Plexus Corp. — Fiscal 2014 Second-Quarter 10-Q
Reporting period: Quarter ended March 29, 2014; year-to-date period covers the six months ended March 29, 2014. Plexus provides electronics manufacturing services across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA).
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $557.6 million | $557.8 million | $1,091.5 million | $1,088.4 million |
| Gross profit / margin | $52.8 million / 9.5% | $52.0 million / 9.3% | $104.3 million / 9.6% | $103.2 million / 9.5% |
| Operating income / margin | $19.0 million / 3.4% | $23.2 million / 4.2% | $40.8 million / 3.7% | $44.7 million / 4.1% |
| Net income | $18.5 million | $18.0 million | $36.2 million | $34.6 million |
| Diluted EPS | $0.53 | $0.52 | $1.04 | $1.00 |
- Revenue mix: Q2 healthcare/life sciences sales grew to $166.4 million from $129.2 million; networking/communications fell to $162.4 million from $212.5 million. The six-month revenue increase was just 0.3%.
- Profitability drivers: Management cited improved customer mix and APAC supply-chain productivity, partly offset by higher facility, depreciation and personnel costs. Reported operating income included $6.0 million of Q2 restructuring and impairment charges, and $9.7 million year to date.
- Taxes and adjusted results: A $3.7 million discrete tax benefit, primarily from completing U.S. federal and state audits, contributed to reported earnings. The effective tax rate was (7.2)% in Q2 and 2.5% year to date. Management’s non-GAAP adjusted diluted EPS, excluding restructuring and discrete tax items, was $0.60 for Q2 and $1.21 year to date, versus $0.52 and $1.00, respectively.
Cash flow, liquidity and debt
- Six-month operating cash flow was $19.7 million, down from $62.9 million. Capital expenditures were $30.6 million, resulting in negative free cash flow of $10.9 million, compared with positive $9.6 million a year earlier. Management attributed the cash-flow decline primarily to Juniper-related customer deposits and working-capital movements; facility construction was a major use of capital.
- Cash and equivalents were $323.7 million at March 29, 2014, down from $341.9 million at September 28, 2013. Approximately 92% was held outside the U.S.; repatriation could create additional taxes. Management said available cash, credit facilities and eligible foreign cash should meet U.S. liquidity needs for at least 12 months.
- Total current and long-term debt and capital lease obligations were approximately $260.0 million. Debt included $75 million drawn under the term loan and $175 million of 5.20% senior notes; there were no revolving borrowings outstanding at quarter-end. The company reported compliance with its debt covenants, and the term-loan balance was effectively fixed-rate through an interest-rate swap.
- Six-month financing cash flows included $14.6 million of share repurchases. The company had $15.4 million remaining under its $30 million repurchase authorization at quarter-end.
Changes, outlook and risks
- Juniper, which disengaged in fiscal 2013, generated no Q2 FY2014 revenue; it had represented 16% of Q2 FY2013 sales. Growth from other networking customers and healthcare programs largely offset the lost business. Plexus expected no further Juniper revenue in FY2014.
- Restructuring related to facility consolidation and relocation included the planned Juarez-to-Guadalajara move and the new Neenah facility. Guadalajara construction was on schedule for completion in Q3 FY2014; approximately $2.0 million of additional restructuring charges were expected through Q1 FY2015. The remaining restructuring accrual was expected to be used by the end of Q1 FY2015.
- Management estimated FY2014 capital expenditures of approximately $75 million and an effective tax rate of 8%–10%. Its stated long-term model includes a 5% operating-margin target, ROIC goal 500 basis points above WACC, and targeted organic revenue growth of 12%; these are strategic targets, not near-term revenue or earnings guidance.
- Key disclosed risks include customer delays, cancellations and forecast uncertainty; customer and sector concentration; new-program execution and ramp costs; excess or obsolete inventory and component shortages; pricing and margin pressures; facility-transition costs; foreign exchange, tax and regulatory exposure; and economic or other events affecting operating regions. Customer manufacturing agreements also carry indemnification and warranty obligations; management did not consider the indemnification exposure material. Ordinary-course litigation was not expected by management to materially affect financial position, results or cash flows.
Important facts for investors to verify
- Whether new networking and healthcare programs sustain growth and profitability as Juniper revenue disappears, and how customer concentration evolves.
- Whether inventory, deposits and other working-capital movements improve enough to restore operating cash flow and positive free cash flow.
- Actual costs and timing of the Juarez-to-Guadalajara transition, Guadalajara facility completion, and projected capital spending.
- How much of reported earnings reflects recurring operations versus restructuring charges and discrete tax benefits, and whether the estimated tax rate remains applicable.
- Availability and practical accessibility of offshore cash, debt-covenant headroom, and the pace of share repurchases.