UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended January 4, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the transition period from ______ to ______
Commission File Number 001-14423
____________________________________________________________________________________________________________________________________
(Exact name of registrant as specified in charter)
____________________________________________________________________________________________________________________________________
(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) (Zip Code)
Telephone Number (920 ) 969-6000
(Registrant’s telephone number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
x | Accelerated filer | ☐ | Non-accelerated filer | ☐ | |
Smaller reporting company | Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of February 4, 2020, there were 29,355,176 shares of common stock outstanding.
PLEXUS CORP.
TABLE OF CONTENTS
January 4, 2020
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Unaudited
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Net sales | $ | $ | ||||||
Cost of sales | ||||||||
Gross profit | ||||||||
Selling and administrative expenses | ||||||||
Operating income | ||||||||
Other income (expense): | ||||||||
Interest expense | ( | ) | ( | ) | ||||
Interest income | ||||||||
Miscellaneous, net | ( | ) | ( | ) | ||||
Income before income taxes | ||||||||
Income tax expense | ||||||||
Net income | $ | $ | ||||||
Earnings per share: | ||||||||
Basic | $ | $ | ||||||
Diluted | $ | $ | ||||||
Weighted average shares outstanding: | ||||||||
Basic | ||||||||
Diluted | ||||||||
Comprehensive income: | ||||||||
Net income | $ | $ | ||||||
Other comprehensive income (loss) : | ||||||||
Derivative instrument fair value adjustment | ||||||||
Foreign currency translation adjustments | ( | ) | ||||||
Other comprehensive income (loss) | ( | ) | ||||||
Total comprehensive income | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
January 4, 2020 | September 28, 2019 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash | ||||||||
Accounts receivable, net of allowances of $1,194 and $1,537, respectively | ||||||||
Contract assets | ||||||||
Inventories, net | ||||||||
Prepaid expenses and other | ||||||||
Total current assets | ||||||||
Property, plant and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Deferred income taxes | ||||||||
Other assets | ||||||||
Total non-current assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt and finance lease obligations | $ | $ | ||||||
Accounts payable | ||||||||
Customer deposits | ||||||||
Accrued salaries and wages | ||||||||
Other accrued liabilities | ||||||||
Total current liabilities | ||||||||
Long-term debt and finance lease obligations, net of current portion | ||||||||
Long-term accrued income taxes payable | ||||||||
Long-term operating lease liabilities | ||||||||
Deferred income taxes payable | ||||||||
Other liabilities | ||||||||
Total non-current liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, $.01 par value, 5,000 shares authorized, none issued or outstanding | ||||||||
Common stock, $.01 par value, 200,000 shares authorized, 53,226 and 52,917 shares issued, respectively, and 29,222 and 29,004 shares outstanding, respectively | ||||||||
Additional paid-in capital | ||||||||
Common stock held in treasury, at cost, 24,004 and 23,913 shares, respectively | ( | ) | ( | ) | ||||
Retained earnings | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Total shareholders’ equity | ||||||||
Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Unaudited
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Common stock - shares outstanding | ||||||||
Beginning of period | ||||||||
Exercise of stock options and vesting of other stock awards | ||||||||
Treasury shares purchased | ( | ) | ( | ) | ||||
End of period | ||||||||
Total stockholders' equity, beginning of period | $ | $ | ||||||
Common stock - par value | ||||||||
Beginning of period | ||||||||
Exercise of stock options and vesting of other stock awards | ||||||||
End of period | ||||||||
Additional paid-in capital | ||||||||
Beginning of period | ||||||||
Stock-based compensation expense | ||||||||
Exercise of stock options and vesting of other stock awards, including tax benefits | ||||||||
End of period | ||||||||
Treasury stock | ||||||||
Beginning of period | ( | ) | ( | ) | ||||
Treasury shares purchased | ( | ) | ( | ) | ||||
End of period | ( | ) | ( | ) | ||||
Retained earnings | ||||||||
Beginning of period | ||||||||
Net income | ||||||||
Cumulative effect adjustment for adoption of new accounting pronouncements (1) | ( | ) | ||||||
End of period | ||||||||
Accumulated other comprehensive (loss) income | ||||||||
Beginning of period | ( | ) | ( | ) | ||||
Other comprehensive income (loss) | ( | ) | ||||||
End of period | ( | ) | ( | ) | ||||
Total stockholders' equity, end of period | $ | $ | ||||||
(1) See Note 1, "Basis of Presentation," for a discussion of recently adopted accounting pronouncements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash flows from operating activities: | ||||||||
Depreciation and amortization | ||||||||
Deferred income taxes | ||||||||
Share-based compensation expense | ||||||||
Other, net | ||||||||
Changes in operating assets and liabilities, excluding impacts of acquisition: | ||||||||
Accounts receivable | ( | ) | ||||||
Contract assets | ( | ) | ( | ) | ||||
Inventories | ( | ) | ( | ) | ||||
Other current and noncurrent assets | ( | ) | ( | ) | ||||
Accrued income taxes payable | ( | ) | ||||||
Accounts payable | ||||||||
Customer deposits | ( | ) | ||||||
Other current and noncurrent liabilities | ( | ) | ||||||
Cash flows provided by (used in) operating activities | ( | ) | ||||||
Cash flows from investing activities | ||||||||
Payments for property, plant and equipment | ( | ) | ( | ) | ||||
Proceeds from sales of property, plant and equipment | ||||||||
Business acquisition | ||||||||
Cash flows used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities | ||||||||
Borrowings under debt agreements | ||||||||
Payments on debt and finance lease obligations | ( | ) | ( | ) | ||||
Repurchases of common stock | ( | ) | ( | ) | ||||
Proceeds from exercise of stock options | ||||||||
Payments related to tax withholding for share-based compensation | ( | ) | ( | ) | ||||
Cash flows used in financing activities | ( | ) | ( | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
Net increase (decrease) in cash and cash equivalents and restricted cash | ( | ) | ||||||
Cash and cash equivalents and restricted cash: | ||||||||
Beginning of period | ||||||||
End of period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLEXUS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 4, 2020 AND DECEMBER 29, 2018
Unaudited
1. Basis of Presentation
Basis of Presentation:
The accompanying Condensed Consolidated Financial Statements included herein have been prepared by Plexus Corp. and its subsidiaries (together “Plexus” or the “Company”) without audit and pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). The accompanying Condensed Consolidated Financial Statements reflect all adjustments, which include normal recurring adjustments necessary for the fair statement of the consolidated financial position of the Company as of January 4, 2020 and September 28, 2019, the results of operations and shareholders' equity for the three months ended January 4, 2020 and December 29, 2018, and the cash flows for the same three month periods.
The Company’s fiscal year ends on the Saturday closest to September 30. The Company uses a “4-4-5” weekly accounting system for the interim periods in each quarter. Each quarter, therefore, ends on a Saturday at the end of the 4-4-5 period. Periodically, an additional week must be added to the fiscal year to re-align with the Saturday closest to September 30. Fiscal 2020 includes 53 weeks; therefore, the first quarter of fiscal 2020 included 14 weeks while all other fiscal quarters presented herein included 13 weeks.
Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"), have been condensed or omitted pursuant to the SEC’s rules and regulations dealing with interim financial statements. However, the Company believes that the disclosures made in the Condensed Consolidated Financial Statements included herein are adequate to make the information presented not misleading. It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s 2019 Annual Report on Form 10-K.
In May 2014, the FASB issued ASU 2014-09, which requires an entity to recognize revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services ("Topic 606"). On September 30, 2018, the Company adopted and applied Topic 606 to all contracts using the modified retrospective method of adoption. Upon adoption, the Company recognized an increase to its fiscal 2019 beginning Retained earnings balance of $7.8 million.
In February 2016, the FASB issued ASU 2016-02 (“Topic 842”), which is intended to improve financial reporting of lease transactions by requiring lessees to recognize most leases as a right-of-use (“ROU”) asset and lease liability on their balance sheets for the rights and obligations created by leases, but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. ASU 2016-02 also requires disclosures regarding the amount, timing and judgments related to accounting for an entity’s leases and related cash flows.
On September 29, 2019, the Company adopted Topic 842 using the modified retrospective method of adoption, which allows financial information for comparative periods prior to adoption not to be updated. The Company recognized right-of-use assets and operating lease liabilities on its Consolidated Balance Sheets, but the standard did not have a material impact on its Consolidated Statements of Comprehensive Income or Consolidated Statements of Cash Flows.
ASC 842 provides optional practical expedients to assist with transition to the new standard. Management elected the package of practical expedients offered, which allows entities to not reassess: (i) whether any contracts prior to the adoption date are or contain leases, (ii) lease classification, and (iii) whether capitalized initial direct costs continue to meet the definition of initial direct costs under the new guidance. For all new and modified leases after adoption, management elected the short-term lease recognition exemption for all of the Company’s leases that qualify, in addition to the practical expedient to not separate lease and nonlease components. Refer to Note 7, "Leases," for further information.
In August 2017, the FASB issued ASU 2017-12 related to the accounting for hedging activities. The pronouncement expands and refines hedge accounting, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the
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assessment of hedge effectiveness. The Company adopted this guidance during the first quarter of fiscal 2020 with no material impact to the Company's Consolidated Financial Statements; however, the impact of the new standard on future periods will depend on the facts and circumstances of future transactions.
