PLEXUS CORP. — Fiscal 2013 Q1 Form 10-Q
Reporting period: Three months ended December 29, 2012; comparisons are primarily with the three months ended December 31, 2011. Plexus provides electronic manufacturing and product-realization services across the Americas (AMER), Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA).
Financial performance
| Metric | Q1 FY2013 | Prior-year quarter |
|---|---|---|
| Net sales | $530.5 million | $529.7 million |
| Gross profit / margin | $51.2 million / 9.6% | $51.7 million / 9.8% |
| Operating income / margin | $21.5 million / 4.1% | $23.8 million / 4.5% |
| Net income | $16.6 million | $17.9 million |
| Diluted EPS | $0.47 | $0.51 |
| Operating cash flow | $8.5 million | $29.8 million |
| Capital expenditures | $25.8 million | $22.2 million |
| Free cash flow (company-defined) | $(17.3) million | $7.6 million |
Sales were nearly flat year over year. Net income fell 7.3%; lower gross profit and higher selling and administrative expense contributed to lower earnings. Gross profit was pressured by $2.2 million of higher fixed costs associated with site expansions, partly offset by sales of previously written-down inventory and favorable customer mix. S&A increased $1.8 million, including Kontron-related amortization and bad-debt expense.
Revenue by segment was AMER $259.0 million, down 19.3%; APAC $272.4 million, up 16.1%; and EMEA $28.2 million, up 44.6%. Segment operating income was $19.3 million in AMER and $25.2 million in APAC; EMEA recorded a $0.2 million operating loss. Corporate and other costs were $22.8 million.
Balance sheet, cash flow and capital
At December 29, 2012, cash and cash equivalents were $274.2 million, down from $297.6 million at fiscal year-end. Current assets were $1.067 billion and current liabilities were $450.6 million. Inventory was $481.0 million, up from $457.7 million; accounts receivable was $290.5 million.
Total debt and capital lease obligations were approximately $269.8 million, including $82.5 million outstanding under the term loan and $175 million of 5.20% senior notes. No revolver borrowings were outstanding; $160 million of committed revolving capacity was available. The company reported compliance with its debt covenants. Shareholders’ equity was $664.5 million.
Operating cash flow declined principally because of working-capital demands. The annualized cash cycle increased to 74 days from 70, with higher receivable and inventory days. Investing cash use was $25.8 million, primarily capital expenditures. Cash used in financing was $6.7 million, including $6.1 million of share repurchases. Management estimated fiscal 2013 capital expenditures of approximately $100 million, largely for replacement facilities in Neenah, Wisconsin, and Oradea, Romania.
Material changes, outlook and risks
- Juniper disengagement: Juniper, Plexus’s largest customer, notified Plexus of its intention to disengage. Juniper represented 12% of Q1 sales, versus 22% a year earlier. Production was expected to continue through fiscal Q3, including transition buffer inventory. Plexus expected Juniper cash deposits to mitigate inventory exposure, anticipated redeploying substantially all standard equipment and most employees, and estimated up to $0.3 million of possible equipment impairment and up to $1.0 million of severance and retention costs in the second half of FY2013.
- Revenue mix: Networking/communications sales fell $30.9 million amid softer demand and reduced Juniper demand. Healthcare/life sciences rose $19.0 million and defense/security/aerospace rose $17.1 million, reflecting program ramps and growth. The Kontron arrangement contributed approximately $17.8 million of incremental quarterly sales; Kontron had committed to approximately $100 million of incremental annual revenue for two years.
- Management outlook: The estimated FY2013 effective tax rate was 6%–8%. Management expected cash, operating cash flow, credit availability and leasing capacity to meet requirements for the next 12 months and foreseeable future. Its stated strategic targets include 10% gross margin, 5% operating margin, and ROIC 500 basis points above WACC; estimated FY2013 WACC was 12%. These targets are not presented as quarterly earnings guidance.
- Key risks and contingencies: Customer demand, order timing and forecast accuracy are uncertain; risks include customer concentration, program transitions, pricing pressure, inventory exposure, component availability, foreign exchange, and facility expansion execution. A financially distressed customer had $6.9 million of related receivables and inventory; Plexus recorded a $0.7 million estimated loss and said additional loss was reasonably possible but not estimable. The company also disclosed ordinary-course litigation and customer indemnity and warranty obligations, which management did not consider material.
- Tax and unusual items: The effective tax rate was 6%, benefiting from APAC income and tax holidays; the rate may vary with geographic earnings mix. Full valuation allowances remained on certain deferred tax assets. A U.S. tax examination could be resolved within 12 months, but any impact was not estimable. Prior-period land-use-right classification errors were revised; the company said they were not material and did not affect prior-period operating results.
Important facts for investors to verify
- Juniper’s actual exit timing, sales decline, transition costs, and any resulting inventory or asset impairments.
- Whether working capital improves and operating cash flow supports the planned capital expenditures and repurchases.
- Progress and costs of the Neenah and Oradea facility projects, and whether fiscal 2013 capex remains near $100 million.
- Customer recovery of the $6.9 million exposure and whether the recorded $0.7 million allowance proves sufficient.
- Segment demand, margins, and the sustainability of Kontron-related revenue and APAC tax benefits.