10-Q
PLEXUS CORP (PLXS)
Table of Contents
UNITED STATES 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 December 31, 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
____________________________________________________________________________________________________________________________________
PLEXUS CORP.
(Exact name of registrant as specified in charter)
____________________________________________________________________________________________________________________________________
| Wisconsin | 39-1344447 |
|---|---|
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
One Plexus Way
Neenah, Wisconsin 54957
(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 |
|---|---|---|
| Common Stock, $0.01 par value | PLXS | The Nasdaq Global Select Market |
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.
| Large accelerated filer | 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 January 31, 2023, there were 27,702,483 shares of common stock outstanding.
Table of Contents
PLEXUS CORP.
TABLE OF CONTENTS
December 31, 2022
| PART I. FINANCIAL INFORMATION | 3 |
|---|---|
| ITEM 1. FINANCIAL STATEMENTS | 3 |
| Condensed Consolidated Statements of Comprehensive Income | 3 |
| Condensed Consolidated Balance Sheet | 4 |
| Condensed Consolidated Statements of Shareholders' Equity | 5 |
| Condensed Consolidated Statements of Cash Flows | 6 |
| Notes to Condensed Consolidated Financial Statements | 7 |
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 18 |
| "Safe Harbor" Cautionary Statement Under the Private Securities Litigation Reform Act of 1995 | 18 |
| Overview | 19 |
| Results of Operations | 20 |
| Liquidity of Capital Resources | 23 |
| Disclosure About Critical Accounting Policies | 27 |
| New Accounting Pronouncements | 27 |
| ITEM3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 27 |
| ITEM 4. CONTROLS AND PROCEDURES | 28 |
| PART II.OTHER INFORMATION | 28 |
| ITEM 1A. Risk Factors | 28 |
| ITEM 2. Unregistered Sales of Equity Securities and Use of Proceed | 28 |
| ITEM 6. Exhibits | 29 |
| SIGNATURES | 30 |
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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 | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Net sales | $ | 1,093,925 | $ | 817,456 |
| Cost of sales | 992,726 | 747,460 | ||
| Gross profit | 101,199 | 69,996 | ||
| Selling and administrative expenses | 43,858 | 37,502 | ||
| Restructuring and impairment charges | — | 2,021 | ||
| Operating income | 57,341 | 30,473 | ||
| Other income (expense): | ||||
| Interest expense | (6,894) | (3,046) | ||
| Interest income | 934 | 271 | ||
| Miscellaneous, net | (1,944) | (923) | ||
| Income before income taxes | 49,437 | 26,775 | ||
| Income tax expense | 7,247 | 3,352 | ||
| Net income | $ | 42,190 | $ | 23,423 |
| Earnings per share: | ||||
| Basic | $ | 1.53 | $ | 0.84 |
| Diluted | $ | 1.49 | $ | 0.82 |
| Weighted average shares outstanding: | ||||
| Basic | 27,639 | 28,018 | ||
| Diluted | 28,305 | 28,709 | ||
| Comprehensive income: | ||||
| Net income | $ | 42,190 | $ | 23,423 |
| Other comprehensive income (loss): | ||||
| Derivative instrument and other fair value adjustments | 8,439 | 1,272 | ||
| Foreign currency translation adjustments | 13,777 | (1,578) | ||
| Other comprehensive income (loss) | 22,216 | (306) | ||
| Total comprehensive income | $ | 64,406 | $ | 23,117 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
| December 31, 2022 | October 1, 2022 | |||
|---|---|---|---|---|
| ASSETS | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 247,880 | $ | 274,805 |
| Restricted cash | 31 | 665 | ||
| Accounts receivable, net of allowances of $2,531 and $1,961, respectively | 733,962 | 737,696 | ||
| Contract assets | 119,016 | 138,540 | ||
| Inventories, net | 1,645,011 | 1,602,783 | ||
| Prepaid expenses and other | 68,401 | 61,633 | ||
| Total current assets | 2,814,301 | 2,816,122 | ||
| Property, plant and equipment, net | 448,325 | 444,705 | ||
| Operating lease right-of-use assets | 64,069 | 65,134 | ||
| Deferred income taxes | 39,337 | 39,075 | ||
| Other assets | 29,260 | 28,189 | ||
| Total non-current assets | 580,991 | 577,103 | ||
| Total assets | $ | 3,395,292 | $ | 3,393,225 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||
| Current liabilities: | ||||
| Current portion of long-term debt and finance lease obligations | $ | 329,076 | $ | 273,971 |
| Accounts payable | 753,755 | 805,583 | ||
| Customer deposits | 511,037 | 480,486 | ||
| Accrued salaries and wages | 64,126 | 88,876 | ||
| Other accrued liabilities | 296,466 | 357,273 | ||
| Total current liabilities | 1,954,460 | 2,006,189 | ||
| Long-term debt and finance lease obligations, net of current portion | 187,272 | 187,776 | ||
| Long-term accrued income taxes payable | 42,019 | 42,019 | ||
| Long-term operating lease liabilities | 32,149 | 33,628 | ||
| Deferred income taxes payable | 5,616 | 6,327 | ||
| Other liabilities | 23,517 | 21,555 | ||
| Total non-current liabilities | 290,573 | 291,305 | ||
| Total liabilities | 2,245,033 | 2,297,494 | ||
| Commitments and contingencies | ||||
| Shareholders’ equity: | ||||
| Preferred stock, $0.01 par value, 5,000 shares authorized, none issued or outstanding | — | — | ||
| Common stock, $0.01 par value, 200,000 shares authorized, 54,133 and 54,084 shares issued, respectively, and 27,612 and 27,679 shares outstanding, respectively | 541 | 541 | ||
| Additional paid-in capital | 654,059 | 652,467 | ||
| Common stock held in treasury, at cost, 26,521 and 26,405 shares, respectively | (1,104,953) | (1,093,483) | ||
| Retained earnings | 1,614,424 | 1,572,234 | ||
| Accumulated other comprehensive loss | (13,812) | (36,028) | ||
| Total shareholders’ equity | 1,150,259 | 1,095,731 | ||
| Total liabilities and shareholders’ equity | $ | 3,395,292 | $ | 3,393,225 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Unaudited
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Common stock - shares outstanding | ||||
| Beginning of period | 27,679 | 28,047 | ||
| Exercise of stock options and vesting of other share-based awards | 49 | 60 | ||
| Treasury shares purchased | (116) | (110) | ||
| End of period | 27,612 | 27,997 | ||
| Total stockholders' equity, beginning of period | $ | 1,095,731 | $ | 1,028,232 |
| Common stock - par value | ||||
| Beginning of period | 541 | 538 | ||
| Exercise of stock options and vesting of other share-based awards | — | 1 | ||
| End of period | 541 | 539 | ||
| Additional paid-in capital | ||||
| Beginning of period | 652,467 | 639,778 | ||
| Share-based compensation expense | 5,683 | 6,270 | ||
| Exercise of stock options and vesting of other share-based awards, including tax withholding | (4,091) | (3,394) | ||
| End of period | 654,059 | 642,654 | ||
| Treasury stock | ||||
| Beginning of period | (1,093,483) | (1,043,091) | ||
| Treasury shares purchased | (11,470) | (10,131) | ||
| End of period | (1,104,953) | (1,053,222) | ||
| Retained earnings | ||||
| Beginning of period | 1,572,234 | 1,433,991 | ||
| Net income | 42,190 | 23,423 | ||
| End of period | 1,614,424 | 1,457,414 | ||
| Accumulated other comprehensive loss | ||||
| Beginning of period | (36,028) | (2,984) | ||
| Other comprehensive income (loss) | 22,216 | (306) | ||
| End of period | (13,812) | (3,290) | ||
| Total stockholders' equity, end of period | $ | 1,150,259 | $ | 1,044,095 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLEXUS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Cash flows from operating activities | ||||
| Net income | $ | 42,190 | $ | 23,423 |
| Adjustments to reconcile net income to net cash flows from operating activities: | ||||
| Depreciation and amortization | 16,290 | 15,489 | ||
| Share-based compensation expense and related charges | 5,683 | 6,357 | ||
| Other, net | 502 | 602 | ||
| Changes in operating assets and liabilities, excluding impacts of currency: | ||||
| Accounts receivable | 10,506 | (70,159) | ||
| Contract assets | 19,745 | 9,904 | ||
| Inventories | (31,409) | (214,416) | ||
| Other current and non-current assets | (7,270) | (9,436) | ||
| Accrued income taxes payable | (2,655) | 1,121 | ||
| Accounts payable | (52,702) | 76,222 | ||
| Customer deposits | 27,170 | 60,743 | ||
| Other current and non-current liabilities | (76,844) | 11,171 | ||
| Cash flows used in operating activities | (48,794) | (88,979) | ||
| Cash flows from investing activities | ||||
| Payments for property, plant and equipment | (23,085) | (33,246) | ||
| Other, net | 1,503 | (124) | ||
| Cash flows used in investing activities | (21,582) | (33,370) | ||
| Cash flows from financing activities | ||||
| Borrowings under debt agreements | 197,000 | 181,134 | ||
| Payments on debt and finance lease obligations | (142,001) | (97,565) | ||
| Repurchases of common stock | (11,470) | (10,131) | ||
| Proceeds from exercise of stock options | — | 307 | ||
| Payments related to tax withholding for share-based compensation | (4,091) | (3,702) | ||
| Cash flows provided by financing activities | 39,438 | 70,043 | ||
| Effect of exchange rate changes on cash and cash equivalents | 3,379 | 184 | ||
| Net decrease in cash and cash equivalents and restricted cash | (27,559) | (52,122) | ||
| Cash and cash equivalents and restricted cash: | ||||
| Beginning of period | 275,470 | 270,513 | ||
| End of period | $ | 247,911 | $ | 218,391 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PLEXUS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2022 AND JANUARY 1, 2022
Unaudited
1.Basis of Presentation
Basis of Presentation:
The accompanying Condensed Consolidated Financial Statements included herein have been prepared by Plexus Corp. and its subsidiaries (together “Plexus” or the “Company”) without audit and pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). The accompanying Condensed Consolidated Financial Statements reflect all adjustments, which include normal recurring adjustments necessary for the fair statement of the consolidated financial position of the Company as of December 31, 2022 and October 1, 2022, the results of operations and shareholders' equity for the three months ended December 31, 2022 and January 1, 2022, and the cash flows for the same three month periods.
