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PLXS > SEC Filings for PLXS > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for PLEXUS CORP

Form 10-Q for PLEXUS CORP


31-Jul-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

"SAFE HARBOR" CAUTIONARY STATEMENT:
The statements contained in this Form 10-Q that are guidance or which are not historical facts (such as statements in the future tense and statements including believe, expect, intend, plan, anticipate, goal, target and similar terms and concepts), including all discussions of periods which are not yet completed, are forward-looking statements that involve risks and uncertainties. These risks and uncertainties include, but are not limited to: the risk of customer delays, changes, cancellations or forecast inaccuracies in both ongoing and new programs; the poor visibility of future orders, particularly in view of changing economic conditions; the adequacy of restructuring and similar charges as compared to actual expenses; the economic performance of the industries, sectors and customers we serve; the effects of the volume of revenue from certain sectors or programs on our margins in particular periods; our ability to secure new customers, maintain our current customer base and deliver product on a timely basis; the particular risks relative to new or recent customers or programs, which risks include customer and other delays, start-up costs, potential inability to execute, the establishment of appropriate terms of agreements, and the lack of a track record of order volume and timing; the risks of concentration of work for certain customers; our ability to manage successfully a complex business model characterized by high customer and product mix, low volumes and demanding quality, regulatory, and other requirements; the risk that new program wins and/or customer demand may not result in the expected revenue or profitability; the fact that customer orders may not lead to long-term relationships; the effects of shortages and delays in obtaining components as a result of economic cycles or natural disasters; the risks associated with excess and obsolete inventory, including the risk that inventory purchased on behalf of our customers may not be consumed or otherwise paid for by the customer, resulting in an inventory write-off; the weakness of areas of the global economy; the effect of changes in the


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pricing and margins of products; the effect of start-up costs of new programs and facilities, such as our announced plans to replace a facility in Mexico and our other recent, planned and potential future expansions, closures or replacements; increasing regulatory and compliance requirements; possible unexpected costs and operating disruption in transitioning programs; raw materials and component cost fluctuations; the potential effect of fluctuations in the value of the currencies in which we transact business; the potential effects of regional results on our taxes and ability to use deferred tax assets; the potential effect of world or local events or other events outside our control (such as drug cartel-related violence in Mexico, changes in oil prices, terrorism and weather events); the impact of increased competition; and other risks detailed herein, as well as those in our other Securities and Exchange Commission filings (particularly in "Risk Factors" in our fiscal 2013 Form 10-K).

OVERVIEW
Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or "we") participate in the Electronic Manufacturing Services ("EMS") industry. We deliver optimized Product Realization solutions through a unique Product Realization Value Stream services model. This customer focused services model seamlessly integrates innovative product conceptualization, design, commercialization, manufacturing, fulfillment and sustaining services to deliver comprehensive end-to-end solutions for customers in the Americas ("AMER"), Asia-Pacific ("APAC") and Europe, Middle East and Africa ("EMEA") regions. Customer service is provided to over 140 branded product companies in the Networking/Communications, Healthcare/Life Sciences, Industrial/Commercial and Defense/Security/Aerospace market sectors. Our customers' products typically require exceptional production and supply-chain flexibility, necessitating an optimized demand-pull-based manufacturing and supply chain solution across an integrated global platform. Many of our customers' products require complex configuration management and direct order fulfillment to their customers across the globe. In such cases we provide global logistics management and after-market service and repair. Our customers' products may have stringent requirements for quality, reliability and regulatory compliance. We offer our customers the ability to outsource all phases of product realization, including product specifications; development, design and design verification; regulatory compliance support; prototyping and new product introduction; manufacturing test equipment development; materials sourcing, procurement and supply-chain management; product assembly/manufacturing, configuration and test; order fulfillment, logistics and service/repair.
We provide most of our contract manufacturing services on a turnkey basis, which means that we procure some or all of the materials required for product assembly. We provide some services on a consignment basis, which means that the customer supplies the necessary materials, and we provide the labor and other services required for product assembly. Turnkey services require material procurement and warehousing, in addition to manufacturing, and involve greater resource investments than consignment services. Other than certain test equipment and software used for internal operations, we do not design or manufacture our own proprietary products.
The following information should be read in conjunction with our Condensed Consolidated Financial Statements included herein, the "Risk Factors" section in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended September 28, 2013 and our "Safe Harbor" Cautionary Statement included above. Recent Developments
Construction of the Company's new leased Guadalajara, Mexico manufacturing facility, which will replace a leased facility in Juarez, Mexico, is currently on schedule for completion, with only a portion of leasehold improvements left to be completed in the fiscal fourth quarter of 2014. Consolidation of the existing Juarez facility into the new Guadalajara facility resulted in $0.8 million and $6.2 million of restructuring and impairment charges in the three and nine months ended June 28, 2014, respectively. We anticipate that production will be substantively transferred to Guadalajara in the fiscal fourth quarter of 2014 and that we will cease activities in Juarez during the fiscal first quarter of 2015. The consolidation is expected to result in approximately $2.1 million of additional restructuring charges through the fiscal first quarter of 2015. Our new Neenah, Wisconsin manufacturing facility opened in the fiscal first quarter of 2014. Consolidation of the three former facilities in Neenah and Appleton, Wisconsin (the "Fox Cities") into our new facility resulted in $0.4 million and $4.5 million of restructuring charges in the three and nine months ended June 28, 2014, respectively. No further material restructuring charges are expected related to the consolidation of these facilities.
During the fiscal third quarter of 2014, we amended our credit agreement. The amendment converted our previous $250.0 million senior unsecured credit facility, which consisted of a $160.0 million revolving credit facility and a $90.0 million term loan, into a $235.0 million revolving credit facility and extended the maturity of the credit facility from May 2017 to May 2019. The amendment also allowed us to take advantage of rates that we believe are favorable.