Recently Issued Accounting Pronouncements Not Yet Adopted:
In June 2016, the FASB issued ASU 2016-13, which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and required consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective for the Company beginning in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is currently in the process of assessing the impact of the adoption of the new standard on its Consolidated Financial Statements.
The Company believes that no other recently issued accounting standards will have a material impact on its Consolidated Financial Statements, or apply to its operations.
2. Inventories
Inventories as of January 4, 2020 and September 28, 2019 consisted of the following (in thousands):
January 4, 2020 | September 28, 2019 | |||||||
Raw materials | $ | $ | ||||||
Work-in-process | ||||||||
Finished goods | ||||||||
Total inventories, net | $ | $ | ||||||
3. Debt, Finance Lease Obligations and Other Financing
Debt, finance lease obligations and other financing as of January 4, 2020 and September 28, 2019 consisted of the following (in thousands):
January 4, 2020 | September 28, 2019 | |||||||
4.05% Senior Notes, due June 15, 2025 | $ | $ | ||||||
4.22% Senior Notes, due June 15, 2028 | ||||||||
Borrowings under the credit facility | ||||||||
Finance lease and other financing obligations | ||||||||
Unamortized deferred financing fees | ( | ) | ( | ) | ||||
Total obligations | ||||||||
Less: current portion | ( | ) | ( | ) | ||||
Long-term debt and finance lease obligations, net of current portion | $ | $ | ||||||
On June 15, 2018, the Company entered into a Note Purchase Agreement (the “2018 NPA”) pursuant to which it issued an aggregate of $150.0 million in principal amount of unsecured senior notes, consisting of $100.0 million in principal amount of 4.05 % Series A Senior Notes, due on June 15, 2025, and $50.0 million in principal amount of 4.22 % Series B Senior Notes, due on June 15, 2028 (collectively, the “2018 Notes”), in a private placement. The 2018 NPA includes customary operational and financial covenants with which the Company is required to comply, including, among others, maintenance of certain financial ratios such as a total leverage ratio and a minimum interest coverage ratio. The 2018 Notes may be prepaid in whole
8
or in part at any time, subject to payment of a make-whole amount; interest on the 2018 Notes is payable semiannually. As of January 4, 2020, the Company was in compliance with the covenants under the 2018 NPA.
On May 15, 2019, the Company refinanced its then-existing senior unsecured revolving credit facility (the "Prior Credit Facility") by entering into a new 5 -year senior unsecured revolving credit facility (collectively with the Prior Credit Facility, referred to as the "Credit Facility"), which expanded the maximum commitment from $300.0 million to $350.0 million and extended the maturity from July 5, 2021 to May 15, 2024. The maximum commitment under the Credit Facility may be further increased to $600.0 million, generally by mutual agreement of the Company and the lenders, subject to certain customary conditions. During the three months ended January 4, 2020, the highest daily borrowing was $164.5 million; the average daily borrowings were $128.1 million. The Company borrowed $156.5 million and repaid $189.5 million of revolving borrowings under the Credit Facility during the three months ended January 4, 2020. As of January 4, 2020, the Company was in compliance with all financial covenants relating to the Credit Agreement, which are generally consistent with those in the 2018 NPA discussed above. The Company is required to pay a commitment fee on the daily unused revolver credit commitment based on the Company's leverage ratio; the fee was 0.125 % as of January 4, 2020.
The fair value of the Company’s debt, excluding finance leases, was $219.4 million and $252.3 million as of January 4, 2020 and September 28, 2019, respectively. The carrying value of the Company's debt, excluding finance leases, was $212.0 million and $245.0 million as of January 4, 2020 and September 28, 2019, respectively. If measured at fair value in the financial statements, the Company's debt would be classified as Level 2 in the fair value hierarchy. Refer to Note 4, "Derivatives," for further information regarding the Company's fair value calculations and classifications.
4. Derivatives
All derivatives are recognized in the accompanying Condensed Consolidated Balance Sheets at their estimated fair value. The Company uses derivatives to manage the variability of foreign currency obligations. The Company has cash flow hedges related to forecasted foreign currency obligations, in addition to non-designated hedges to manage foreign currency exposures associated with certain foreign currency denominated assets and liabilities. The Company does not enter into derivatives for speculative purposes.
The Company designates some foreign currency exchange contracts as cash flow hedges of forecasted foreign currency expenses. Changes in the fair value of the derivatives that qualify as cash flow hedges are recorded in "Accumulated other comprehensive loss" in the accompanying Condensed Consolidated Balance Sheets until earnings are affected by the variability of the cash flows. In the next twelve months, the Company estimates that $1.6 million of unrealized gains, net of tax, related to cash flow hedges will be reclassified from other comprehensive income (loss) into earnings. Changes in the fair value of the non-designated derivatives related to recognized foreign currency denominated assets and liabilities are recorded in "Miscellaneous, net" in the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss).
The Company enters into forward currency exchange contracts for its operations in Malaysia and Mexico on a rolling basis. The Company had cash flow hedges outstanding with a notional value of $79.8 million as of January 4, 2020, and $80.0 million as of September 28, 2019. These forward currency contracts fix the exchange rates for the settlement of future foreign currency obligations that have yet to be realized. The total fair value of the forward currency exchange contracts was a $1.6 million asset as of January 4, 2020, and a $0.6 million liability as of September 28, 2019.
The Company had additional forward currency exchange contracts outstanding as of January 4, 2020, with a notional value of $17.2 million; there were $34.4 million such contracts outstanding as of September 28, 2019. The Company did not designate these derivative instruments as hedging instruments. The net settlement amount (fair value) related to these contracts is recorded on the Condensed Consolidated Balance Sheets as either a current or long-term asset or liability, depending on the term, and as an element of "Miscellaneous, net." The total fair value of these derivatives was a $0.1 million asset as of January 4, 2020, and a $0.9 million asset as of September 28, 2019.
9
The tables below present information regarding the fair values of derivative instruments and the effects of derivative instruments on the Company’s Condensed Consolidated Financial Statements:
Fair Values of Derivative Instruments (in thousands) | ||||||||||||||||||||
Derivative Assets | Derivative Liabilities | |||||||||||||||||||
January 4, 2020 | September 28, 2019 | January 4, 2020 | September 28, 2019 | |||||||||||||||||
Derivatives designated as hedging instruments | Balance Sheet Classification | Fair Value | Fair Value | Balance Sheet Classification | Fair Value | Fair Value | ||||||||||||||
Forward currency forward contracts | Prepaid expenses and other | $ | $ | Other accrued liabilities | $ | $ | ||||||||||||||
Fair Values of Derivative Instruments (in thousands) | ||||||||||||||||||||
Derivative Assets | Derivative Liabilities | |||||||||||||||||||
January 4, 2020 | September 28, 2019 | January 4, 2020 | September 28, 2019 | |||||||||||||||||
Derivatives not designated as hedging instruments | Balance Sheet Classification | Fair Value | Fair Value | Balance Sheet Classification | Fair Value | Fair Value | ||||||||||||||
Forward currency forward contracts | Prepaid expenses and other | $ | $ | Other accrued liabilities | $ | $ | ||||||||||||||
The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) ("OCL") (in thousands) | ||||||||
for the Three Months Ended | ||||||||
Derivatives in Cash Flow Hedging Relationships | Amount of Income (Loss) Recognized in OCL on Derivatives | |||||||
January 4, 2020 | December 29, 2018 | |||||||
Forward currency forward contracts | $ | $ | ( | ) | ||||
Derivative Impact on (Loss) Gain Recognized in Condensed Consolidated Statements of Comprehensive Income (in thousands) | ||||||||||
for the Three Months Ended | ||||||||||
Derivatives in Cash Flow Hedging Relationships | Classification of Loss Reclassified from Accumulated OCL into Income | Amount of Loss Reclassified from Accumulated OCL into Income | ||||||||
January 4, 2020 | December 29, 2018 | |||||||||
Forward currency forward contracts | Cost of sales | $ | ( | ) | $ | ( | ) | |||
Forward currency forward contracts | Selling and administrative expenses | $ | ( | ) | $ | ( | ) | |||
Derivatives Not Designated as Hedging Instruments | Location of Gain Recognized on Derivatives in Income | Amount of (Loss) Gain on Derivatives Recognized in Income | ||||||||
January 4, 2020 | December 29, 2018 | |||||||||
Forward currency forward contracts | Miscellaneous, net | $ | ( | ) | $ | |||||
Fair Value Measurements:
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (or exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses quoted market prices when available or discounted cash flows to calculate fair value. The accounting guidance establishes a fair value hierarchy based on three levels of inputs that may be used to measure fair value. The input levels are:
Level 1: Quoted (observable) market prices in active markets for identical assets or liabilities.
Level 2: Inputs other than Level 1 that are observable, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
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Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability.
The following table lists the fair values of liabilities of the Company’s derivatives as of January 4, 2020 and September 28, 2019, by input level:
Fair Value Measurements Using Input Levels Asset/(Liability) (in thousands) | ||||||||||||||||
January 4, 2020 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Derivatives | ||||||||||||||||
Forward currency forward contracts | $ | $ | $ | $ | ||||||||||||
September 28, 2019 | ||||||||||||||||
Derivatives | ||||||||||||||||
Forward currency forward contracts | $ | $ | $ | $ | ||||||||||||
The fair value of foreign currency forward contracts is determined using a market approach, which includes obtaining directly or indirectly observable values from third parties active in the relevant markets. Inputs in the fair value of the foreign currency forward contracts include prevailing forward and spot prices for currency and interest rate forward curves.
