Plexus Corp. — Q3 FY2023 Form 10-Q
Business context and reporting period: Plexus provides design, supply-chain, manufacturing and related services to customers in the Industrial, Healthcare/Life Sciences and Aerospace/Defense sectors. The third quarter was the 13 weeks ended July 1, 2023; year-to-date results cover nine months. Comparisons are with the periods ended July 2, 2022.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $1,021.6 million | $981.3 million | $3,186.4 million | $2,687.5 million |
| Gross profit / margin | $93.6 million / 9.2% | $93.6 million / 9.5% | $297.8 million / 9.3% | $240.1 million / 8.9% |
| Operating income / margin | $28.2 million / 2.8% | $49.6 million / 5.1% | $142.5 million / 4.5% | $115.9 million / 4.3% |
| Net income | $15.8 million | $37.5 million | $98.8 million | $87.8 million |
| Diluted EPS | $0.56 | $1.33 | $3.51 | $3.09 |
Cash flow and liquidity: For the nine months, operating cash flow was $76.0 million, versus cash used of $25.8 million a year earlier. Capital expenditures were $79.8 million, resulting in company-defined free cash flow of negative $3.8 million, improved from negative $110.8 million. Cash and restricted cash totaled $253.6 million at quarter-end. Total debt, finance lease and other financing obligations were $492.2 million, including $297.0 million drawn on the credit facility; $203 million remained available under the $500 million facility. The company reported compliance with debt covenants. Inventory was $1,641.7 million, and customer deposits were $582.2 million.
Other key metrics: Interest expense was $8.2 million for the quarter and $23.4 million year to date, up from $3.9 million and $10.3 million, respectively. The year-to-date effective tax rate was 13.8%. Annualized cash-cycle days rose to 111 from 102 a year earlier.
Material changes versus prior periods
- Quarterly sales rose 4.1%, while nine-month sales grew 18.6%. Growth in the quarter was strongest in Healthcare/Life Sciences (+12.5%) and Aerospace/Defense (+13.3%); Industrial sales declined 5.9%. For the nine months, all three sectors grew.
- Quarterly gross profit was essentially unchanged despite higher sales, and gross margin declined 30 basis points. Year-to-date gross margin improved 40 basis points, reflecting sales growth and operating efficiencies, partly offset by component, labor and fixed-cost inflation and customer mix.
- Quarterly operating income fell 43.1% and net income fell 57.9%, largely reflecting $23.1 million of restructuring and other charges and higher interest expense. Year-to-date operating income increased 23.0% and net income increased 12.5%.
- Year-to-date operating cash flow improved substantially, primarily because inventory investment increased more slowly than in the prior-year period. Free cash flow nevertheless remained slightly negative as capital spending exceeded operating cash flow.
Outlook, commentary and risks
- Management expects fiscal 2023 capital expenditures of approximately $115–$125 million. It expects a fiscal 2023 annual effective tax rate of approximately 13%–15%, assuming no tax-law changes. No sales or earnings guidance is stated in the provided filing text.
- Management believes available cash, operating cash flow and credit-facility capacity should meet working- and fixed-capital needs for the next 12 months and foreseeable future. It cautions that increased working-capital needs or future financing requirements could require additional funding.
- Management reports continuing component shortages and long lead times, which can constrain customer demand fulfillment and require elevated inventory. Inflation in components, labor and operating costs may pressure margins; customer pricing recoveries may be dilutive. Export controls affecting China have contributed to forecast volatility and weaker demand in some customer programs.
- In June, Plexus paid $15.8 million related to a Norway arbitration decision and recorded a $14.2 million charge net of insurance recoveries and prior accruals. It no longer serves that customer, expects no further charges, and is pursuing additional insurance recoveries. A further $8.9 million of charges related to workforce reductions and a lease termination contributed to the quarter’s $23.1 million total.
- Other risks include customer forecast changes or cancellations, program ramps and transitions, inventory obsolescence, customer and sector concentration, foreign-exchange and interest-rate exposure, tax developments, and litigation. The company states that its risk factors were not materially changed from its FY2022 Form 10-K.
Important facts for investors to verify
- Whether elevated inventory and the 111-day cash cycle convert into operating cash flow, and how customer deposits and supplier-payment timing affect liquidity.
- Whether component availability, customer demand and China-related export controls affect sales, utilization and margins in subsequent quarters.
- How much of the Norway payment is ultimately recovered through insurance, and whether restructuring actions deliver expected savings.
- Credit-facility borrowing costs and working-capital needs, especially given higher interest expense and the $297 million drawn balance.
- Use of receivables-sale programs: the facilities are uncommitted, and $216.8 million of sold receivables remained outstanding and uncollected at quarter-end.
- Execution against the stated capital-spending and tax-rate outlook, and the remaining $9.1 million authorization under the share-repurchase program.