Business context and reporting period
Plexus Corp. is an electronic manufacturing services provider serving Healthcare/Life Sciences, Industrial/Commercial, Aerospace/Defense, and Communications customers across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA). This unaudited Form 10-Q covers fiscal Q2 and the six months ended March 30, 2019; comparative periods ended March 31, 2018.
Financial performance and position
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $789.1 million | $698.7 million | $1,554.6 million | $1,375.9 million |
| Gross margin | 9.0% | 7.6% | 9.2% | 8.5% |
| Operating income / margin | $33.2 million / 4.2% | $17.3 million / 2.5% | $70.1 million / 4.5% | $48.9 million / 3.6% |
| Net income (loss) | $24.8 million | $12.3 million | $47.0 million | $(86.2) million |
| Diluted EPS | $0.79 | $0.36 | $1.48 | $(2.57) |
Q2 sales grew 12.9%; operating income rose 91.9%. For the six-month period, sales increased 13.0% and operating income rose 43.4%. Six-month earnings reversed from a loss to profit, principally reflecting much lower tax expense versus the prior year, which included a substantial Tax Reform charge, as well as improved operating income. Q2 gross and operating margins improved 140 and 170 basis points, respectively. Prior-year comparisons also reflect a $13.5 million one-time employee bonus paid in Q2 FY2018.
At March 30, 2019, cash and restricted cash were $184.4 million, versus $297.7 million at fiscal year-end. Current assets were $1.55 billion and current liabilities $844.7 million. Total debt and capital lease obligations were $280.3 million, including $87.0 million drawn under the $300 million revolving facility; $93.2 million was classified current. Cash was 88.5% held outside the U.S. The company reported compliance with debt covenants.
For the six months, operating cash flow was negative $34.5 million, versus positive $2.8 million a year earlier. Capital expenditures were $54.6 million, and free cash flow, a non-GAAP measure, was negative $89.1 million versus negative $26.3 million. Cash outflows reflected higher inventory and receivables and lower accounts payable, partly offset by customer deposits. The annualized cash cycle increased to 86 days from 76 days.
Material changes and operating trends
- AMER Q2 sales increased 20.8%, APAC 8.0%, and EMEA 2.4%. AMER growth reflected product ramps and stronger end-market demand; APAC growth included new-customer production ramps, partly offset by weaker demand.
- By market sector, Q2 Healthcare/Life Sciences sales rose 20.8% and Aerospace/Defense 27.6%; Industrial/Commercial rose 3.6%. Communications was essentially flat in Q2 and declined 4.5% for the six-month period, partly due to customer disengagements.
- Higher sales and the absence of the prior-year employee bonus supported margins. Management also cited customer-mix inefficiencies, new-program ramp costs, and increased compensation expense as offsets.
- Topic 606 adoption changed revenue timing for a significant portion of contracts: about 90% of current-period revenue was recognized over time as products were produced. Adoption increased reported six-month sales by $11.5 million and net income by $1.3 million versus a presentation without adoption; prior-year comparisons were not restated. Contract assets were $86.8 million at quarter-end.
- Plexus repurchased 1.86 million shares for $106.3 million in the first half; $72.5 million remained under the $200 million authorization.
Outlook, risks and unusual items
Management expects fiscal 2019 reported effective tax expense to produce a 19%–21% tax rate; its adjusted estimate, excluding Tax Reform effects, is 13%–15%. Fiscal 2019 funded capital expenditures were estimated at $70–$90 million, mainly for facilities in Malaysia and Mexico, program ramps, and equipment. Management said cash, operating cash generation, and available credit should meet liquidity needs for at least the next 12 months. Its stated objectives include 12% targeted organic revenue growth, a 4.7%–5.0% operating margin, and 5.0% economic return; first-half ROIC was 13.3% and economic return 4.3% (both non-GAAP).
Future operating cash flow is expected to include $73.8 million of payments related to taxes on deemed repatriation of foreign earnings, including $63.8 million of U.S. federal tax payable over eight years; timing of an additional $10.0 million of foreign withholding taxes was not specified. Contractual cash obligations totaled $1.23 billion, including $653.1 million of purchase obligations. Plexus sold $474.4 million of receivables under sale programs in the first half, receiving $471.6 million; these sales provide cash but incur discounts.
Risks highlighted include uncertain customer forecasts, delays or cancellations, demand weakness, component shortages and lead times, tariffs, customer and program concentration, ramp and transition execution, excess or obsolete inventory, pricing and mix pressure, foreign exchange, tax matters, regulatory and compliance obligations, and IT and data-security risks. The company uses foreign-exchange derivatives for hedging, not speculation, and stated a 10% currency move would not have a material financial effect based on its exposure at quarter-end. Ordinary-course litigation was not expected to have a material effect; certain customer indemnities and product warranties are also disclosed. Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and margin gains persist after accounting for the prior-year bonus and Topic 606’s changed revenue timing.
- Whether negative operating cash flow and free cash flow improve as inventory, receivables, contract assets, and the cash cycle evolve.
- How planned facility investment and share repurchases affect cash, borrowings, and covenant headroom.
- Whether customer demand, program ramps, customer disengagements, and mix trends support management’s growth and margin objectives.
- How the stated tax-rate outlook and scheduled repatriation-tax payments develop, including the uncertain timing of foreign withholding taxes.