5. Income Taxes
Income tax expense for the three months ended January 4, 2020 was $3.3 million compared to $11.9 million for the three months ended December 29, 2018.
The effective tax rates for the three months ended January 4, 2020 and December 29, 2018 were 9.5 % and 34.9 %, respectively. The effective tax rate for the three months ended January 4, 2020 decreased from the effective tax rate for the three months ended December 29, 2018, primarily due to the additional impact of the U.S. Tax Cuts & Jobs Act of $7.0 million recorded during the three months ended December 29, 2018. The Company also recorded a $1.9 million benefit related to guidance issued by the U.S. Department of the Treasury regarding foreign tax credits partially offset by $1.1 million of special tax items during the three months ended January 4, 2020.
There were no material additions to the amount of unrecognized tax benefits recorded for uncertain tax positions as of January 4, 2020. The Company recognizes accrued interest and penalties on uncertain tax positions as a component of income tax expense. The amount of interest and penalties recorded for the three months ended January 4, 2020 was not material.
One or more uncertain tax positions may be settled within the next 12 months. Settlement of these matters is not expected to have a material effect on the Company's consolidated results of operations, financial position and cash flows. The Company is not currently under examination by taxing authorities in the U.S. The Company is under audit in various foreign jurisdictions but settlement is not expected to have a material impact.
The Company maintains valuation allowances when it is more likely than not that all or a portion of a net deferred tax asset will not be realized. During the three months ended January 4, 2020, the Company continued to record a full valuation allowance against its net deferred tax assets in certain jurisdictions within the EMEA segment and a partial valuation against its net deferred tax assets in certain jurisdictions within the AMER segment, as it was more likely than not that these assets would not be fully realized based primarily on historical performance. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until it determines it is more likely than not that the deferred tax assets will be realized.
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6. Earnings Per Share
The following is a reconciliation of the amounts utilized in the computation of basic and diluted earnings per share for the three months ended January 4, 2020 and December 29, 2018 (in thousands, except per share amounts):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Net income | $ | $ | ||||||
Basic weighted average common shares outstanding | ||||||||
Dilutive effect of share-based awards and options outstanding | ||||||||
Diluted weighted average shares outstanding | ||||||||
Earnings per share: | ||||||||
Basic | $ | $ | ||||||
Diluted | $ | $ | ||||||
For the three months ended January 4, 2020 there were no antidilutive awards. For the three months ended December 29, 2018 share-based awards for approximately 0.1 million shares were not included in the computation of diluted earnings per share as they were antidilutive.
See also Note 12, "Shareholders' Equity," for information regarding the Company's share repurchase plans.
7. Leases
The Company’s lease portfolio includes both real estate and non-real estate type leases which are accounted for as either finance or operating leases. Real estate leases generally include office, warehouse and manufacturing facilities and non-real estate leases generally include office equipment and vehicles. The Company determines if a contract is or contains a lease at inception. The Company’s leases have remaining lease terms of less than 1 year to 41 years. Renewal options that are deemed reasonably certain are included as part of the lease term for purposes of calculating the right-of-use (“ROU”) assets and lease liability. Variable lease payments are generally expensed as incurred and include certain index-based changes in rent, certain nonlease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. The Company elected the practical expedient to not separate lease and nonlease components, as such non-lease components are included in the calculation of the ROU asset and lease liability and included in the lease expense over the term of the lease. The Company uses a discount rate to calculate the ROU asset and lease liability. When the implicit rate is known or provided in the lease documents, the Company is required to use this rate. In cases in which the implicit rate is not known, the Company uses an estimated incremental borrowing rate.
Operating lease ROU assets and lease liabilities are recorded on the date the Company takes possession of the leased assets with expense recognized on a straight-line basis over the lease term. Leases with an estimated total term of 12 months or less are not recorded on the balance sheet and the lease expense is recognized on a straight-line basis over the lease term. Generally, the Company's lease agreements do not contain material residual value guarantees or material restrictive covenants.
Upon adoption of ASU 2016-02, the Company recorded $45.5 million of right-of-use assets and lease liabilities, related to its existing operating lease portfolio. The Company also reclassified amounts previously held on the balance sheet to right-of-use assets and lease liabilities upon adoption due to existing arrangements subject to the new standard, including $30.2 million of prepaid leases in other non-current assets. The accounting for the Company’s finance leases remained substantially unchanged. In addition, the company recognized a $1.1 million reduction to retained earnings as a result of two existing build-to-suit arrangements for the facilities in Guadalajara, Mexico that were reassessed to be finance leases under the new standard. The adoption of this new standard did not have a material impact on the Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Comprehensive Income.
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As a result of the adoption, the following adjustments were made to the opening balances of the Company's Condensed Consolidated Balance Sheets (in thousands):
September 28, 2019 | Impacts due to adoption of Topic 842 | September 29, 2019 | |||||||||
ASSETS | |||||||||||
Prepaid expenses and other | $ | $ | ( | ) | $ | ||||||
Operating right-of-use assets | |||||||||||
Property, plant and equipment, net | ( | ) | |||||||||
Deferred income taxes | |||||||||||
Other non-current assets | ( | ) | |||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
Other accrued liabilities | $ | $ | $ | ||||||||
Long-term debt and finance lease obligations, net of current portion | ( | ) | |||||||||
Long-term operating lease liabilities | |||||||||||
Retained earnings | ( | ) | |||||||||
The components of lease expense for three months ended January 4, 2020 were as follows (in thousands):
Three Months Ended | |||
January 4, 2020 | |||
Finance lease expense: | |||
Amortization of right-of-use assets | $ | ||
Interest on lease liabilities | |||
Operating lease expense | |||
Other lease expense | |||
Total | $ | ||
Based on the nature of the ROU asset, amortization of finance right-of-use assets, operating lease expense and other lease expense are recorded within either cost of goods sold or selling and administrative expenses and interest on finance lease liabilities is recorded within interest expense on the Condensed Consolidated Statements of Comprehensive Income. Other lease expense includes lease expense for leases with an estimated total term of twelve months or less and variable lease expense related to variations in lease payments as a result of a change in factors or circumstances occurring after the lease possession date.
13
The following tables sets forth the amount of lease assets and lease liabilities included in the Company’s Condensed Consolidated Balance Sheets was (in thousands):
Financial Statement Line Item | January 4, 2020 | |||
ASSETS | ||||
Finance lease assets | Property, plant and equipment, net | $ | ||
Operating lease assets | Right-of-use operating lease assets | |||
Total lease assets | $ | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||
Current | ||||
Finance lease liabilities | Current portion of long-term debt and finance lease obligations | $ | ||
Operating lease liabilities | Other accrued liabilities | |||
Non-current | ||||
Finance lease liabilities | Long-term debt and finance lease obligations, net of current portion | |||
Operating lease liabilities | Long-term operating lease liabilities | |||
Total lease liabilities | $ | |||
Other information related to the Company’s leases was as follows:
Three Months Ended | |||
January 4, 2020 | |||
Weighted-average remaining lease term (in years) | |||
Finance leases | |||
Operating leases | |||
Weighted-average discount rate | |||
Finance leases | % | ||
Operating leases | % | ||
Cash paid for amounts included in the measurement of lease liabilities (in thousands) | |||
Operating cash flows used in finance leases | $ | ||
Operating cash flows used in operating leases | |||
Finance cash flows used in finance leases | |||
ROU assets obtained in exchange for lease liabilities (in thousands) | |||
Operating leases | $ | ||
Finance leases | |||
14
Future minimum lease payments required under finance and operating leases as of January 4, 2020, were as follows (in thousands):
Operating leases | Finance leases | |||||||
Remaining 2020 | $ | $ | ||||||
2021 | ||||||||
2022 | ||||||||
2023 | ||||||||
2024 | ||||||||
2025 and thereafter | ||||||||
Total minimum lease payments | ||||||||
Less: imputed interest | ( | ) | ( | ) | ||||
Present value of lease liabilities | $ | $ | ||||||
As of January 4, 2020, the Company’s future operating leases that have not yet commenced are immaterial.
Future minimum lease payments required under long-term operating and capital leases as of September 28, 2019, were as follows (in thousands):
Operating leases | Capital leases | |||||||
2020 | $ | $ | ||||||
2021 | ||||||||
2022 | ||||||||
2023 | ||||||||
2024 | ||||||||
Thereafter | ||||||||
Total | $ | $ | ||||||
8. Share-Based Compensation
The Company recognized $5.0 million and $4.8 million of compensation expense associated with share-based awards for the three months ended January 4, 2020 and December 29, 2018, respectively.
The Company uses the Black-Scholes valuation model to determine the fair value of stock options and stock-settled appreciation rights ("SARs"). The Company uses its stock price on grant date as the fair value assigned to restricted stock units ("RSUs").
Performance stock units ("PSUs") are payable in shares of the Company's common stock. Beginning for fiscal 2017 grants, PSUs vest based on the relative total shareholder return ("TSR") of the Company's common stock as compared to the companies in the Russell 3000 index, a market condition, and the Company's economic return performance during the three year performance period, a performance condition. The Company uses the Monte Carlo valuation model to determine the fair value of PSUs at the date of grant for PSUs that vest based on the relative TSR of the Company's common stock. The Company uses its stock price on grant date as the fair value assigned to PSUs that vest based on the Company's economic return performance. The number of shares that may be issued pursuant to PSUs ranges from zero to 0.5 million and is dependent upon the Company's TSR and economic return performance over the applicable performance periods.