The Company’s fiscal year ends on the Saturday closest to September 30. The Company uses a “4-4-5” weekly accounting system for the interim periods in each quarter. Each quarter, therefore, ends on a Saturday at the end of the 4-4-5 period. Periodically, an additional week must be added to the fiscal year to re-align with the Saturday closest to September 30. 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 2022 Annual Report on Form 10-K.
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and notes thereto. The Company has considered information available as of the date of issuance of these financial statements and is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or a revision of the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information becomes available. Actual results could differ materially from these estimates.
Recently Issued Accounting Pronouncements Not Yet Adopted:
In September 2022, the FASB issued ASU 2022-04, which requires enhanced disclosures about supplier finance programs. The guidance is effective for the Company beginning in the first quarter of fiscal 2024. Early adoption is permitted. The Company is currently in the process of assessing the impacts of the guidance.
The Company does not believe that any other recently issued accounting standards will have a material impact on its Consolidated Financial Statements, or apply to its operations.
2. Inventories
Inventories as of December 31, 2022 and October 1, 2022 consisted of the following (in thousands):
| December 31, 2022 | October 1, 2022 | |||
|---|---|---|---|---|
| Raw materials | $ | 1,468,942 | $ | 1,433,353 |
| Work-in-process | 81,822 | 81,207 | ||
| Finished goods | 94,247 | 88,223 | ||
| Total inventories, net | $ | 1,645,011 | $ | 1,602,783 |
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
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Consolidated Balance Sheets as of December 31, 2022 and October 1, 2022 was $483.1 million and $463.2 million, respectively.
3. Debt, Finance Lease and Other Financing Obligations
Debt, finance lease and other financing obligations as of December 31, 2022 and October 1, 2022 consisted of the following (in thousands):
| December 31, 2022 | October 1, 2022 | |||
|---|---|---|---|---|
| 4.05% Senior Notes, due June 15, 2025 | $ | 100,000 | $ | 100,000 |
| 4.22% Senior Notes, due June 15, 2028 | 50,000 | 50,000 | ||
| Borrowings under Credit Facility | 320,000 | 263,000 | ||
| Finance lease and other financing obligations | 47,786 | 50,269 | ||
| Unamortized deferred financing fees | (1,438) | (1,522) | ||
| Total obligations | 516,348 | 461,747 | ||
| Less: current portion | (329,076) | (273,971) | ||
| Long-term debt, finance lease and other financing obligations, net of current portion | $ | 187,272 | $ | 187,776 |
As of December 31, 2022, the Company was in compliance with covenants for all debt agreements.
During the three months ended December 31, 2022, the highest daily borrowing under the Company's 5-year senior unsecured revolving credit facility (referred to as the "Credit Facility") was $394.0 million; the average daily borrowings were $320.9 million.
The fair value of the Company’s debt, excluding finance lease and other financing obligations, was $461.5 million and $401.6 million as of December 31, 2022 and October 1, 2022, respectively. The carrying value of the Company's debt, excluding finance lease and other financing obligations, was $470.0 million and $413.0 million as of December 31, 2022 and October 1, 2022, 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 $2.4 million of unrealized gains, net of tax, related to cash flow hedges will be reclassified from other comprehensive income (loss) into earnings. Changes in the fair value of the non-designated derivatives related to recognized foreign currency denominated assets and liabilities are recorded in "Miscellaneous, net" in the accompanying Condensed Consolidated Statements of Comprehensive Income.
The Company enters into forward currency exchange contracts for its operations in certain jurisdictions in the AMER and APAC segments on a rolling basis. The Company had cash flow hedges outstanding with a notional value of $148.7 million as of December 31, 2022, and a notional value of $143.2 million as of October 1, 2022. 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 $2.4 million asset as of December 31, 2022, and a $6.0 million liability as of October 1, 2022.
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The Company had additional forward currency exchange contracts outstanding as of December 31, 2022, with a notional value of $113.5 million; there were $60.1 million such contracts outstanding as of October 1, 2022. 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 $1.0 million asset as of December 31, 2022, and a $0.3 million asset as of October 1, 2022.
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 | |||||||||||||||||||||
| December 31,<br>2022 | October 1,<br>2022 | December 31,<br>2022 | October 1,<br>2022 | |||||||||||||||||||
| Derivatives designated as hedging instruments | Balance sheet<br>classification | Fair Value | Fair Value | Balance sheet<br>classification | Fair Value | Fair Value | ||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other | $ | 2,451 | $ | 715 | Other accrued liabilities | $ | 44 | $ | 6,747 | Fair Values of Derivative Instruments (in thousands) | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||
| December 31,<br>2022 | October 1,<br>2022 | December 31,<br>2022 | October 1,<br>2022 | |||||||||||||||||||
| Derivatives not designated as hedging instruments | Balance sheet<br>classification | Fair Value | Fair Value | Balance sheet<br>classification | Fair Value | Fair Value | ||||||||||||||||
| Foreign currency forward contracts | Prepaid expenses and other | $ | 2,487 | $ | 1,555 | Other accrued liabilities | $ | 1,486 | $ | 1,249 | 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 Gain Recognized in OCL on Derivatives | |||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | |||||||||||||||||||||
| Foreign currency forward contracts | $ | 6,150 | $ | 470 | Derivative Impact on Loss Recognized in Condensed Consolidated Statements of Comprehensive Income (in thousands) | |||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||||||
| for the Three Months Ended | ||||||||||||||||||||||
| Derivatives in cash flow hedging relationships | Classification of Loss Reclassified from Accumulated OCL into Income | Amount of Loss Reclassified from Accumulated OCL into Income | ||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | |||||||||||||||||||||
| Foreign currency forward contracts | Cost of sales | $ | (2,132) | $ | (743) | |||||||||||||||||
| Foreign currency forward contracts | Selling and administrative expenses | $ | (157) | $ | (59) | Derivatives not designated as hedging instruments | Location of Gain (Loss) Recognized on Derivatives in Income | Amount of Gain (Loss) on Derivatives Recognized in Income | ||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | |||||||||||||||
| December 31, 2022 | January 1, 2022 | |||||||||||||||||||||
| Foreign currency forward contracts | Miscellaneous, net | $ | 747 | $ | (43) |
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
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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 December 31, 2022 and October 1, 2022, by input level:
| Fair Value Measurements Using Input Levels Asset/(Liability) (in thousands) | ||||||||
|---|---|---|---|---|---|---|---|---|
| Fiscal period ended December 31, 2022 | Level 1 | Level 2 | Level 3 | Total | ||||
| Derivatives | ||||||||
| Foreign currency forward contracts | $ | — | $ | 3,408 | $ | — | $ | 3,408 |
| Fiscal period ended October 1, 2022 | ||||||||
| Derivatives | ||||||||
| Foreign currency forward contracts | $ | — | $ | (5,726) | $ | — | $ | (5,726) |
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.
