Plexus Corp. — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Quarter ended April 1, 2017 (13 weeks); six-month comparison is against the six months ended April 2, 2016. Financial statements are unaudited. Plexus provides electronic manufacturing services, principally for mid-to-low-volume, higher-complexity products, across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA).
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $604.3 million, down 2.3% year over year | $1,239.4 million, up 0.3% |
| Gross profit / margin | $63.8 million / 10.6%, versus $53.3 million / 8.6% | $128.2 million / 10.3%, versus $103.3 million / 8.4% |
| Operating income / margin | $32.6 million / 5.4%, versus $23.3 million / 3.8% | $66.5 million / 5.4%, versus $44.9 million / 3.6% |
| Net income | $29.3 million, versus $16.8 million | $57.5 million, versus $31.2 million |
| Diluted EPS | $0.84, versus $0.50 | $1.66, versus $0.92 |
Management attributed stronger gross profit and margins primarily to favorable customer mix and supply-chain productivity, with higher production and inventory levels also improving absorption of labor and fixed costs. S&A expense increased, mainly from variable compensation and share-based compensation. No restructuring charges were recorded in the current quarter or six-month period; prior-year periods included $1.9 million and $3.4 million, respectively.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $105.6 million, versus $91.3 million; capital expenditures were $14.6 million, yielding reported non-GAAP free cash flow of $91.0 million, versus $74.5 million.
- Cash and cash equivalents were $524.5 million at April 1, 2017, with an additional $0.5 million of restricted cash. Total debt, capital lease and other financing obligations were $278.3 million. Cash therefore exceeded these obligations; approximately 94.3% of cash was held outside the U.S.
- Current assets were $1.480 billion and current liabilities $641.4 million. Inventory was $609.7 million, up from $564.1 million at fiscal year-end.
- Debt included $90 million drawn on a $300 million revolving credit facility and $175 million of 5.20% senior notes due June 15, 2018. The facility expires in July 2021. The company reported compliance with debt covenants; $75 million of revolver borrowings was effectively fixed through an interest-rate swap.
- Six-month financing cash flow was positive $3.3 million, including net borrowing activity and $13.9 million of share repurchases. The board’s fiscal 2017 repurchase authorization is up to $150 million.
Material changes and operating drivers
- Quarterly sales declined in AMER by 17.6%, partly reflecting lower end-market demand, customer disengagements, a customer’s decision to bring manufacturing in-house, and transfers of production to APAC. APAC sales rose 14.5%, supported by program ramps and demand; EMEA sales rose 2.9%.
- For the six-month period, Healthcare/Life Sciences and Industrial/Commercial sales increased, while Communications and Defense/Security/Aerospace sales declined. Communications was the largest sector decline, reflecting reduced demand, program and customer disengagements, and end-of-life products.
- APAC operating income increased substantially; AMER operating income declined in the quarter, and EMEA remained loss-making. Corporate and other costs were $24.9 million in the quarter.
- Foreign-exchange results improved year over year: miscellaneous income was $1.9 million in the quarter versus expense of $1.1 million, primarily reflecting currency volatility. Six-month miscellaneous income was $1.3 million versus expense of $2.7 million.
- Inventory days increased to 103 from 91 a year earlier, primarily from delayed customer shipments and inventory built for new program ramps. The annualized cash cycle lengthened to 73 days from 66.
- Receivables sales under purchase programs were $169.3 million for the six months, versus $41.5 million in the prior-year period. These transactions are accounted for as sales and contributed to operating cash flow; the filing notes factoring activity helped offset receivables-related working-capital pressure.
Outlook, risks and contingencies
- Management estimated a fiscal 2017 effective tax rate of 8%–10%, citing the geographic mix of earnings and lower-tax jurisdictions. The rate is subject to changes in earnings mix, tax laws, tax positions and valuation allowances.
- Fiscal 2017 funded capital expenditures were estimated at $40–$50 million, primarily for capabilities, program ramps and equipment replacement. Management expected cash, operating cash flow and available credit to cover working-capital and capital needs for the next 12 months.
- Management’s stated operating-margin target was 4.7%–5.0%; its longer-term strategic goals included 12% targeted organic revenue growth and a 5.0% Economic Return objective. These are management goals, not a specific quarterly sales or earnings forecast.
- Key risks include customer forecast changes, delays or cancellations; program ramps and transition costs; customer and sector concentration; excess or obsolete inventory and delayed shipments; component shortages; pricing and margin pressure; foreign-exchange exposure; and regulatory, geopolitical and economic conditions, including Brexit. Management said a 10% U.S.-dollar movement against transactional currencies would not have a material effect based on exposure at quarter-end.
- Approximately $519.4 million of purchase obligations were disclosed, primarily for inventory and equipment. The company also disclosed customer indemnification and product-warranty obligations; management did not expect ordinary-course litigation or indemnities to have a material effect. Warranty liability was $5.2 million at quarter-end.
- Management stated that cash held in the U.S. and available credit were sufficient for U.S. liquidity needs, while noting its intent to permanently reinvest foreign-held cash and no expectation of a similar foreign-earnings repatriation in the foreseeable future.
Important facts for investors to verify
- Whether APAC growth and improved margins can offset ongoing AMER and Communications weakness, and whether reported profitability is sustainable as program mix changes.
- Whether elevated inventory and the longer cash cycle convert into shipments and cash without excess or obsolete inventory losses.
- How much reported operating cash flow depends on receivables factoring, and the availability and terms of the non-committed purchase facilities.
- The use and availability of overseas cash, the 2018 senior-note maturity and refinancing plans, and continued covenant compliance.
- Whether the fiscal-year tax-rate and capital-spending estimates, and the longer-term strategic targets, remain achievable.