Plexus Corp 10-Q for FY2022 Q3
Plexus Corp (PLXS)
10-Q
2022-08-05
For: 2022-07-02
View Original
Added on
April 12, 2026
About this 10-Q
Plexus Corp filed this 10-Q on August 5, 2022, covering the quarter ended July 2, 2022 (FY2022 Q3).
Headline figures
Quarter ended July 2, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.01B
- up 20.3% from $842.33M a year earlier
- Net income
- $37.49M
- up 35.8% from net income of $27.61M a year earlier
- Diluted EPS
- $1.33
- up 40.0% from $0.95 a year earlier
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 July 2, 2022
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 August 2, 2022, there were 27,712,174 shares of common stock outstanding.
PLEXUS CORP.
TABLE OF CONTENTS
July 2, 2022
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share data)
Unaudited
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Selling and administrative expenses | ||||||||||||||||||||||||||
| Restructuring and impairment charges | ||||||||||||||||||||||||||
| 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 (loss) income: | ||||||||||||||||||||||||||
| Derivative instrument and other fair value adjustments | ( | ( | ( | ( | ||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ||||||||||||||||||||||||
| Other comprehensive (loss) income | ( | ( | ||||||||||||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
| July 2, 2022 | October 2, 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
Accounts receivable, net of allowances of $ | ||||||||||||||
| 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, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
Common stock held in treasury, at cost, | ( | ( | ||||||||||||
| 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.
4
PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Unaudited
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| Common stock - shares outstanding | ||||||||||||||||||||||||||
| Beginning of period | ||||||||||||||||||||||||||
| Exercise of stock options and vesting of other share-based 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 share-based awards | ||||||||||||||||||||||||||
| End of period | ||||||||||||||||||||||||||
| Additional paid-in capital | ||||||||||||||||||||||||||
| Beginning of period | ||||||||||||||||||||||||||
| Share-based compensation expense | ||||||||||||||||||||||||||
| Exercise of stock options and vesting of other share-based awards, including tax withholding | ( | ( | ( | |||||||||||||||||||||||
| End of period | ||||||||||||||||||||||||||
| Treasury stock | ||||||||||||||||||||||||||
| Beginning of period | ( | ( | ( | ( | ||||||||||||||||||||||
| Treasury shares purchased | ( | ( | ( | ( | ||||||||||||||||||||||
| End of period | ( | ( | ( | ( | ||||||||||||||||||||||
| Retained earnings | ||||||||||||||||||||||||||
| Beginning of period | ||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||
| End of period | ||||||||||||||||||||||||||
| Accumulated other comprehensive loss | ||||||||||||||||||||||||||
| Beginning of period | ( | ( | ( | ( | ||||||||||||||||||||||
| Other comprehensive (loss) income | ( | ( | ||||||||||||||||||||||||
| End of period | ( | ( | ( | ( | ||||||||||||||||||||||
| Total stockholders' equity, end of period | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
| Nine Months Ended | ||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| 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 and related charges | ||||||||||||||
| Provision for allowance for doubtful accounts | ( | |||||||||||||
| Other, net | ||||||||||||||
| Changes in operating assets and liabilities, excluding impacts of acquisition: | ||||||||||||||
| Accounts receivable | ( | |||||||||||||
| Contract assets | ( | ( | ||||||||||||
| Inventories | ( | ( | ||||||||||||
| Other current and non-current assets | ( | ( | ||||||||||||
| Accrued income taxes payable | ( | ( | ||||||||||||
| Accounts payable | ||||||||||||||
| Customer deposits | ||||||||||||||
| Other current and non-current liabilities | ||||||||||||||
| Cash flows (used in) provided by operating activities | ( | |||||||||||||
| Cash flows from investing activities | ||||||||||||||
| Payments for property, plant and equipment | ( | ( | ||||||||||||
| Other, net | ( | |||||||||||||
| Cash flows used in investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities | ||||||||||||||
| Borrowings under debt agreements | ||||||||||||||
| Payments on debt and finance lease obligations | ( | ( | ||||||||||||
| Debt issuance costs | ( | |||||||||||||
| Repurchases of common stock | ( | ( | ||||||||||||
| Proceeds from exercise of stock options | ||||||||||||||
| Payments related to tax withholding for share-based compensation | ( | ( | ||||||||||||
| Cash flows provided by (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.
6
PLEXUS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JULY 2, 2022 AND JULY 3, 2021
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 condensed consolidated financial position of the Company as of July 2, 2022 and October 2, 2021, the results of operations and shareholders' equity for the three and nine months ended July 2, 2022 and July 3, 2021, and the cash flows for the same nine 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. All 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 2021 Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements Not Yet Adopted:
The Company believes that no recently issued accounting standards will have a material impact on its Consolidated Financial Statements, or apply to its operations.
2. Inventories
Inventories as of July 2, 2022 and October 2, 2021 consisted of the following (in thousands):
| July 2, 2022 | October 2, 2021 | |||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Work-in-process | ||||||||||||||
| Finished goods | ||||||||||||||
| Total inventories, net | $ | $ | ||||||||||||
In certain circumstances, per contractual terms, customer deposits are received by the Company to offset inventory risks. The total amount of customer deposits related to inventory and included within current liabilities on the accompanying Condensed Consolidated Balance Sheets as of July 2, 2022 and October 2, 2021 were $379.8 million and $200.6 million, respectively.
7
3. Debt, Finance Lease Obligations and Other Financing
Debt and finance lease obligations as of July 2, 2022 and October 2, 2021, consisted of the following (in thousands):
| July 2, 2022 | October 2, 2021 | |||||||||||||
| $ | $ | |||||||||||||
| 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 $150.0 100.0 4.05 50.0 4.22
On June 9, 2022, the Company refinanced its then-existing senior unsecured revolving credit facility (as amended by that certain Amendment No. 1 to Credit Agreement dated April 29, 2020, the "Prior Credit Facility") by entering into a new 5 -year revolving credit facility (collectively with the Prior Credit Facility, referred to as the "Credit Facility"), which expanded the maximum commitment from $350.0 million to $500.0 million and extended the maturity from May 15, 2024 to June 9, 2027. The maximum commitment under the Credit Facility may be further increased to $750.0 million, generally by mutual agreement of the Company and the lenders, subject to certain customary conditions. During the nine months ended July 2, 2022, the highest daily borrowing was $327.0 million; the average daily borrowings were $204.9 million. The Company borrowed $524.0 million and repaid $339.0 million of revolving borrowings under the Credit Facility during the nine months ended July 2, 2022. As of July 2, 2022, the Company was in compliance with all financial covenants relating to the Credit Facility, 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 Credit Facility based on the Company's leverage ratio; the fee was 0.125 % as of July 2, 2022.
The fair value of the Company’s debt, excluding finance lease and other financing obligations, was $383.5 million and $217.1 million as of July 2, 2022 and October 2, 2021, respectively. The carrying value of the Company's debt, excluding finance lease and other financing obligations, was $390.0 million and $205.0 million as of July 2, 2022 and October 2, 2021, 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 and Fair Value Measurements," for further information regarding the Company's fair value calculations and classifications.
4. Derivatives and Fair Value Measurements
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 $2.6 million of unrealized losses, net of tax, related to
8
cash flow hedges will be reclassified from other comprehensive (loss) income 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.
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 $141.4 million as of July 2, 2022, and a notional value of $107.4 million as of October 2, 2021. 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 $2.6 million liability as of July 2, 2022, and a $1.0 million liability as of October 2, 2021.
The Company had additional forward currency exchange contracts outstanding as of July 2, 2022, with a notional value of $52.4 million; there were $38.6 million such contracts outstanding as of October 2, 2021. 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" in the Condensed Consolidated Statements of Comprehensive Income. The total fair value of these derivatives was a $0.4 million liability as of July 2, 2022, and a $0.2 million liability as of October 2, 2021.
