Plexus Corp. — Q2 FY2013 Form 10-Q
Reporting period: Fiscal second quarter ended March 30, 2013; comparisons are with the quarter ended March 31, 2012. Six-month figures compare the periods ended March 30, 2013 and March 31, 2012. Plexus provides electronic manufacturing services across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA).
Financial performance
Dollar amounts are in millions, except per-share data.
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $557.8 | $573.5 | $1,088.4 | $1,103.1 |
| Gross profit / margin | $52.0 / 9.3% | $54.6 / 9.5% | $103.2 / 9.5% | $106.3 / 9.6% |
| Operating income / margin | $23.2 / 4.2% | $25.8 / 4.5% | $44.7 / 4.1% | $49.5 / 4.5% |
| Net income | $18.0 | $20.0 | $34.6 | $37.8 |
| Diluted EPS | $0.52 | $0.56 | $1.00 | $1.07 |
- Q2 sales declined 2.7%; net income declined 10.0%. Six-month sales fell 1.3% and net income fell 8.5%. Lower sales and unfavorable customer mix weighed on quarterly gross profit; six-month results also reflected expansion-related fixed costs and higher selling and administrative expense.
- Regional results diverged: Q2 AMER sales declined 21.7% and operating income fell 37.0%; APAC sales grew 10.2% and operating income rose 23.4%. EMEA sales grew 25.5% and operating income improved to $0.8 million from $0.3 million.
- For the six months, operating cash flow was $62.9 million, versus $82.0 million. Capital expenditures were $53.3 million, producing reported free cash flow of $9.6 million, versus $49.1 million. Higher working capital needs and expansion spending were the main cash uses.
- Cash and equivalents were $276.5 million at March 30, 2013, down from $297.6 million at September 29, 2012. Current assets were $1,120.6 million and current liabilities $515.2 million. Approximately three-quarters of cash was held outside the U.S.; management intends to permanently reinvest those funds.
- Debt principal comprised $75 million under the term loan and $175 million of 5.20% senior notes. The company had no revolving borrowings and $160 million of committed revolver availability; it was in compliance with debt covenants. The term-loan interest-rate swaps expired April 4, 2013, leaving the $75 million term balance floating-rate.
Material changes and management outlook
- Juniper, Plexus’s largest customer, represented 16% of Q2 sales, versus 14% a year earlier, but is disengaging. Production was expected to conclude by the end of fiscal Q3; some inventory sales could continue into Q4. Management expected $1.0–$1.5 million of restructuring costs, primarily severance, in Q3 and did not expect material inventory adjustments.
- Management expected fiscal 2013 capital expenditures of approximately $90 million. The new Neenah facility was on schedule for completion late in Q4; consolidation was expected to generate $4.0–$5.0 million of restructuring charges in the first half of fiscal 2014. A replacement facility in Oradea, Romania was also part of the expansion program.
- Management forecast a fiscal 2013 effective tax rate of 6%–8%. The Q2 rate was 9.8%, partly reflecting an IRS assessment related to an audit of fiscal 2008–2010; the six-month rate was 8.0%. Tax rates may vary with geographic earnings mix and APAC tax holidays.
- Management said available cash, operating cash flow, credit facilities and leasing capabilities should meet working-capital and capital needs for the next 12 months and foreseeable future. The company’s longer-term targets include 10% gross margin, 5% operating margin, and ROIC 500 basis points above estimated WACC; these are targets, not near-term guidance. No specific near-term revenue or earnings guidance is stated in the supplied filing text.
Risks, contingencies and notable items
- Sales remain exposed to customer order delays, cancellations and forecast inaccuracies, customer concentration, weak end-market demand, program start-up and execution risks, component shortages, inventory obsolescence, pricing and margin pressure, foreign exchange, and global economic conditions.
- Plexus reported approximately $6.4 million of receivables and inventory related to a financially troubled customer. It recorded a $0.7 million estimated probable loss, began litigation, and was negotiating a payment plan; any additional loss could not be estimated.
- Approximately $18.1 million of inventory-related customer deposits was associated with Juniper’s disengagement. The filing also reports $308.7 million of purchase obligations, largely ordinary-course inventory and equipment commitments, and $701.2 million of total contractual cash obligations.
- The company repurchased 877,105 shares for approximately $21.5 million during the six months under a $50 million authorization. The repurchases contributed to the decrease in cash and outstanding shares.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. Customer indemnities and product warranties are provided; the recorded warranty liability was $5.2 million at March 30, 2013.
Important facts for investors to verify
- Progress and final costs of the Juniper disengagement, including remaining sales, inventory exposure, customer deposits and restructuring charges.
- Whether AMER demand and customer mix recover, and whether APAC and EMEA growth offsets continued weakness in certain markets.
- Working-capital trends, capital spending, free cash flow and completion costs for the Neenah and Oradea facilities.
- Cash accessibility and tax consequences for funds held overseas, alongside debt covenant compliance and the impact of floating-rate term debt.
- Developments in the troubled-customer litigation and payment plan, and any resulting change to the recorded $0.7 million allowance.