5. Income Taxes
Income tax expense for the three months ended December 31, 2022 was $7.2 million compared to $3.4 million for the three months ended January 1, 2022.
The effective tax rates for the three months ended December 31, 2022 and January 1, 2022 were 14.7% and 12.5%, respectively. The effective tax rate for the three months ended December 31, 2022 increased from the effective tax rate for the three months ended January 1, 2022 primarily due to a change in the geographic distribution of pre-tax book income.
The amount of unrecognized tax benefits recorded for uncertain tax positions increased by $0.9 million for the three months ended December 31, 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 months ended December 31, 2022 was not material.
One or more uncertain tax positions may be settled within the next 12 months. Settlement of these matters is not expected to have a material effect on the Company's consolidated results of operations, financial position and cash flows. The Company is not currently under examination by taxing authorities in the U.S. The Company is under audit in a foreign jurisdiction but a settlement is not expected to have a material impact.
The Company maintains valuation allowances when it is more likely than not that all or a portion of a net deferred tax asset will not be realized. During the three months ended December 31, 2022, the Company continued to record a full valuation allowance against its net deferred tax assets in certain jurisdictions within the EMEA segment and a partial valuation against its net deferred tax assets in certain jurisdictions within the AMER segment, as it was more likely than not that these assets would not be fully realized based primarily on historical performance. The Company will continue to provide a valuation allowance against its net deferred tax assets in each of the applicable jurisdictions going forward until it determines it is more likely than not that the deferred tax assets will be realized.
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6. Earnings Per Share
The following is a reconciliation of the amounts utilized in the computation of basic and diluted earnings per share for the three months ended December 31, 2022 and January 1, 2022 (in thousands, except per share amounts):
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Net income | $ | 42,190 | $ | 23,423 |
| Basic weighted average common shares outstanding | 27,639 | 28,018 | ||
| Dilutive effect of share-based awards and options outstanding | 666 | 691 | ||
| Diluted weighted average shares outstanding | 28,305 | 28,709 | ||
| Earnings per share: | ||||
| Basic | $ | 1.53 | $ | 0.84 |
| Diluted | $ | 1.49 | $ | 0.82 |
For the three months ended December 31, 2022 and January 1, 2022, there were no antidilutive awards.
See also Note 12, "Shareholders' Equity," for information regarding the Company's share repurchase plans.
7. Leases
The components of lease expense for the three months ended December 31, 2022 and January 1, 2022 indicated were as follows (in thousands):
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Finance lease expense: | ||||
| Amortization of right-of-use assets | $ | 1,614 | $ | 1,693 |
| Interest on lease liabilities | 1,272 | 1,222 | ||
| Operating lease expense | 2,606 | 2,857 | ||
| Other lease expense | 1,766 | 1,404 | ||
| Total | $ | 7,258 | $ | 7,176 |
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.
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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 | December 31, 2022 | October 1, 2022 | |||
|---|---|---|---|---|---|
| ASSETS | |||||
| Finance lease assets | Property, plant and equipment, net | $ | 38,025 | $ | 40,063 |
| Operating lease assets | Operating lease right-of-use assets | 64,069 | 65,134 | ||
| Total lease assets | $ | 102,094 | $ | 105,197 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||
| Current | |||||
| Finance lease liabilities | Current portion of long-term debt and finance lease obligations | $ | 4,406 | $ | 5,087 |
| Operating lease liabilities | Other accrued liabilities | 8,878 | 7,948 | ||
| Non-current | |||||
| Finance lease liabilities | Long-term debt and finance lease obligations, net of current portion | 38,583 | 39,257 | ||
| Operating lease liabilities | Long-term operating lease liabilities | 32,149 | 33,628 | ||
| Total lease liabilities | $ | 84,016 | $ | 85,920 |
8. Share-Based Compensation
The Company recognized $5.8 million and $6.3 million of compensation expense associated with share-based awards for the three months ended December 31, 2022 and January 1, 2022, respectively.
9. Litigation
The Company is party to lawsuits in the ordinary course of business. Management does not believe that these proceedings, individually or in the aggregate, will have a material positive or adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
10. Reportable Segments
Reportable segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in assessing performance and allocating resources. The Company uses an internal management reporting system, which provides important financial data to evaluate performance and allocate the Company’s resources on a regional basis. Net sales for the segments are attributed to the region in which the product is manufactured or the service is performed. The services provided, manufacturing processes used, class of customers serviced and order fulfillment processes used are similar and generally interchangeable across the segments. A segment’s performance is evaluated based upon its operating income (loss). A segment’s operating income (loss) includes its net sales less cost of sales and selling and administrative expenses, but excludes corporate and other expenses. Corporate and other expenses primarily represent corporate selling and administrative expenses, and restructuring costs and other charges, if any. These costs are not allocated to the segments, as management excludes such costs when assessing the performance of the segments. Inter-segment transactions are generally recorded at amounts that approximate arm’s length transactions. The accounting policies for the segments are the same as for the Company taken as a whole.
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Information about the Company’s three reportable segments for three months ended December 31, 2022 and January 1, 2022 is as follows (in thousands):
| Three Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||||||||
| Net sales: | ||||||||||
| AMER | $ | 389,662 | $ | 277,346 | ||||||
| APAC | 641,904 | 491,672 | ||||||||
| EMEA | 89,373 | 72,863 | ||||||||
| Elimination of inter-segment sales | (27,014) | (24,425) | ||||||||
| $ | 1,093,925 | $ | 817,456 | |||||||
| Operating income (loss): | ||||||||||
| AMER | $ | 17,415 | $ | 1,790 | ||||||
| APAC | 78,406 | 60,688 | ||||||||
| EMEA | (639) | 956 | ||||||||
| Corporate and other costs | (37,841) | (32,961) | ||||||||
| 57,341 | 30,473 | |||||||||
| Other income (expense): | ||||||||||
| Interest expense | (6,894) | (3,046) | ||||||||
| Interest income | 934 | 271 | ||||||||
| Miscellaneous, net | (1,944) | (923) | ||||||||
| Income before income taxes | $ | 49,437 | $ | 26,775 | December 31,<br>2022 | October 1,<br>2022 | ||||
| --- | --- | --- | --- | --- | ||||||
| Total assets: | ||||||||||
| AMER | $ | 1,171,188 | $ | 1,150,605 | ||||||
| APAC | 1,809,364 | 1,807,542 | ||||||||
| EMEA | 339,382 | 302,901 | ||||||||
| Corporate and eliminations | 75,358 | 132,177 | ||||||||
| $ | 3,395,292 | $ | 3,393,225 |
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 three months ended December 31, 2022 and January 1, 2022 (in thousands):
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Reserve balance, beginning of period | $ | 6,925 | $ | 6,645 |
| Accruals for warranties issued during the period | 727 | 1,258 | ||
| Settlements (in cash or in kind) during the period | (1,131) | (741) | ||
| Reserve balance, end of period | $ | 6,521 | $ | 7,162 |
12. Shareholders' Equity
On August 11, 2021, the Board of Directors approved a share repurchase program under which the Company was 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 and was completed in fiscal 2022. During the three months ended January 1, 2022, the Company repurchased 110,440 shares under this program for $10.2 million at an average price of $91.74 per share.
