Plexus Corp. — Q3 FY2018 Form 10-Q
Business context and period. Plexus provides electronics manufacturing and product-realization services across Healthcare/Life Sciences, Industrial/Commercial, Communications, and Aerospace/Defense. This unaudited quarterly report covers the 13 weeks ended June 30, 2018, and the nine months ended that date; comparatives are the periods ended July 1, 2017.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $726.4 million | $618.8 million | $2,102.3 million | $1,858.2 million |
| Gross profit / margin | $67.8 million / 9.3% | $61.2 million / 9.9% | $184.3 million / 8.8% | $189.3 million / 10.2% |
| Operating income / margin | $32.4 million / 4.5% | $29.5 million / 4.8% | $81.3 million / 3.9% | $95.9 million / 5.2% |
| Net income (loss) | $26.5 million | $25.6 million | $(59.7) million | $83.1 million |
| Diluted EPS | $0.79 | $0.74 | $(1.79) | $2.40 |
| Cash from operations | Not separately stated for the quarter | $41.5 million | $121.9 million | |
| Free cash flow | Not separately stated for the quarter | $(10.6) million | $97.5 million |
Q3 sales rose 17.4% year over year, but gross margin fell 0.6 percentage points and operating margin fell 0.3 points. Nine-month sales rose 13.1%, while gross profit and operating income declined. The nine-month net loss chiefly reflects a $124.5 million tax charge related to U.S. Tax Reform; excluding Tax Reform and the one-time employee bonus, Plexus reported adjusted nine-month tax expense of $8.8 million, a non-GAAP presentation.
Liquidity, debt, and capital allocation
- At June 30, cash and restricted cash totaled $333.6 million, down from $569.3 million at September 30, 2017. About 67% of cash was held outside the U.S.
- Total debt and capital lease obligations were $186.6 million, including $150.0 million of senior notes and $37.9 million of capital lease and other financing obligations. The company issued $150.0 million of new senior notes at 4.05% and 4.22%, due in 2025 and 2028, and repaid $175.0 million of 5.20% notes at maturity. It reported compliance with debt covenants.
- Current assets were $1,499.7 million and current liabilities $709.3 million. Inventory was $755.8 million, up from $654.6 million at September 30, 2017.
- Nine-month capital expenditures were $52.1 million. Management estimated FY2018 capital expenditures of $70–$80 million and expected operating cash, available cash, credit-facility capacity, and leasing to cover requirements for the next 12 months.
- Plexus repurchased $97.8 million of shares in the first nine months; $18.0 million remained under the 2016 authorization. A further $200 million program is authorized to begin after the prior plan is completed.
Drivers, outlook, risks, and unusual items
- Growth was led by APAC and EMEA and by Healthcare/Life Sciences; new-product ramps and customer demand were key contributors. Customer disengagements, end-of-life programs, and transfers between regions partly offset growth.
- Management attributed margin pressure to lower-margin customer mix, higher labor costs and ramp-related inefficiencies, and a constrained component market. Longer component lead times increased inventory; management expected inventory levels to remain higher for at least the next two quarters.
- A $13.5 million one-time employee bonus was approved and paid during FY2018, with $12.6 million recorded in cost of sales. The nine-month results also include higher selling and administrative costs and increased receivables-sale fees.
- Management’s stated objectives include 12% targeted organic revenue growth, a 4.7%–5.0% operating margin target, and a 5.0% Economic Return goal. Nine-month ROIC was 15.9% and Economic Return was 6.4% (both non-GAAP). The estimated FY2018 effective tax rate was 122%–130%, or 10%–12% excluding Tax Reform and the bonus.
- Tax Reform produced a provisional $124.5 million expense. Outstanding related tax liabilities were $116.4 million; management noted the final tax impact could differ, potentially materially. It anticipated repatriating a further $50 million in Q4, subject to future conditions.
- The company sold $497.4 million of receivables through purchase programs in the first nine months, receiving $494.4 million. The MUFG facility, with a $210 million maximum, was due for renewal in October 2018; management expected extension but could not assure it. The programs provide cash at a discount.
- After quarter-end, Plexus acquired assets of a Cascade Controls business line for $12.5 million in cash, subject to customary adjustments, to enhance new-product-introduction capabilities. Key risks cited include customer order variability, component shortages, tariffs, inventory obsolescence, program execution and ramp costs, foreign exchange, tax uncertainty, and customer concentration. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth converts into improved margins and operating cash flow, given mix pressure, labor inefficiencies, and component constraints.
- Whether inventory levels and customer protection through deposits remain adequate, and whether component shortages or excess/obsolete inventory create additional costs.
- The final Tax Reform liability, timing of cash payments, and the effect of related tax provisions on reported earnings and future effective tax rates.
- Availability and renewal of receivables-sale facilities, and the cost and sustainability of factoring as a source of operating cash.
- Execution and returns from planned repurchases, capital spending, and the Cascade Controls acquisition, while maintaining covenant compliance and liquidity.