Plexus Corp. — Form 10-Q summary
Reporting period: Third quarter and first nine months of fiscal 2017, ended July 1, 2017. The quarter comprised 13 weeks. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Business context and performance
Plexus provides electronics manufacturing services, including product design, manufacturing, fulfillment and sustaining services, primarily for mid-to-low-volume, higher-complexity programs. It reports in the Americas (AMER), Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA).
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $618.8 | $667.6 | $1,858.2 | $1,902.9 |
| Gross profit | $61.2 | $62.5 | $189.3 | $165.8 |
| Gross margin | 9.9% | 9.4% | 10.2% | 8.7% |
| Operating income | $29.5 | $30.9 | $95.9 | $75.8 |
| Operating margin | 4.8% | 4.6% | 5.2% | 4.0% |
| Net income | $25.6 | $26.1 | $83.1 | $57.3 |
| Diluted EPS | $0.74 | $0.76 | $2.40 | $1.68 |
Key financial changes
- Quarter: Sales declined 7.3% year over year, while gross and operating margins improved. Net income fell $0.5 million and diluted EPS declined $0.02.
- Nine months: Sales declined 2.3%, but gross profit increased 14.2% and operating income increased 26.6%. Net income rose $25.7 million and diluted EPS increased $0.72. Higher gross margins, lower restructuring charges and improved other income contributed to the improvement.
- Regional mix: Q3 AMER sales fell 26.2% and segment operating income declined to $7.4 million from $22.1 million. APAC sales grew 11.4% and operating income rose to $49.8 million from $38.3 million. EMEA sales grew 29.5%, but the segment recorded a $0.8 million operating loss. For the nine months, AMER remained weaker while APAC led profit growth.
- Market sectors: Q3 Communications sales fell to $98.7 million from $155.6 million; Healthcare/Life Sciences and Defense/Security/Aerospace grew modestly. Over nine months, Industrial/Commercial and Healthcare/Life Sciences grew, while Communications declined materially.
- Taxes: Effective tax rates were 6.5% for Q3 and 8.5% for the first nine months, versus 9.1% and 12.6% a year earlier. Management cited earnings in lower-tax jurisdictions and a $1.5 million APAC tax benefit.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $121.9 million, versus $122.6 million a year earlier. Capital expenditures were $24.4 million, producing reported free cash flow of $97.5 million versus $98.8 million.
- Cash, cash equivalents and restricted cash totaled $520.0 million, up from $433.0 million at fiscal year-end. Approximately 98.2% of cash was held outside the United States; management said it intended to permanently reinvest foreign-held funds and did not anticipate another similar repatriation absent tax reform.
- Total debt, capital lease and other financing obligations were $293.4 million, including $88.0 million drawn on the revolving facility and $175.0 million of 5.20% senior notes due June 15, 2018. The notes were classified as current because maturity was within 12 months. The company reported compliance with debt covenants.
- The $300 million revolving credit facility expires in July 2021; its Q3 weighted-average rate was 2.221%. Management expected to refinance the notes with a similar long-term product, but gave no assurance of availability or favorable terms. It also said cash, operating cash flow and available credit should meet needs for the next 12 months.
- Inventory was $653.1 million, up from $564.1 million at October 1, 2016. Inventory days increased to 107 from 87 a year earlier; management attributed the build to new-program ramps and longer component lead times. It anticipated a meaningful Q4 reduction and more normalized levels in fiscal 2018, with no assurance.
- Receivable-sale programs generated $283.1 million of proceeds during the nine months on $284.6 million of receivables sold. The programs are non-committed and proceeds affect operating cash flow; increased factoring materially supported receivables cash flows.
Outlook, risks and unusual items
- Management estimated a fiscal 2017 effective tax rate of 8.0%–9.0% and funded capital expenditures of approximately $45–$50 million for the year. It stated targets of 4.7%–5.0% operating margin, 12% organic revenue growth and 5% economic return; these are management goals, not a specific quarterly revenue forecast.
- Management attributed margin gains to supply-chain productivity, favorable customer mix, and lower warranty and inventory-obsolescence expenses. It cited lower AMER demand and Communications-sector weakness as offsets, alongside APAC program ramps.
- Key stated risks include customer forecast changes, delays or cancellations; customer and program concentration; start-up and transition execution; component shortages and longer lead times; excess or obsolete inventory; pricing and margin pressure; foreign exchange, political and trade changes; and the pending U.K. exit from the EU.
- No restructuring charges were recorded in the first nine months of FY2017, compared with $5.2 million in the prior-year period. A $15.7 million facility-related lease capitalization was a non-cash financing transaction. The company’s litigation was described as ordinary-course and not expected to have a material effect.
- The company said the new revenue-recognition standard, effective for it in FY2019, will shift significant revenue from recognition at delivery to recognition over time and could materially affect reported results and balance-sheet presentation. The transition method had not been selected.
Important facts for investors to verify
- Whether the Q4 inventory reduction and subsequent normalization occur as management anticipated, given elevated inventory days and longer component lead times.
- How the AMER downturn and Communications-sector weakness compare with continuing APAC growth, and whether new program ramps deliver expected revenue and profitability.
- Refinancing progress and terms for the $175 million notes due June 2018, while tracking revolver usage and covenant compliance.
- The sustainability of cash generation and the extent to which operating cash flow depends on receivable factoring and working-capital movements.
- Actual fiscal 2017 tax rate and capital expenditures versus management estimates, and the eventual financial-statement effects and transition method for the FY2019 revenue standard.