Plexus Corp. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 30, 2017; comparative period ended December 31, 2016. Plexus provides electronic manufacturing services across the AMER, APAC and EMEA regions and serves Healthcare/Life Sciences, Industrial/Commercial, Communications, and Aerospace/Defense markets.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $677.3 million | $635.0 million |
| Gross profit / margin | $63.5 million / 9.4% | $64.4 million / 10.1% |
| Operating income / margin | $31.6 million / 4.7% | $33.9 million / 5.3% |
| Income before taxes | $29.0 million | $31.0 million |
| Income tax expense | $127.5 million | $2.8 million |
| Net income (loss) | $(98.5) million | $28.2 million |
| Diluted EPS | $(2.93) | $0.82 |
| Operating cash flow | $69.1 million | $79.5 million |
| Capital expenditures | $16.7 million | $7.0 million |
| Free cash flow (non-GAAP) | $52.4 million | $72.5 million |
Balance sheet and liquidity
- At December 30, 2017, cash and cash equivalents were $506.7 million and restricted cash was $8.2 million, versus combined cash and restricted cash of $569.3 million at September 30, 2017. Approximately 91% of cash was held outside the U.S.
- Current assets were $1.551 billion and current liabilities were $817.2 million. Inventory was $669.9 million, up from $654.6 million at fiscal year-end.
- Total debt and capital lease obligations were $205.9 million, down from $313.1 million. The balance included $175.0 million of 5.20% senior notes due June 15, 2018; no revolving-credit borrowings were outstanding at quarter-end. Plexus reported compliance with its debt covenants.
- The $300 million revolving credit facility expires in July 2021. Management expected operating cash flows, available cash and potential credit-facility borrowings to be sufficient for the next 12 months, including repayment of the notes.
Material changes and operating drivers
- Sales grew 6.7% year over year, but gross profit declined 1.2% and operating income declined $2.3 million. Gross margin fell 70 basis points, primarily due to customer mix and increased fixed labor and overhead supporting new program ramps; selling and administrative expense also increased $1.5 million.
- By region, APAC sales rose 11.6% and EMEA sales rose 61.9%, while AMER sales declined 5.0%. APAC operating income improved; AMER operating income fell, and EMEA remained loss-making but narrowed its operating loss.
- Healthcare/Life Sciences sales rose 12.4% and Aerospace/Defense rose 14.7%; Industrial/Commercial and Communications were nearly flat.
- Cash flow from operations and free cash flow declined year over year. Management cited working-capital needs, including inventory investment for program ramps and longer component lead times. Days in inventory rose to 100 from 90 year over year; the annualized cash cycle increased to 67 days from 66.
Outlook, risks and unusual items
- Tax Reform: The quarter included a provisional $124.5 million tax charge following enactment of the U.S. Tax Cuts and Jobs Act, driving the reported net loss and 439.2% effective tax rate. The charge included $101.8 million for deemed repatriation taxes and $22.7 million of foreign withholding taxes. The company said the estimate could change, potentially materially. It expected a FY2018 effective tax rate of 102%–110%, or 10%–12% excluding the Tax Reform impact.
- The company expected to repatriate a substantial portion of offshore cash and was refining its capital allocation plan. Possible uses included tax payments, business investment, shareholder returns, and repayment or refinancing of the senior notes. Federal repatriation tax payments were scheduled to begin in FY2019; timing of certain other tax payments was not specified.
- FY2018 funded capital expenditures were estimated at approximately $80–$90 million, including a planned Penang, Malaysia building purchase, program-ramp capacity and equipment replacement.
- Management cited a 4.7%–5.0% operating-margin target, a 12% targeted organic revenue growth rate and a 5% economic-return goal; these are stated strategic targets, not a specific quarterly revenue forecast.
- Topic 606 revenue guidance, expected to be adopted in FY2019, is expected to change recognition timing for a significant portion of revenue from delivery to over time as products are produced. Plexus warned the adoption could materially affect the financial statements, including contract assets and inventory balances.
- Key risks include customer delays, cancellations and forecast inaccuracies; program ramp and execution costs; component shortages and excess inventory; customer and sector concentration; foreign exchange, tax and regulatory changes; and cybersecurity and operational disruption. The company said ordinary-course litigation was not expected to have a material effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- How the provisional Tax Reform charge and related cash-tax timing evolve, and whether final tax effects differ materially from the recorded estimate.
- Whether Plexus repays or refinances the $175 million notes due June 2018, and the resulting impact on liquidity and capital allocation.
- Whether new program ramps translate into sales and margin improvement, particularly given lower gross and operating margins and higher inventory days.
- Whether FY2018 capital spending remains within the $80–$90 million estimate and produces the expected capacity and productivity benefits.
- The financial-statement and working-capital effects of FY2019 adoption of Topic 606, and the continuing role of receivables sales in cash generation.