Plexus Corp. — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended March 31, 2012; comparisons are with the periods ended April 2, 2011. Amounts are in U.S. dollars. Plexus provides electronics manufacturing and product-realization services across the Americas, Asia-Pacific and EMEA.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $573.5M | $568.1M | $1,103.1M | $1,133.9M |
| Gross profit / margin | $54.6M / 9.5% | $55.5M / 9.8% | $106.3M / 9.6% | $110.4M / 9.7% |
| Operating income / margin | $25.8M / 4.5% | $26.4M / 4.6% | $49.5M / 4.5% | $54.3M / 4.8% |
| Net income | $20.0M | $23.9M | $37.8M | $48.9M |
| Diluted EPS | $0.56 | $0.59 | $1.07 | $1.19 |
Quarterly sales increased 0.9% year over year, but six-month sales declined 2.7%. Net income fell 16.3% in the quarter and 22.7% for the six months. Management attributed lower profitability chiefly to weaker gross margins, less favorable customer mix, new-program ramp and Kontron transition costs, capacity-related fixed costs, higher interest expense and higher tax rates. Q2 and six-month effective tax rates were 11% and 10%, respectively, versus 3% in the prior-year periods; management cited a greater contribution from U.S. earnings and geographic earnings mix. The company benefits from tax holidays in Malaysia and China.
Cash flow, balance sheet and debt
- Cash: $257.8M at March 31, 2012, up from $242.1M at October 1, 2011; approximately 60% was held outside the U.S. Management said available resources were sufficient for expected U.S. liquidity needs.
- Six-month cash flows: Operating cash flow was $82.0M, versus $48.4M; capital expenditures were $32.9M, versus $25.0M. Company-defined free cash flow was $49.1M, versus $23.4M. Investing used $65.6M, including the Kontron transaction; financing used $1.3M.
- Working capital indicators: Inventory was $492.3M, up from $455.8M at fiscal year-end; accounts receivable was $295.2M, up from $284.0M. Cash-cycle days improved to 66 from 71 year over year. Six-month operating cash flow benefited from working-capital changes.
- Debt: $90M of term loans and $175M of 5.20% senior notes due June 2018 were outstanding. The balance sheet reports $279.1M of current and long-term debt and capital lease obligations combined. No revolving borrowings were outstanding; $100M of revolving capacity was available. The credit facility expires April 4, 2013, with a $75M final balloon repayment. The company was in compliance with debt covenants and was pursuing refinancing, expected by management in Q3 FY2012.
- Liquidity and investment: Management expected operating cash flow, cash, credit availability and leasing capacity to meet needs for the next 12 months and beyond. FY2012 capital expenditures were estimated at $75M–$85M, including completion of the Xiamen facility and construction of a larger Oradea, Romania facility.
Material changes and business developments
- Market-sector mix: Q2 industrial/commercial sales rose to $189.0M from $123.2M, supported by Coca-Cola program ramp, a new customer and Kontron-related revenue. Networking/communications fell to $209.8M from $266.7M, reflecting weaker demand, customer disengagements and lower Juniper sales. Medical declined to $114.9M from $128.0M; defense/security/aerospace increased to $59.8M from $50.2M.
- Customer concentration: Juniper represented 14% of Q2 sales (16% prior year) and 18% of six-month sales (17% prior year). Coca-Cola represented 12% of Q2 sales and 10% of six-month sales, versus less than 10% in the comparable prior-year periods. The top ten customers represented 63% of sales in both current periods, up from 53% and 54%. Management noted that loss or disruption involving major customers or sectors could materially affect results.
- Kontron arrangement: Plexus paid $35.2M for inventory and equipment of Kontron’s Malaysian manufacturing operation, hired substantially all employees and began recording results after the January 18, 2012 closing. Kontron committed to approximately $100M of incremental annual revenue for two years. Transition costs affected margins; purchase-price allocation remained subject to customary adjustments.
- Regional results: Q2 Americas operating income rose to $26.2M from $19.0M; APAC fell to $21.8M from $29.6M, partly due to capacity costs, mix and Kontron transition costs. EMEA operating income was $0.3M versus $0.1M.
- Debt and share count: Interest expense increased following issuance of $175M in senior notes in 2011. No shares were repurchased in the current six-month period; 2.7M shares were repurchased for $83.4M in the prior-year period. Lower weighted-average shares partly offset the earnings decline in diluted EPS.
Outlook, risks and unusual items
- No specific near-term revenue or earnings guidance is provided in the filing. Management’s stated strategic targets include 10% gross margin, 5% operating margin and ROIC 500 basis points above its estimated 12.5% WACC; targeted organic revenue growth is 15%. Six-month ROIC was 14.4%, down from 16.8%.
- Management expected most top-ten customers to grow in FY2012, while anticipating that their share of full-year sales would moderate if overall sales increased. The company generally lacks firm long-term customer purchase commitments and cites limited order visibility.
- Risks highlighted include customer forecast changes or cancellations, customer and market-sector concentration, component shortages and cost fluctuations, excess or obsolete inventory, program start-up and transition execution, capacity expansion costs, currency and multinational operating risks, economic weakness, and whether the Kontron arrangement achieves expected revenue and margins.
- A U.S. Customs and Border Protection review of import activity remained pending final determination of duties and fees. The company had accrued an amount it described as not material and did not expect a material adverse effect, while noting outcomes were not final. Other ordinary-course litigation was not expected to have a material adverse effect.
- The company revised prior-period balance-sheet and cash-flow classifications for upfront land-use-right payments, treating them as operating leases and operating cash outflows rather than capital leases and investing outflows. It concluded the errors were not material and reported no effect on statements of operations.
Important facts for investors to verify
- Progress and terms of the expected credit-facility refinancing, including the 2013 maturity and $75M balloon repayment.
- Actual revenue, profitability and transition costs under the Kontron arrangement, and fulfillment of its approximate $100M annual revenue commitment.
- Whether customer concentration, especially Juniper and the top ten customers, rises or moderates as management anticipated.
- Execution and funding of planned capital expenditures, facility expansions and their effect on margins and cash conversion.
- Final CBP duties, fees or penalties, and whether any material developments arise from tax examinations or uncertain tax positions.
- Effects of the land-use-right accounting revision in future comparative filings; the filing states no income-statement impact.