Plexus Corp. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 28, 2013; comparative period ended December 29, 2012. Plexus provides electronic manufacturing services across the Americas, Asia-Pacific and EMEA. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $533.9 million | $530.5 million |
| Gross profit / margin | $51.5 million / 9.6% | $51.2 million / 9.6% |
| Operating income / margin | $21.8 million / 4.1% | $21.5 million / 4.1% |
| Net income | $17.7 million | $16.6 million |
| Diluted EPS | $0.51 | $0.47 |
| Operating cash flow | $3.7 million | $8.5 million |
| Capital expenditures | $21.8 million | $25.8 million |
| Free cash flow | $(18.1) million | $(17.3) million |
Sales rose 0.6%. Net income increased 6.6%, with lower other expense partly offset by higher income tax expense. Selling and administrative expenses fell $3.5 million, but $3.6 million of restructuring charges offset that reduction. Gross and operating margins were unchanged year over year. The effective tax rate was 11%, versus 6%; management expects a 9%–11% effective rate for FY2014.
Segments and material changes
- AMER: Sales increased 2.3% to $265.0 million; operating income fell 11.4% to $17.1 million, primarily due to Neenah facility costs.
- APAC: Sales declined 0.8% to $270.2 million; operating income rose 26.6% to $31.9 million, reflecting favorable customer mix and lower material costs.
- EMEA: Sales declined 5.0% to $26.8 million; operating loss widened to $2.5 million, mainly from higher facility-related fixed costs.
- Juniper disengagement reduced sales by $64.1 million year over year. Juniper revenue was not significant in this quarter, and Plexus expects no further Juniper revenue in FY2014. Growth in healthcare/life sciences and other customer programs largely offset the loss.
Liquidity, debt and capital allocation
Cash and cash equivalents were $324.2 million at December 28, 2013, down from $341.9 million at September 28, 2013. Current assets were $1.093 billion and current liabilities $475.0 million. Balance-sheet debt and capital lease obligations totaled $260.7 million, including $3.8 million current; principal debt outstanding was $250 million ($75 million under the credit facility and $175 million of 5.20% senior notes). No revolving-credit borrowings were outstanding at quarter-end. The company reported compliance with debt covenants.
Operating cash flow was limited by higher working-capital needs, particularly inventory. Cash returned to Juniper included $26.3 million of customer deposits; the inventory-related deposit balance also reflects an $11.0 million return to Juniper. Approximately 94% of cash was held outside the U.S.; repatriation could create additional tax obligations. Management believes available cash, operating cash flow, credit availability and leasing capacity are sufficient for foreseeable requirements.
FY2014 capital expenditures are estimated at approximately $75 million, with remaining spending expected to support program ramps and the Guadalajara facility. The company repurchased 173,884 shares for approximately $6.9 million during the quarter under a $30 million authorization. A $45 million revolver draw was borrowed and repaid during the quarter.
Outlook, risks and unusual items
- Management targets 12% organic revenue growth and a 5% operating margin under its longer-term financial model; these are targets, not a specific FY2014 revenue forecast. FY2014 estimated WACC is 11%; reported Q1 ROIC was 14.5%, excluding restructuring charges, versus 12.6% a year earlier.
- The new Neenah facility opened during the quarter. Restructuring costs were $3.6 million, mainly facility exit and consolidation costs; approximately $0.6 million of additional charges were expected in Q2 FY2014. The remaining $2.9 million accrued balance was expected to be used during FY2014.
- Key risks include customer delays, cancellations and forecast inaccuracy; customer and sector concentration; new-program execution and start-up costs; component shortages; excess or obsolete inventory; facility ramp costs; foreign-exchange exposure; and global economic conditions.
- Foreign-currency contracts and interest-rate swaps are used for risk management, not speculation. Management stated that a 10% U.S. dollar movement would not materially affect the company’s financial position, results or cash flows. Litigation in the ordinary course was not expected by management to have a material effect; customer indemnities were not considered material.
- Disclosure controls were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether new program ramps and sector growth can sustain sales and profitability after the Juniper disengagement.
- Execution and cost of the Neenah consolidation and Guadalajara expansion, including the expected Q2 restructuring charges and FY2014 capital spending.
- Working-capital trends, especially inventory, customer deposits and operating cash generation.
- Tax-rate expectations and the effects of geographic earnings mix and the expiration of the China tax holiday.
- Availability and potential tax cost of overseas cash, as well as debt-covenant compliance and future capital allocation.