Plexus Corp. — Q2 FY2016 Form 10-Q
Business context and period: Plexus provides electronic manufacturing services, focused on mid-to-low-volume, higher-complexity programs. This unaudited quarterly report covers the three and six months ended April 2, 2016; comparisons are with the periods ended April 4, 2015.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | First half FY2016 | First half FY2015 |
|---|---|---|---|---|
| Net sales | $618.7 million | $651.3 million | $1,235.3 million | $1,316.0 million |
| Gross profit / margin | $53.3 million / 8.6% | $59.8 million / 9.2% | $103.3 million / 8.4% | $121.2 million / 9.2% |
| Operating income / margin | $23.3 million / 3.8% | $29.5 million / 4.5% | $44.9 million / 3.6% | $58.2 million / 4.4% |
| Net income | $16.8 million | $23.6 million | $31.2 million | $46.7 million |
| Diluted EPS | $0.50 | $0.69 | $0.92 | $1.36 |
- Cash flow: First-half operating cash flow was $91.3 million, versus $40.7 million; capital expenditures were $16.8 million, versus $16.7 million. Company-defined free cash flow was $74.5 million, compared with $24.0 million. Management attributed the operating cash flow improvement largely to lower working-capital needs as sales declined, including a $57.7 million reduction in accounts receivable.
- Liquidity and balance sheet: Cash was $409.8 million at April 2, up from $357.1 million at October 3, 2015. Current assets were $1,336.1 million and current liabilities $529.2 million. Total debt, capital lease and other financing obligations were $261.9 million, including $75.0 million drawn on the revolver and $175.0 million of 5.20% notes due June 2018. The revolver commitment is $265.0 million and expires May 2019. The company reported compliance with debt covenants.
- Approximately 92% of cash was held outside the U.S.; management intends to permanently reinvest those funds and notes that repatriation could create additional tax obligations.
- First-half ROIC was 11.6% and Economic Return was 0.6%, versus 14.5% and 3.5%, respectively, a year earlier. These are non-GAAP measures.
Material changes and drivers
- Sales fell 5.0% in the quarter and 6.1% in the first half. The main headwind was Networking/Communications, down $53.4 million in Q2 and $130.4 million year to date, driven by program disengagements and weaker end-market demand. APAC sales declined 15.3% in the quarter.
- Growth in Industrial/Commercial and Defense/Security/Aerospace partly offset the declines; EMEA sales also increased. Healthcare/Life Sciences was nearly flat in Q2.
- Gross margin decreased 60 basis points in Q2 and 80 basis points in the first half, principally due to lower APAC sales and customer mix. Operating income also reflected higher restructuring charges; lower selling and administrative expense partially offset these pressures.
- Foreign-exchange losses increased by $1.2 million in Q2 and $2.8 million for the first half versus prior-year periods, primarily from unhedged exposures in Malaysia and China.
Outlook, risks and unusual items
- Management estimated a 10%–12% effective tax rate for FY2016 and funded capital expenditures of $40–$45 million for the year. It expected remaining capital spending to support capabilities and program ramps and to refresh equipment.
- FY2016 restructuring costs were expected to total $5–$6 million. Q2 charges were $1.9 million, mainly employee severance related to the Fremont, California closure and partial Livingston, Scotland closure; the remaining restructuring accrual was expected to be used by fiscal year-end.
- Management’s stated long-term targets include a 4.7%–5.0% operating margin, 5% Economic Return, and 12% targeted organic revenue growth. These are targets, not reported-period results or assurance of future performance.
- Key disclosed risks include uncertain customer forecasts, delays or cancellations, customer and program concentration, new-program execution and start-up costs, component shortages, excess or obsolete inventory, competition, margin and pricing pressure, foreign-exchange volatility, and global economic weakness. The company also cautioned that restructuring savings and new-program revenue or profitability may not meet expectations.
- Ordinary-course litigation was not believed by management to have a material effect. Customer indemnities and product warranties are described; warranty liability was $6.3 million at April 2, 2016. The filing states that disclosure controls were effective and that no material change in internal control occurred during the quarter.
Important facts for investors to verify
- Whether Networking/Communications demand and customer program transitions stabilize, and whether new program ramps deliver expected revenue and margins.
- Whether APAC utilization and margins recover as sales change, and whether cost reductions sufficiently offset lower volumes.
- Whether foreign-exchange exposure, particularly in Malaysia and China, creates further earnings volatility.
- How much of overseas cash can be accessed without material tax cost, and whether working-capital-driven cash generation is sustainable.
- Actual FY2016 restructuring costs and capital expenditures versus management’s estimates, as well as debt covenant compliance and the timing of the 2018 notes maturity.