The tables below present information regarding the fair values of derivative instruments (as defined in Note 1, "Description of Business and Significant Accounting Policies") 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 | |||||||||||||||||||||||||||||||||||||
| July 2, 2022 | October 2, 2021 | July 2, 2022 | October 2, 2021 | |||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | Balance sheet classification | Fair Value | Fair Value | Balance sheet classification | Fair Value | Fair Value | ||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other | $ | $ | Other accrued liabilities | $ | $ | ||||||||||||||||||||||||||||||||
| Fair Values of Derivative Instruments (in thousands) | ||||||||||||||||||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||||||
| July 2, 2022 | October 2, 2021 | July 2, 2022 | October 2, 2021 | |||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Balance sheet classification | Fair Value | Fair Value | Balance sheet classification | Fair Value | Fair Value | ||||||||||||||||||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other | $ | $ | Other accrued liabilities | $ | $ | ||||||||||||||||||||||||||||||||
| The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Loss ("OCL") (in thousands) | ||||||||||||||
| for the Three Months Ended | ||||||||||||||
| Derivatives in cash flow hedging relationships | Amount of (Loss) Gain Recognized in OCL on Derivatives | |||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Foreign 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) Gain Reclassified from Accumulated OCL into Income | Amount of (Loss) Gain Reclassified from Accumulated OCL into Income | ||||||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| Foreign currency forward contracts | Cost of sales | $ | ( | $ | ||||||||||||||||
| Foreign currency forward contracts | Selling and administrative expenses | $ | ( | $ | ||||||||||||||||
| Derivatives not designated as hedging instruments | Location of (Loss) Gain Recognized on Derivatives in Income | Amount of (Loss) Gain on Derivatives Recognized in Income | ||||||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| Foreign currency forward contracts | Miscellaneous, net | $ | ( | $ | ||||||||||||||||
9
| The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Loss ("OCL") (in thousands) | ||||||||||||||
| for the Nine Months Ended | ||||||||||||||
| Derivatives in cash flow hedging relationships | Amount of (Loss) Gain Recognized in OCL on Derivatives | |||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Foreign currency forward contracts | $ | ( | $ | |||||||||||
| Derivative Impact on (Loss) Gain Recognized in Condensed Consolidated Statements of Comprehensive Income (in thousands) | ||||||||||||||||||||
| for the Nine Months Ended | ||||||||||||||||||||
| Derivatives in cash flow hedging relationships | Classification of (Loss) Gain Reclassified from Accumulated OCL into Income | Amount of (Loss) Gain Reclassified from Accumulated OCL into Income | ||||||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| Foreign currency forward contracts | Cost of sales | $ | ( | $ | ||||||||||||||||
| Foreign currency forward contracts | Selling and administrative expenses | $ | ( | $ | ||||||||||||||||
| Derivatives not designated as hedging instruments | Location of (Loss) Gain Recognized on Derivatives in Income | Amount of (Loss) Gain on Derivatives Recognized in Income | ||||||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||||||||
| Foreign 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.
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 assets of the Company’s derivatives as of July 2, 2022 and October 2, 2021, by input level:
| Fair Value Measurements Using Input Levels Asset/(Liability) (in thousands) | ||||||||||||||||||||||||||
July 2, 2022 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
October 2, 2021 | ||||||||||||||||||||||||||
| Derivatives | ||||||||||||||||||||||||||
| Foreign 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.
10
5. Income Taxes
Income tax expense for the three and nine months ended July 2, 2022 was $5.8 million and $13.6 million, respectively, compared to $5.3 million and $15.4 million for the three and nine months ended July 3, 2021, respectively.
The effective tax rate for the three and nine months ended July 2, 2022 was 13.4 16.1 % and 12.7 % for the three and nine months ended July 3, 2021, respectively. The decrease for the three months ended July 2, 2022 compared to the three months ended July 3, 2021, was due to a change in the geographic distribution of pre-tax book income, partially offset by an increase in discrete tax expenses of $1.4 million. The increase for the nine months ended July 2, 2022 compared to the nine months ended July 3, 2021, was due to a change in the geographic distribution of pre-tax book income and an increase in discrete tax expenses of $2.0 million.
The amount of unrecognized tax benefits recorded for uncertain tax positions increased by $1.5 million for the three months ended July 2, 2022. 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 and nine months ended July 2, 2022 was $0.2
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 or any foreign jurisdiction.
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 July 2, 2022, the Company released a full valuation allowance for a jurisdiction within the EMEA segment related to the settlement of an income tax audit. 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.
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 and nine months ended July 2, 2022 and July 3, 2021 (in thousands, except per share amounts):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| 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 and nine months ended July 2, 2022 there were no 0.1
See also Note 12, "Shareholders' Equity," for information regarding the Company's share repurchase plans.
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7. Leases
The components of lease expense for the three and nine months ended July 2, 2022 and July 3, 2021 were as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| 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 right-of-use ("ROU") asset, amortization of finance lease ROU 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.
The following tables sets forth the amount of lease assets and lease liabilities included in the Company’s Condensed Consolidated Balance Sheets (in thousands):
| Financial Statement Line Item | July 2, 2022 | October 2, 2021 | ||||||||||||
| ASSETS | ||||||||||||||
| Finance lease assets | Property, plant and equipment, net | $ | $ | |||||||||||
| Operating lease assets | Operating lease right-of-use assets | |||||||||||||
| Total lease assets | $ | $ | ||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
| Current | ||||||||||||||
| Current portion of long-term debt and finance lease obligations | $ | $ | ||||||||||||
| Other accrued liabilities | ||||||||||||||
| Non-current | ||||||||||||||
| Long-term debt and finance lease obligations, net of current portion | ||||||||||||||
| Operating lease liabilities | Long-term operating lease liabilities | |||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||
As of July 2, 2022 we had $8.1 million of payments related to leases signed but not yet commenced. These leases will commence in the next twelve months, with lease terms between 3 and 25 years.
8. Share-Based Compensation
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Performance stock units ("PSUs") are payable in shares of the Company's common stock and have a performance period of three years . For PSUs, 50 % 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 for grants issued in fiscal 2020 and prior and the S&P 400 Index for grants issued in fiscal 2021 and beyond. Both are a market condition. The remaining 50 % of PSUs vest based upon a three -point annual average of the Company's absolute economic return, a performance condition, with grants made in fiscal 2021 and beyond being subject to an individual year minimum and maximum absolute economic return. The vesting and payout of awards will range between 0 % and 200 % of the shares granted based upon metrics during a performance period for PSUs based on economic return and PSUs based on TSR compared to the Russell 3000 Index. For PSUs based on TSR compared to the S&P 400 Index, the vesting and payout of awards will range between 0 % and 150 % of shares granted. Payout at target, 100 % of the shares granted, will occur if the TSR of Plexus stock is at the 50 th percentile of companies in the Russell 3000 Index or S&P 400 Index during the performance period and if a 2.5 % average economic return is achieved over the performance period of three years. 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.
The Company recognizes share-based compensation expense over the share-based awards' vesting period.
9. Litigation
10. Reportable Segments
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Information about the Company’s three reportable segments for the three and nine months ended July 2, 2022 and July 3, 2021 is as follows (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||||||||||||
| July 2, 2022 | October 2, 2021 | |||||||||||||
| 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 cause other than the Company.
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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 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 nine months ended July 2, 2022 and July 3, 2021 (in thousands):
| Nine Months Ended | ||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| 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 share repurchase program under which the Company is authorized to repurchase $50.0 million of its common stock (the "2019 Program"). During the nine months ended July 3, 2021, the Company completed the 2019 Program by repurchasing 73,560 shares under this program for $5.3 million at an average price of $72.44 per share.
On August 13, 2020, the Board of Directors approved a share repurchase program under which the Company is authorized to repurchase up to $50.0 million of its common stock (the "2021 Program"). On November 18, 2020, the Board of Directors approved an additional $50.0 million in share repurchase authority under the 2021 Program such that there then existed a total of $100.0 million in share repurchase authority under the program. The 2021 Program commenced upon completion of the 2019 Program. During the three months ended July 3, 2021, the Company repurchased 291,898 shares under this program for $27.3 million at an average price of $93.53 per share. During the nine months ended July 3, 2021, the Company repurchased 874,706 shares under this program for $73.9 million at an average price of $84.45 per share.
On August 11, 2021, the Board of Directors approved a share repurchase program that authorizes the Company to repurchase up to $50.0 million of its common stock (the "2022 Program"). The 2022 Program commenced upon completion of the 2021 Program. During the three months ended July 2, 2022, the Company repurchased 148,571 shares under this program for $11.7 million at an average price of $79.27 per share. During the nine months ended July 2, 2022, the Company repurchased 564,718 shares under this program for $46.9 million at an average price of $83.07 per share. As of July 2, 2022, the Company completed the 2022 Program, and there is no remaining authority for share repurchases.
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"), HSBC Bank (China) Company Limited, Xiamen branch (the "HSBC RPA") and other unaffiliated financial institutions, under which the Company may elect to sell receivables; at a discount. All facilities are uncommitted facilities. The maximum facility amount under the MUFG RPA as of July 2, 2022 is $340.0 million. The maximum facility amount under the HSBC RPA as of July 2, 2022 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 previously discussed.