On August 18, 2022, 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 "2023 Program"). The 2023 Program became effective immediately and has no expiration. During the three months ended December 31, 2022, the Company repurchased 115,723 shares under this program for $11.5 million at an average price of $99.12 per share. As of December 31, 2022, $35.0 million of authority remained under the 2023 Program.
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 is $340.0 million. The maximum facility amount under the HSBC RPA 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 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 months ended December 31, 2022 and January 1, 2022 were not material.
The Company sold $185.6 million and $148.0 million of trade accounts receivable under these programs, or their predecessors, during three months ended December 31, 2022 and January 1, 2022, respectively, in exchange for cash proceeds of $183.6 million and $147.5 million, respectively. As of December 31, 2022 and January 1, 2022, $196.8 million and $151.0 million,
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respectively, of accounts receivables sold under trade accounts receivable programs and subject to servicing by the Company remained outstanding and had not yet been collected.
14. Revenue from Contracts with Customers
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 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.
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Disaggregated Revenue
The table below includes the Company’s revenue for the three months ended December 31, 2022 and January 1, 2022 indicated disaggregated by geographic reportable segment and market sector (in thousands):
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, 2022 | ||||||||
| Reportable Segment: | ||||||||
| AMER | APAC | EMEA | Total | |||||
| Market Sector: | ||||||||
| Industrial | $ | 103,027 | $ | 350,584 | $ | 18,471 | $ | 472,082 |
| Healthcare/Life Sciences | 215,381 | 223,290 | 49,196 | 487,867 | ||||
| Aerospace/Defense | 68,022 | 45,654 | 20,300 | 133,976 | ||||
| External revenue | 386,430 | 619,528 | 87,967 | 1,093,925 | ||||
| Inter-segment sales | 3,232 | 22,376 | 1,406 | 27,014 | ||||
| Segment revenue | $ | 389,662 | $ | 641,904 | $ | 89,373 | $ | 1,120,939 |
| Three Months Ended | ||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| January 1, 2022 | ||||||||
| Reportable Segment: | ||||||||
| AMER | APAC | EMEA | Total | |||||
| Market Sector: | ||||||||
| Industrial | $ | 83,245 | $ | 265,275 | $ | 15,307 | $ | 363,827 |
| Healthcare/Life Sciences | 135,962 | 169,237 | 39,266 | 344,465 | ||||
| Aerospace/Defense | 55,750 | 35,743 | 17,671 | 109,164 | ||||
| External revenue | 274,957 | 470,255 | 72,244 | 817,456 | ||||
| Inter-segment sales | 2,389 | 21,417 | 619 | 24,425 | ||||
| Segment revenue | $ | 277,346 | $ | 491,672 | $ | 72,863 | $ | 841,881 |
For each of the three months ended December 31, 2022 and January 1, 2022, approximately 81% and 87% of the Company's revenue, respectively, was recognized as products and services were transferred over time.
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 three months ended December 31, 2022 and January 1, 2022 (in thousands):
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Contract assets, beginning of period | $ | 138,540 | $ | 115,283 |
| Revenue recognized during the period | 884,099 | 709,723 | ||
| Amounts collected or invoiced during the period | (903,623) | (719,556) | ||
| Contract assets, end of period | $ | 119,016 | $ | 105,450 |
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 Condensed
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Consolidated Balance Sheets. As of December 31, 2022 and October 1, 2022 the balance of advance payments from customers was $247.1 million and $298.8 million, respectively. The advance payment is not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect the company from the other party failing to adequately complete some or all of its obligations under the contract. Deferred revenue is recognized into revenue when all revenue recognition criteria are met. For performance obligations satisfied over time, recognition will occur as work progresses; otherwise deferred revenue will be recognized based upon shipping terms.
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.
During the first quarter of fiscal 2023, the Company did not incur any restructuring and impairment charges. During the first quarter of fiscal 2022, the Company recorded $2.0 million of restructuring and impairment charges primarily due to employee severance costs associated with a facility transition in the Company's APAC segment.
The Company recognized a tax benefit of $0.2 million related to restructuring and impairment charges for the three months ended January 1, 2022.
The Company's restructuring accrual activity for the three months ended January 1, 2022 is included in the tables below (in thousands):
| Fixed Asset and Operating ROU Asset Impairment | Employee Termination and Severance Costs | Total | ||||
|---|---|---|---|---|---|---|
| Accrual balance, as of October 2, 2021 | $ | — | $ | 71 | $ | 71 |
| Restructuring and impairment costs | 255 | 1,766 | 2,021 | |||
| Amounts utilized | (255) | (75) | (330) | |||
| Accrual balance, as of January 1, 2022 | $ | — | $ | 1,762 | $ | 1,762 |
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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 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; any tax law changes and 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; the potential effect of other world or local events or other events outside our control (such as the conflict between Russia and Ukraine, escalating tensions between China and Taiwan or China and the United States, 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 contained in our fiscal 2022 Form 10-K.
* * *
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OVERVIEW
Plexus Corp. and its subsidiaries (together "Plexus," the "Company", "our", 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. We are a global leader with a team of nearly 25,000 individuals who are dedicated to providing Design and Development, Supply Chain Solutions, New Product Introduction, Manufacturing and Sustaining Services. We specialize in serving customers in industries with highly complex products and demanding regulatory environments. We deliver customer service excellence to leading global companies in the Industrial, Healthcare/Life Sciences and Aerospace/Defense market sectors by providing innovative, comprehensive solutions throughout the product's lifecycle. We provide these innovative solutions to customers in the Americas ("AMER"), Asia-Pacific ("APAC") and Europe, Middle East and Africa ("EMEA") regions.
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 1, 2022, and our "Safe Harbor" Cautionary Statement included above.
Market Pressures Update
We have experienced an inability to procure certain components on a timely basis due to global supply chain constraints. These constraints have impacted our ability to meet customer demand and may inhibit our ability to capture the demand from our customers. 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, the global supply chain constraints have led to inflation in some of the components we acquire, as well as labor and operating costs. We expect the increase in costs, including labor-related issues which have become more pronounced, to continue in the near future. We have been, and expect to continue to be, subject to such inflationary and general labor cost increases. 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.
Customers within certain segments are working to better understand the impact of the Department of Commerce’s export controls restricting the People’s Republic of China’s access to advanced semiconductors, supercomputers, and semiconductor manufacturing equipment. We could continue to see demand volatility as they adjust their forecasts as a result of these restrictions.
Changes in tax laws or tax rates in the jurisdictions where we operate, including the potential passage of tax regulation changes such as the establishment of a global minimum tax could result in adverse tax consequences. During the first quarter of fiscal 2023, certain jurisdictions consented to implement a global minimum tax. We will continue to monitor these developments as each jurisdiction incorporates such changes into tax laws.
We believe our balance sheet is positioned to support the potential future challenges presented by the macro-economic pressures we are facing. As of the first quarter of fiscal 2023, cash and cash equivalents and restricted cash were $248 million, while debt, finance lease obligations and other financing were $516 million. Borrowings under our Credit Facility as of December 31, 2022 were $320 million, leaving $180 million of our revolving commitment of $500 million available for use as well as the ability to expand our revolving commitment to $750 million upon mutual agreement with the bank. Interest expense could increase above current levels due to increased borrowing under our Credit Facility associated with working capital investments along with the impact of rising interest rates. Refer to Note 3, "Debt, Finance Lease and Other Financing Obligations," in Notes to Consolidated Financial Statements and "Management’s Discussion and Analysis Liquidity and Capital Resources" in Part I, Item 2 for further information.