15
9. Litigation
The Company is party to lawsuits in the ordinary course of business. Management does not believe that these proceedings, individually or in the aggregate, will have a material positive or adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
10. Reportable Segments
Reportable segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in assessing performance and allocating resources. The Company uses an internal management reporting system, which provides important financial data to evaluate performance and allocate the Company’s resources on a regional basis. Net sales for the segments are attributed to the region in which the product is manufactured or the service is performed. The services provided, manufacturing processes used, class of customers serviced and order fulfillment processes used are similar and generally interchangeable across the segments. A segment’s performance is evaluated based upon its operating income (loss). A segment’s operating income (loss) includes its net sales less cost of sales and selling and administrative expenses, but excludes corporate and other expenses. Corporate and other expenses primarily represent corporate selling and administrative expenses, and restructuring costs and other charges, if any. These costs are not allocated to the segments, as management excludes such costs when assessing the performance of the segments. Inter-segment transactions are generally recorded at amounts that approximate arm’s length transactions. The accounting policies for the segments are the same as for the Company taken as a whole.
Information about the Company’s three reportable segments for the three months ended January 4, 2020 and December 29, 2018, respectively, is as follows (in thousands):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Net sales: | ||||||||
AMER | $ | $ | ||||||
APAC | ||||||||
EMEA | ||||||||
Elimination of inter-segment sales | ( | ) | ( | ) | ||||
$ | $ | |||||||
Operating income (loss): | ||||||||
AMER | $ | $ | ||||||
APAC | ||||||||
EMEA | ( | ) | ||||||
Corporate and other costs | ( | ) | ( | ) | ||||
$ | $ | |||||||
Other income (expense): | ||||||||
Interest expense | $ | ( | ) | $ | ( | ) | ||
Interest income | ||||||||
Miscellaneous, net | ( | ) | ( | ) | ||||
Income before income taxes | $ | $ | ||||||
16
January 4, 2020 | September 28, 2019 | |||||||
Total assets: | ||||||||
AMER | $ | $ | ||||||
APAC | ||||||||
EMEA | ||||||||
Corporate and eliminations | ||||||||
$ | $ | |||||||
11. Guarantees
The Company offers certain indemnifications under its customer manufacturing agreements. In the normal course of business, the Company may from time to time be obligated to indemnify its customers or its customers’ customers against damages or liabilities arising out of the Company’s negligence, misconduct, breach of contract, or infringement of third-party intellectual property rights. Certain agreements have extended broader indemnification, and while most agreements have contractual limits, some do not. However, the Company generally does not provide for such indemnities and seeks indemnification from its customers for damages or liabilities arising out of the Company’s adherence to customers’ specifications or designs or use of materials furnished, or directed to be used, by its customers. The Company does not believe its obligations under such indemnities are material.
In the normal course of business, the Company also provides its customers a limited warranty covering workmanship, and in some cases materials, on products manufactured by the Company. Such warranty generally provides that products will be free from defects in the Company’s workmanship and meet mutually agreed-upon specifications for periods generally ranging from 12 months to 24 months. The Company’s obligation is generally limited to correcting, at its expense, any defect by repairing or replacing such defective product. The Company’s warranty generally excludes defects resulting from faulty customer-supplied components, design defects or damage caused by any party or caused other than by the Company.
The Company provides for an estimate of costs that may be incurred under its limited warranty at the time product revenue is recognized and establishes additional reserves for specifically identified product issues. These costs primarily include labor and materials, as necessary, associated with repair or replacement and are included in the Company's accompanying Condensed Consolidated Balance Sheets in "other current accrued liabilities." The primary factors that affect the Company’s warranty liability include the value and the number of shipped units and historical and anticipated rates of warranty claims. As these factors are impacted by actual experience and future expectations, the Company assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Below is a table summarizing the activity related to the Company’s limited warranty liability for the three months ended January 4, 2020 and December 29, 2018 (in thousands):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Reserve balance, beginning of period | $ | $ | ||||||
Accruals for warranties issued during the period | ||||||||
Settlements (in cash or in kind) during the period | ( | ) | ( | ) | ||||
Reserve balance, end of period | $ | $ | ||||||
12. Shareholders' Equity
On August 20, 2019, the Board of Directors approved a new stock repurchase plan under which the Company is authorized to repurchase $50.0 million of its common stock (the "2019 Program"). The 2019 Program commenced upon completion of the 2018 Program, as defined below. During the three months ended January 4, 2020, the Company repurchased 90,667 shares under the 2019 Program program for $6.3 million at an average price of $69.82 per share. As of January 4, 2020, $40.4 million of authority remained under the 2019 Program.
17
On February 14, 2018, the Board of Directors approved a stock repurchase plan under which the Company was authorized to repurchase $200.0 million of its common stock (the "2018 Program"). During the three months ended December 29, 2018, the Company repurchased 869,949 shares under the 2018 Program program for $50.1 million, at an average price of $57.53 per share. The 2018 Program was completed during the fiscal fourth quarter of 2019, when all share repurchase authority under it was exhausted.
All shares repurchased under the aforementioned programs were recorded as treasury stock.
13. Trade Accounts Receivable Sale Programs
The Company has Master Accounts Receivable Purchase Agreements with MUFG Bank, New York Branch (formerly known as The Bank of Tokyo-Mitsubishi UFJ, Ltd.) (the "MUFG RPA"), and HSBC Bank (China) Company Limited, Xiamen branch (the "HSBC RPA"), under which the Company may elect to sell receivables at a discount. These facilities are uncommitted facilities. The MUFG RPA was amended on December 23, 2019 to increase the maximum facility amount from $280.0 million to $340.0 million. The maximum facility amount under the HSBC RPA as of January 4, 2020 is $60.0 million. The MUFG RPA will be automatically extended each year unless any party gives no less than 10 days prior notice that the agreement should not be extended. The terms of the HSBC RPA are generally consistent with the terms of the MUFG RPA discussed above.
Transfers of receivables under the programs are accounted for as sales and, accordingly, receivables sold under the programs are excluded from accounts receivable on the Condensed Consolidated Balance Sheets and are reflected as cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. Proceeds from the transfer reflect the face value of the receivables less a discount. The sale discount is recorded within "Miscellaneous, net" in the Condensed Consolidated Statements of Comprehensive Income in the period of the sale.
14. Revenue from Contracts with Customers
Significant Judgments
Revenue is recognized over time for arrangements with customers for which: (i) the Company's performance does not create an asset with an alternative use to the Company, and (ii) the Company has an enforceable right to payment, including reasonable profit margin, for performance completed to date. Revenue recognized over time is estimated based on costs incurred to date plus a reasonable profit margin. If either of the two conditions noted above are not met to recognize revenue over time, revenue is recognized following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying arrangement.
The Company recognizes revenue when a contract exists and when, or as, it satisfies a performance obligation by transferring control of a product or service to a customer. Contracts are accounted for when they have approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.
The Company generally enters into a master services arrangement that establishes the framework under which business will be conducted. These arrangements represent the master terms and conditions of the Company's services that apply to individual orders, but they do not commit the customer to work with, or to continue to work with, the Company nor do they obligate the customer to any specific volume or pricing of purchases. Moreover, these terms can be amended in appropriate situations. Customer purchase orders are received for specific quantities with predominantly fixed pricing and delivery requirements. Thus, for the majority of our contracts, there is no guarantee of any revenue to the Company until a customer submits a purchase order. As a result, the Company generally considers its arrangement with a customer to be the combination of the master services arrangement and the purchase order. Most of the Company's arrangements with customers create a single performance obligation as the promise to transfer the individual manufactured product or service is capable of being distinct.
The Company’s performance obligations are satisfied over time as work progresses or at a point in time. A performance obligation is satisfied over time if the Company has an enforceable right to payment, including a reasonable profit margin.
18
Determining if an enforceable right to payment includes a reasonable profit margin requires judgment and is assessed on a contract by contract basis.
Generally, there are no subjective customer acceptance requirements or further obligations related to goods or services provided; if such requirements or obligations exist, then a sale is recognized at the time when such requirements are completed and such obligations are fulfilled.
The Company does not allow for a general right of return. Net sales include amounts billed to customers for shipping and handling and out-of-pocket expenses. The corresponding shipping and handling costs and out-of-pocket expenses are included in cost of sales. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from net sales.
Contract Costs
For contracts requiring over time revenue recognition, the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company uses a cost-based input measurement of progress because it best depicts the transfer of assets to the customer, which occurs as costs are incurred during the manufacturing process or as services are rendered. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the costs incurred to date.
There were no other costs to obtain or fulfill customer contracts.