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
15
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. The Company continues servicing receivables sold and performing all accounts receivable administrative functions, and in exchange receives a servicing fee, under both the MUFG RPA and HSBC RPA. Servicing fees related to trade accounts receivable programs recognized during the three and nine months ended July 2, 2022 and July 3, 2021 were not material.
The Company sold $213.6 million and $180.6 million of trade accounts receivable under these programs, or their predecessors, during the three months ended July 2, 2022 and July 3, 2021, respectively, in exchange for cash proceeds of $212.3 million and $180.1 million, respectively.
The Company sold $563.8 million and $574.6 million of trade accounts receivable under these programs, or their predecessors, during the nine months ended July 2, 2022 and July 3, 2021, respectively, in exchange for cash proceeds of $561.3 million and $573.0 million, respectively.
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. 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
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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 and nine months ended July 2, 2022 and July 3, 2021 and disaggregated by geographic reportable segment and market sector (in thousands):
| Three Months Ended | ||||||||||||||||||||||||||
| July 2, 2022 | ||||||||||||||||||||||||||
| Reportable Segment: | ||||||||||||||||||||||||||
| AMER | APAC | EMEA | Total | |||||||||||||||||||||||
| Market Sector: | ||||||||||||||||||||||||||
| Industrial | $ | $ | $ | $ | ||||||||||||||||||||||
| Healthcare/Life Sciences | ||||||||||||||||||||||||||
| Aerospace/Defense | ||||||||||||||||||||||||||
| External revenue | ||||||||||||||||||||||||||
| Inter-segment sales | ||||||||||||||||||||||||||
| Segment revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||
| July 3, 2021 | ||||||||||||||||||||||||||
| Reportable Segment: | ||||||||||||||||||||||||||
| AMER | APAC | EMEA | Total | |||||||||||||||||||||||
| Market Sector: | ||||||||||||||||||||||||||
| Industrial | $ | $ | $ | $ | ||||||||||||||||||||||
| Healthcare/Life Sciences | ||||||||||||||||||||||||||
| Aerospace/Defense | ||||||||||||||||||||||||||
| External revenue | ||||||||||||||||||||||||||
| Inter-segment sales | ||||||||||||||||||||||||||
| Segment revenue | $ | $ | $ | $ | ||||||||||||||||||||||
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| Nine Months Ended | ||||||||||||||||||||||||||
| July 2, 2022 | ||||||||||||||||||||||||||
| Reportable Segment: | ||||||||||||||||||||||||||
| AMER | APAC | EMEA | Total | |||||||||||||||||||||||
| Market Sector: | ||||||||||||||||||||||||||
| Industrial | $ | $ | $ | $ | ||||||||||||||||||||||
| Healthcare/Life Sciences | ||||||||||||||||||||||||||
| Aerospace/Defense | ||||||||||||||||||||||||||
| External revenue | ||||||||||||||||||||||||||
| Inter-segment sales | ||||||||||||||||||||||||||
| Segment revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||
| July 3, 2021 | ||||||||||||||||||||||||||
| Reportable Segment: | ||||||||||||||||||||||||||
| AMER | APAC | EMEA | Total | |||||||||||||||||||||||
| Market Sector: | ||||||||||||||||||||||||||
| Industrial | $ | $ | $ | $ | ||||||||||||||||||||||
| Healthcare/Life Sciences | ||||||||||||||||||||||||||
| Aerospace/Defense | ||||||||||||||||||||||||||
| External revenue | ||||||||||||||||||||||||||
| Inter-segment sales | ||||||||||||||||||||||||||
| Segment revenue | $ | $ | $ | $ | ||||||||||||||||||||||
For the three and nine months ended July 2, 2022, approximately 83 % and 85 % of the Company's revenue, respectively, was recognized as the performance obligations for products and services were transferred over time. For the three and nine months ended July 3, 2021, approximately 91
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 during the nine months ended July 2, 2022 and July 3, 2021 (in thousands):
| Nine Months Ended | ||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Contract assets, beginning of period | $ | $ | ||||||||||||
| Revenue recognized during the period | ||||||||||||||
| Amounts collected or invoiced during the period | ( | ( | ||||||||||||
| Contract assets, end of period | $ | $ | ||||||||||||
Deferred Revenue: Deferred revenue is recorded when consideration is received from a customer prior to transferring goods or services to the customer under the terms of the contract, which is included in other accrued liabilities on the Condensed Consolidated Balance Sheets. As of July 2, 2022 and October 2, 2021, the balance of advance payments from customers that
18
15. Restructuring and Impairment Charges
Restructuring and impairment charges are recorded within restructuring and impairment charges on the Condensed Consolidated Statements of Comprehensive Income. Restructuring liabilities are recorded within other accrued liabilities on the Condensed Consolidated Balance Sheets.
For the three months ended July 2, 2022, the Company did not incur any restructuring and impairment charges. For the nine months ended July 2, 2022, the Company recorded $2.0 million of restructuring and charges primarily due to employee severance costs associated with a facility transition in the Company's APAC segment.
For the three months ended July 3, 2021, the Company incurred restructuring and impairment charges of $1.2 million, which consisted of severance from the reduction of the Company's workforce primarily in the AMER segment. For the nine months ended July 3, 2021, the Company incurred restructuring and impairment charges of $3.3 million, which consisted of severance from the reduction of the Company's workforce primarily in the AMER and EMEA segments.
The Company recognized a tax benefit of $0.2 million related to restructuring and impairment charges for the nine months ended July 2, 2022 and $0.1 million and $0.3 million related to restructuring charges in the three and nine months ended July 3, 2021, respectively.
The Company's restructuring accrual activity for the three and nine months ended July 2, 2022 and nine months ended July 3, 2021 is included in the table below (in thousands):
| Fixed Asset and Operating ROU Asset Impairment | Employee Termination and Severance Costs | Total | ||||||||||||||||||
Accrual balance, as of October 2, 2021 | $ | $ | $ | |||||||||||||||||
| Restructuring and impairment costs | ||||||||||||||||||||
| Amounts utilized | ( | ( | ( | |||||||||||||||||
| Accrual balance, as of January 1, 2022 | $ | $ | $ | |||||||||||||||||
| Restructuring and impairment costs | ||||||||||||||||||||
| Amounts utilized | ( | ( | ||||||||||||||||||
| Accrual balance, as of April 2, 2022 | $ | $ | $ | |||||||||||||||||
| Restructuring and impairment costs | ||||||||||||||||||||
| Amounts utilized | ( | ( | ||||||||||||||||||
Accrual balance, as of July 2, 2022 | $ | $ | $ | |||||||||||||||||
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| Fixed Asset and Operating ROU Asset Impairment | Employee Termination and Severance Costs | Total | ||||||||||||||||||
| Accrual balance, as of January 2, 2021 | $ | $ | $ | |||||||||||||||||
| Restructuring and impairment costs | ||||||||||||||||||||
| Amounts utilized | ( | ( | ||||||||||||||||||
Accrual balance, as of April 3, 2021 | $ | $ | $ | |||||||||||||||||
| Restructuring and impairment costs | ||||||||||||||||||||
| Amounts utilized | ( | ( | ||||||||||||||||||
Accrual balance, as of July 3, 2021 | $ | $ | $ | |||||||||||||||||
There was no material restructuring activity for the three months ended January 2, 2021.
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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 the evolving effect, which may intensify, of COVID-19 on our employees, customers, suppliers, and logistics providers, including the impact of governmental actions being taken to curtail the spread of the virus. Other risks and uncertainties include, but are not limited to: the effect of inflationary pressures on our costs of production, profitability, and on the economic outlook of our markets; the effects of shortages and delays in obtaining components as a result of economic cycles, natural disasters or otherwise; 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 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 or the costs associated with the closure or consolidation of 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, any tax law changes as a result of change in U.S. presidential administration, 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 exit from the European Union); the potential effect of other world or local events or other events outside our control (such as the recent conflict between Russia and Ukraine, 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 2021 Form 10-K.
* * *
OVERVIEW
Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or "we") participate in the Electronic Manufacturing Services ("EMS") industry. Since 1979, we have been partnering with companies to create the products that build a better world by providing Design and Development, Supply Chain Solutions, New Product Introduction, Manufacturing and Aftermarket Services. We are a global leader that specializes in serving customers in industries with highly complex products and demanding regulatory environments. Plexus delivers customer service excellence to leading companies by providing innovative, comprehensive solutions throughout a product’s lifecycle. We engineer innovative solutions for customers in growth markets and focus on partnering with leading global companies in the Industrial, Healthcare/Life Sciences and Aerospace/Defense market sectors. We deliver comprehensive end-to-end solutions in the Americas ("AMER"), Asia-Pacific ("APAC") and Europe, Middle East and Africa ("EMEA") regions.