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RESULTS OF OPERATIONS
Consolidated Performance Summary. The following table presents selected consolidated financial data (dollars in millions, except per share data):
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||||
| Net sales | $ | 1,093.9 | $ | 817.5 | ||
| Cost of sales | 992.7 | 747.5 | ||||
| Gross profit | 101.2 | 70.0 | ||||
| Gross margin | 9.3 | % | 8.6 | % | ||
| Operating income | 57.3 | 30.5 | ||||
| Operating margin | 5.2 | % | 3.7 | % | ||
| Other expense | 7.9 | 3.7 | ||||
| Income tax expense | 7.2 | 3.4 | ||||
| Net income | 42.2 | 23.4 | ||||
| Diluted earnings per share | $ | 1.49 | $ | 0.82 | ||
| Return on invested capital* | 13.8 | % | 10.0 | % | ||
| Economic return* | 4.8 | % | 0.7 | % | ||
| *Non-GAAP metric; refer to "Return on Invested Capital ("ROIC") and economic return" below and Exhibit 99.1 for more information. |
Net sales. For the three months ended December 31, 2022, net sales increased $276.4 million, or 33.8%, as compared to the three months ended January 1, 2022.
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 | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Net sales: | ||||
| AMER | $ | 389.7 | $ | 277.3 |
| APAC | 641.9 | 491.7 | ||
| EMEA | 89.4 | 72.9 | ||
| Elimination of inter-segment sales | (27.1) | (24.4) | ||
| Total net sales | $ | 1,093.9 | $ | 817.5 |
AMER. Net sales for the three months ended December 31, 2022 in the AMER segment increased $112.4 million, or 40.5%, as compared to the three months ended January 1, 2022. The increase in net sales was driven by a $68.2 million increase in production ramps of new products for existing customers and overall net increased customer end-market demand, inclusive of a partial easing of supply chain constraints that had previously created limitations with meeting available customer demand. The increase was also driven by higher pricing associated with inflated component prices and an $11.0 million increase in production ramps for new customers.
APAC. Net sales for the three months ended December 31, 2022 in the APAC segment increased $150.2 million, or 30.5%, as compared to the three months ended January 1, 2022. The increase in net sales was driven by overall net increased customer end-market demand inclusive of a partial easing of supply chain constraints that had previously created limitations with meeting available customer demand. The increase was also driven by higher pricing associated with inflated component prices and a $5.0 million increase in production ramps of new products for existing customers.
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EMEA. Net sales for the three months ended December 31, 2022 in the EMEA segment increased $16.5 million, or 22.6%, as compared to the three months ended January 1, 2022. The increase in net sales was driven by overall net increased customer end-market demand and increased pricing associated with inflated component prices.
Our net sales by market sector were as follows (in millions):
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Net sales: | ||||
| Industrial | $ | 472.1 | $ | 363.8 |
| Healthcare/Life Sciences | 487.9 | 344.5 | ||
| Aerospace/Defense | 133.9 | 109.2 | ||
| Total net sales | $ | 1,093.9 | $ | 817.5 |
Industrial. Net sales for the three months ended December 31, 2022 in the Industrial sector increased $108.3 million, or 29.8%, as compared to the three months ended January 1, 2022. The increase in net sales was driven by overall net increased customer end-market demand inclusive of a partial easing of supply chain constraints that had previously created limitations with meeting available customer demand. The increase was also driven by higher pricing associated with inflated component prices, a $7.7 million increase in production ramps for new customers and a $7.6 million increase due to production ramps of new products for existing customers.
Healthcare/Life Sciences. Net sales for the three months ended December 31, 2022 in the Healthcare/Life Sciences sector increased $143.4 million, or 41.6%, as compared to the three months ended January 1, 2022. The increase in net sales was driven by overall net increased customer end-market demand inclusive of a partial easing of supply chain constraints that had previously created limitations with meeting available customer demand. The increase was also driven by higher pricing associated with inflated component prices and a $58.5 million increase due to production ramps of new products for existing customers.
Aerospace/Defense. Net sales for the three months ended December 31, 2022 in the Aerospace/Defense sector increased $24.7 million, or 22.6%, as compared to the three months ended January 1, 2022. The increase was driven by overall net increased customer end-market demand and increased pricing associated with inflated component prices, a $7.8 million increase due to production ramps of new products for existing customers and a $7.6 million increase in production ramps for a new customer.
Cost of sales. Cost of sales for the three months ended December 31, 2022 increased $245.2 million, or 32.8%, as compared to the three months ended January 1, 2022. Cost of sales is comprised primarily of material and component costs, labor costs and overhead. For the three months ended December 31, 2022 and January 1, 2022, approximately 89% to 91% of the total cost of sales was variable in nature and fluctuated with sales volumes. Approximately 87% to 88% of these costs were related to material and component costs.
As compared to the three months ended January 1, 2022, the increase in cost of sales for the three months ended December 31, 2022 was primarily driven by the increase in net sales, inflated component costs and an increase in fixed costs, partially offset by improvements in operational efficiencies.
Gross profit. Gross profit for the three months ended December 31, 2022 increased $31.2 million, or 44.6%, as compared to the three months ended January 1, 2022. Gross margin of 9.3% for the three months ended December 31, 2022 increased 70 basis points compared to the three months ended January 1, 2022. The primary driver of the increase in gross profit and gross margin was the increase in net sales and improvements in operational efficiencies, partially offset by inflated component costs and increased fixed costs.
Operating income. Operating income for the three months ended December 31, 2022 increased $26.8 million, or 87.9%, as compared to the three months ended January 1, 2022. Operating margin of 5.2% for the three months ended December 31, 2022 increased 150 basis points compared to the three months ended January 1, 2022. The primary driver of the increase in operating income and operating margin was the result of the increase in gross profit and gross margin along with a $2.0 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.
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A discussion of operating income by reportable segment presented below (in millions):
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Operating income (loss): | ||||
| AMER | $ | 17.4 | $ | 1.8 |
| APAC | 78.4 | 60.7 | ||
| EMEA | (0.6) | 1.0 | ||
| Corporate and other costs | (37.9) | (33.0) | ||
| Total operating income | $ | 57.3 | $ | 30.5 |
AMER. Operating income increased $15.6 million for the three months ended December 31, 2022 as compared to the three months ended January 1, 2022, primarily as a result of an increase in net sales and improvements in operational efficiencies, partially offset by inflated component costs and increased fixed costs.
APAC. Operating income increased $17.7 million for the three months ended December 31, 2022 as compared to the three months ended January 1, 2022, primarily as a result of an increase in net sales and improvements in operational efficiencies, partially offset by inflated component costs, increased fixed costs and an increase in S&A.
EMEA. Operating income decreased $1.6 million for the three months ended December 31, 2022 as compared to the three months ended January 1, 2022 primarily as a result of inflated component costs and a negative shift in customer mix, partially offset by an increase in net sales.
Other expense. Other expense for the three months ended December 31, 2022 increased $4.2 million as compared to the three months ended January 1, 2022. The increase in other expense for the three months ended December 31, 2022 was primarily due to the increase in interest expense of $3.8 million and factoring fees of $1.5 million.
Income taxes. Income tax expense for the three months ended December 31, 2022 was $7.2 million compared to $3.4 million for the three months ended January 1, 2022. The increase is primarily due to an increase in pre-tax book income and change in the geographic distribution of pre-tax book income.
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 2023 is expected to be approximately 14.0% to 16.0% assuming no changes to tax laws.
Net Income. Net income for the three months ended December 31, 2022 increased $18.8 million, or 80.3%, from the three months ended January 1, 2022 to $42.2 million. Net income increased primarily as a result of operating income, partially offset by an increase in tax expense and other expense, as previously discussed.
Diluted earnings per share. Diluted earnings per share increased to $1.49 for the three months ended December 31, 2022 from $0.82 for the three months ended January 1, 2022, primarily as a result of increased net income due to the factors previously discussed as well as 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 an ROIC goal of 15% which would exceed our weighted average cost of capital ("WACC") and represent positive economic return. Economic return is the amount our ROIC exceeds our WACC.
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. We view ROIC and economic return as important measures in evaluating the efficiency and effectiveness of our long-term capital investments. We also use ROIC as a performance criteria in determining certain elements of compensation as well as economic return performance.
We define ROIC as tax-effected operating income before restructuring and other special items divided by average invested capital over a rolling two-quarter period for the first quarter. Invested capital is defined as equity plus debt and operating lease
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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 ("U.S. GAAP").
