Plexus Corp. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended January 3, 2015; unaudited. Comparisons are to the three months ended December 28, 2013, except balance-sheet comparisons, which are to September 27, 2014. The quarter included an additional week; management said it did not materially affect results.
Business context and performance
Plexus provides electronic manufacturing services, including product design, manufacturing, fulfillment and sustaining services, for mid-to-low-volume, higher-complexity programs. It serves Networking/Communications, Healthcare/Life Sciences, Industrial/Commercial and Defense/Security/Aerospace customers across the Americas, APAC and EMEA.
| Metric | Q1 FY2015 | Comparable period | Change/comment |
|---|---|---|---|
| Net sales | $664.7 million | $533.9 million | Up 24.5% |
| Gross profit / margin | $61.4 million / 9.2% | $51.5 million / 9.6% | Profit up 19.2%; margin down 0.4 percentage points |
| Operating income / margin | $28.8 million / 4.3% | $21.8 million / 4.1% | Income up about $7.0 million |
| Net income | $23.1 million | $17.7 million | Up 30.7% |
| Diluted EPS | $0.67 | $0.51 | Adjusted for restructuring, company-reported non-GAAP EPS was $0.72 and $0.61, respectively |
| Operating cash flow | $(90.3) million | $3.7 million | Driven mainly by working-capital outflows |
| Capital expenditures / free cash flow | $9.6 million / $(99.9) million | $21.8 million / $(18.1) million | Free cash flow is company-defined, non-GAAP |
Material changes and operating drivers
- Sales growth was broad-based, led by Networking/Communications, up $70.6 million, and Healthcare/Life Sciences, up $31.5 million. Management attributed growth primarily to key-customer demand and new program ramps.
- APAC operating income rose to $41.8 million from $31.9 million, aided by higher sales and favorable customer mix. AMER operating income increased modestly to $18.0 million from $17.1 million; EMEA’s operating loss widened to $3.8 million from $2.5 million.
- Gross margin declined amid customer mix and the Guadalajara facility ramp. Operating margin improved as higher sales leveraged selling and administrative costs; lower restructuring expense also supported operating income.
- Interest expense rose to $3.8 million from $2.8 million, including costs associated with the Guadalajara lease and increased revolver activity. Selling and administrative expense increased $4.8 million, primarily to support growth.
Financial position, liquidity and debt
- Cash and cash equivalents were $239.7 million, down from $346.6 million at fiscal year-end. Accounts receivable increased to $378.9 million and inventory to $539.6 million; accounts payable declined to $347.1 million.
- Total debt, capital lease obligations and other financing were $265.8 million, including $175.0 million of 5.20% senior notes and $75.0 million outstanding under the $235.0 million revolving facility. Cash exceeded these obligations by approximately $26.1 million, using the reported aggregate obligations figure.
- The company borrowed and repaid $152.0 million under its revolver during the quarter. It reported compliance with the credit-facility and senior-note covenants. The revolver matures May 2019; the notes mature June 2018.
- Approximately 98.8% of cash was held outside the U.S.; management intends to permanently reinvest those funds and noted that repatriation could trigger additional taxes. Management said available cash, operating cash flow, borrowing capacity and leasing capability should cover requirements for the next 12 months and the foreseeable future.
- Operating cash flow was pressured by increases in receivables and decreases in payables. The annualized cash cycle lengthened to 72 days from 62 days in the comparable period, chiefly reflecting fewer days payable outstanding.
Outlook, risks and unusual items
- No specific quarterly revenue or earnings guidance is provided in the filing. The company estimated FY2015 capital expenditures of approximately $50 million and an effective tax rate of 9%–11%. Its stated longer-term model targets 12% organic revenue growth, a 5% operating margin and economic return of 5%; these are goals, not quarterly guidance.
- Restructuring costs were $1.7 million, mainly for moving and transition costs and severance related to relocating Juarez operations to Guadalajara, compared with $3.6 million in the prior period. The transition was completed in Q1; management did not expect further related Q2 costs to be material.
- Other comprehensive loss was $10.0 million, including a $4.6 million after-tax derivative fair-value loss and a $5.4 million foreign-currency translation loss. Cash-flow hedges included foreign-currency contracts with a $3.6 million liability fair value at quarter-end.
- Key disclosed risks include customer concentration and order uncertainty, program ramp and facility-transition execution, excess or obsolete inventory, component supply disruptions, competitive and pricing pressures, foreign-exchange exposure, and variability in tax outcomes from geographic earnings mix. The company reported ordinary-course litigation and did not expect it to have a material effect; customer indemnities and product warranties are also disclosed.
Important facts for investors to verify
- Whether sales growth and program ramps—particularly in Networking/Communications—are sustainable and how concentrated revenue is among key customers.
- Whether gross margin recovers as Guadalajara operations mature and whether the EMEA operating loss improves.
- Whether working-capital demands ease, given negative operating cash flow, rising receivables and the longer cash cycle.
- How much offshore cash is practically available for U.S. needs, including any tax cost of repatriation, and whether liquidity and covenant headroom remain adequate.
- Whether FY2015 capital spending and the estimated tax rate remain consistent with management’s outlook, and whether any further restructuring or transition costs arise.