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The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide an analysis of both short-term results and future prospects from management’s perspective, including an assessment of the financial condition and results of operations, events and uncertainties that are not indicative of future operations and any other financial or statistical data that we believe will enhance the understanding of our company’s financial condition, cash flows and other changes in financial condition and results of operations.
The following information should be read in conjunction with our condensed consolidated financial statements included herein and "Risk Factors" included in Part II, Item 1A included herein as well as Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 2, 2021, and our "Safe Harbor" Cautionary Statement included above.
Current Events Update
We continue to monitor the global outbreak and spread of COVID-19 and take steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. These efforts will continue as requirements change, new risks are identified and infections impact us. The spread and resurgence of COVID-19 from new variants in jurisdictions where we operate may make our ability to mitigate the impacts of the pandemic on our productivity more challenging.
We have experienced, and expect to continue to experience, an inability to procure certain components and materials on a timely basis due to global supply chain constraints likely as a result of the COVID-19 pandemic and worsened by geopolitical conditions including the conflict in Ukraine. These constraints have impacted our ability to meet customer demand and will continue to inhibit our ability to capture the demand from our customers. We remain in close contact with our suppliers to understand the impacts on their businesses and operations and continue to take steps to validate their ability to deliver to us on time. However, the extended lead times have required us to make additional investments in inventory to satisfy customer demand, which we expect to persist.
Over the past few quarters, global supply chain constraints have led to inflation in many of the components we acquire, as well as labor and operating costs. We expect the increase in costs to continue in the near future. Labor-related issues have become more pronounced likely as a result of COVID-19 and current economic conditions. We have been, and expect to continue to be, subject to such inflationary and general labor cost increases including in our Malaysia operations where the government has imposed a mandatory increase to the minimum wage that went into effect in our third quarter of fiscal 2022. While we have been largely able to mitigate the impacts of inflation through our contractual rights with customers on pricing, the pricing recoveries received may be dilutive to our operating margin. The inability to offset these costs in future periods or the impacts of continued inflation on end markets and our customers may affect our operating results, cash flows and inventory levels, which could increase as a result of higher component prices or the negative effects of inflation on customer end-market demand.
We believe our balance sheet is positioned to support the potential future challenges presented by COVID-19 and other macro-economic pressures we are facing. As of the third quarter of fiscal 2022, cash and cash equivalents and restricted cash were $278 million, while debt, finance lease obligations and other financing were $435 million. To further ensure our ability to meet the needs of working capital investments to support anticipated revenue growth, we refinanced our revolving credit facility, expanding the maximum commitment from $350.0 million to $500.0 million. Borrowings under our Credit Facility as of July 2, 2022 were $240 million, leaving $260 million of our revolving commitment of $500.0 million available for use as of July 2, 2022 as well as the ability to expand our revolving commitment to $750 million upon mutual agreement with the bank. Refer to Note 3, "Debt, Finance Lease Obligations and Other Financing," in Notes to Condensed Consolidated Financial Statements and "Management’s Discussion and Analysis Liquidity and Capital Resources" in Part I, Item 2 for further information.
The recent conflict between Russia and Ukraine has negatively impacted the global economy and led to various economic sanctions being imposed by the U.S., United Kingdom, European Union and other countries against Russia. While the impacts of the conflict have not been material on our operating results, as we do not have operations or material customers or suppliers in either country, it is not possible to predict the broader consequences of this conflict.
See in particular the "Risk Factors" contained in our Annual Report on Form 10-K for the fiscal year ended October 2, 2021, including "Our financial condition and results of operations may be materially adversely affected by the ongoing coronavirus (COVID-19) outbreak", "We experience component shortages, price fluctuations and supplier quality concerns.", and "Plexus is a multinational corporation and operating in multiple countries exposes us to increased risks, including adverse local developments and currency risks."
22
RESULTS OF OPERATIONS
Consolidated Performance Summary. The following table presents selected consolidated financial data (dollars in millions, except per share data):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| Net sales | $ | 981.3 | $ | 814.4 | $ | 2,687.5 | $ | 2,525.6 | ||||||||||||||||||
| Cost of sales | 887.7 | 740.3 | 2,447.4 | 2,281.3 | ||||||||||||||||||||||
| Gross profit | 93.6 | 74.1 | 240.1 | 244.3 | ||||||||||||||||||||||
| Gross margin | 9.5 | % | 9.1 | % | 8.9 | % | 9.7 | % | ||||||||||||||||||
| Operating income | 49.6 | 36.4 | 115.9 | 133.9 | ||||||||||||||||||||||
| Operating margin | 5.1 | % | 4.5 | % | 4.3 | % | 5.3 | % | ||||||||||||||||||
| Other expense | 6.3 | 3.5 | 14.5 | 12.9 | ||||||||||||||||||||||
| Income tax expense | 5.8 | 5.3 | 13.6 | 15.4 | ||||||||||||||||||||||
| Net income | 37.5 | 27.6 | 87.8 | 105.6 | ||||||||||||||||||||||
| Diluted earnings per share | $ | 1.33 | $ | 0.95 | $ | 3.09 | $ | 3.60 | ||||||||||||||||||
| Return on invested capital* | 11.5 | % | 15.9 | % | ||||||||||||||||||||||
| Economic return* | 2.2 | % | 7.8 | % | ||||||||||||||||||||||
| *Non-GAAP metric; refer to "Return on Invested Capital ("ROIC") and economic return" below for more information and Exhibit 99.1 to this Quarterly Report on Form 10-Q for a reconciliation. | ||||||||||||||||||||||||||
Net sales. For the three months ended July 2, 2022, net sales increased $166.9 million, or 20.5%, as compared to the three months ended July 3, 2021. For the nine months ended July 2, 2022, net sales increased $161.9 million, or 6.4%, as compared to the nine months ended July 3, 2021.
Net sales are analyzed by management by geographic segment, which reflects our reportable segments, and by market sector. Management measures operational performance and allocates resources on a geographic segment basis. Our 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 | Nine Months Ended | |||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||
| AMER | $ | 342.6 | $ | 318.9 | $ | 931.1 | $ | 1,011.2 | ||||||||||||||||||
| APAC | 586.3 | 446.9 | 1,611.9 | 1,357.1 | ||||||||||||||||||||||
| EMEA | 84.2 | 76.5 | 230.7 | 238.5 | ||||||||||||||||||||||
| Elimination of inter-segment sales | (31.8) | (27.9) | (86.2) | (81.2) | ||||||||||||||||||||||
| Total net sales | $ | 981.3 | $ | 814.4 | $ | 2,687.5 | $ | 2,525.6 | ||||||||||||||||||
AMER. Net sales for the three months ended July 2, 2022 in the AMER segment increased $23.7 million, or 7.4%, as compared to the three months ended July 3, 2021. The increase in net sales was driven by a $26.8 million increase in production ramps of new products for existing customers, overall net increased customer end-market demand and increased pricing associated with inflated component prices, partially offset by the impact of supply chain constraints that have created limitations with meeting available customer demand. These increases were further offset by an $8.3 million decrease due to partial loss of business with customers and a $6.4 million decrease for end-of-life products.
During the nine months ended July 2, 2022, net sales in the AMER segment decreased $80.1 million, or 7.9%, as compared to the nine months ended July 3, 2021. The decrease in net sales was driven by a $55.5 million decrease for end-of-life products, a $39.0 million decrease due to partial loss of business with customers, $3.6 million due to a disengagement with a customer and
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supply chain constraints that have created limitations with meeting available customer demand. These decreases were partially offset by a $34.0 million increase in production ramps of new products for existing customers, overall net increased customer end-market demand and increased pricing associated with inflated component prices as well as a $5.0 million increase in production ramps for a new customer.
APAC. Net sales for the three months ended July 2, 2022 in the APAC segment increased $139.4 million, or 31.2%, as compared to the three months ended July 3, 2021. The increase in net sales was driven by overall net increased customer end-market demand and increased pricing associated with inflated component prices, a $25.0 million increase in production ramps of new products for existing customers and partial recovery from supply chain constraints that had previously created limitations with meeting available customer demand.