Disaggregated Revenue
The table below includes the Company’s revenue for the three months ended January 4, 2020 and December 29, 2018, respectively, disaggregated by geographic reportable segment and market sector (in thousands):
Three Months Ended January 4, 2020 | ||||||||||||||||
Reportable Segment: | ||||||||||||||||
AMER | APAC | EMEA | Total | |||||||||||||
Market Sector: | ||||||||||||||||
Healthcare/Life Sciences | $ | $ | $ | $ | ||||||||||||
Industrial/Commercial | ||||||||||||||||
Aerospace/Defense | ||||||||||||||||
Communications | ||||||||||||||||
External revenue | ||||||||||||||||
Inter-segment sales | ||||||||||||||||
Segment revenue | $ | $ | $ | $ | ||||||||||||
Three Months Ended December 29, 2018 | ||||||||||||||||
Reportable Segment: | ||||||||||||||||
AMER | APAC | EMEA | Total | |||||||||||||
Market Sector: | ||||||||||||||||
Healthcare/Life Sciences | $ | $ | $ | $ | ||||||||||||
Industrial/Commercial | ||||||||||||||||
Aerospace/Defense | ||||||||||||||||
Communications | ||||||||||||||||
External revenue | ||||||||||||||||
Inter-segment sales | ||||||||||||||||
Segment revenue | $ | $ | $ | $ | ||||||||||||
19
For the three months ended January 4, 2020 and December 29, 2018, approximately 91 % and 89 %, respectively, of the Company's revenue was recognized as products and services were transferred over time, respectively.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, contract assets, and deferred revenue on the Company’s accompanying Condensed Consolidated Balance Sheets.
Contract Assets: For performance obligations satisfied at a point in time, billing occurs subsequent to revenue recognition, at which point the customer has been billed and the resulting asset is recorded within accounts receivable. For performance obligations satisfied over time as work progresses, the Company has an unconditional right to payment, which results in the recognition of contract assets. The following table summarizes the activity in the Company's contract assets for the three months ended January 4, 2020 and December 29, 2018 (in thousands):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Contract assets, beginning of period | $ | $ | ||||||
Cumulative effect adjustment at September 29, 2018 | — | |||||||
Revenue recognized during the period | ||||||||
Amounts collected or invoiced during the period | ( | ) | ( | ) | ||||
Contract assets, end of period | $ | $ | ||||||
15. Acquisition
On July 27, 2018, the Company purchased the assets of one of the business lines of Cascade Controls, Inc., a new product introduction company in Portland, Oregon, for $12.4 million in cash, subject to certain customary post-closing adjustments. In the three months ended December 29, 2018, the Company received a $1.2 million purchase price adjustment as a result of a post-closing adjustment.
16. Subsequent Event
On January 22, 2020, the Company announced the decision to close a leased facility within the AMER segment, and transition the service offerings to another Company-owned facility in the region to provide synergies and cost advantages of a campus environment. We are assessing the impacts of the announcement on our Condensed Consolidated Financial Statements.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
"SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
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 lack of visibility of future orders, particularly in view of changing economic conditions; the economic performance of the industries, sectors and customers we serve; the effects of shortages and delays in obtaining components as a result of economic cycles, natural disasters or otherwise; the effects of tariffs, trade disputes, trade agreements and other trade protection measures; 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 risks of concentration of work for certain customers; the particular risks relative to new or recent customers, programs or services, 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 effects of start-up costs of new programs and facilities; possible unexpected costs and operating disruption in transitioning programs, including transitions between Company facilities; 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; our ability to manage successfully and execute a complex business model characterized by high product mix and demanding quality, regulatory, and other requirements; 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; risks related to information technology systems and data security; the ability to realize anticipated savings from restructuring or similar actions, as well as the adequacy of related charges as compared to actual expenses; increasing regulatory and compliance requirements; the effects of U.S. Tax Reform and of related foreign jurisdiction tax developments; current or potential future barriers to the repatriation of funds that are currently held outside of the United States as a result of actions taken by other countries or otherwise; the potential effects of jurisdictional results on our taxes, tax rates, and our ability to use deferred tax assets and net operating losses; the weakness of areas of the global economy; the effect of changes in the pricing and margins of products; raw materials and component cost fluctuations; the potential effect of fluctuations in the value of the currencies in which we transact business; the effects of changes in economic conditions, political conditions and tax matters in the United States and in the other countries in which we do business (including as a result of the United Kingdom’s pending exit from the European Union); the potential effect of other world or local events or other events outside our control (such as changes in energy prices, terrorism, global health epidemics and weather events); the impact of increased competition; an inability to successfully manage human capital; changes in financial accounting standards; and other risks detailed herein and in our other Securities and Exchange Commission filings (particularly in "Risk Factors" in our fiscal 2019 Form 10-K).
* * *
OVERVIEW
Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or "we") participate in the Electronic Manufacturing Services ("EMS") industry. We partner with our customers to create the products that build a better world. Since 1979, Plexus has been partnering with companies to transform concepts into branded products and deliver them to the market. From idea to aftermarket and everything in between, Plexus is a global leader in providing support for all the facets of the product realization process - Design and Development, Supply Chain Solutions, New Product Introduction, Manufacturing, and Aftermarket Services. Plexus delivers comprehensive end-to-end solutions in the Americas ("AMER"), Europe, Middle East, and Africa ("EMEA") and Asia-Pacific ("APAC") regions for our customers.
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, 2019, and our "Safe Harbor" Cautionary Statement included above.
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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 | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Net sales | $ | 852.4 | $ | 765.5 | ||||
Cost of sales | 773.2 | 693.2 | ||||||
Gross profit | 79.2 | 72.4 | ||||||
Gross margin | 9.3 | % | 9.5 | % | ||||
Operating income | 39.9 | 37.0 | ||||||
Operating margin | 4.7 | % | 4.8 | % | ||||
Net income | 31.0 | 22.2 | ||||||
Diluted earnings per share | $ | 1.03 | $ | 0.69 | ||||
Return on invested capital* | 14.7 | % | 14.6 | % | ||||
Economic return* | 5.9 | % | 5.6 | % | ||||
*Non-GAAP metric; refer to "Return on Invested Capital ("ROIC") and Economic Return" below for more information and Exhibit 99.1 for a reconciliation. | ||||||||
Net sales. For the three months ended January 4, 2020, net sales increased $86.9 million, or 11.4%, as compared to the three months ended December 29, 2018.
Net sales are analyzed by management by geographic segment, which reflects the Company's reportable segments, and by market sector. Management measures operational performance and allocates resources on a geographic segment basis. The Company’s global business development strategy is based on our targeted market sectors.
A discussion of net sales by reportable segment is presented below (in millions):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Net sales: | ||||||||
AMER | $ | 353.5 | $ | 353.9 | ||||
APAC | 451.1 | 378.1 | ||||||
EMEA | 84.5 | 72.3 | ||||||
Elimination of inter-segment sales | (36.7 | ) | (38.8 | ) | ||||
Total net sales | $ | 852.4 | $ | 765.5 | ||||
AMER. Net sales for the three months ended January 4, 2020 in the AMER segment decreased $0.4 million, or 0.1%, as compared to the three months ended December 29, 2018. The decrease in net sales was driven by a reduction in net sales of $16.9 million due to manufacturing transfers to our APAC segment and overall net decreased customer end-market demand in the Communications sector. The decrease was mostly offset by a $52.6 million increase in production ramps of new products for existing customers and an $11.7 million increase in production ramps for new customers.
APAC. Net sales for the three months ended January 4, 2020 in the APAC segment increased $73.0 million, or 19.3%, as compared to the three months ended December 29, 2018. The increase in net sales was driven by a $22.9 million increase in production ramps of new products for existing customers, a $16.9 million increase due to manufacturing transfers from our AMER segment and overall net increased customer end-market demand. The increase was partially offset by a $9.3 million decrease for end-of-life products.
EMEA. Net sales for the three months ended January 4, 2020 in the EMEA segment increased $12.2 million, or 16.9%, as compared to the three months ended December 29, 2018. The increase in net sales was the result of a $6.0 million increase in production ramps of new products for existing customers and overall net increased customer end-market demand.
22
Our net sales by market sector is presented below (in millions):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Market Sector: | ||||||||
Healthcare/Life Sciences | $ | 312.3 | $ | 300.6 | ||||
Industrial/Commercial | 310.0 | 219.1 | ||||||
Aerospace/Defense | 172.1 | 122.5 | ||||||
Communications | 58.0 | 123.3 | ||||||
Total net sales | $ | 852.4 | $ | 765.5 | ||||
Healthcare/Life Sciences. Net sales for the three months ended January 4, 2020 in the Healthcare/Life Sciences sector increased $11.7 million, or 3.9%, as compared to the three months ended December 29, 2018. The increase was driven by a $15.2 million increase in production ramps of new products for existing customers and overall net increased customer end-market demand. The increase was partially offset by a decrease of $6.4 million for end-of-life products.
Industrial/Commercial. Net sales for the three months ended January 4, 2020 in the Industrial/Commercial sector increased $90.9 million, or 41.5%, as compared to the three months ended December 29, 2018. The increase was driven by a $28.0 million increase in production ramps of new products for existing customers and overall net increased customer end-market demand.
Aerospace/Defense. Net sales for the three months ended January 4, 2020 in the Aerospace/Defense sector increased $49.6 million, or 40.5%, as compared to the three months ended December 29, 2018. The increase was driven by a $29.9 million increase in production ramps of new products for existing customers, a $5.1 million increase in production ramps for new customers and overall net increased customer end-market demand.
Communications. Net sales for the three months ended January 4, 2020 in the Communications sector decreased $65.3 million, or 53.0%, as compared to the three months ended December 29, 2018. The decrease was driven by overall net decreased customer end-market demand.
