Plexus Corp. 10-Q Summary
Reporting period: Fiscal third quarter ended June 29, 2019; results compare the three and nine months ended June 29, 2019 with the corresponding 2018 periods. Amounts are U.S. dollars.
Business context and results
Plexus provides electronics manufacturing services, including design, supply-chain, manufacturing and aftermarket services, across the AMER, APAC and EMEA regions. It serves Healthcare/Life Sciences, Industrial/Commercial, Aerospace/Defense and Communications markets.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $799.6 million | $726.4 million | $2,354.2 million | $2,102.3 million |
| Gross profit | $71.0 million | $67.8 million | $214.0 million | $184.3 million |
| Gross margin | 8.9% | 9.3% | 9.1% | 8.8% |
| Operating income | $34.4 million | $32.4 million | $104.5 million | $81.3 million |
| Operating margin | 4.3% | 4.5% | 4.4% | 3.9% |
| Net income (loss) | $24.8 million | $26.5 million | $71.8 million | $(59.7) million |
| Diluted EPS | $0.81 | $0.79 | $2.28 | $(1.79) |
For the nine-month period, operating cash flow was $7.0 million, versus $41.5 million in 2018. Capital expenditures were $74.6 million, producing negative free cash flow of $67.6 million, compared with negative $10.6 million a year earlier. Cash and restricted cash totaled $205.4 million at quarter-end, down from $297.7 million at fiscal year-end. Total debt and capital-lease obligations were $326.6 million; current maturities were $139.0 million. Current assets were $1,557.7 million and current liabilities were $875.6 million.
Changes and drivers
- Q3 sales rose 10.1% year over year; nine-month sales rose 12.0%. AMER was the strongest regional growth driver, while APAC was nearly flat in Q3. Healthcare/Life Sciences and Aerospace/Defense grew; Communications declined.
- Q3 gross margin declined 40 basis points, with higher labor and fixed costs supporting new program ramps. Nine-month gross margin improved 30 basis points, partly because the prior-year period included a $13.5 million one-time employee bonus.
- Nine-month operating income increased 28.5%, supported by higher sales and the absence of the prior-year bonus. Q3 net income fell despite higher sales and operating income, primarily due to higher income tax expense.
- The prior-year nine-month net loss included a substantial one-time Tax Reform charge. Reported tax expense was $133.0 million in 2018 versus $20.7 million in 2019; reported effective tax rates were 181.4% and 22.4%, respectively.
Outlook, liquidity and risks
- Management expects a fiscal 2019 reported effective tax rate of 19%–21%, or 13%–15% excluding the first-quarter one-time Tax Reform impact. Estimated fiscal 2019 capital expenditures are $80–$90 million.
- Management’s stated long-term goals include 4.7%–5.0% operating margin, 5.0% economic return and 12.0% targeted organic revenue growth. These are objectives, not a specific near-term sales forecast.
- The company says cash, operating cash flow and available credit should meet liquidity needs for at least the next 12 months. It also expects $72.9 million of future cash payments for taxes related to Tax Reform, with most U.S. federal payments scheduled over eight years.
- A new five-year unsecured revolving credit facility increased commitment from $300 million to $350 million and extended maturity to May 2024. Revolver borrowings were $133 million at quarter-end; the company reported covenant compliance. The facility may be increased to $600 million subject to conditions.
- Receivables-sale programs generated $693.7 million of cash proceeds during the nine months. These sales support working capital; discounts are recorded in miscellaneous expense. Customer deposits and receivables sales also affected operating cash-flow comparisons.
- Topic 606 was adopted in fiscal 2019. Revenue is recognized over time for qualifying contracts; about 92% of Q3 and 90% of nine-month revenue was recognized over time. Adoption increased reported nine-month sales by $29.3 million and net income by $1.3 million versus the unaudited presentation without adoption.
- Key stated risks include customer order delays, cancellations and forecast inaccuracies; market and customer concentration; component shortages and tariffs; program-ramp and execution costs; excess inventory; foreign exchange; and tax, regulatory and cybersecurity risks. Ordinary-course litigation was not expected by management to have a material effect.
Important facts for investors to verify
- Whether weak operating cash generation and negative free cash flow persist as facility spending and working-capital requirements continue.
- How much sales growth and profitability depend on new program ramps, customer demand, and the timing of customer deposits and receivable sales.
- Whether the margin decline in Q3 reverses, particularly given higher ramp-related labor and fixed costs and weaker APAC segment operating income.
- The effect of Topic 606’s over-time revenue recognition and contract assets on reported revenue, earnings and cash conversion.
- Debt maturities, revolver utilization, covenant headroom, and the timing of Tax Reform-related cash payments.
- Execution and utilization of the Penang and Guadalajara manufacturing investments, alongside the $80–$90 million fiscal 2019 capital-spending estimate.