During the nine months ended July 2, 2022, net sales in the APAC segment increased $254.8 million, or 18.8%, as compared to the nine months ended July 3, 2021. The increase in net sales was driven by overall net increased customer end-market demand and increased pricing associated with inflated component prices as well as a $68.4 million increase in production ramps of new products for existing customers, partially offset by the impact of supply chain constraints that have created limitations with meeting available customer demand. These increases were further offset by a $31.9 million decrease for end-of-life products and a $5.4 million decrease for the loss of existing business.
EMEA. Net sales for the three months ended July 2, 2022 in the EMEA segment increased $7.7 million, or 10.1%, as compared to the three months ended July 3, 2021. The increase in net sales was driven by overall net increased customer end-market demand and increased pricing associated with inflated component prices.
During the nine months ended July 2, 2022, net sales in the EMEA segment decreased $7.8 million, or 3.3%, as compared to the nine months ended July 3, 2021. The decrease in net sales was driven by overall net decreased customer end-market demand, partially offset by a $6.7 million increase in production ramps of new products for existing customers.
Our net sales by market sector were as follows (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||
| Industrial | $ | 454.4 | $ | 371.9 | $ | 1,232.9 | $ | 1,156.9 | ||||||||||||||||||
| Healthcare/Life Sciences | 400.8 | 324.5 | 1,098.5 | 993.5 | ||||||||||||||||||||||
| Aerospace/Defense | 126.1 | 118.0 | 356.1 | 375.2 | ||||||||||||||||||||||
| Total net sales | $ | 981.3 | $ | 814.4 | $ | 2,687.5 | $ | 2,525.6 | ||||||||||||||||||
Industrial. Net sales for the three months ended July 2, 2022 in the Industrial sector increased $82.5 million, or 22.2%, as compared to the three months ended July 3, 2021. The increase in net sales was driven by overall net increased customer end-market demand and increased pricing associated with inflated component prices as well as a $16.6 million increase in production ramps of new products for existing customers, partially offset by the impact of supply chain constraints that have created limitations with meeting available customer demand. The increase was further offset by a $9.1 million decrease due to partial loss of business with customers.
During the nine months ended July 2, 2022, net sales in the Industrial sector increased $76.0 million, or 6.6%, as compared to the nine months ended July 3, 2021. The increase in net sales was driven by overall net increased customer end-market demand and increased pricing associated with inflated component prices as well as a $26.5 million increase due to production ramps of new products for existing customers, partially offset by the impact of supply chain constraints that have created limitations with meeting available customer demand. The increase was further offset by a $39.3 million decrease due to partial loss of business with customers, $3.6 million due to a disengagement with a customer and an $18.2 million decrease for end-of-life products.
Healthcare/Life Sciences. Net sales for the three months ended July 2, 2022 in the Healthcare/Life Sciences sector increased $76.3 million, or 23.5%, as compared to the three months ended July 3, 2021. The increase in net sales was driven by overall net increased customer end-market demand and increased pricing associated with inflated component prices, a $31.8 million increase due to production ramps of new products for existing customers and a partial recovery of supply chain constraints that had previously created limitations with meeting available customer demand. These increases were partially offset by a $6.2 million decrease for end-of-life products.
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During the nine months ended July 2, 2022, net sales in the Healthcare/Life Sciences sector increased $105.0 million, or 10.6%, as compared to the nine months ended July 3, 2021. The increase in net sales was driven by overall net increased customer end-market demand and increased pricing associated with inflated component prices, a $59.8 million increase due to production ramps of new products for existing customers and a partial recovery of supply chain constraints that had previously created limitations with meeting available customer demand. These increases were partially offset by a $65.0 million decrease for end-of-life products and a $5.4 million decrease for the loss of existing business.
Aerospace/Defense. Net sales for the three months ended July 2, 2022 in the Aerospace/Defense sector increased $8.1 million, or 6.9%, as compared to the three months ended July 3, 2021. The increase was driven by a $7.0 million increase due to production ramps of new products for existing customers as well as overall net increased customer end-market demand.
During the nine months ended July 2, 2022, net sales in the Aerospace/Defense sector decreased $19.1 million, or 5.1%, as compared to the nine months ended July 3, 2021. The decrease was driven by net decreased customer end-market demand, inclusive of the impact of supply chain constraints that have created limitations with meeting available customer demand and a $6.0 million decrease due to end-of-life products. These decreases were partially offset by a $22.4 million increase due to production ramps of new products for existing customers.
Cost of sales. Cost of sales for the three months ended July 2, 2022 increased $147.4 million, or 19.9%, as compared to the three months ended July 3, 2021, while cost of sales for the nine months ended July 2, 2022 increased $166.1 million, or 7.3%, as compared to the nine months ended July 3, 2021. Cost of sales is comprised primarily of material and component costs, labor costs and overhead. For the three and nine months ended July 2, 2022 and the three and nine months ended July 3, 2021, approximately 89% to 90% of the total cost of sales was variable in nature and fluctuated with sales volumes. Of these amounts, approximately 87% to 88% of the variable costs for the three and nine months ended July 2, 2022 and July 3, 2021, were related to material and component costs.
As compared to the three and nine months ended July 3, 2021, the increase in cost of sales for the three and nine months ended July 2, 2022 was primarily driven by the increase in net sales, unfavorable customer mix, an increase in fixed costs, reduced labor productivity and increased labor costs.
Gross profit. Gross profit for the three months ended July 2, 2022 increased $19.5 million, or 26.3%, as compared to the three months ended July 3, 2021. Gross margin of 9.5% for the three months ended July 2, 2022 increased 40 basis points compared to the three months ended July 3, 2021. The primary driver of the increase in gross profit and gross margin for the three months ended July 2, 2022 was the increase in net sales and reduced employee compensation and supplies costs associated with COVID-19, partially offset by unfavorable customer mix, increased fixed costs, reduced labor productivity and increased labor costs.
Gross profit for the nine months ended July 2, 2022 decreased $4.2 million, or 1.7%, as compared to the nine months ended July 3, 2021. Gross margin of 8.9% for the nine months ended July 2, 2022 decreased 80 basis points compared to the nine months ended July 3, 2021. The primary driver of the decrease in gross profit and gross margin for the nine months ended July 2, 2022 was unfavorable customer mix, an increase in fixed costs, reduced labor productivity and increased labor costs, partially offset by the increase in net sales and reduced employee compensation and supplies costs associated with COVID-19.
Operating income. Operating income for the three months ended July 2, 2022 increased $13.2 million, or 36.3%, as compared to the three months ended July 3, 2021. Operating margin of 5.1% for the three months ended July 2, 2022 increased 60 basis points compared to the three months ended July 3, 2021. The primary driver of the increase in operating income and operating margin for the three months ended July 2, 2022 was the result of the increase in gross profit and gross margin along with a $1.2 million decrease in restructuring and impairment charges, partially offset by a $6.4.million increase in selling and administrative expenses ("S&A"). The increase in S&A was primarily due to an increase in compensation costs.
Operating income for the nine months ended July 2, 2022 decreased $18.0 million, or 13.4%, as compared to the nine months ended July 3, 2021. Operating margin of 4.3% for the nine months ended July 2, 2022 decreased 100 basis points compared to the nine months ended July 3, 2021. The primary driver of the decrease in operating income and operating margin for the nine months ended July 2, 2022 was the result of the decrease in gross profit and gross margin along with a $13.8 million increase in S&A. The increase in S&A was primarily due to an increase in bad debt expense compared to recovery of a previously reserved customer receivable received during the nine months ended July 3, 2021, as well as increased compensation costs.
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A discussion of operating income by reportable segment is presented below (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||||||||||
| Operating income (loss): | ||||||||||||||||||||||||||
| AMER | $ | 17.0 | $ | 9.2 | $ | 26.5 | $ | 51.9 | ||||||||||||||||||
| APAC | 67.3 | 57.1 | 188.8 | 176.7 | ||||||||||||||||||||||
| EMEA | 2.6 | 0.1 | 4.0 | (2.5) | ||||||||||||||||||||||
| Corporate and other costs | (37.3) | (30.0) | (103.4) | (92.2) | ||||||||||||||||||||||
| Total operating income | $ | 49.6 | $ | 36.4 | $ | 115.9 | $ | 133.9 | ||||||||||||||||||
AMER. Operating income increased $7.8 million for the three months ended July 2, 2022 as compared to the three months ended July 3, 2021, primarily as a result of an increase in net sales and a positive shift in customer mix, partially offset by increased fixed costs and increased labor costs.
During the nine months ended July 2, 2022, operating income in the AMER segment decreased $25.4 million as compared to the nine months ended July 3, 2021, primarily as a result of a decrease in net sales, increased fixed costs, reductions in labor productivity and increased labor costs. There was also an increase in bad debt expense compared to recovery of a previously reserved customer receivable for the nine months ended July 3, 2021. This was partially offset by a positive shift in customer mix.
