Plexus Corp. — Form 10-Q Summary
Business and period. Plexus provides electronics manufacturing and product-realization services across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA). This unaudited report covers the quarter and nine months ended July 4, 2020; fiscal 2020 has 53 weeks, with the first quarter containing 14 weeks. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $857.4 | $799.6 | $2,477.2 | $2,354.2 |
| Gross profit / margin | $82.9 / 9.7% | $71.0 / 8.9% | $223.5 / 9.0% | $214.0 / 9.1% |
| Operating income / margin | $45.9 / 5.3% | $34.4 / 4.3% | $103.0 / 4.2% | $104.5 / 4.4% |
| Net income | $35.8 | $24.8 | $79.8 | $71.8 |
| Diluted EPS | $1.20 | $0.81 | $2.66 | $2.28 |
- Q3 sales rose 7.2% year over year; nine-month sales rose 5.2%. Q3 improvement reflected higher APAC and EMEA sales, partly offset by AMER decline. APAC sales grew 25.3% in Q3, while AMER sales fell 16.5%.
- Q3 gross margin expanded 80 basis points, driven by favorable customer mix, higher sales and fixed-cost leverage, partly offset by COVID-related employee and supply costs. Nine-month gross margin declined 10 basis points.
- Nine-month operating income was lower despite sales growth, reflecting $6.0 million in restructuring and impairment charges, higher bad-debt expense and compensation costs. Net income also benefited from lower income tax expense versus the prior period.
- Healthcare/Life Sciences sales were $330.1 in Q3, including demand for critical-care products; Industrial/Commercial sales increased 27.9% year over year. Communications sales fell 24.4% in Q3.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $92.5 versus $7.0 in the prior-year period. Capital expenditures were $41.2, resulting in company-defined free cash flow of $51.3 versus negative $67.6.
- Cash and restricted cash totaled $299.6 at July 4, 2020, compared with $226.3 at September 28, 2019. Total debt, finance lease and other financing obligations were $334.6, including $138.0 of term loans due April 2021. The full $350.0 revolving facility was available; the company reported covenant compliance.
- Operating cash flow benefited from increased accounts payable and customer-program purchasing, but was partly absorbed by an $116.8 inventory cash outflow. Inventory on the balance sheet was $819.5, up from $700.9 at fiscal year-end. Management attributed higher inventory and longer component lead times in part to program ramps and COVID-19.
- The company sold $606.0 of receivables under uncommitted sale programs during the nine months, receiving $603.4 in cash proceeds. These sales are reported as operating cash flow.
- Funded FY2020 capital expenditures were estimated at approximately $50–$60; $41.2 had been spent through the first nine months. Management said cash, operating cash flows and available credit were expected to meet needs for the next 12 months.
Outlook, risks and unusual items
- Management said global operations were at pre-COVID production capacity and described opportunities in healthcare, while warning that renewed spread, customer demand volatility, supplier disruption, component shortages and restrictions could impair output, costs and liquidity. The pandemic’s full financial impact remained uncertain.
- Estimated FY2020 effective tax rate was 12%–14%. The nine-month rate was 11.4%, versus 22.4% a year earlier; the comparison was affected by prior-year Tax Reform charges and current-period tax benefits and geographic earnings mix.
- The $6.0 restructuring and impairment charge related primarily to the Boulder Design Center closure: $3.1 of asset impairment and $2.9 of severance. The remaining restructuring accrual was $0.3, expected to be used by fiscal year-end.
- The company drew the full $138.0 delayed-draw term loan facility in May as a precaution amid COVID-19 uncertainty. Share repurchases were suspended in March; management expected to resume them in Q4 FY2020, with $27.2 of authorization remaining at quarter-end.
- Contractual cash obligations totaled $1,280.5, including $685.3 of purchase obligations and $59.6 of remaining U.S. repatriation-tax payments. Ordinary-course litigation was not expected by management to have a material effect.
- Other risks include customer concentration and order volatility, excess or obsolete inventory, foreign exchange and interest rates, and execution costs for new programs. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor facts to verify
- Whether COVID-related demand, customer program ramps and the strong APAC contribution persisted after July 4, and how AMER and Communications demand evolved.
- Whether elevated inventory and component lead times converted into shipments and cash, and whether customer deposits and accounts-payable timing remain supportive of operating cash flow.
- Repayment or refinancing plans for the $138.0 term loan due April 2021, continued revolver availability, and compliance with debt covenants.
- Actual FY2020 capital expenditures, tax rate and share-repurchase activity versus management’s stated expectations.
- Ongoing use and terms of receivables-sale programs, including their contribution to reported operating cash flow.