We review our internal calculation of WACC annually. Our WACC is 9.0% for fiscal 2023 as compared to 9.3% for fiscal 2022. By exercising discipline to generate ROIC in excess of our WACC, our goal is to create value for our shareholders. For the three months ended December 31, 2022, ROIC of 13.8% reflects an economic return of 4.8%, based on our weighted average cost of capital of 9.0%. For the three months ended January 1, 2022, ROIC of 10.0% reflects an economic return of 0.7%, based on our weighted average cost of capital of 9.3% 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 U.S. 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):
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||||
| Adjusted operating income (tax-effected) | $ | 192.7 | $ | 113.1 | ||
| Average invested capital | 1,392.0 | 1,135.3 | ||||
| After-tax ROIC | 13.8 | % | 10.0 | % | ||
| WACC | 9.0 | % | 9.3 | % | ||
| Economic return | 4.8 | % | 0.7 | % |
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and restricted cash were $247.9 million as of December 31, 2022, as compared to $275.5 million as of October 1, 2022.
As of December 31, 2022, 87% 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 four years (in millions):
| Remaining 2023 | $ | 5.7 |
|---|---|---|
| 2024 | 10.6 | |
| 2025 | 14.1 | |
| 2026 | 17.3 | |
| Total | $ | 47.7 |
Cash Flows. The following table provides a summary of cash flows (in millions):
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31, 2022 | January 1, 2022 | |||
| Cash used in operating activities | $ | (48.8) | $ | (89.0) |
| Cash used in investing activities | (21.6) | (33.4) | ||
| Cash provided by financing activities | 39.4 | 70.0 |
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Operating Activities. Cash flows used in operating activities were $48.8 million for the three months ended December 31, 2022, as compared to cash flows used in operating activities of $89.0 million for the three months ended January 1, 2022. The change was primarily due to cash flow improvements (reductions) of:
•$18.8 million increase in net income.
•$183.0 million in inventory cash flows driven by inventory levels increasing at a slower rate in the first quarter of fiscal 2023 as compared to the first quarter of fiscal 2022. In the first quarter of fiscal 2023, inventory levels have primarily increased to support the ramp of customer programs, as well as supply chain constraints have led to inflation in some of the components we acquire, increasing inventory.
•$80.7 million in accounts receivable cash flows driven by timing of shipments, mix of customer payment terms and increased factoring of receivables.
•$9.8 million in contract assets cash flows driven by increases in advance payments received from customers who recognize revenue over time.
•$(128.9) million in accounts payables cash flows primarily driven by the timing of materials procurement and payments to suppliers.
•$(88.0) million in other current and non-current liabilities cash flows driven by a release of advance payments to customers as we sold products that contained inflated component prices.
•$(33.6) million in customer deposit cash flows driven by deposits increasing at a slower rate in the first quarter of fiscal 2023 as compared to the first quarter of fiscal 2022, consistent with inventory cash flows. Deposit increases in both periods were primarily to cover certain inventory balances.
The following table provides a summary of cash cycle days for the periods indicated (in days):
| Three Months Ended | ||
|---|---|---|
| December 31,<br>2022 | January 1, 2022 | |
| Days in accounts receivable | 61 | 66 |
| Days in contract assets | 10 | 12 |
| Days in inventory | 151 | 145 |
| Days in accounts payable | (69) | (87) |
| Days in cash deposits | (47) | (33) |
| Annualized cash cycle | 106 | 103 |
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 December 31, 2022, annualized cash cycle days increased three days compared to January 1, 2022 due to the following:
Days in accounts receivable for the three months ended December 31, 2022 decreased five days compared to the three months ended January 1, 2022. The decrease is primarily attributable to an increase in factored receivables.
Days in contract assets for the three months ended December 31, 2022 decreased two days compared to the three months ended January 1, 2022. The decrease is primarily attributable to increased net sales and an increase in advance payments received from customers with arrangements requiring revenue to be recognized over time as products are produced.
Days in inventory for the three months ended December 31, 2022 increased six days compared to the three months ended January 1, 2022. The increase is primarily attributable to increased inventory levels to support the ramp of customer programs. Inventory levels also increased due to customer demand volatility as well as supply chain constraints which have led to inflation in some of the components we acquire.
Days in accounts payable for the three months ended December 31, 2022 decreased eighteen days compared to the three months ended January 1, 2022. The decrease is primarily attributable to timing of materials procurement and payments to suppliers as well as increased net sales.
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Days in cash deposits for the three months ended December 31, 2022 increased fourteen days compared to the three months ended January 1, 2022. The increase was primarily attributable to significant deposits received from customers to cover certain increasing inventory balances.
Free Cash Flow. We define free cash flow ("FCF"), a non-GAAP financial measure, as cash flow used in operations less capital expenditures. FCF was $(71.9) million for the three months ended December 31, 2022 compared to $(122.2) million for the three months ended January 1, 2022, an improvement of $50.3 million. The improvement in FCF was primarily due to less of a working capital investment in inventory to support our customers in the first quarter of fiscal 2023 as compared to the first quarter of fiscal 2022.
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 U.S. GAAP.
A reconciliation of FCF to our financial statements that were prepared using U.S. GAAP as follows (in millions):
| Three Months Ended | ||||
|---|---|---|---|---|
| December 31,<br>2022 | January 1, 2022 | |||
| Cash flows used in operating activities | $ | (48.8) | $ | (89.0) |
| Payments for property, plant and equipment | (23.1) | (33.2) | ||
| Free cash flow | $ | (71.9) | $ | (122.2) |
Investing Activities. Cash flows used in investing activities were $21.6 million for the three months ended December 31, 2022 compared to $33.4 million for the three months ended January 1, 2022. The decrease in cash used in investing activities was due to a $10.2 million decrease in capital expenditures, as the manufacturing footprint expansion in Bangkok, Thailand has been substantially completed.
We estimate capital expenditures for fiscal 2023 will be approximately $110.0 million to $130.0 million to support new program ramps and replace older equipment. This estimate does not contemplate any site expansions.
Financing Activities. Cash flows provided by financing activities were $39.4 million for the three months ended December 31, 2022 compared to cash flows provided by financing activities of $70.0 million for the three months ended January 1, 2022. The decrease was primarily attributable to lower borrowings on the credit facility in the first quarter of fiscal 2023 of $57.0 million as compared to the first quarter of fiscal 2022 of $85.0 million.
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 our common stock (the "2022 Program"). The 2022 Program commenced upon completion of the 2021 Program and was completed in fiscal 2022. During the three months ended January 1, 2022, we repurchased 110,440 shares under this program for $10.2 million at an average price of $91.74 per share.
On August 18, 2022, the Board of Directors approved a share repurchase program under which we are authorized to repurchase up to $50.0 million of our common stock (the "2023 Program"). The 2023 Program became effective immediately and has no expiration. During the three months ended December 31, 2022, we repurchased 115,723 shares under this program for $11.5 million at an average price of $99.12 per share. As of December 31, 2022, $35.0 million of authority remained under the 2023 Program.
All shares repurchased under the aforementioned programs were recorded as treasury stock.
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. These facilities are uncommitted facilities. The maximum facility amount under the MUFG RPA as of December 31, 2022 was $340.0 million. The maximum facility amount under the HSBC RPA as of December 31, 2022 was $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.
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We sold $185.6 million and $148.0 million of trade accounts receivable under these programs, or their predecessors, during the three months ended December 31, 2022 and January 1, 2022, respectively, in exchange for cash proceeds of $183.6 million and $147.5 million, respectively. As of December 31, 2022 and January 1, 2022, $196.8 million and $151.0 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, our leasing capabilities and potential borrowings under our 5-year senior unsecured revolving credit facility (referred to as the "Credit Facility"), including our ability to expand our revolving commitment, 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 macro-economic factors including increased working capital requirements associated with longer lead-times for components, increased component and labor costs, and operating inefficiencies due to supply chain constraints. As of the end of the first quarter of fiscal 2023, cash and cash equivalents and restricted cash were $247.9 million, while debt, finance lease obligations and other financing were $516.3 million. If our future financing needs increase, including to support additional capital expenditures or investments in the growth of our business, 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.