APAC. Operating income increased $10.2 million for the three months ended July 2, 2022 as compared to the three months ended July 3, 2021, primarily as a result of an increase in net sales and improvements in labor productivity, partially offset by a negative shift in customer mix and increased fixed costs.
During the nine months ended July 2, 2022, operating income in the APAC segment increased $12.1 million as compared to the nine months ended July 3, 2021, primarily as a result of an increase in net sales, partially offset by a negative shift in customer mix, increased fixed costs, reductions in labor productivity and increased labor costs.
EMEA. Operating income increased $2.5 million for the three months ended July 2, 2022 as compared to the three months ended July 3, 2021 primarily as a result of an increase in net sales, a positive shift in customer mix and improvements in labor productivity.
During the nine months ended July 2, 2022, operating income in the EMEA segment increased $6.5 million as compared to the nine months ended July 3, 2021, primarily as a result of a positive shift in customer mix and improvements in labor productivity, partially offset by a decrease in net sales.
Other expense. Other expense for the three months ended July 2, 2022 increased $2.8 million as compared to the three months ended July 3, 2021. The increase in other expense was primarily due to an increase in foreign exchange losses of $1.2 million, an increase in factoring fees of $0.8 million and an increase in interest expense of $0.7 million.
Other expense for the nine months ended July 2, 2022 increased $1.6 million as compared to the nine months ended July 3, 2021. The increase in other expense was primarily due to an increase in foreign exchange losses of $1.0 million, an increase in factoring fees of $0.9 million, partially offset by a decrease in interest expense of $0.8 million.
Income taxes. Income tax expense for the three and nine months ended July 2, 2022 was $5.8 million and $13.6 million, respectively, compared to $5.3 million and $15.4 million for the three and nine months ended July 3, 2021, respectively. The increase for the three months ended July 2, 2022 as compared to July 3, 2021 was primarily due to an increase in pre-tax book income and an increase in discrete tax expenses of $1.4 million, partially offset by the change in the geographic distribution of pre-tax book income. The decrease for the nine months ended July 2, 2022 as compared to July 3, 2021 was primarily due to a decrease in pre-tax book income and change in geographic distribution of pre-tax book income, partially offset by an increase in discrete tax expenses of $2.0 million.
Our annual effective tax rate varies from the U.S. statutory rate of 21.0% primarily due to the geographic distribution of worldwide earnings as well as a tax holiday granted to a subsidiary located in the APAC segment where we derive a significant portion of our earnings. Our effective tax rate may also be impacted by disputes with taxing authorities, tax planning activities, adjustments to uncertain tax positions and changes in valuation allowances.
The annual effective tax rate for fiscal 2022 is expected to be approximately 13.0% to 15.0% assuming no changes to tax laws.
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Net Income. Net income for the three months ended July 2, 2022 increased $9.9 million, or 35.9%, from the three months ended July 3, 2021 to $37.5 million. Net income increased primarily as a result of the increase in operating income, as previously discussed.
Net income for the nine months ended July 2, 2022 decreased $17.8 million, or 16.9%, from the nine months ended July 3, 2021 to $87.8 million. Net income decreased primarily as a result of the decrease in operating income, partially offset by the decrease in tax expense, as previously discussed.
Diluted earnings per share. Diluted earnings per share increased to $1.33 for the three months ended July 2, 2022 from $0.95 for the three months ended July 3, 2021 primarily as a result of increased net income due to the factors previously discussed and a reduction in diluted shares outstanding due to repurchase activity under our share repurchase plans.
Diluted earnings per share decreased to $3.09 for the nine months ended July 2, 2022 from $3.60 for the nine months ended July 3, 2021 primarily as a result of decreased net income due to the factors previously discussed, partially offset by a reduction in diluted shares outstanding due to repurchase activity under our share 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 15%.
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 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 four-quarter period for the third 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 define economic return as ROIC less our weighted average cost of capital ("WACC").
We review our internal calculation of WACC annually. Our WACC is 9.3% for fiscal 2022 as compared to 8.1% for fiscal 2021. By exercising discipline to generate ROIC in excess of our WACC, our goal is to create value for our shareholders. For the nine months ended July 2, 2022, ROIC of 11.5% reflects an economic return of 2.2%, based on our weighted average cost of capital of 9.3%. For the nine months ended July 3, 2021, ROIC of 15.9% reflects an economic return of 7.8%, based on our weighted average cost of capital of 8.1% for that fiscal year.
For a reconciliation of ROIC, economic return and adjusted operating income (tax effected) to our financial statements that were prepared using GAAP, see Exhibit 99.1 to this quarterly report on Form 10-Q, which exhibit is incorporated herein by reference.
Refer to the table below, which includes the calculation of ROIC and economic return for the indicated fiscal period (dollars in millions):
| Nine Months Ended | ||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Adjusted operating income (tax effected) | $ | 135.2 | $ | 159.1 | ||||||||||
| Average invested capital | 1,178.1 | 1,003.6 | ||||||||||||
| After-tax ROIC | 11.5 | % | 15.9 | % | ||||||||||
| WACC | 9.3 | % | 8.1 | % | ||||||||||
| Economic return | 2.2 | % | 7.8 | % | ||||||||||
27
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and restricted cash were $277.8 million as of July 2, 2022, as compared to $270.5 million as of October 2, 2021.
As of July 2, 2022, 94% of our cash and cash equivalents balance was held outside of the U.S. by our foreign subsidiaries. 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 $47.7 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 years (in millions):
| 2023 | $ | 5.5 | |||
| 2024 | 10.6 | ||||
| 2025 | 14.2 | ||||
| 2026 | 17.4 | ||||
| Total | $ | 47.7 | |||
Cash Flows. The following table provides a summary of cash flows (in millions):
| Nine Months Ended | ||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Cash (used in) provided by operating activities | $ | (25.8) | $ | 131.5 | ||||||||||
| Cash used in investing activities | (85.1) | (34.3) | ||||||||||||
| Cash provided by (used in) financing activities | 122.1 | (179.1) | ||||||||||||
Operating Activities. Cash flows used in operating activities were $25.8 million for the nine months ended July 2, 2022, as compared to cash flows provided by operating activities of $131.5 million for the nine months ended July 3, 2021. The decrease was primarily due to cash flow (reductions) improvements of:
•$(17.8) million decrease in net income.
•$(494.5) million in inventory cash flows primarily attributable to efforts to mitigate supply chain constraints for certain components with longer lead times by acquiring materials to support production of certain products in future quarters. This allows us to support our customers' continuity of supply for their customers. Supply chain constraints have also led to inflation in many of the components we acquire, increasing inventory. In addition, inventory levels have increased to support the ramp of customer programs.
•$(119.0) million in accounts receivable cash flows driven by increased net sales as well as timing of customer shipments and payments.
•$166.2 million in accounts payables cash flows driven by increased purchasing activity to support the ramp of customer programs as well as supply chain constraints leading to inflation in many of the components we acquire.
•$170.2 million in customer deposit cash flows driven by significant deposits received from ten customers in the current year to cover certain inventory balances associated with longer lead times as a result of supply chain constraints.
•$131.7 million in other current and non-current liabilities cash flows driven by an increase in advance payments from customers.
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The following table provides a summary of cash cycle days for the periods indicated (in days):
| Three Months Ended | ||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Days in accounts receivable | 57 | 52 | ||||||||||||
| Days in contract assets | 12 | 13 | ||||||||||||
| Days in inventory | 160 | 108 | ||||||||||||
| Days in accounts payable | (87) | (71) | ||||||||||||
| Days in cash deposits | (40) | (22) | ||||||||||||
| Annualized cash cycle | 102 | 80 | ||||||||||||
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 July 2, 2022, annualized cash cycle days increased 22 days compared to July 3, 2021 due to the following:
Days in accounts receivable for the three months ended July 2, 2022 increased five days compared to the three months ended July 3, 2021. The increase is primarily attributable to the timing of customer shipments and payments and mix of customer payment terms, partially offset by an increase in factored receivables.
Days in contract assets for the three months ended July 2, 2022 decreased one day compared to the three months ended July 3, 2021. The decrease is primarily attributable to increased net sales.
Days in inventory for the three months ended July 2, 2022 increased 52 days compared to the three months ended July 3, 2021. The increase is primarily attributable to efforts to mitigate supply chain constraints for certain components with longer lead times by acquiring materials to support production of certain products in future quarters. This allows us to support our customers' continuity of supply for their customers. Supply chain constraints have also led to inflation in many of the components we acquire, increasing inventory. In addition, inventory levels have increased to support the ramp of customer programs.
