Plexus Corp. — Fiscal 2017 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2016 (13 weeks), compared with the three months ended January 2, 2016. Plexus provides electronic manufacturing services for higher-complexity, mid-to-low-volume programs across Healthcare/Life Sciences, Industrial/Commercial, Communications, and Defense/Security/Aerospace.
Financial performance
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Net sales | $635.0 million | $616.7 million |
| Gross profit / gross margin | $64.4 million / 10.1% | $50.1 million / 8.1% |
| Operating income / operating margin | $33.9 million / 5.3% | $21.5 million / 3.5% |
| Net income | $28.2 million | $14.4 million |
| Diluted EPS | $0.82 | $0.42 |
| Cash from operating activities | $79.5 million | $21.3 million |
| Capital expenditures | $7.0 million | $11.7 million |
| Free cash flow (non-GAAP) | $72.5 million | $9.5 million |
Sales rose 3.0%; gross profit increased 28.3%, and operating income increased 57.7%. Margin improvement reflected favorable customer mix and lower variable labor costs, while operating income also benefited from the absence of prior-year restructuring charges. S&A expense increased $3.4 million, mainly due to higher variable compensation.
Net sales increased in Industrial/Commercial ($32.8 million) and Healthcare/Life Sciences ($19.5 million), offset by declines in Communications ($25.4 million) and Defense/Security/Aerospace ($8.6 million). By region, AMER sales were $314.7 million and operating income $14.8 million; APAC sales were $310.0 million and operating income $48.2 million; EMEA sales were $39.4 million and operating loss $2.2 million. APAC operating income improved substantially; EMEA sales and operating results weakened.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $496.5 million at December 31, 2016, up from $433.0 million at October 1; restricted cash was $1.3 million. Approximately 95.3% of cash was held by foreign subsidiaries.
- Total debt, capital lease, and other financing obligations were $263.0 million, including $75.0 million drawn on the $300 million revolving facility and $175.0 million of 5.20% senior notes due June 2018. The company reported covenant compliance. The revolver expires in July 2021.
- Current assets were $1.430 billion and current liabilities $628.9 million. Inventory was $564.8 million. Management said available cash, operating cash flow, and credit-facility capacity should cover working-capital and fixed-capital needs for at least the next 12 months.
- Operating cash flow benefited from working-capital movements and expanded receivables factoring. Plexus sold $77.8 million of receivables for $77.4 million cash under a non-committed program capped at $100 million. Management attributed $55.3 million of the year-over-year increase in receivables sold to the program’s expansion.
Guidance, outlook, and notable items
- Management estimated a fiscal 2017 effective tax rate of 8%–10%; the quarter’s rate was 9.2%, versus 16.5% a year earlier. The lower rate primarily reflected earnings mix across tax jurisdictions.
- Fiscal 2017 funded capital expenditures were estimated at $50–$60 million. Management’s longer-term goals include 4.7%–5.0% operating margin, 12% targeted organic revenue growth, and economic return of 5%; estimated fiscal 2017 weighted-average cost of capital was 10.5%. These are management goals, not quarterly revenue guidance.
- No restructuring charges were recorded in the quarter, versus $1.5 million in the prior-year quarter. The remaining restructuring accrual was $0.2 million.
- Other comprehensive loss was $16.8 million, primarily reflecting foreign-currency translation adjustments and derivative fair-value changes. The company estimated $5.9 million of net-of-tax cash-flow-hedge losses would be reclassified into earnings over the next 12 months.
- Share repurchases totaled $7.1 million for 144,729 shares under a program authorizing up to $150 million. A share-based-payment accounting adoption generated tax benefits that were offset by valuation allowances, resulting in no financial-statement impact.
Risks and contingencies
Key disclosed risks include customer forecast changes, delays, cancellations and program disengagements; customer and sector concentration; new-program ramp and execution costs; demand weakness, component shortages, and excess or obsolete inventory; pricing and margin pressure; foreign-exchange movements; tax-law and jurisdictional uncertainty; and operational, regulatory, cybersecurity, and geopolitical risks, including Brexit-related uncertainty. Foreign-currency contracts are used for risk management, not speculation; management stated a 10% U.S.-dollar move against transactional currencies would not materially affect results, financial position, or cash flows. Litigation in the ordinary course was not expected to have a material effect. Customer indemnities and product warranties are disclosed; management did not consider indemnification obligations material.
Important facts for investors to verify
- Whether operating-margin improvement and stronger APAC performance persist, particularly given EMEA losses and sector-level program exits.
- How much reported operating cash flow and free cash flow depend on receivables factoring, and the availability and cost of that non-committed facility.
- The location, accessibility, and potential tax consequences of foreign-held cash; management did not anticipate another repatriation in the foreseeable future.
- Execution against the $50–$60 million capital-spending estimate, growth and margin goals, and fiscal 2017 tax-rate range.
- Ability to refinance or repay the $175 million notes due June 2018 and maintain compliance with debt covenants.
- Whether derivative losses, customer demand shifts, inventory requirements, or other disclosed risks materially affect future earnings and cash flow.