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RESULTS OF OPERATIONS
Consolidated Performance Summary
The following table presents selected consolidated financial data (dollars in
millions, except per share data):

                                Three Months Ended           Nine Months Ended
                               June 28,      June 29,     June 28,      June 29,
                                 2014          2013         2014          2013
Net sales                    $   620.5      $  571.9     $ 1,712.0     $ 1,660.3
Gross profit                 $    58.6      $   55.5     $   162.9     $   158.7
Gross margin                       9.4 %         9.7 %         9.5 %         9.6 %
Operating income             $    28.2      $   25.2     $    69.0     $    69.9
Operating margin                   4.5 %         4.4 %         4.0 %         4.2 %
Net income                   $    24.6      $   23.2     $    60.8     $    57.8
Earnings per share (diluted) $    0.71      $   0.68     $    1.75     $    1.69
Return on invested capital                                    14.6 %        13.2 %

Net sales. For the three months ended June 28, 2014, net sales increased $48.6 million, or 8.5 percent, compared to the three months ended June 29, 2013. This net increase was largely driven by a $76.2 million increase in net sales from two large customers in the networking/communications sector, resulting primarily from new product ramps and increased end-market demand. Excluding the $84.7 million headwind related to the disengagement of Juniper Networks, Inc. ("Juniper"), net sales increased across all sectors, including $34.7 million in the healthcare/life sciences sector, $15.8 million in the industrial/commercial sector and $13.1 million in the defense/security/aerospace sector. These increases were primarily driven by new product ramps and increased end-market demand. Juniper-related net sales were 14.8 percent of our net sales for the three months ended June 29, 2013.
For the nine months ended June 28, 2014, net sales increased $51.7 million, or 3.1 percent, compared to the nine months ended June 29, 2013. A $174.8 million increase in net sales from three customers in the networking/communications sector was driven by new product ramps and increased end-market demand. Additionally, an increase in net sales of $103.8 million was primarily the result of new product ramps and market share gains in the healthcare/life sciences sector. These increases were partially offset by a $240.6 million decrease in net sales from Juniper; excluding the reduction in net sales from Juniper, sales increased across all sectors. Juniper-related net sales were not significant to our net sales for the nine months ended June 28, 2014, as compared to Juniper related net sales of 14.6 percent of our net sales in the same period of fiscal 2013.
Our net sales by market sector for the indicated periods were as follows (in millions):

                                 Three Months Ended            Nine Months Ended
                               June 28,        June 29,      June 28,     June 29,
Market Sector                    2014            2013          2014         2013
Networking/Communications  $    203.1         $    218.1    $   528.4    $   629.4
Industrial/Commercial           153.5              137.7        433.5        408.4
Healthcare/Life Sciences        176.8              142.1        508.5        404.2
Defense/Security/Aerospace       87.1               74.0        241.6        218.3
                           $    620.5         $    571.9    $ 1,712.0    $ 1,660.3