Days in accounts payable for the three months ended July 2, 2022 increased 16 days compared to the three months ended July 3, 2021. The increase is primarily attributable to increased purchasing activity to support the ramp of customer products as well as supply chain constraints leading to inflation in many of the components we acquire.
Days in cash deposits for the three months ended July 2, 2022 increased 18 days compared to the three months ended July 3, 2021. The increase was primarily attributable to significant deposits received from nine customers to cover certain inventory balances.
Free Cash Flow. We define free cash flow ("FCF"), a non-GAAP financial measure, as cash flow (used in) provided by operations less capital expenditures. FCF was $(110.8) million for the nine months ended July 2, 2022 compared to $97.1 million for the nine months ended July 3, 2021, a decrease of $207.9 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):
| Nine Months Ended | ||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Cash flows (used in) provided by operating activities | $ | (25.8) | $ | 131.5 | ||||||||||
| Payments for property, plant and equipment | (85.0) | (34.4) | ||||||||||||
| Free cash flow | $ | (110.8) | $ | 97.1 | ||||||||||
Investing Activities. Cash flows used in investing activities were $85.1 million for the nine months ended July 2, 2022 compared to $34.3 million for the nine months ended July 3, 2021. The increase in cash used in investing activities was due to a $50.6 million increase in capital expenditures, primarily due to our manufacturing footprint expansion in Bangkok, Thailand.
We estimate funded capital expenditures for fiscal 2022 will be approximately $110.0 million to $120. 0 million, of which $85.0 million was utilized through the first nine months of fiscal 2022. The remaining fiscal 2022 capital expenditures are anticipated to be used primarily for our manufacturing footprint expansion in Bangkok, Thailand, and to support new program ramps and replace older equipment.
Financing Activities. Cash flows provided by financing activities were $122.1 million for the nine months ended July 2, 2022 compared to cash flows used in financing activities of $179.1 million for the nine months ended July 3, 2021. The increase was primarily attributable to an increase of $273.0 million in net borrowings on the Credit Facility and a decrease of $32.3 million in cash used to repurchase our common stock.
On August 20, 2019, the Board of Directors approved a share repurchase program under which we were authorized to repurchase $50.0 million of our common stock (the "2019 Program"). During the nine months ended July 3, 2021, we completed the 2019 Program by repurchasing 73,560 shares under this program for $5.3 million at an average price of $72.44 per share.
On August 13, 2020, the Board of Directors approved a share repurchase program under which we were authorized to repurchase up to $50.0 million of our common stock (the "2021 Program"). On November 18, 2020, the Board of Directors approved an additional $50.0 million in share repurchase authority under the existing 2021 Program such that there then existed a total of $100.0 million in share repurchase authority under the program. The 2021 program commenced upon completion of the 2019 Program. During the three months ended July 3, 2021, we repurchased 291,898 shares under this program for $27.3 million at an average price of $93.53 per share. During the nine months ended July 3, 2021, the Company repurchased 874,706 shares under this program for $73.9 million at an average price of $84.45 per share.
On August 11, 2021, the Board of Directors approved a share repurchase program under which we were authorized to repurchase up to $50.0 million of its common stock (the "2022 Program"). The 2022 Program commenced upon completion of the 2021 Program. The 2022 Program has no expiration. During the three months ended July 2, 2022, we repurchased 148,571 shares under this program for $11.7 million at an average price of $79.27 per share. During the nine months ended July 2, 2022, we repurchased 564,718 shares under this program for $46.9 million at an average price of $83.07 per share. As of July 2, 2022, we completed the 2022 Program, and there is no remaining authority for share repurchases.
All shares repurchased under the aforementioned programs were recorded as treasury stock.
On June 15, 2018, we entered into a Note Purchase Agreement (the “2018 NPA”) pursuant to which we issued an aggregate of $150.0 million in principal amount of unsecured senior notes, consisting of $100.0 million in principal amount 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 we are 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 July 2, 2022, we were in compliance with the covenants under the 2018 NPA.
On June 9, 2022, we refinanced our then-existing senior unsecured revolving credit facility (as amended by that certain Amendment No. 1 to Credit Agreement dated April 29, 2020, the "Prior Credit Facility") by entering into a new five-year revolving credit facility (collectively with the Prior Credit Facility, referred to as the "Credit Facility"), which expanded the maximum commitment from $350.0 million to $500.0 million and extended the maturity from May 15, 2024 to June 9, 2027. The maximum commitment under the Credit Facility may be further increased to $750.0 million, generally by mutual agreement of the lenders and us, subject to certain customary conditions. During the nine months ended July 2, 2022, the
30
highest daily borrowing was $327.0 million; the average daily borrowings were $204.9 million. We borrowed $524.0 million and repaid $339.0 million of revolving borrowings under the Credit Facility during the nine months ended July 2, 2022. As of July 2, 2022, we were in compliance with all financial covenants relating to the Credit Facility, which are generally consistent with those in the 2018 NPA discussed above. We are required to pay a commitment fee on the daily Credit Facility based on our leverage ratio; the fee was 0.15% as of July 2, 2022.
The Credit Facility 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, we evaluate 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.
We have Master Accounts Receivable Purchase Agreements with MUFG Bank, New York Branch (formerly known as The Bank of Tokyo-Mitsubishi UFJ, Ltd.) (the "MUFG RPA"), HSBC Bank (China) Company Limited, Xiamen branch (the "HSBC RPA") and other unaffiliated financial institutions, under which we may elect to sell receivables, at a discount, on an ongoing basis. These facilities are uncommitted facilities. The maximum facility amount under the MUFG RPA as of July 2, 2022 is $340.0 million. The maximum facility amount under the HSBC RPA as of July 2, 2022 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 previously discussed.
We sold $213.6 million and $180.6 million of trade accounts receivable under these programs during the three months ended July 2, 2022 and July 3, 2021, respectively, in exchange for cash proceeds of $212.3 million and $180.1 million, respectively.
We sold $563.8 million and $574.6 million of trade accounts receivable under these programs during the nine months ended July 2, 2022 and July 3, 2021, respectively, in exchange for cash proceeds of $561.3 million and $573.0 million, respectively.
As of July 2, 2022 and October 2, 2021, $216.9 million and $176.0 million, respectively, of accounts receivables sold under trade accounts receivable programs and subject to servicing by us remained outstanding and had not yet been collected.
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 13, "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, as well as execution upon our share repurchase authorizations as management deems appropriate, for the next twelve months. We believe our balance sheet is positioned to support the potential future challenges presented by COVID-19 and other macro-economic factors, including increased working capital requirements associated with longer lead time for components, increased component and labor costs, and operating inefficiencies due to supply chain constraints or workplace safety restrictions. As of the end of the third quarter of fiscal 2022, cash and cash equivalents and restricted cash were $278 million, while debt, finance lease obligations and other financing were $435 million. To further ensure our ability to meet the needs of working capital investments to support anticipated revenue growth, we refinanced our credit facility, expanding the maximum commitment from $350.0 million to $500.0 million, as discussed above. If our future financing needs increase, then 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 or at all.
31
DISCLOSURE ABOUT CRITICAL ACCOUNTING ESTIMATES
Our critical accounting estimates are disclosed in our 2021 Annual Report on Form 10-K. During the third quarter of fiscal 2022, there were no material changes.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1, "Basis of Presentation," in Notes to Condensed Consolidated Financial Statements regarding recent accounting pronouncements.
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. We cannot predict changes in currency rates, nor the degree to which we will be able to manage the impacts of currency exchange rate changes. Such changes could have a material effect on our business, results of operations and financial condition.
Our percentages of transactions denominated in currencies other than the U.S. dollar for the indicated periods were as follows:
| Three Months Ended | ||||||||||||||
| July 2, 2022 | July 3, 2021 | |||||||||||||
| Net Sales | 9% | 10% | ||||||||||||
| Total Costs | 15% | 16% | ||||||||||||
We have 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 our overall currency exposure, as of July 2, 2022, a 10.0% change in the value of the U.S. dollar relative to our other transactional currencies would not have a material effect on our 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 limit the amount of principal exposure to any one issuer. We cannot predict changes in interest rates.
