 million | $25.2 million | $69.0 million | $69.9 million |
| Operating margin | 4.5% | 4.4% | 4.0% | 4.2% |
| Net income | $24.6 million | $23.2 million | $60.8 million | $57.8 million |
| Diluted EPS | $0.71 | $0.68 | $1.75 | $1.69 |
Quarterly sales rose 8.5% and net income rose 6.0%; nine-month sales increased 3.1% and net income 5.1%. Gross margin narrowed in both comparison periods. Quarterly operating margin improved slightly, while year-to-date operating margin declined, reflecting restructuring and impairment charges.
- Cash flow: Nine-month operating cash flow was $57.7 million, versus $116.9 million a year earlier. Capital expenditures were $58.3 million, producing reported free cash flow of negative $0.6 million, compared with positive $32.6 million. Investing cash outflow was $55.6 million; financing cash outflow was $13.0 million.
- Liquidity and debt: Cash and equivalents were $330.3 million at quarter-end, down from $341.9 million at fiscal year-end. Current assets were $1,208.0 million and current liabilities $549.5 million (about 2.2x current coverage). Balance-sheet debt and capital lease obligations totaled $267.3 million, including $75.0 million outstanding on the revolver and $175.0 million of 5.20% senior notes. The company was in compliance with debt covenants.
- Working capital: Inventory increased to $517.0 million from $404.0 million at fiscal year-end. Management cited inventory build to support forecast demand. Accounts payable rose to $413.4 million; customer deposits fell to $49.9 million.
- Taxes: Effective tax rates were 9.6% for the quarter and 5.5% year to date. Management said rates fluctuate with the geographic mix of earnings and Malaysian tax holidays.
Material changes and business drivers
- Growth was led by new program ramps and demand from networking/communications customers, as well as healthcare/life sciences. Quarterly AMER sales rose 21.0%; APAC sales were nearly flat and EMEA sales declined 10.1%.
- The substantial reduction in Juniper Networks business remained a major offset: Juniper sales fell $84.7 million year over year in the quarter and $240.6 million year to date. Management said year-to-date sales increased excluding Juniper’s decline.
- Quarterly gross profit benefited from higher sales, but higher fixed costs—associated with the new Neenah facility, facility expansions and new-business ramps—offset much of the benefit. Nine-month operating income was affected by $10.9 million of restructuring and impairment charges.
- Segment performance diverged: nine-month APAC operating income improved to $102.1 million from $83.6 million; EMEA moved to a $7.5 million operating loss from $0.5 million of income, with management citing higher facility depreciation and personnel costs.
Outlook, risks and unusual items
- Management expected the Guadalajara facility to be completed in fiscal Q4 2014, with production transfer substantially in that quarter and Juarez operations to cease in fiscal Q1 2015. It expected about $2.1 million of additional Juarez-related restructuring charges through Q1 2015. No further material charges were expected for the Fox Cities consolidation.
- Fiscal 2014 capital expenditures were estimated at approximately $75 million. Management expected the remaining spending to support program ramps and Guadalajara improvements, funded primarily from operations, with possible short-term borrowing.
- Management estimated a fiscal 2014 effective tax rate of 6%–8%, or 8%–10% excluding discrete tax items and restructuring. The company’s stated strategic targets include 12% organic sales growth and a 5.0% operating margin; these are goals, not period-specific guidance.
- The credit facility was amended in May 2014 into a $235 million revolving facility, with maturity extended to May 2019. The $75 million outstanding was effectively fixed-rate through an interest-rate swap.
- Reported results included $1.2 million of quarterly and $10.9 million of nine-month restructuring and impairment charges, mainly for the Juarez-to-Guadalajara move and Neenah-area consolidation. Nine-month earnings also included $3.8 million of discrete tax benefits. Management reported a favorable outcome on a previously expected China land-penalty charge.
- Key risks include customer forecast changes, program ramps that may not deliver expected volume or profitability, customer concentration and Juniper disengagement, excess or obsolete inventory, component availability, execution and transition costs, competition, foreign exchange, and changing geographic earnings mix. About 92% of cash was held outside the U.S.; repatriation could create additional taxes.
- Management said ordinary-course litigation was not expected to materially affect results or financial position. Customer indemnities and product warranties are disclosed; warranty liability was $6.6 million at quarter-end. No material additions to uncertain tax benefits were reported, though state tax examinations were ongoing.
Important facts for investors to verify
- Whether new customer and product ramps can sustain growth as Juniper-related sales decline, including the unusually high networking/communications ramp expected to normalize after fiscal Q4.
- Whether elevated inventory converts to sales and cash, and whether operating cash flow recovers after customer-deposit returns and facility investment.
- Progress, costs and production-transfer timing for Guadalajara and the closure of Juarez, including the remaining expected restructuring charges.
- Whether gross margins improve as new facilities and programs ramp, and whether EMEA losses and fixed-cost pressure moderate.
- Cash accessibility, debt levels, covenant compliance and the effect of share repurchases on liquidity; the company repurchased $22.3 million of stock in the first nine months.
- Actual tax rate versus management’s estimates and the impact of geographic earnings mix and tax-related discrete items.