Networking/Communications. Net sales for the networking/communications sector decreased $15.0 million for the three months ended June 28, 2014 as compared to the three months ended June 29, 2013. The decrease was primarily the result of the elimination of net sales to Juniper of $84.7 million, partially offset by an increase in net sales of $76.2 million to two customers in this sector as a result of new product ramps and expansion of end-market demand; $49.5 million was due to a new product ramp that is anticipated to be episodically high in the fiscal fourth quarter of 2014 before reducing to normalized levels. Net sales for the networking/communications sector decreased $101.0 million for the nine months ended June 28, 2014 as compared to the nine months ended June 29, 2013. The decrease was primarily the result of a $240.6 million reduction in net sales to Juniper, offset by a $174.8 million increase in net sales to three customers in this sector as a result of new product ramps and increased end-market demand.


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Industrial/Commercial. Net sales for the industrial/commercial sector increased $15.8 million for the three months ended June 28, 2014 as compared to the three months ended June 29, 2013. The increase was primarily driven by $18.0 million in incremental net sales from two customers, of which $9.9 million was attributable to a new customer and $8.1 million was attributable to new product ramps with an existing customer. This increase was partially offset by small decreases in net sales to various other customers in this sector.
Net sales for the industrial/commercial sector increased $25.1 million for the nine months ended June 28, 2014 as compared to the nine months ended June 29, 2013. The increase was primarily driven by $42.6 million in incremental net sales from two customers, of which $15.2 million was attributable to a new customer and $27.4 million was attributable to new product ramps with an existing customer, as well as incremental increases in net sales from several other customers. This increase was partially offset by a $15.5 million reduction in net sales due to a customer disengagement and a $17.4 million reduction in net sales from one customer due to its loss of market share with its customers. Healthcare/Life Sciences. Net sales for the healthcare/life sciences sector increased $34.7 million for the three months ended June 28, 2014 as compared to the three months ended June 29, 2013. The increase was primarily driven by $22.3 million of increases in net sales from new program ramps with two existing key customers. The remainder of the increase resulted from increased net sales to various customers within the sector as a result of new program ramps and increased end-market demand.
Net sales for the healthcare/life sciences sector increased $104.3 million for the nine months ended June 28, 2014 as compared to the nine months ended June 29, 2013. New program ramps with two existing key customers drove $64.7 million of the increase; the remainder of the increase resulted from increased net sales to various customers within the sector as a result of new program ramps and increased end-market demand.
Defense/Security/Aerospace. Net sales for the defense/security/aerospace sector increased $13.1 million for the three months ended June 28, 2014 as compared to the three months ended June 29, 2013. The increase was primarily driven by $16.5 million of increased net sales from four customers, primarily resulting from new product ramps and increased end-market demand. This increase was partially offset by a $7.8 million reduction in net sales as a result of softening end-market demand for one customer in this sector.
Net sales for the defense/security/aerospace sector increased $23.3 million for the nine months ended June 28, 2014 as compared to the nine months ended June 29, 2013. The increase was largely the result of $58.8 million of increased net sales from five customers primarily as a result of new product ramps and increased end-market demand. This increase was partially offset by a $39.4 million reduction in net sales as a result of softening end-market demand for one customer in this sector.
Gross profit. For the three months ended June 28, 2014, gross profit increased $3.1 million, or 5.6 percent, as compared to the three months ended June 29, 2013. Overall gross margin decreased to 9.4 percent from 9.7 percent. Increased sales drove approximately $8.5 million of the increase in gross profit. The favorable effect of the increase in sales-related gross profit was offset by a $5.4 million increase in fixed costs primarily due to our investment in a new manufacturing facility in Neenah, ramp up of new business in the AMER region and increased depreciation and personnel expenses associated with our new manufacturing facilities in Romania and Guadalajara.
For the nine months ended June 28, 2014, gross profit increased $4.3 million, or 2.7 percent, as compared to the nine months ended June 29, 2013. Overall gross margin decreased to 9.5 percent from 9.6 percent. Gross profit increased $18.6 million primarily as a result of increased sales. The favorable effect of the increase in sales-related gross profit was largely offset by a $14.3 million increase in fixed costs due to our investment in a new manufacturing facility in Neenah, ramp up of new business in the AMER region and increased depreciation and personnel expenses associated with our new manufacturing facilities in Romania and Guadalajara.
Operating income. For the three months ended June 28, 2014, operating income increased $3.0 million as compared to the three months ended June 29, 2013 primarily due to increased gross profit. In addition, a $1.1 million decrease in selling and administrative ("S&A") expenses as compared to the prior year period was offset by $1.2 million of restructuring and impairment charges in the three months ended June 28, 2014 primarily related to the planned closure of our Juarez facility. Operating margin increased to 4.5 percent for the three months ended June 28, 2014 from 4.4 percent for the three months ended June 29, 2013. For the nine months ended June 28, 2014, operating income decreased $0.9 million compared to the nine months ended June 29, 2013. A $5.7 million decrease in S&A expenses as compared to the prior year period and increased gross profit were offset by $10.9 million of restructuring and impairment charges in the nine months ended June 28, 2014 primarily related to the consolidation of facilities into our new Neenah manufacturing facility, which opened in the fiscal first quarter of 2014, and the planned closure of our Juarez facility. As a result, operating margin decreased to 4.0 percent for the nine months ended June 28, 2014 from 4.2 percent for the nine months ended June 29, 2013.