As of July 2, 2022, our only material interest rate risk was associated with our Credit Facility. Borrowings under the Credit Facility bear interest, at the Company's option, at (a)(1) for borrowings denominated in U.S. dollars, the Term Secured Overnight Financing Rate ("SOFR"), (2) for borrowings denominated in pounds sterling, the Daily Simple Risk-Free Rate, plus, in each case of (a)(1) and (2), 10 basis points, (b) for borrowings denominated in euros, the EURIBOR Rate plus a statutory reserve rate, or (c) an Alternate Base Rate equal to the highest of (i) 100 basis points per annum, (ii) the prime rate last quoted by The Wall Street Journal (or, if not quoted, as otherwise provided in the Credit Facility), (iii) the greater of the federal funds effective rate and the overnight bank funding rate in effect on such day plus, in each case, 50 basis points per annum (or, if neither are available, as otherwise provided in the Credit Facility), and (iv) Term SOFR for a one month interest period on such day plus 110 basis points, plus, in each case of (a), (b), and (c), an applicable interest rate margin based on the Company's then current consolidated total indebtedness (minus certain unrestricted cash and cash equivalents in an amount not to exceed $100 million) to consolidated EBITDA. As of July 2, 2022, the borrowing rate under the Credit Facility was SOFR plus 1.10%. Borrowings under the 2018 NPA are based on a fixed interest rate, thus mitigating much of our interest rate risk. Based on our overall interest rate exposure, as of July 2, 2022, a 10.0% change in interest rates would not have a material effect on our financial position, results of operations, or cash flows.
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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 third quarter of fiscal 2022 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.
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 October 2, 2021 that have had no material changes.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides the specified information about the repurchases of shares by us during the three months ended July 2, 2022:
| 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 (1) | ||||||||||||||||||||||
| April 3, 2022 - April 30, 2022 | 137,120 | $ | 79.03 | 137,120 | $ | 905,814 | ||||||||||||||||||||
| May 1, 2022- May 28, 2022 | 11,451 | 82.17 | 11,451 | — | ||||||||||||||||||||||
| May 29, 2022 - July 2, 2022 | — | — | — | $ | — | |||||||||||||||||||||
| 148,571 | $ | 79.27 | 148,571 | |||||||||||||||||||||||
(1) On August 11, 2021, the Board of Directors approved a share repurchase program that authorizes the Company to repurchase up to $50.0 million of its common stock (the "2022 Program"). The 2022 Program commenced upon completion of the 2021 Program during the fourth quarter of fiscal 2021. The table above reflects that there was nothing remaining available for purchase under the 2022 Program as of July 2, 2022, as the Company had completed the 2022 Program.
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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 fiscal quarter ended July 2, 2022, formatted in Inline Extensible Business Reporting Language ("XBRL"): (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 | The cover page from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended July 2, 2022, formatted in Inline XBRL and contained in Exhibit 101. | |||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: | August 5, 2022 | /s/ Todd P. Kelsey | ||||||||||||
| Todd P. Kelsey | ||||||||||||||
| Chief Executive Officer | ||||||||||||||
| Date: | August 5, 2022 | /s/ Patrick J. Jermain | ||||||||||||
| Patrick J. Jermain | ||||||||||||||
| Executive Vice President and Chief Financial Officer | ||||||||||||||
35
Exhibit 31.1
CERTIFICATION
I, Todd P. Kelsey, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Plexus Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 5, 2022
| /s/ Todd P. Kelsey | |||||
| Todd P. Kelsey | |||||
| Chief Executive Officer | |||||
Exhibit 31.2
CERTIFICATION
I, Patrick J. Jermain, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Plexus Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 5, 2022
/s/ Patrick J. Jermain | |||||
Patrick J. Jermain | |||||
Executive Vice President and Chief Financial Officer | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Plexus Corp. (the “Company”) on Form 10-Q for the fiscal quarter ended July 2, 2022, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Todd P. Kelsey, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Todd P. Kelsey | |||||
| Todd P. Kelsey | |||||
| Chief Executive Officer | |||||
| August 5, 2022 | |||||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Plexus Corp. and will be retained by Plexus Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Plexus Corp. (the “Company”) on Form 10-Q for the fiscal quarter ended July 2, 2022, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Patrick J. Jermain, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Patrick J. Jermain | |||||
| Patrick J. Jermain | |||||
| Executive Vice President and Chief Financial Officer | |||||
| August 5, 2022 | |||||
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Plexus Corp. and will be retained by Plexus Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
| Exhibit 99.1 | |||||||||||||||||||||||||||||
| Return on Invested Capital ("ROIC") and Economic Return Calculations GAAP to non-GAAP reconciliation (dollars in thousands): | |||||||||||||||||||||||||||||
| Nine Months Ended | Six Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
| Jul 2, | Apr 2, | Jul 3, | |||||||||||||||||||||||||||
| 2022 | 2022 | 2021 | |||||||||||||||||||||||||||
| Operating income, as reported | $ | 115,871 | $ | 66,310 | $ | 133,926 | |||||||||||||||||||||||
| Restructuring and impairment charges | + | 2,021 | + | 2,021 | + | 3,267 | |||||||||||||||||||||||
| Adjusted operating income | 117,892 | 68,331 | 137,193 | ||||||||||||||||||||||||||
| ÷ | 3 | x | 2 | x | 3 | ||||||||||||||||||||||||
| 39,297 | 45,731 | ||||||||||||||||||||||||||||
| x | 4 | 4 | |||||||||||||||||||||||||||
| Adjusted annualized operating income | $ | 157,188 | $ | 136,662 | $ | 182,924 | |||||||||||||||||||||||
| Adjusted effective tax rate | x | 14 | % | x | 14 | % | x | 13 | % | ||||||||||||||||||||
| Tax impact | $ | 22,006 | $ | 19,133 | $ | 23,780 | |||||||||||||||||||||||
| Adjusted operating income (tax effected) | $ | 135,182 | $ | 117,529 | $ | 159,144 | |||||||||||||||||||||||
| Average invested capital | $ | 1,178,134 | $ | 1,151,775 | $ | 1,003,614 | |||||||||||||||||||||||
| ROIC | 11.5 | % | 10.2 | % | 15.9 | % | |||||||||||||||||||||||
| WACC | 9.3 | % | 9.3 | % | 8.1 | % | |||||||||||||||||||||||
| Economic Return | 2.2 | % | 0.9 | % | 7.8 | % | |||||||||||||||||||||||
| July 2, | April 2, | January 2, | October 2, | ||||||||||||||||||||
| 2022 | 2022 | 2022 | 2021 | ||||||||||||||||||||
| Equity | $ | 1,058,190 | $ | 1,040,591 | $ | 1,044,095 | $ | 1,028,232 | |||||||||||||||
| Plus: | |||||||||||||||||||||||
| Debt and finance lease obligations - current | 250,012 | 222,393 | 151,417 | 66,313 | |||||||||||||||||||
| Operating lease obligations - current (1) | 8,640 | 9,266 | 9,507 | 9,877 | |||||||||||||||||||
| Debt and finance lease obligations - long-term | 184,707 | 186,069 | 187,075 | 187,033 | |||||||||||||||||||
| Operating lease obligations - long-term | 32,270 | 34,347 | 36,343 | 37,970 | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| Cash and cash equivalents | (276,608) | (307,964) | (217,067) | (270,172) | |||||||||||||||||||
| $ | 1,257,211 | $ | 1,184,702 | $ | 1,211,370 | $ | 1,059,253 | ||||||||||||||||
| July 3, | April 3, | January 2, | October 3, | ||||||||||||||||||||
| 2021 | 2021 | 2021 | 2020 | ||||||||||||||||||||
| Equity | $ | 1,020,450 | $ | 1,013,952 | $ | 1,006,959 | $ | 977,480 | |||||||||||||||
| Plus: | |||||||||||||||||||||||
| Debt and finance lease obligations - current | 60,468 | 50,229 | 148,408 | 146,829 | |||||||||||||||||||
| Operating lease obligations - current (1) | 9,130 | 9,314 | 9,351 | 7,724 | |||||||||||||||||||
| Debt and finance lease obligations - long-term | 187,690 | 188,730 | 188,148 | 187,975 | |||||||||||||||||||
| Operating lease obligations - long-term | 33,193 | 34,751 | 37,052 | 36,779 | |||||||||||||||||||
| Less: | |||||||||||||||||||||||
| Cash and cash equivalents | (303,255) | (294,370) | (356,724) | (385,807) | |||||||||||||||||||
| $ | 1,007,676 | $ | 1,002,606 | $ | 1,033,194 | $ | 970,980 | ||||||||||||||||
| (1) | Included in other accrued liabilities on the Condensed Consolidated Balance Sheets. | |||||||||||||||||||