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DISCLOSURE ABOUT CRITICAL ACCOUNTING ESTIMATES
Our critical accounting policies are disclosed in our 2022 Annual Report on Form 10-K. During the first quarter of fiscal 2023, 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
There were no material changes in our exposure to market risk from changes in foreign exchange and interest rates from those disclosed in our 2022 Annual Report on Form 10-K.
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 | ||
|---|---|---|
| December 31, 2022 | January 1, 2022 | |
| Net Sales | 7% | 10% |
| Total Costs | 15% | 18% |
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 December 31, 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.
As of December 31, 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 December 31, 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 December 31, 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. Based on such evaluation, the CEO and CFO have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective, at the reasonable assurance level, (a) in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act, and (b) in assuring that information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the first quarter of fiscal 2023, 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 1, 2022 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 December 31, 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) | ||
|---|---|---|---|---|---|---|
| October 2, 2022 - <br>October 29, 2022 | 47,769 | $ | 91.16 | 47,769 | $ | 42,165,377 |
| October 30, 2022 -<br>November 26, 2022 | 30,306 | 102.60 | 30,306 | 39,055,994 | ||
| November 27, 2022 -<br>December 31, 2022 | 37,648 | 106.41 | 37,648 | 35,049,821 | ||
| 115,723 | $ | 99.12 | 115,723 |
(1) On August 18, 2022, the Board of Directors approved a new share repurchase program that authorizes the Company to repurchase up to $50.0 million of its common stock (the "2023 Program"). The 2023 Program became effective immediately and has no expiration. The table above reflects the maximum dollar amount remaining available for purchase under the 2023 Program as of December 31, 2022.
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ITEM 6. EXHIBITS
The list of exhibits is included below.
| Exhibit <br>No. | Exhibit |
|---|---|
| 10.1 | Form of Performance Stock Unit Agreement (Economic Return) |
| 10.2 | Form of Performance Stock Unit Agreement (Total Shareholder Return) |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of the CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of the CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.1 | Reconciliation of ROIC to GAAP and Economic Return Financial Statements. |
| 101 | The following materials from Plexus Corp.’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 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 first quarter ended December 31, 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: | February 3, 2023 | /s/ Todd P. Kelsey |
| Todd P. Kelsey | ||
| Chief Executive Officer | ||
| Date: | February 3, 2023 | /s/ Patrick J. Jermain |
| Patrick J. Jermain | ||
| Executive Vice President and Chief Financial Officer |
30
Document
PLEXUS CORP. PERFORMANCE STOCK UNIT AGREEMENT
(ECONOMIC RETURN)
TO: %%FIRST_NAME_MIDDLE_NAME_LAST_NAME%-%
DATE: %%OPTION_DATE,'Month DD, YYYY'%-%
In order to provide additional incentive through stock ownership for certain officers and key employees of Plexus Corp. (the “Corporation”) and its subsidiaries, you (the “Grantee”) are hereby granted a performance stock unit award (“Award”) effective as of _______, 20__ (the “Grant Date”). This Award is subject to the terms and conditions set forth in this Agreement and in the Plexus Corp. 2016 Omnibus Incentive Plan (the “Plan”), the terms of which are incorporated herein by reference.
1.Target Number of Performance Stock Units.
This Award applies to performance stock units that are based upon shares of the Corporation’s Common Stock (the “Performance Stock Units”). The Performance Stock Units granted under this Agreement are units that will be reflected in a book account maintained by the Corporation until they become earned or have been forfeited. The number of Performance Stock Units at target is as follows:
Number of Performance Stock Units (at target): %%TOTAL_SHARES_GRANTED%-%
2.Performance Terms.
(a)The terms of this Section 2 will apply to your Performance Stock Units except in so far as Section 3 ("Treatment Upon Termination") or Section 5 ("Change in Control") apply.
(b)The performance period (the “Performance Period”) for your Performance Stock Units will be the three-year period commencing ______ 20__ and ending on or near _________, 20__. The performance period end date is an estimate based on the projected date of the last day of Fiscal 20__ and may be subject to change. Following the conclusion of the Performance Period, the Committee shall certify in writing the number of Performance Stock Units which are payable (your “Final Performance Stock Units”). The Committee will calculate your Final Performance Stock Units by multiplying your Performance Stock Units (at target) by the “Performance Factor.” The Performance Factor means a percentage (from zero to 200%) which is based on the Corporation’s Economic Return during the Performance Period, determined according to Table 1 of this Agreement.
(c)All determinations made by the Committee shall be binding and conclusive on all parties.
3.Treatment Upon Termination. If your employment with the Corporation terminates prior to the end of the Performance Period, your Final Performance Stock Units will be calculated as follows:
(a)Death, Disability. In the event your employment terminates during the Performance Period as a result of your death or Disability, your Final Performance Stock Units will be based upon a prorated number of Performance Stock Units (at target). Your Final
Performance Stock Units will be determined by multiplying your Performance Stock Units (at target) by a fraction, the numerator of which is the number of days elapsed between the beginning of the Performance Period and the date of your death or Disability, and the denominator of which is the number of days in the Performance Period.
(b)Termination for Cause. In the event your employment is terminated during the Performance Period for Cause, your Performance Stock Units will be forfeited immediately.
(c)Other Termination (Without Cause, Retirement or Resignation). In the event your employment terminates during the Performance Period for any other reason, your Performance Stock Units will be forfeited immediately unless otherwise determined by the Committee.
4.Payment of Awards.
Except for payments pursuant to Section 5 ("Change in Control"), your Final Performance Stock Units shall be paid in the form of Common Stock and all payments will be made to you within two and a half months after the end of the Performance Period (or earlier termination of employment pursuant to Section 3).
5.Change in Control. In the event of a Change in Control:
(a)The Performance Factor shall be calculated as of the date of the Change in Control. The Performance Factor shall be calculated using achieved performance for any completed fiscal year in the three year measurement period prior to the Change in Control and the Target level of performance for the fiscal year of the Change in Control and any future fiscal year(s). Your Final Performance Share Units will be equal to the number of Performance Stock Units (at target) times the calculated Performance Factor.
(b)Within 15 days following the Change in Control, your Final Performance Stock Units will be paid in the form of Common Stock or common stock of any successor corporation; provided that the Corporation may elect to pay an amount of cash equal to the value of the Common Stock that would otherwise be issued. The value shall be equal to the number of shares of Common Stock that would be issued times the Fair Market Value of the Common Stock at the time of the Change in Control.
6.Rights Prior to Payment.
Prior to any payment of the Award, you will not have any right to vote the Performance Stock Units or to receive credit for cash dividends. You will not be deemed a stockholder of the Corporation with respect to any of the Performance Stock Units. The Performance Stock Units may not be sold, assigned, transferred, pledged, encumbered or otherwise disposed of prior to payment.
7.Tax Withholding.
The Corporation shall have the power and right to deduct or withhold, or require you to remit to the Corporation, an amount sufficient to satisfy Federal, state and local taxes required by law to be withheld with respect to issuance of shares under this Agreement. You may make a written election to satisfy this withholding requirement, in whole or in part, by having the Corporation withhold shares having a Fair Market Value on the date the tax is to be determined equal to the minimum marginal total tax which could be imposed on the transaction.
8.Transfer Restrictions After Issuance.
Under applicable securities laws, you may not be able to sell any shares for a period of time after issuance, and you must comply with the Corporation’s Insider Trading Restrictions and Policies. The Corporation’s counsel should be consulted on your ability to sell your shares under the 1934 Act.
9.No Employment Agreement Intended.
Neither the establishment of, nor the awarding of Awards under this Plan shall be construed to create a contract of employment between you and the Corporation or its subsidiaries; nor does it give you the right to continue in the employment of the Corporation or its subsidiaries or limit in any way the right of the Corporation or its subsidiaries to discharge you at any time and without notice, with or without cause, or to any benefits not specifically provided by this Plan, or in any manner modify the Corporation’s right to establish, modify, amend or terminate any profit sharing, retirement or other benefit plans.
10.Section 409A Compliance.