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Other income (expense). Other expense decreased to $1.0 million and $4.7 million for the three and nine months ended June 28, 2014, respectively, as compared to $2.2 million and $9.3 million for the three and nine months ended June 29, 2013, respectively. The decrease in other expense for the three months ended June 28, 2014 was primarily the result of a $0.8 million decrease in miscellaneous expense due to the favorable outcome of a previously expected charge related to a land penalty in China. The decrease in other expense for the nine months ended June 28, 2014 was primarily the result of a $1.1 million decrease in interest expense related to lower fixed interest rates resulting from interest rate swaps, a $1.0 million increase in currency exchange gains, a $0.9 million increase in interest income, and a $0.8 million decrease in miscellaneous expense related to the favorable outcome on the China land penalty previously discussed in the current year period as compared to the prior year period. Income taxes. Effective income tax rates for the indicated periods were as follows:

                     Three Months Ended        Nine Months Ended
                   June 28,      June 29,    June 28,     June 29,
                     2014          2013        2014         2013
Effective tax rate    9.6 %        (1.1 )%      5.5 %         4.6 %

Income tax expense (benefit) was a $2.6 million expense as compared to a $0.3 million benefit for the three months ended June 28, 2014 and June 29, 2013, respectively. Income tax expense increased to $3.5 million from $2.8 million for the nine months ended June 28, 2014 and June 29, 2013, respectively. The Company has not recognized an income tax benefit for restructuring and impairment costs due to existing tax losses in the jurisdictions where the costs are deductible for tax purposes.
The impact of discrete items on the Company's income tax expense is reflected in the following table (dollars in millions):

                                                Three Months Ended                  Nine Months Ended
                                          June 28, 2014    June 29, 2013    June 28, 2014     June 29, 2013
Income tax (benefit) expense, as reported $       2.6     $        (0.3 )   $       3.5     $           2.8
Impact of discrete tax items                        0.0               2.0             3.8                 1.9
Income tax expense, as adjusted*          $       2.6     $         1.7     $       7.3     $           4.7

*The Company believes that the non-GAAP presentation of income tax expense, as adjusted provides a more accurate representation and allows for a more meaningful comparison of reporting periods by eliminating discrete benefits unrelated to operations in those periods.
The increase in the adjusted tax expense for the three and nine months ended June 28, 2014, as compared to the three and nine months ended June 29, 2013, is primarily due to increased earnings in the APAC segment.
Our effective tax rate varies from the U.S. statutory rate of 35.0 percent primarily as a result of the amount of earnings from different U.S. and foreign jurisdictions, and tax holidays granted to our subsidiary in Malaysia, where we derive a significant portion of our earnings. The Company's effective tax rate fluctuates depending on the geographic distribution of its worldwide earnings. The estimated effective tax rate for fiscal 2014 is expected to be between 6.0 percent and 8.0 percent. When excluding discrete tax items and restructuring, the effective tax rate is expected to be between 8.0 percent and 10.0 percent. Net income. Net income for the three months ended June 28, 2014 increased $1.4 million, or 6.0 percent, to $24.6 million from $23.2 million for the three months ended June 29, 2013. Net income for the nine months ended June 28, 2014 increased $3.0 million, or 5.1 percent, to $60.8 million from $57.8 million for the nine months ended June 29, 2013. Net income increased in both periods primarily as a result of increased gross profit, partially offset by increased income tax expense, as discussed previously.
Diluted earnings per share. Diluted earnings per share, as reported and diluted earnings per share, as adjusted to exclude restructuring and impairment costs and discrete tax items for the three and nine months ended June 28, 2014 and June 29, 2013 was as follows:


