Plexus Corp. — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended July 2, 2011; comparative periods ended July 3, 2010. Financial statements are unaudited. Plexus provides electronics manufacturing services, focused on mid-to-lower-volume, higher-complexity products.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Net sales | $559.2 million | $536.4 million | $1,693.1 million | $1,457.8 million |
| Gross profit / margin | $54.1 million / 9.7% | $55.5 million / 10.4% | $164.5 million / 9.7% | $150.6 million / 10.3% |
| Operating income | $24.9 million | $27.0 million | $79.1 million | $70.6 million |
| Net income | $22.0 million | $24.4 million | $70.9 million | $62.9 million |
| Diluted EPS | $0.58 | $0.59 | $1.78 | $1.54 |
- Quarterly sales rose 4.3%, but net income fell 9.6%; nine-month sales rose 16.1% and net income rose 12.7%.
- Quarterly gross profit declined 2.5% despite higher sales. Management cited customer mix, higher headcount and depreciation, and ramp-up costs for new programs. Nine-month gross margin was also lower; the prior-year period included a $3.2 million litigation settlement benefit.
- Cash provided by operations was $67.2 million for the nine months, versus $26.8 million used in the prior-year period. Investing used $45.3 million, mainly for capital expenditures; financing used $2.4 million. Cash increased $20.5 million to $208.7 million.
- Capital expenditures were $47.4 million for the nine months; management estimated approximately $80 million for FY2011, including facility construction in Malaysia and China.
Liquidity, debt and capital
- At July 2, 2011, current assets were $1,036.0 million and current liabilities $443.5 million; cash was $208.7 million. Inventory was $484.0 million and accounts receivable $301.2 million.
- Balance-sheet debt and capital lease obligations were $291.9 million, including $17.2 million current and $274.7 million long-term. The company also had $20.3 million of capital lease obligations in its contractual-obligations schedule. Debt rose substantially from October 2, 2010, primarily following issuance of $175 million of senior notes.
- Plexus issued $175 million of unsecured 5.20% Senior Notes due June 15, 2018; the reported effective rate after treasury-rate-lock proceeds was 4.97%. It also had $101.3 million outstanding under its bank term loan, no revolving borrowings, and $100 million of revolving availability. Management reported compliance with debt covenants.
- Operating cash, available cash, credit facilities, private-placement debt and leasing capacity were expected by management to cover working-capital and capital needs for the next 12 months. The $200 million repurchase authorization was substantially used: 5.3 million shares repurchased for $170.4 million at a $32.24 weighted-average price, with about $25 million authorization remaining.
Material changes and management commentary
- Growth was attributed to new program wins and improved demand across most sectors, partly offset by disengagement of a significant wireless-infrastructure customer. APAC sales grew strongly; AMER quarterly sales declined, while EMEA remained loss-making amid facility and engineering costs.
- Juniper was the largest customer, representing 17% of sales in both comparative periods; the top 10 customers accounted for 53% of nine-month sales versus 57% a year earlier.
- Quarterly interest expense increased to $3.3 million from $2.4 million, partly reflecting the notes issued to support the repurchase program. The effective tax rate was 3% versus 2%; management expected a 3% FY2011 rate, benefiting from APAC tax holidays.
- Management’s stated financial objective is to earn return on invested capital 500 basis points above its estimated 13.5% weighted average cost of capital. No specific revenue or earnings guidance was provided in the supplied filing text.
Risks, contingencies and unusual items
- Risks include customer forecast changes, limited order visibility, customer and sector concentration, customer/program transitions, early-stage program costs, and component shortages, cost increases or excess inventory. The Japan earthquake and tsunami disrupted some component supply; the magnitude and duration of any effect were uncertain.
- U.S. Customs and Border Protection was reviewing import activity and Plexus had reported errors dating from July 2004. Final duties and fees remained undetermined; management did not expect a material adverse effect, but the matter was unresolved.
- Ordinary-course lawsuits and customer indemnities were not considered material by management. Warranty liability was $4.6 million at July 2, 2011.
- Potential U.S. tax losses could require an additional deferred-tax valuation allowance if they continue. The filing also notes customer warranty, supplier, foreign-exchange and interest-rate exposure; derivatives were used for hedging, not speculation.
Important facts for investors to verify
- Whether sales growth can translate into margin recovery after customer-mix shifts, program ramp costs, and higher staffing and depreciation expenses.
- Whether customer concentration, the wireless-infrastructure disengagement, and changing forecasts affect future volumes and profitability.
- Execution and returns from the Malaysia and China capacity expansion, against the approximately $80 million FY2011 capital-spending estimate.
- Debt-service capacity, covenant headroom and refinancing exposure, including the bank term loan’s 2013 maturity and balloon repayment.
- Final CBP duties and fees, ongoing component-supply conditions, and continued eligibility for APAC tax holidays.