Plexus Corp. (PLXS) — Q3 FY2022 Form 10-Q
Business context and period. Plexus provides design, supply-chain, manufacturing, and aftermarket services for customers in the industrial, healthcare/life sciences, and aerospace/defense sectors. This unaudited filing covers the 13 weeks ended July 2, 2022, and the nine months ended that date; comparisons are to the periods ended July 3, 2021.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $981.3 million | $814.4 million | $2,687.5 million | $2,525.6 million |
| Gross profit / margin | $93.6 million / 9.5% | $74.1 million / 9.1% | $240.1 million / 8.9% | $244.3 million / 9.7% |
| Operating income / margin | $49.6 million / 5.1% | $36.4 million / 4.5% | $115.9 million / 4.3% | $133.9 million / 5.3% |
| Net income | $37.5 million | $27.6 million | $87.8 million | $105.6 million |
| Diluted EPS | $1.33 | $0.95 | $3.09 | $3.60 |
| Operating cash flow | Not presented by quarter in the supplied filing text | $(25.8) million | $131.5 million |
Quarterly sales rose 20.5%; nine-month sales rose 6.4%. Quarterly diluted EPS increased, while nine-month diluted EPS declined. Nine-month return on invested capital was 11.5% versus 15.9% a year earlier; economic return was 2.2% versus 7.8%.
Liquidity and debt. At July 2, cash and restricted cash were $277.8 million. Total debt, finance lease, and other financing obligations were $434.7 million, including $240.0 million drawn on the revolving facility; $260.0 million of its $500.0 million commitment remained available. The company reported covenant compliance. Current assets were $2.654 billion and current liabilities were $1.861 billion. Nine-month investing cash use was $85.1 million, mainly capital spending; free cash flow, a non-GAAP measure, was $(110.8) million.
Material changes and operating drivers
- Q3 gross margin improved 40 basis points and operating margin improved 60 basis points year over year. Management cited higher sales and lower COVID-related employee compensation and supply costs, partly offset by unfavorable customer mix, higher fixed and labor costs, and weaker labor productivity.
- For the nine-month period, gross margin fell 80 basis points and operating margin fell 100 basis points. Management cited customer mix, fixed costs, labor productivity and labor costs; selling and administrative expense also rose, including higher compensation and bad-debt expense compared with a prior-year recovery.
- APAC sales increased 31.2% in Q3 and 18.8% year to date. AMER sales increased 7.4% in Q3 but fell 7.9% year to date; EMEA sales increased in Q3 and declined 3.3% year to date. Supply constraints, program ramps, end-of-life products, customer losses, and pricing associated with higher component costs affected results.
- Inventory increased to $1.561 billion from $972.3 million at October 2, 2021. Nine-month operating cash flow was pressured by inventory investment and higher receivables, partly offset by higher accounts payable, customer deposits, and other liabilities. Annualized cash-cycle days rose to 102 from 80 year over year, principally because inventory days increased to 160 from 108.
Outlook, risks, and unusual items
- Management expects supply-chain constraints, extended component lead times, inflation, and labor-cost pressures to continue in the near term. Constraints have limited the company’s ability to meet customer demand; inventory investment to support customers is expected to persist. Pricing recoveries may pressure margins.
- Management said cash, available credit, projected operating cash flow, and leasing capacity should meet working-capital and capital needs for the next 12 months. FY2022 funded capital expenditures were estimated at $110–$120 million; $85.0 million had been spent in the first nine months, with remaining spending directed primarily to Bangkok expansion, program ramps, and equipment replacement.
- The company expected a FY2022 annual effective tax rate of approximately 13%–15%, assuming no tax-law changes. It refinanced its revolving facility in June 2022, increasing commitments from $350 million to $500 million and extending maturity to June 2027; the commitment may increase to $750 million subject to conditions and lender agreement.
- The $50 million FY2022 share-repurchase authorization was completed during the quarter; no authority remained at July 2. Nine-month repurchases totaled $46.9 million.
- Key risks include COVID-19 impacts, supply shortages and delays, inflation, customer order changes or cancellations, inventory obsolescence, execution of program and facility transitions, foreign-exchange exposure, and geopolitical and economic uncertainty. Management said the Russia-Ukraine conflict had not materially affected operations to date. Ordinary-course litigation was not expected to have a material effect; the filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether elevated inventory and longer lead times convert into shipments and customer cash collections without material excess or obsolete inventory.
- Whether pricing recoveries offset component, labor, and operating-cost inflation without further margin dilution.
- Whether operating cash flow and free cash flow recover as working-capital investment moderates, and how much revolving-credit capacity remains available.
- Whether APAC growth and new program ramps offset year-to-date declines in AMER and EMEA and end-of-life or lost-customer business.
- Whether the projected tax-rate range and capital-spending plan remain achievable; the filing provides no specific revenue or earnings guidance.