Cost of sales. Cost of sales for the three months ended January 4, 2020 increased $80.0 million, or 11.5%, as compared to the three months ended December 29, 2018. Cost of sales is comprised primarily of material and component costs, labor costs and overhead. For the three months ended January 4, 2020 and December 29, 2018, approximately 89% and 90%, respectively, of the total cost of sales was variable in nature and fluctuated with sales volumes. Of these amounts, approximately 89% and 90%, respectively, of these costs in each period were related to material and component costs. As compared to the prior year period, the increase in cost of sales for the three months ended January 4, 2020 was primarily due to the increase in net sales and fixed costs to support new program ramps.
Gross profit. Gross profit for the three months ended January 4, 2020 increased $6.8 million, or 9.4%, as compared to the three months ended December 29, 2018. Gross margin of 9.3% decreased by 20 basis points as compared to the three months ended December 29, 2018. The primary driver of the increase in gross profit was the increase in net sales, partially offset by higher fixed costs to support new program ramps and a negative shift in customer mix, which drove the decrease in gross margin.
Operating income. Operating income for the three months ended January 4, 2020 increased $2.9 million, or 7.8%, as compared to the three months ended December 29, 2018 as a result of the increase in gross profit, partially offset by a $3.8 million increase in selling and administrative expenses ("S&A") that was primarily due to an increase in compensation expense. Operating margin of 4.7% decreased 10 basis points compared to the three months ended December 29, 2018 primarily due to the decrease in gross margin as a result of the factors discussed above.
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A discussion of operating income by reportable segment is presented below (in millions):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Operating income (loss): | ||||||||
AMER | $ | 12.3 | $ | 14.5 | ||||
APAC | 62.4 | 51.8 | ||||||
EMEA | (0.3 | ) | 1.0 | |||||
Corporate and other costs | (34.5 | ) | (30.3 | ) | ||||
Total operating income | $ | 39.9 | $ | 37.0 | ||||
AMER. Operating income for the three months ended January 4, 2020 decreased $2.2 million as compared to the three months ended December 29, 2018, primarily as a result of increased fixed costs to support new program ramps and an increase in S&A primarily due to an increase in compensation expense, partially offset by a positive shift in customer mix.
APAC. Operating income for the three months ended January 4, 2020 increased $10.6 million as compared to the three months ended December 29, 2018, primarily as a result of the increase in net sales, partially offset by a negative shift in customer mix and increased fixed costs to support new program ramps.
EMEA. Operating income for the three months ended January 4, 2020 decreased $1.3 million as compared to the three months ended December 29, 2018, primarily as a result of increased fixed costs to support new program ramps and a negative shift in customer mix, partially offset by an increase in net sales.
Other expense. Other expense for the three months ended January 4, 2020 increased $2.8 million as compared to the three months ended December 29, 2018, primarily due to an increase of $1.9 million in interest expense and the impact of foreign exchange volatility, which resulted in a foreign exchange loss of $0.9 million during the three months ended January 4, 2020 as compared to a $0.2 million foreign exchange gain during the three months ended December 29, 2018.
Income taxes. Income tax expense and effective income tax rates is presented below (dollars in millions):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Income tax expense, as reported (GAAP) | $ | 3.3 | $ | 11.9 | ||||
Special tax items | 0.8 | (7.0 | ) | |||||
Income tax expense, as adjusted (non-GAAP) (1) | $ | 4.1 | $ | 4.9 | ||||
Three Months Ended | ||||||
January 4, 2020 | December 29, 2018 | |||||
Effective tax rate, as reported (GAAP) | 9.5 | % | 34.9 | % | ||
Special tax items | 2.4 | (20.7 | ) | |||
Effective tax rate, as adjusted (non-GAAP) (1) | 11.9 | % | 14.2 | % | ||
(1) We believe the non-GAAP presentation of income tax expense and the effective tax rate excluding special tax items provides additional insight into the change between comparative reporting periods by isolating the impact of these significant, special items. In addition, we believe that our income tax expense, as adjusted, and effective tax rate, as adjusted, enhance the ability of investors to analyze our operating performance and supplement, but do not replace, income tax expense and effective tax rate calculated in accordance with U.S. GAAP.
For the three months ended January 4, 2020, we recorded a tax benefit of $1.9 million benefit related to guidance issued by the U.S. Department of the Treasury regarding foreign tax credits partially offset by $1.1 million of other special tax items. For the three months ended December 29, 2018, we recorded a $7.0 million adjustment to income tax expense, inclusive of unrecognized tax benefits, as a result of proposed additional guidance issued by the U.S. Department of the Treasury, related to the U.S. Tax Cuts and Jobs Act ("Tax Reform").
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Income tax expense for the three months ended January 4, 2020 and December 29, 2018 was $3.3 million and $11.9 million, respectively. The decrease in income tax expense and the effective tax rate is primarily due to the impact of Tax Reform recorded in the three months ended December 29, 2018. During the three months ended January 4, 2020, we recorded a benefit related to guidance issued by the U.S. Department of the Treasury regarding foreign tax credits partially offset by special tax items.
Our U.S. statutory tax rate for fiscal 2020 is 21%. Our effective tax rate varies from our blended U.S. statutory rate primarily due to the geographic distribution of worldwide earnings as well as a tax holiday granted to a subsidiary within our APAC segment, where we derive a significant portion of our earnings. In addition, our effective tax rate has been impacted by changes due to Tax Reform discussed above. Our effective tax rate may be impacted by disputes with taxing authorities, tax planning activities, adjustments to uncertain tax positions and changes in valuation allowances.
The estimated effective income tax rate for fiscal 2020 is expected to be between 13% and 15%.
Net income. Net income for the three months ended January 4, 2020 increased $8.8 million, or 39.6%, from the three months ended December 29, 2018 to $31.0 million. Net income increased primarily as a result of the increase in operating income and decrease in income tax expense as previously discussed.
Diluted earnings per share. Diluted earnings per share for the three months ended January 4, 2020 increased to $1.03 from $0.69 for the three months ended December 29, 2018, primarily as a result of increased net income due to the factors discussed above and a reduction in diluted shares outstanding due to repurchase activity under the Company's stock repurchase plans.
Return on Invested Capital ("ROIC") and economic return. We use a financial model that is aligned with our business strategy and includes a ROIC goal of 500 basis points over our weighted average cost of capital ("WACC"), which we refer to as "economic return."
Non-GAAP financial measures, including ROIC and economic return, are used for internal management goals and decision making because such measures provide management and investors additional insight into financial performance. In particular, we provide ROIC and economic return because we believe they offer insight into the metrics that are driving management decisions because we view ROIC and economic return as important measures in evaluating the efficiency and effectiveness of our long-term capital requirements. We also use a derivative measure of ROIC as a performance criteria in determining certain elements of compensation, and certain compensation incentives are based on economic return performance.
We define ROIC as tax-effected operating income before restructuring and other special items divided by average invested capital over a rolling two-quarter period for the first quarter. Invested capital is defined as equity plus debt and operating lease liabilities, less cash and cash equivalents. Other companies may not define or calculate ROIC in the same way. ROIC and other non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance with U.S. generally accepted accounting principles ("GAAP").
We review our internal calculation of WACC annually, and our estimated WACC is 8.8% for fiscal 2020. By exercising discipline to generate ROIC in excess of our WACC, our goal is to create value for our shareholders. ROIC was 14.7% and 14.6% for the three months ended January 4, 2020 and December 29, 2018, respectively.
For a reconciliation of ROIC and economic return to our financial statements that were prepared using GAAP, see Exhibit 99.1 to this quarterly report on Form 10-Q, which is incorporated herein by reference.
Refer to the table below, which includes the calculation of ROIC and economic return (dollars in millions) for the indicated periods:
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Adjusted operating income (tax-effected) | $ | 139.0 | $ | 125.6 | ||||
Average invested capital | 945.4 | 862.5 | ||||||
ROIC | 14.7 | % | 14.6 | % | ||||
WACC | 8.8 | % | 9.0 | % | ||||
Economic return | 5.9 | % | 5.6 | % | ||||
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and restricted cash were $255.1 million as of January 4, 2020, as compared to $226.3 million as of September 28, 2019.
As of January 4, 2020, 94% of our cash balance was held outside of the U.S. by our foreign subsidiaries. With the enactment of Tax Reform, we believe that our offshore cash can be accessed in a more tax efficient manner than before Tax Reform. Currently, we believe that our cash balance, together with cash available under our Credit Facility, will be sufficient to meet our liquidity needs and potential share repurchases, if any, for the next twelve months and for the foreseeable future.
