Plexus Corp. — Q2 FY2011 Form 10-Q
Reporting period: Quarter and six months ended April 2, 2011; comparable periods ended April 3, 2010. Dollar amounts below are in millions except per-share data.
Business context
Plexus provides electronic manufacturing services, including product design and development, supply-chain management, manufacturing, testing, fulfillment, and aftermarket services. It focuses on mid-to-lower-volume, higher-complexity products across wireline/networking, wireless infrastructure, medical, industrial/commercial, and defense/security/aerospace markets. In FY2011, it reorganized segment reporting into Americas (AMER), Asia Pacific (APAC), and Europe, Middle East and Africa (EMEA).
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Net sales | $568.1 | $491.0 | $1,133.9 | $921.4 |
| Gross profit | $55.5 | $50.5 | $110.4 | $95.0 |
| Gross margin | 9.8% | 10.3% | 9.7% | 10.3% |
| Operating income | $26.4 | $23.4 | $54.3 | $43.6 |
| Net income | $23.9 | $20.7 | $48.9 | $38.6 |
| Diluted EPS | $0.59 | $0.51 | $1.19 | $0.95 |
- Sales rose 15.7% for the quarter and 23.1% for the six-month period, driven by demand from existing customers and new medical and industrial/commercial customers. Wireless infrastructure was the exception, with weaker demand and customer disengagement.
- Gross margin declined year over year. Management cited higher headcount and fixed costs, customer mix, and early-stage program costs. The six-month comparison also reflects a $3.2 million litigation settlement that benefited prior-year cost of sales; excluding it, management said current-period margin would have increased slightly.
- Selling and administrative expense was $29.1 million for the quarter and $56.1 million for six months. The six-month increase reflected added headcount and stock compensation, partly offset by a $0.8 million supplier-dispute recovery and lower incentive compensation.
- Income tax expense was $0.7 million for the quarter and $1.5 million for six months; the effective tax rate was 3% in both current periods. Asia Pacific tax holidays reduce the rate, which may vary with the geographic mix of earnings.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $51.6 million, versus $5.0 million a year earlier. Investing cash outflow was $27.4 million, principally for property and equipment; financing cash outflow was $89.5 million, primarily share repurchases and debt payments.
- Cash declined to $123.4 million at April 2, 2011, from $188.2 million at October 2, 2010. Current assets were $943.6 million and current liabilities $450.7 million.
- Total debt and capital lease obligations were approximately $121.1 million, including $105.0 million of term-loan borrowings; no revolving credit was outstanding. The company had $100 million of revolving availability and was in compliance with its debt covenants.
- After quarter-end, Plexus issued $100 million of 5.20% senior notes due June 15, 2018, and planned to issue the remaining $75 million on June 15, 2011. The company reported an effective rate of 4.97% after treasury-rate-lock proceeds. Management expected cash, operating cash flow, credit availability, the notes, and leasing capacity to meet requirements for the next 12 months.
- The board authorized up to $200 million in share repurchases. By April 2, Plexus had repurchased 2.7 million shares for approximately $83.4 million, at an average $30.57 per share; approximately $10.2 million of purchases remained unsettled at period-end.
Segments, outlook and risks
- For the quarter, AMER sales were $332.4 million and operating income $19.0 million; APAC sales were $265.9 million and operating income $29.6 million; EMEA sales were $24.3 million and operating income $0.1 million. Inter-segment sales are eliminated in consolidated results.
- Management expected FY2011 capital expenditures of approximately $100 million, including facility construction in Penang, Malaysia, and Xiamen, China. It expected a 3% annual effective tax rate. No specific revenue or earnings guidance was provided in the filing text.
- Juniper Networks represented 16% of quarterly sales and 17% of six-month sales; the top ten customers represented 53% and 54%, respectively. Management noted that customers generally do not provide firm, long-term purchase commitments, and forecasts can change.
- Risks include customer and program concentration, forecast changes, pricing and mix pressure, start-up costs, component shortages and cost increases, excess or obsolete inventory, and foreign-exchange exposure. The March 2011 Japan earthquake and tsunami disrupted supply for certain components; the potential scale and duration of the impact were not yet known.
- A U.S. Customs and Border Protection review of import activity was pending final duties and fees determination. Plexus said it did not expect the matter to have a material adverse effect. Other ordinary-course lawsuits were also not expected by management to be material.
Important facts for investors to verify
- Whether sales growth and new customer programs convert into sustainable margins as start-up costs and customer mix change.
- Whether the component supply disruptions, including those linked to Japan, affect production, costs, or inventory.
- Progress on the remaining $75 million senior-note issuance, the share-repurchase program, and debt maturities and covenants.
- Customer concentration and the expected ramp-down or disengagement of acquired customers and wireless infrastructure programs.
- Final outcome and potential costs of the CBP import review, and continued eligibility for Asia Pacific tax holidays.