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                                              Three Months Ended                    Nine Months Ended
                                       June 28, 2014       June 29, 2013     June 28, 2014     June 29, 2013
Diluted earnings per share, as
reported                             $      0.71          $        0.68     $       1.75      $        1.69
Impact of restructuring and
impairment charges                          0.03                      -             0.31                  -
Impact of discrete tax items                   -                  (0.06 )          (0.11 )            (0.06 )
Diluted earnings per share, as
adjusted*                            $      0.74          $        0.62     $       1.95      $        1.63

*The Company believes that the non-GAAP presentation of diluted earnings per share excluding restructuring and impairment costs and discrete tax items provides a more meaningful comparison of reporting periods by eliminating charges and discrete benefits unrelated to operations in those periods. Diluted earnings per share increased to $0.71 and $1.75 for the three and nine months ended June 28, 2014 as compared to $0.68 and $1.69 for the three and nine months ended June 29, 2013. Diluted earnings per share for the three months ended June 28, 2014 was unfavorably impacted by $1.2 million of restructuring costs. Diluted earnings per share was unfavorably impacted by $10.9 million of restructuring and impairment costs and was favorably impacted by $3.8 million of discrete tax items recorded during the nine months ended June 28, 2014. The increase in diluted earnings per share for the three months ended June 28, 2014 was primarily the result of the increase in gross profit previously discussed, as well as lower S&A expenses and other expense, partially offset by restructuring costs. The increase in diluted earnings per share for the nine months ended June 28, 2014 was primarily the result of increased net sales combined with increased contribution profit, as well as lower S&A expenses and other expense. These improvements were offset by discrete tax items and restructuring and impairment costs. See Note 13, "Restructuring and Impairment Costs," in Notes to Condensed Consolidated Financial Statements. Return on Invested Capital ("ROIC"). We use a 5-5 financial model which is aligned with our business strategy, and includes a ROIC goal of 500 basis points over our weighted average cost of capital ("WACC") and a 5.0 percent operating margin target. Our primary focus is our ROIC goal, which is designed to create shareholder value and generate enough cash to self-fund our targeted organic net sales growth rate of 12.0 percent.
We review our internal calculation of WACC annually, and our estimated WACC is 11.0 percent for fiscal 2014. By exercising discipline to generate ROIC in excess of our WACC, our goal is to create value for our shareholders. ROIC was 14.6 percent and 13.2 percent for the nine months ended June 28, 2014 and June 29, 2013, respectively. The current period ROIC of 14.6 percent was calculated excluding restructuring and impairment charges of $10.9 million. The period-over-period increase in ROIC was due to higher annualized operating income, offset by higher average invested capital (as defined below). We define ROIC as tax-effected annualized operating income, excluding special items such as restructuring and impairment charges and discrete tax benefits, divided by average invested capital over a rolling four-quarter period for the fiscal third quarter of 2014. Invested capital is defined as shareholders' equity plus long-term debt and capital lease obligations, less cash and cash equivalents. Other companies may not define or calculate ROIC in the same way. ROIC is a non-GAAP financial measure which should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance with United States generally accepted accounting principles ("GAAP"). Non-GAAP financial measures, including ROIC, are used for internal management assessments because such measures provide additional insight into ongoing financial performance. In particular, we provide ROIC because we believe it offers insight into the metrics that are driving management decisions. We view ROIC as an important measure in evaluating the efficiency and effectiveness of our long-term capital requirements. We also use ROIC as a performance criteria in determining certain elements of compensation.
For a reconciliation of ROIC to our financial statements that were prepared using GAAP, see exhibit 99.1 to this quarterly report on Form 10-Q, which exhibit is incorporated herein by reference.

REPORTABLE SEGMENTS
A further discussion of financial performance by reportable segment is presented
below (dollars in millions):


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