Plexus Corp. — Q1 Fiscal 2019 Form 10-Q
Reporting period: Three months ended December 29, 2018; comparative period ended December 30, 2017. Plexus provides electronics manufacturing and related services across Healthcare/Life Sciences, Industrial/Commercial, Communications, and Aerospace/Defense markets.
Financial performance and position
| Metric | Q1 FY2019 | Prior-year quarter |
|---|---|---|
| Net sales | $765.5 million | $677.3 million |
| Gross profit / margin | $72.4 million / 9.5% | $63.5 million / 9.4% |
| Operating income / margin | $37.0 million / 4.8% | $31.6 million / 4.7% |
| Net income (loss) | $22.2 million | $(98.5) million |
| Diluted EPS | $0.69 | $(2.93) |
| Operating cash flow | $(33.3) million | $69.1 million |
| Capital expenditures | $24.9 million | $16.7 million |
- Growth and margins: Sales increased 13.0% year over year. Gross margin improved 10 basis points and operating margin improved 10 basis points. Management attributed operating improvement mainly to higher sales, better fixed-cost leverage, and segment performance, partly offset by higher selling and administrative costs and new-program ramp costs.
- Segment and market mix: Sales rose in AMER (18.4%), APAC (9.2%), and EMEA (13.3%). Healthcare/Life Sciences grew 26.8% and Aerospace/Defense 22.7%; Communications declined 7.7%, primarily reflecting a customer disengagement.
- Cash and working capital: Cash and restricted cash totaled $192.9 million at quarter-end, down from $297.7 million at fiscal year-end. Operating cash use reflected higher receivables and inventory, including inventory for program ramps and longer component lead times. Free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $(58.2) million versus $52.4 million. The annualized cash cycle increased to 83 days from 67 days.
- Debt and liquidity: Debt and capital lease obligations totaled $196.2 million, including $153.0 million of debt excluding capital leases. The $300 million revolving credit facility had $3 million drawn at quarter-end; the company reported covenant compliance. Management said cash, operating cash flow, and available borrowing capacity should meet anticipated needs for the next 12 months.
- Capital allocation: Plexus repurchased 869,949 shares for $50.1 million at an average $57.53 per share; $128.8 million remained under the $200 million authorization.
Material changes, outlook, and risks
- Tax comparison: The prior-year quarter included a substantial Tax Reform-related charge, contributing to its $98.5 million net loss and 439.2% reported effective tax rate. Current-quarter tax expense was $11.9 million and the reported effective rate was 34.9%; management cited a $7.0 million Tax Reform adjustment. Excluding Tax Reform impacts, the company reported non-GAAP effective rates of 14.2% and 10.4%, respectively. Fiscal 2019 estimated effective tax rate guidance was 13%–15%.
- Revenue accounting change: Plexus adopted ASC 606 using the modified retrospective method. Revenue for a significant portion of business is now recognized over time as products are produced; 89% of current-quarter revenue was recognized over time. Adoption increased opening retained earnings by $7.8 million. For the quarter, adoption increased reported sales by $6.2 million and net income by $0.8 million versus the company’s presentation without adoption; prior-year figures were not restated, limiting comparability.
- Spending and operating targets: Management estimated FY2019 capital expenditures of approximately $70 million–$90 million, primarily for manufacturing facilities, equipment, and program ramps. Stated management targets include a 4.7%–5.0% operating margin, 5.0% Economic Return, and 12.0% targeted organic revenue growth; these are objectives, not guaranteed outcomes.
- Cash obligations and risks: Future operating cash flows are expected to include $80 million of cash payments related to Tax Reform accrued taxes, including $69.4 million of U.S. federal taxes scheduled in installments through FY2026; timing of $10.6 million of foreign withholding taxes was uncertain. Risks cited include customer delays, cancellations and forecast variability; customer and sector concentration; component shortages and extended lead times; excess or obsolete inventory; tariffs and trade measures; program ramp and transition execution; foreign exchange; and tax developments.
- Other matters: The company reported ordinary-course litigation that management did not believe would materially affect its financial position, results, or cash flows. It was in compliance with debt covenants. The filing reported effective disclosure controls.
Key facts for investors to verify
- Whether sales growth and new-program ramps continue, particularly given the Communications decline and customer disengagements.
- Whether receivables, contract assets, and elevated inventory convert to cash, and whether component lead times or customer demand create excess-inventory exposure.
- Progress against the FY2019 capital expenditure estimate and the expected timing and funding of facility projects.
- Cash generation after the scheduled Tax Reform payments, and the company’s continued access to its revolver and receivables-sale programs.
- How ASC 606 affects reported growth, contract assets, inventory, and comparability with periods not restated under the new standard.
- Whether the guided tax rate and management’s operating and return targets are achieved; these targets are subject to business and economic risks.