Plexus Corp. — Q1 FY2020 Form 10-Q
Reporting period: 14 weeks ended January 4, 2020, compared with 13 weeks ended December 29, 2018. The extra week makes year-over-year comparisons less directly comparable. Plexus provides electronic manufacturing services across AMER, APAC and EMEA.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $852.4 million | $765.5 million | +11.4% |
| Gross profit / margin | $79.2 million / 9.3% | $72.4 million / 9.5% | Margin down 20 bps |
| Operating income / margin | $39.9 million / 4.7% | $37.0 million / 4.8% | Margin down 10 bps |
| Net income | $31.0 million | $22.2 million | +39.6% |
| Diluted EPS | $1.03 | $0.69 | Up $0.34 |
| Operating cash flow | $74.7 million | $(33.3) million | Improved $108.1 million |
| Capital expenditures | $13.7 million | $24.9 million | |
| Free cash flow (non-GAAP) | $61.0 million | $(58.2) million |
Sales growth was led by APAC (+19.3%) and EMEA (+16.9%); AMER was essentially flat. By market sector, Industrial/Commercial rose 41.5% and Aerospace/Defense 40.5%, while Communications fell 53.0%. Management attributed margin pressure to customer mix and fixed costs supporting new program ramps; higher sales and APAC performance supported operating income.
Net income benefited from lower tax expense: the GAAP effective tax rate was 9.5%, versus 34.9% in the prior period, which included a $7.0 million Tax Reform-related charge. Current-period tax items included a $1.9 million benefit related to Treasury guidance, partly offset by $1.1 million of special items. Diluted EPS also benefited from fewer shares outstanding following repurchases.
Balance sheet, liquidity and capital
- Cash and restricted cash totaled $255.1 million at quarter-end; 94% of cash was held outside the U.S.
- Total debt, finance lease and other financing obligations were $254.7 million, including $62.0 million drawn on the revolving facility. The $350 million facility matures in May 2024; the company reported compliance with debt covenants.
- Current assets were $1.593 billion and current liabilities were $889.9 million. Inventory was $735.8 million, up from $700.9 million at fiscal year-end.
- Operating cash flow improved substantially, with management citing shipment timing, accounts payable and inventory management. Cash flow also reflects working-capital timing; the company sold $227.8 million of receivables through sale programs during the quarter.
- The company repurchased 90,667 shares for $6.3 million; $40.4 million remained under the $50 million authorization.
Outlook, risks and unusual items
- Management expects a fiscal 2020 effective tax rate of 13%–15% and funded capital expenditures of approximately $55–$70 million. It stated available cash, operating cash flow and potential credit-facility borrowings should meet liquidity needs for at least the next 12 months. No revenue or EPS guidance is provided in the filing text.
- Management cited risks including customer demand changes or cancellations, program ramp and transition costs, customer and sector concentration, component shortages, excess inventory, tariffs and trade disputes, foreign exchange, and broader economic uncertainty.
- The filing newly identifies the coronavirus outbreak in China as a risk; potential impacts on employees, customers, suppliers and logistics were still being assessed, including possible disruption to operations outside China due to component sourcing.
- On January 22, 2020, Plexus announced the planned closure of a leased AMER facility and transfer of its services to another company facility. The financial impact was still under assessment.
- Adoption of the lease accounting standard put operating lease assets and liabilities on the balance sheet; the company reported no material impact on income or cash flows. Litigation in the ordinary course was not expected to have a material effect.
Most important facts for investors to verify
- How much reported sales growth reflects the extra quarter week versus underlying demand, and whether new program ramps sustain margins.
- Whether the sharp Communications-sector contraction and weaker AMER/EMEA segment profitability persist.
- Whether working-capital cash flow gains are repeatable, considering inventory levels and the use of receivable-sale programs.
- The realized impact of coronavirus-related supply-chain disruption and the AMER facility closure.
- Whether the expected 13%–15% tax rate and $55–$70 million capital-spending outlook are achieved.