Our future cash flows from operating activities will be reduced by $65.1 million due to cash payments for U.S. federal taxes on the deemed repatriation of undistributed foreign earnings that are payable over an eight year period that began in fiscal 2019 with the first payment. The table below provides the expected timing of these future cash outflows, in accordance with the following installment schedule for the remaining seven years (in millions):
Remaining 2020 | $ | 5.5 | |
2021 | 5.7 | ||
2022 | 5.7 | ||
2023 | 5.7 | ||
2024 | 10.6 | ||
2025 | 14.2 | ||
2026 | 17.7 | ||
Total | $ | 65.1 | |
Cash Flows. The following table provides a summary of cash flows for the periods presented, excluding the effect of exchange rates on cash and cash equivalents and restricted cash (in millions):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Cash provided by (used in) operating activities | $ | 74.7 | $ | (33.3 | ) | |||
Cash used in investing activities | $ | (13.4 | ) | $ | (23.7 | ) | ||
Cash used in financing activities | $ | (33.1 | ) | $ | (47.3 | ) | ||
Operating Activities. Cash flows provided by operating activities were $74.7 million for the three months ended January 4, 2020, as compared to cash flows used in operating activities of $33.3 million for the three months ended December 29, 2018. The increase was primarily due to cash flow improvements (reductions) of:
• | $63.0 million in accounts receivable cash flows, which resulted primarily from the timing of shipments. |
• | $57.0 million in accounts payables cash flows driven by increased purchasing activity to support increased net sales. |
• | $42.7 million in inventory cash flows driven by inventory management efforts. |
• | $(25.4) million in customer deposit cash flows driven by a significant deposit received from one customer in the prior year. |
• | $(16.6) million in other current and noncurrent liabilities cash flows driven by decreases in advance payments from customers and accrued salaries and wages due to timing of the quarter-end. |
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The following table provides a summary of cash cycle days for the periods indicated (in days):
Three Months Ended | ||||
January 4, 2020 | December 29, 2018 | |||
Days in accounts receivable | 49 | 51 | ||
Days in contract assets | 12 | 10 | ||
Days in inventory | 87 | 105 | ||
Days in accounts payable | (61) | (68) | ||
Days in cash deposits | (16) | (15) | ||
Annualized cash cycle | 71 | 83 | ||
We calculate days in accounts receivable and contract assets as each balance sheet item for the respective quarter divided by annualized sales for the respective quarter by day. We calculate days in inventory, accounts payable, and cash deposits as each balance sheet line item for the respective quarter divided by annualized cost of sales for the respective quarter by day. We calculate annualized cash cycle as the sum of days in accounts receivable, days in contract assets and days in inventory, less days in accounts payable and days in cash deposits.
As of January 4, 2020, annualized cash cycle days decreased twelve days compared to December 29, 2018 due to the following factors:
• | Days in accounts receivable for the three months ended January 4, 2020 decreased 2 days compared to the three months ended December 29, 2018. The decrease is primarily attributable to the timing of customer shipments with the additional week in the quarter. |
• | Days in contract assets for the three months ended January 4, 2020 increased 2 days compared to the three months ended December 29, 2018. The increase is due to increased demand from customers with arrangements requiring revenue to be recognized over time as products are produced. |
• | Days in inventory for the three months ended January 4, 2020 decreased eighteen days compared to the three months ended December 29, 2018. The decrease is primarily attributable to inventory management efforts. |
• | Days in accounts payable for the three months ended January 4, 2020 decreased 7 days compared to the three months ended December 29, 2018. The decrease is primarily attributable to reduced purchasing activity in connection with our inventory management efforts. |
• | Days in cash deposits for the three months ended January 4, 2020 increased 1 day compared to the three months ended December 29, 2018. The increase was primarily attributable to significant deposits received from two customers to cover higher inventory balances. |
Free Cash Flow. We define free cash flow ("FCF"), a non-GAAP financial measure, as cash flow provided by (used in) operations less capital expenditures. FCF was $61.0 million for the three months ended January 4, 2020 compared to $(58.2) million for the three months ended December 29, 2018, an increase of $119.2 million.
Non-GAAP financial measures, including FCF, are used for internal management assessments because such measures provide additional insight to investors into ongoing financial performance. In particular, we provide FCF because we believe it offers insight into the metrics that are driving management decisions. We view FCF as an important financial metric as it demonstrates our ability to generate cash and can allow us to pursue opportunities that enhance shareholder value. FCF is a non-GAAP financial measure that should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance with GAAP.
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A reconciliation of FCF to our financial statements that were prepared using GAAP follows (in millions):
Three Months Ended | ||||||||
January 4, 2020 | December 29, 2018 | |||||||
Cash flows provided by (used in) operating activities | $ | 74.7 | $ | (33.3 | ) | |||
Payments for property, plant and equipment | (13.7 | ) | (24.9 | ) | ||||
Free cash flow | $ | 61.0 | $ | (58.2 | ) | |||
Investing Activities. Cash flows used in investing activities were $13.4 million for the three months ended January 4, 2020 compared to $23.7 million for the three months ended December 29, 2018. The decrease in cash used in investing activities was due to a $11.2 million decrease in capital expenditures, primarily due to the construction of a second manufacturing facility in Guadalajara, Mexico which was completed in the fiscal first quarter of 2020.
We estimate funded capital expenditures for fiscal 2020 to be approximately $55.0 to $70.0 million, of which $13.7 million was utilized through the first three months of fiscal 2020. The remaining fiscal 2020 capital expenditures are anticipated to be used primarily to support new program ramps as well as to replace older equipment. We believe our estimated capital expenditures will continue to be funded from cash flows provided by operations, and may be supplemented by available cash or borrowings, if required.
Financing Activities. Cash flows used in financing activities were $33.1 million for the three months ended January 4, 2020 compared to cash flows used in financing activities of $47.3 million for the three months ended December 29, 2018. The decrease was primarily attributable to a $43.7 million decrease in cash used to repurchase our common stock and a $9.1 million increase in proceeds from the exercise of stock options. This change was partially offset by an increase of $36.0 million in pay-downs on our revolving credit facility.
On August 20, 2019, the Board of Directors approved a new stock repurchase plan, pursuant to which the Company is authorized to repurchase $50.0 million of its common stock (the "2019 Program"). The 2019 Program commenced upon completion of the 2018 Program, as defined below. During the three months ended January 4, 2020, the Company repurchased 90,667 shares under the 2019 Program for $6.3 million at an average price of $69.82. As of January 4, 2020, $40.4 million of authority remained under the 2019 Program.
On February 14, 2018, the Board of Directors approved a stock repurchase plan under which the Company was authorized to repurchase $200.0 million of its common stock (the "2018 Program"). During the three months ended December 29, 2018, the Company repurchased 869,949 shares under this program for $50.1 million, at an average price of $57.53 per share. The 2018 Program was completed during the fiscal fourth quarter of 2019, when all share repurchase authority under it was exhausted.
All shares repurchased under the aforementioned programs were recorded as treasury stock.
On June 15, 2018, the Company entered into a Note Purchase Agreement (the “2018 NPA”) pursuant to which it issued an aggregate of $150.0 million in principal amount of unsecured senior notes, consisting of $100.0 million in principal amount of 4.05% Series A Senior Notes, due on June 15, 2025, and $50.0 million in principal amount of 4.22% Series B Senior Notes, due on June 15, 2028 (collectively, the “2018 Notes”), in a private placement. The 2018 NPA includes customary operational and financial covenants with which the Company is required to comply, including, among others, maintenance of certain financial ratios such as a total leverage ratio and a minimum interest coverage ratio. The 2018 Notes may be prepaid in whole or in part at any time, subject to payment of a make-whole amount; interest on the 2018 Notes is payable semiannually. As of January 4, 2020, the Company was in compliance with the covenants under the 2018 NPA.
On May 15, 2019, the Company refinanced its then-existing senior unsecured revolving credit facility (the "Prior Credit Facility") by entering into a new 5-year senior unsecured revolving credit facility (collectively with the Prior Credit Facility, referred to as the "Credit Facility"), which expanded the maximum commitment from $300.0 million to $350.0 million and extended the maturity from July 5, 2021 to May 15, 2024. The maximum commitment under the Credit Facility may be further increased to $600.0 million, generally by mutual agreement of the Company and the lenders, subject to certain customary conditions. During the three months ended January 4, 2020, the highest daily borrowing was $164.5 million; the average daily borrowings were $128.1 million. The Company borrowed $156.5 million and repaid $189.5 million of revolving borrowings under the Credit Facility during the three months ended January 4, 2020. As of January 4, 2020, the Company was in compliance with all financial covenants relating to the Credit Agreement, which are generally consistent with those in the 2018 NPA discussed above. The Company is required to pay a commitment fee on the daily unused revolver credit commitment based on the Company's leverage ratio; the fee was 0.175% as of January 4, 2020.
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The Credit Agreement and the 2018 NPA allow for the future payment of cash dividends or the repurchase of shares provided that no event of default (including any failure to comply with a financial covenant) exists at the time of, or would be caused by, the dividend payment or the share repurchases. We have not paid cash dividends in the past. However, the Board of Directors of the Company evaluates from time to time potential uses of excess cash, which in the future may include share repurchases above those already authorized, a special dividend or recurring dividends.
The Company has Master Accounts Receivable Purchase Agreements with MUFG Bank, New York Branch (formerly known as The Bank of Tokyo-Mitsubishi UFJ, Ltd.) (the "MUFG RPA"), and HSBC Bank (China) Company Limited, Xiamen branch (the "HSBC RPA"), under which the Company may elect to sell receivables at a discount. These facilities are uncommitted facilities. The MUFG RPA was amended on December 23, 2019 to increase the maximum facility amount from $280.0 million to $340.0 million. The maximum facility amount under the HSBC RPA as of January 4, 2020 is $60.0 million. The MUFG RPA will be automatically extended each year unless any party gives no less than 10 days prior notice that the agreement should not be extended. The terms of the HSBC RPA are generally consistent with the terms of the MUFG RPA discussed above.
The Company sold $227.8 million and $232.5 million of trade accounts receivable under these programs during the three months ended January 4, 2020 and December 29, 2018, respectively, in exchange for cash proceeds of $226.6 million and $231.2 million, respectively.
