Plexus Corp. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended April 4, 2015; comparisons are with the periods ended March 29, 2014, except balance-sheet comparisons, which are with September 27, 2014. Plexus provides electronic manufacturing services across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA), serving higher-complexity programs in four market sectors.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $651.3m | $557.6m | $1,316.0m | $1,091.5m |
| Gross profit / margin | $59.8m / 9.2% | $52.8m / 9.5% | $121.2m / 9.2% | $104.3m / 9.6% |
| Operating income / margin | $29.5m / 4.5% | $19.0m / 3.4% | $58.2m / 4.4% | $40.8m / 3.7% |
| Net income | $23.6m | $18.5m | $46.7m | $36.2m |
| Diluted EPS | $0.69 | $0.53 | $1.36 | $1.04 |
- Quarterly sales rose 16.8%, and six-month sales rose 20.6%. Growth was led by networking/communications, including new product ramps and increased demand from key customers; healthcare/life sciences also grew.
- Gross margin declined year over year, which management attributed to customer mix, the Guadalajara site ramp, and operational inefficiencies while investing in sites and regions. Operating income improved, helped by higher sales and lower restructuring costs; Q2 had no restructuring charge versus $6.0m a year earlier.
- For the six months, restructuring costs were $1.7m versus $9.7m in the prior-year period, primarily related to moving manufacturing from Juarez to Guadalajara.
- APAC generated $41.0m of Q2 operating income and $82.8m for six months. AMER operating income was $15.7m and $35.5m, respectively. EMEA reported operating losses of $1.8m and $5.6m, respectively, with higher compensation costs cited.
Cash flow, liquidity and debt
- Six-month operating cash flow was $40.7m, versus $19.7m; capital expenditures were $16.7m, resulting in company-defined free cash flow of $24.0m versus negative $10.9m.
- Cash and equivalents were $356.3m at April 4, 2015, up from $346.6m at September 27, 2014. About 85.8% was held by foreign subsidiaries; the company intends to permanently reinvest those funds and notes that repatriation could create additional taxes.
- Total current assets were $1,288.8m and current liabilities $568.4m. Debt, capital leases and other financing totaled $264.8m, including $175.0m of 5.20% senior notes due 2018 and $75.0m outstanding on a $235.0m revolving facility due 2019. The company reported compliance with applicable debt covenants.
- Inventory was $557.0m, up from $526.0m at fiscal year-end. Management said higher inventory days reflected support for forecast sales; customer deposits related to inventory were $58.5m.
Outlook, risks and notable items
- Management estimated a fiscal 2015 effective tax rate of 9%–11%. Rates vary with the geographic distribution of earnings; the prior-year comparison included a $3.7m discrete tax benefit from completed tax audits.
- Fiscal 2015 capital expenditures were estimated at approximately $50m, primarily for capabilities, program ramps and equipment replacement. Management stated expected operating cash flow, cash balances and available borrowing capacity should meet requirements for the next 12 months.
- The company’s strategic model targets a 5% operating margin and economic return of 5 percentage points above its estimated 11% cost of capital; six-month economic return was 3.5 percentage points. Management also cited a 12% targeted organic revenue growth rate. These are stated goals, not guaranteed forecasts.
- Management cited limited visibility into future orders and risks from customer delays, changes or cancellations; customer and program concentration; program ramps and site transitions; component shortages; inventory obsolescence; pricing and cost changes; foreign exchange; competition; and regulatory, IT and data-security matters.
- Foreign-currency and interest-rate derivatives are used for risk management, not speculation. Derivative fair values were net liabilities at quarter-end, and foreign-currency hedge movements contributed to other comprehensive loss. Management said a 10% currency move would not have a material effect based on the company’s exposure.
- Ordinary-course litigation was not considered by management likely to have a material effect. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts to verify
- Whether revenue growth from key-customer ramps and end-market demand continued, and how concentrated that growth remained.
- Whether gross margins recover as Guadalajara ramps and operational investments mature, and whether EMEA losses improve.
- Actual FY2015 tax rate and capital expenditures versus the stated estimates, including the effect of foreign-held cash and potential repatriation taxes.
- Working-capital and inventory trends, customer deposits, and cash conversion as sales expand.
- Remaining share-repurchase authorization and debt/covenant position; the company had repurchased approximately $15.0m of its $30.0m FY2015 authorization by quarter-end.