Plexus Corp. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2010, ended July 3, 2010. Plexus provides electronic manufacturing services, including product design, manufacturing, testing and supply-chain services, primarily for complex, mid-to-lower-volume products. The nine-month comparison is not exactly like-for-like: fiscal 2010 covered 273 days, versus 280 days in the prior-year period.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $536.4 million | $378.6 million | $1,457.8 million | $1,223.6 million |
| Gross profit / margin | $55.5 million / 10.4% | $34.6 million / 9.1% | $150.6 million / 10.3% | $117.0 million / 9.6% |
| Operating income | $27.0 million | $12.1 million | $70.6 million | $38.3 million |
| Net income | $24.4 million | $9.2 million | $62.9 million | $31.3 million |
| Diluted EPS | $0.59 | $0.23 | $1.54 | $0.79 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $(26.8) million | $109.3 million |
Q3 sales rose 41.7% year over year; nine-month sales rose 19.1%. Management attributed growth mainly to stronger demand from existing customers and new programs. Gross margin benefited from customer mix and better capacity utilization; nine-month results also benefited from a litigation settlement. Higher fixed costs and headcount partly offset these gains. Selling and administrative expense was $28.5 million in Q3 and $79.9 million year to date. Effective tax rates were 2% in both 2010 periods, compared with 10% for Q3 2009 and 4% year to date in 2009, as reported by management.
Balance sheet, cash flow and liquidity
- At July 3, 2010, cash was $190.2 million, down from $258.4 million at fiscal 2009 year-end. Current assets were $966.8 million and current liabilities $459.2 million.
- Inventory increased to $468.9 million from $322.4 million; accounts receivable rose to $274.7 million from $193.2 million. Management linked inventory growth to anticipated demand. Inventory turns fell to 4.1 from 4.4, and inventory days rose to 89 from 83.
- Nine-month operating cash use of $26.8 million primarily reflected increases in inventory and receivables, partly offset by higher accounts payable. Capital expenditures were $47.3 million; management estimated fiscal 2010 capital expenditures of $80–$90 million.
- Long-term debt and capital lease obligations totaled $134.8 million, including $116.3 million in term-loan borrowings. No revolving-credit borrowings were outstanding. The company reported compliance with all credit-facility covenants and $100 million of revolving availability.
- Management said cash, expected operating cash flows, short-term investments, credit availability and leasing capacity should cover working-capital and fixed-capital needs for the next 12 months. The filing does not provide a separate cash-flow forecast.
Changes, outlook and risks
- Q3 growth was broad across sectors, while nine-month sales increased in all sectors except defense/security/aerospace. Asia revenue increased substantially; Juniper Networks remained the largest customer, at 16% of sales for both Q3 and the nine-month period, down from 23% and 21%, respectively, in the prior-year comparisons.
- No restructuring or impairment charges were recorded in the 2010 periods; the prior-year nine-month period included $8.6 million of such costs. The company also received approximately $3.2 million in settlement funds in December 2009, recorded against cost of sales.
- For fiscal Q4 2010, management forecast sales of $530–$555 million and diluted EPS of $0.58–$0.63, before restructuring or impairment costs. It expected the fiscal-year effective tax rate to remain in the low single digits. These are forecasts, not results.
- Management cited constrained component supply and possible shortages, delays or price increases that could affect sales, inventory and margins. Customer forecasts are uncertain, and the company generally lacks firm long-term purchase commitments. Juniper and the ten largest customers represented 16% and 54% of Q3 sales, respectively.
- Two customers had been acquired by third parties; Plexus anticipated declining fiscal 2011 revenue from both, with one likely and one possible disengagement. Other risks include program transitions and start-up costs, excess or obsolete inventory, economic conditions, and customer concentration.
- A U.S. Customs and Border Protection review of import activity remained ongoing. Plexus planned to report identified errors and pay associated duties and fees; management did not expect a material adverse impact. Ordinary-course lawsuits were also disclosed, with no material adverse effect expected by management.
- The company committed to acquire leasehold land in Penang, Malaysia, for approximately $9.1 million, subject to contingencies, and anticipated beginning facility construction in fiscal 2011. It also held $2.0 million of auction-rate securities that may need to be held until market conditions improve or underlying notes mature.
Investor verification priorities
- Track whether forecast fourth-quarter sales and EPS were achieved, and whether the low-single-digit tax rate persisted.
- Check whether working-capital growth, particularly inventory and receivables, converted into operating cash and improved inventory turns.
- Monitor component availability, related costs, customer order changes, and the pace and profitability of new program ramps.
- Assess Juniper and broader customer concentration, including the expected fiscal 2011 impact of customer acquisitions and possible disengagements.
- Review outcomes of the customs assessment, Penang land purchase and expansion plans, and the company’s ability to meet capital-spending needs while maintaining liquidity and covenant compliance.