In all cases, the sale discount was recorded within "Miscellaneous, net" in the Condensed Consolidated Statements of Comprehensive Income in the period of the sale. For further information regarding the receivable sale programs, see Note 14, "Trade Accounts Receivable Sale Programs," in Notes to Condensed Consolidated Financial Statements.
Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents, potential borrowings under the Credit Facility and our leasing capabilities should be sufficient to meet our working capital and fixed capital requirements for the next twelve months. If our future financing needs increase, we may need to arrange additional debt or equity financing. Accordingly, we evaluate and consider from time to time various financing alternatives to supplement our financial resources. However, we cannot be assured that we will be able to make any such arrangements on acceptable terms.
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CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE SHEET OBLIGATIONS
Our disclosures regarding contractual obligations and commercial commitments are located in our SEC filings. Information in the following table provides a summary of our contractual obligations and commercial commitments as of January 4, 2020 (dollars in millions):
Payments Due by Fiscal Year | ||||||||||||||||||||
Contractual Obligations | Total | Remaining 2020 | 2021-2022 | 2023-2024 | 2025 and thereafter | |||||||||||||||
Debt Obligations (1) | $ | 252.2 | $ | 65.1 | $ | 12.4 | $ | 12.2 | $ | 162.5 | ||||||||||
Finance Lease Obligations | 127.2 | 5.6 | 12.6 | 10.3 | 98.7 | |||||||||||||||
Operating Lease Obligations | 58.8 | 8.0 | 16.8 | 13.6 | 20.4 | |||||||||||||||
Purchase Obligations (2) | 638.4 | 604.5 | 33.4 | 0.4 | 0.1 | |||||||||||||||
Repatriation Tax on Undistributed Foreign Earnings (3) | 65.1 | 5.5 | 11.4 | 16.3 | 31.9 | |||||||||||||||
Other Liabilities on the Balance Sheet (4) | 17.6 | 3.0 | 5.6 | 0.9 | 8.1 | |||||||||||||||
Other Liabilities not on the Balance Sheet (5) | 8.1 | 4.0 | 0.2 | 0.5 | 3.4 | |||||||||||||||
Total Contractual Cash Obligations | $ | 1,167.4 | $ | 695.7 | $ | 92.4 | $ | 54.2 | $ | 325.1 | ||||||||||
1) | As of January 4, 2020, debt obligations includes $150.0 million in principal amount of 2018 Notes as well as interest; see Note 3, "Debt, Finance Lease Obligations and Other Financing," in Notes to Condensed Consolidated Financial Statements for further information. |
2) | As of January 4, 2020, purchase obligations consist primarily of purchases of inventory and equipment in the ordinary course of business. |
3) | As of January 4, 2020, repatriation tax on undistributed foreign earnings consists of U.S. federal income taxes on the deemed repatriation of undistributed foreign earnings due to Tax Reform. Refer to "Liquidity and Capital Resources" above for further detail. |
4) | As of January 4, 2020, other obligations on the balance sheet included deferred compensation obligations to certain of our former and current executive officers, as well as other key employees, other financing obligations arising from information technology maintenance agreements, and asset retirement obligations related to our buildings. We have excluded from the above table the impact of approximately $2.2 million, as of January 4, 2020, related to unrecognized income tax benefits. The Company cannot make reliable estimates of the future cash flows by period related to these obligations. |
5) | As of January 4, 2020, other obligations not on the balance sheet consist of guarantees and a commitment for salary continuation and certain benefits in the event employment of one executive officer of the Company is terminated without cause. Excluded from the amounts disclosed are certain bonus and incentive compensation amounts, which would be paid on a prorated basis in the year of termination. |
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DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are disclosed in our 2019 annual report on Form 10-K. During the first quarter of fiscal 2020, there were no material changes.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1, "Basis of Presentation," in Notes to Condensed Consolidated Financial Statements for further information regarding new accounting pronouncements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign exchange and interest rates. We selectively use financial instruments to reduce such risks. We do not use derivative financial instruments for speculative purposes.
Foreign Currency Risk
Our international operations create potential foreign exchange risk. Our policy is to selectively hedge our foreign currency denominated transactions in a manner that partially offsets the effects of changes in foreign currency exchange rates. We typically use foreign currency contracts to hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. Corresponding gains and losses on the underlying transaction generally offset the gains and losses on these foreign currency hedges.
Our percentages of transactions denominated in currencies other than the U.S. dollar for the indicated periods were as follows:
Three Months Ended | ||||
January 4, 2020 | December 29, 2018 | |||
Net Sales | 10.3% | 9.3% | ||
Total Costs | 16.0% | 15.6% | ||
The Company has evaluated the potential foreign currency exchange rate risk on transactions denominated in currencies other than the U.S. dollar for the periods presented above. Based on the Company’s overall currency exposure, as of January 4, 2020, a 10% change in the value of the U.S. dollar relative to our other transactional currencies would not have a material effect on the Company’s financial position, results of operations, or cash flows.
Interest Rate Risk
We have financial instruments, including cash equivalents and debt, which are sensitive to changes in interest rates. The primary objective of our investment activities is to preserve principal, while maximizing yields without significantly increasing market risk. To achieve this, we maintain our portfolio of cash equivalents in a variety of highly rated securities, money market funds and certificates of deposit, and limit the amount of principal exposure to any one issuer.
As of January 4, 2020, our only material interest rate risk is associated with our Credit Facility. Borrowings under the Credit Facility bear interest, at the Company's option, at a eurocurrency or base rate plus, in each case, an applicable interest rate margin based on the Company's then-current leverage ratio (as defined in the Credit Agreement). As of January 4, 2020, the borrowing rate under the Credit Agreement was LIBOR plus 1.10%. The Company is monitoring developments related to LIBOR; see also Part I, Item 1A "Risk Factors" of our annual report on Form 10-K for the fiscal year ended September 28, 2019 for more information. Borrowings under the 2018 NPA are based on a fixed interest rate, thus mitigating much of our interest rate risk. Based on the Company's overall interest rate exposure, as of January 4, 2020, a 10.0% change in interest rates would not have a material effect on the Company's financial position, results of operations, or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission ("SEC") is recorded, processed, summarized and reported on a timely basis. The Company’s Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have reviewed and evaluated, with the participation of the Company’s management, the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, the CEO and CFO have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective, at the reasonable assurance level, (a) in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act, and (b) in assuring that information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the first quarter of fiscal 2020, other than explained below, there have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Effective September 29, 2019, we adopted the new leasing standard under ASC 2016-02, Leasing, using the modified retrospective method of adoption. The adoption of this guidance required changes to our processes, policies and internal controls to meet the impact of the new standard and disclosure requirements.
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PART II. OTHER INFORMATION
ITEM 1A. | Risk Factors |
In addition to the risks and uncertainties discussed herein, particularly those discussed in the “Safe Harbor” Cautionary Statement and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2, see the risk factors set forth in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended September 28, 2019 that have had no material changes, except as set forth below.
The impact of the coronavirus on our operations, and the operations of our customers, suppliers and logistics providers, may harm our business.
We are actively assessing and responding where possible to the potential impact of the coronavirus outbreak in China. This includes evaluating the impact on our employees, customers, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus. The significance of the impact on Plexus is yet uncertain; however, a material adverse effect on our employees, customers, suppliers, and logistics providers could have a material adverse effect on Plexus. In addition, supply chain or logistics disruptions could materially impact our operations outside China since we purchase a meaningful level of components from Chinese suppliers for our sites in other countries.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table provides the specified information about the repurchases of shares by the Company during the three months ended January 4, 2020.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum approximate dollar value of shares that may yet be purchased under the plans or programs* | ||||||||||
September 29, 2019 to November 2, 2019 | 47,306 | $ | 63.68 | 47,306 | $ | 43,708,530 | ||||||||
November 3, 2019 to November 30, 2019 | 18,262 | $ | 75.35 | 18,262 | $ | 42,332,408 | ||||||||
December 1, 2019 to January 4, 2020 | 25,099 | $ | 77.36 | 25,099 | $ | 40,390,820 | ||||||||
Total | 90,667 | $ | 69.82 | 90,667 | ||||||||||
* On August 20, 2019, the Board of Directors approved a new stock repurchase plan under which the Company is authorized to repurchase $50.0 million of its common stock (the "2019 Program"). The 2019 Program commenced upon completion of the stock repurchase plan approved by the Board of Directors on February 14, 2018, pursuant to which the Company was authorized to repurchase $200.0 million of its common stock. The 2019 Program has no expiration.
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ITEM 6. EXHIBITS
The list of exhibits is included below:
Exhibit No. | Exhibit | |
10.1 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
99.1 | ||
101 | The following materials from Plexus Corp.’s Quarterly Report on Form 10-Q for the quarter ended January 4, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Comprehensive Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Shareholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements. | |
101.INS | Inline XBRL Instance Document (the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document) | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Plexus Corp. | ||||
Registrant | ||||
Date: | 2/7/2020 | /s/ Todd P. Kelsey | ||
Todd P. Kelsey | ||||
President and Chief Executive Officer | ||||
Date: | 2/7/2020 | /s/ Patrick J. Jermain | ||
Patrick J. Jermain | ||||
Executive Vice President and Chief Financial Officer | ||||
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