PLEXUS CORP. — Q3 FY2016 Form 10-Q
Reporting period: Quarter ended July 2, 2016; comparative quarter ended July 4, 2015. The quarter comprised 13 weeks. Plexus provides electronic manufacturing services, serving customers in networking/communications, healthcare/life sciences, industrial/commercial, and defense/security/aerospace markets.
Key financial results
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $667.6M | $669.6M | $1,902.9M | $1,985.6M |
| Gross profit / margin | $62.5M / 9.4% | $59.1M / 8.8% | $165.8M / 8.7% | $180.3M / 9.1% |
| Operating income / margin | $30.9M / 4.6% | $28.6M / 4.3% | $75.8M / 4.0% | $86.9M / 4.4% |
| Net income | $26.1M | $23.8M | $57.3M | $70.5M |
| Diluted EPS | $0.76 | $0.69 | $1.68 | $2.05 |
Cash flow: For the nine months, operating cash flow was $122.6M (prior year $55.6M), capital expenditures were $23.8M ($26.9M), and company-defined free cash flow was $98.8M ($28.7M). Cash and equivalents rose to $433.7M at July 2 from $357.1M at October 3, 2015. Inventory was $575.1M and accounts receivable $375.2M.
Debt and liquidity: Total debt, capital lease and other financing obligations were $262.8M, including $75.0M drawn on the credit facility, $175.0M of 5.20% senior notes due June 2018, and $12.8M of lease/other financing obligations. The balance sheet classified $78.3M as current. The company reported compliance with debt covenants. Approximately 97% of cash was held outside the U.S.; management said available domestic cash, facility capacity, and remittable foreign cash were expected to meet U.S. liquidity needs for the next 12 months.
Material changes and operating trends
- Q3 sales were nearly flat year over year, while nine-month sales fell 4.2%. Networking/Communications was the primary drag: sales declined $66.2M in the quarter and $196.7M over nine months, reflecting lower demand and customer/program disengagements.
- Growth in Healthcare/Life Sciences, Industrial/Commercial, and Defense/Security/Aerospace partly offset the networking decline. Industrial/Commercial gains included substantial ramp-up of a new customer program; EMEA sales also increased, though the region remained loss-making.
- Q3 gross margin improved 60 basis points, attributed mainly to lower variable labor costs, manufacturing shifts to lower-cost locations, and productivity improvements. Nine-month gross margin declined 40 basis points, with lower sales, mix, and fixed-cost under-absorption cited as factors.
- Nine-month operating income decreased 12.8% and net income decreased 18.7%, partly reflecting lower gross profit, higher restructuring costs, and $3.1M more foreign-exchange losses than the prior-year period. Q3 earnings improved year over year.
- Working-capital cash flows improved substantially, especially inventory and receivables, although the reported annualized cash cycle increased one day year over year to 63 days.
Outlook, risks, and unusual items
- Management estimated FY2016 capital expenditures of approximately $40M and an effective tax rate of 11%–13%. It stated a 4.7%–5.0% operating-margin target and a 12% targeted organic revenue growth rate as part of its longer-term financial model; no specific full-year revenue or EPS guidance is provided in the filing text.
- FY2016 restructuring costs were expected to total $5.5M–$6.0M. The company recorded $5.2M through nine months, primarily for closures/partial closures at Fremont, California, and Livingston, Scotland; the remaining accrual was expected to be used by the end of Q1 FY2017.
- On July 5, 2016, after quarter-end, Plexus amended its revolving credit facility, raising commitments from $265M to $300M, extending maturity to July 5, 2021, and permitting a potential increase to $500M subject to conditions. It also amended the senior-note agreement.
- The June 2016 U.K. vote to leave the EU weakened sterling; management said effects to date were not material but that the future business impact was undetermined. Other cited risks include customer demand changes, program delays or cancellations, customer concentration, component availability, excess/obsolete inventory, restructuring execution, foreign exchange, and global economic weakness.
- Litigation in the ordinary course was not expected by management to have a material effect. Customer warranties and indemnities exist; the recorded warranty liability was $6.3M.
Important facts for investors to verify
- Whether new customer/program ramps can offset continued Networking/Communications declines and customer disengagements.
- Whether improved working-capital cash generation is sustainable, particularly given $575.1M of inventory and the 63-day cash cycle.
- Progress and actual costs of the Fremont and Livingston restructuring, and whether expected savings are realized.
- Cash accessibility and any tax consequences associated with the substantial foreign-held cash balance.
- Terms and covenant implications of the post-quarter credit-facility and note-agreement amendments, along with refinancing needs for the 2018 senior notes.
- Actual FY2016 tax rate and capital expenditures versus management’s estimates, and developments affecting Brexit, currency exposure, and end-market demand.