This Award is intended to comply with the requirements of Section 409A, and shall be interpreted and administered in accordance with that intent. If any provision of the Plan or this Agreement would otherwise conflict with or frustrate this intent, the Committee may adopt such amendments to the Plan and the Agreement as the Committee deems necessary.
11.Wisconsin Contract.
This Agreement reflects an Award made in Wisconsin and shall be construed under the laws of that state without regard to the conflict of laws provision of any jurisdiction.
To accept this grant, logon to your E*TRADE account (www.etrade.com). By accepting this grant online you acknowledge and accept this grant and the terms and conditions. You also acknowledge receipt of this Performance Stock Unit Agreement, a copy of the 2016 Omnibus Incentive Plan, and a copy of the Insider Trading Restrictions and Policies. If this grant is not accepted online within thirty (30) days from the grant date of this Agreement, this Award will be deemed refused and may be withdrawn.
PLEXUS CORP.
By: /s/___________________________
Table 1
Determination of Performance Factor
The Performance Factor shall be determined according to the following table:
| Economic Return* | |
|---|---|
| Measurement Period Average | Payout<br><br>Performance Factor |
| 0.0% | 0% |
| 0.5% | 20% |
| 1.0% | 40% |
| 1.5% | 60% |
| 2.0% | 80% |
| 2.5% | 100% |
| 3.0% | 120% |
| 3.5% | 140% |
| 4.0% | 160% |
| 4.5% | 180% |
| 5.0% | 200% |
* The Economic Return of Plexus shall be measured, on an absolute basis, from 0 – 500 basis points above the weighted average cost of capital ("WACC") as calculated for the annual operating plan of the Corporation for each year of the Measurement Period. The average Economic Return over the Measurement Period will determine the Economic Return for calculation of the number of shares delivered, with payout ranging from 0% - 200% of the targeted shares on a linear scale with payout results interpolated for performance between the percentages listed above.
For purposes of the foregoing calculation:
1. “Economic Return” means Return on Invested Capital (“ROIC”) minus Weighted Average Cost of Capital (“WACC”).
2. “Return on Invested Capital” means (i) Adjusted Operating Income (tax effected) divided by (ii) the five (5) quarter average invested capital ending with the fourth quarter of each fiscal year of the Performance Period.
3. "Weighted Average Cost of Capital" means the weighted average cost of the Company’s capital as calculated for the annual operating plan during each year of the performance period. For fiscal 20__, the Company’s WACC has been established as ___%.
4. "Performance Period" means the three fiscal year period beginning with the fiscal year of grant and ending after the conclusion of the third fiscal year.
- Economic Return for any fiscal year during the Performance Period will be a minimum of 0% and a maximum of 5% for purposes of calculating ER-PSU vesting.
Document
PLEXUS CORP. PERFORMANCE STOCK UNIT AGREEMENT
(TOTAL SHAREHOLDER RETURN)
TO: %%FIRST_NAME_MIDDLE_NAME_LAST_NAME%-%
DATE: %%OPTION_DATE,'Month DD, YYYY'%-%
In order to provide additional incentive through stock ownership for certain officers and key employees of Plexus Corp. (the “Corporation”) and its subsidiaries, you (the “Grantee”) are hereby granted a performance stock unit award (“Award”) effective as of _______, 20__ (the “Grant Date”). This Award is subject to the terms and conditions set forth in this Agreement and in the Plexus Corp. 2016 Omnibus Incentive Plan (the “Plan”), the terms of which are incorporated herein by reference.
1.Target Number of Performance Stock Units.
This Award applies to performance stock units that are based upon shares of the Corporation’s Common Stock (the “Performance Stock Units”). The Performance Stock Units granted under this Agreement are units that will be reflected in a book account maintained by the Corporation until they become earned or have been forfeited. The number of Performance Stock Units at target is as follows:
Number of Performance Stock Units (at target): %%TOTAL_SHARES_GRANTED%-%
2.Performance Terms.
(a)The terms of this Section 2 will apply to your Performance Stock Units except in so far as Section 3 ("Treatment Upon Termination") or Section 5 ("Change in Control") apply.
(b)The performance period (the “Performance Period”) for your Performance Stock Units will be the three-year period commencing ________, 20__ and ending ________, 20__. Following the conclusion of the Performance Period, the Committee shall certify in writing the number of Performance Stock Units which are payable (your “Final Performance Stock Units”). The Committee will calculate your Final Performance Stock Units by multiplying your Performance Stock Units (at target) by the “Performance Factor.” The Performance Factor means a percentage (from zero to 150%) which is based on the Corporation’s Total Shareholder Return during the Performance Period compared to the companies in the S&P 400 MidCap Index, determined according to Table 1 of this Agreement.
(c)All determinations made by the Committee shall be binding and conclusive on all parties.
3.Treatment Upon Termination. If your employment with the Corporation terminates prior to the end of the Performance Period, your Final Performance Stock Units will be calculated as follows:
(a)Death, Disability. In the event your employment terminates during the Performance Period as a result of your death or Disability, your Final Performance Stock Units will be based upon a prorated number of Performance Stock Units (at target). Your Final Performance Stock Units will be determined by multiplying your Performance Stock Units (at
target) by a fraction, the numerator of which is the number of days elapsed between the beginning of the Performance Period and the date of your death or Disability, and the denominator of which is the number of days in the Performance Period.
(b)Termination for Cause. In the event your employment is terminated during the Performance Period for Cause, your Performance Stock Units will be forfeited immediately.
(c)Other Termination (Without Cause, Retirement or Resignation). In the event your employment terminates during the Performance Period for any other reason, your Performance Stock Units will be forfeited immediately unless otherwise determined by the Committee.
4.Payment of Awards.
Except for payments pursuant to Section 5 ("Change in Control"), your Final Performance Stock Units shall be paid in the form of Common Stock and all payments will be made to you within two and a half months after the end of the Performance Period (or earlier termination of employment pursuant to Section 3).
5.Change in Control. In the event of a Change in Control:
(a)The Performance Factor shall be calculated as if the date of the Change in Control is the last day of the Performance Period. Your Final Performance Share Units will be equal to the number of Performance Stock Units (at target) times the calculated Performance Factor.
(b)Within 15 days following the Change in Control, your Final Performance Stock Units will be paid in the form of Common Stock or common stock of any successor corporation; provided that the Corporation may elect to pay an amount of cash equal to the value of the Common Stock that would otherwise be issued. The value shall be equal to the number of shares of Common Stock that would be issued times the Fair Market Value of the Common Stock at the time of the Change in Control.
6.Rights Prior to Payment.
Prior to any payment of the Award, you will not have any right to vote the Performance Stock Units or to receive credit for cash dividends. You will not be deemed a stockholder of the Corporation with respect to any of the Performance Stock Units. The Performance Stock Units may not be sold, assigned, transferred, pledged, encumbered or otherwise disposed of prior to payment.
7.Tax Withholding.
The Corporation shall have the power and right to deduct or withhold, or require you to remit to the Corporation, an amount sufficient to satisfy Federal, state and local taxes required by law to be withheld with respect to issuance of shares under this Agreement. You may make a written election to satisfy this withholding requirement, in whole or in part, by having the Corporation withhold shares having a Fair Market Value on the date the tax is to be determined equal to the minimum marginal total tax which could be imposed on the transaction.
8.Transfer Restrictions After Issuance.
Under applicable securities laws, you may not be able to sell any shares for a period of time after issuance, and you must comply with the Corporation’s Insider Trading Restrictions and Policies. The Corporation’s counsel should be consulted on your ability to sell your shares under the 1934 Act.
9.No Employment Agreement Intended.
Neither the establishment of, nor the awarding of Awards under this Plan shall be construed to create a contract of employment between you and the Corporation or its subsidiaries; nor does it give you the right to continue in the employment of the Corporation or its subsidiaries or limit in any way the right of the Corporation or its subsidiaries to discharge you at any time and without notice, with or without cause, or to any benefits not specifically provided by this Plan, or in any manner modify the Corporation’s right to establish, modify, amend or terminate any profit sharing, retirement or other benefit plans.
10.Section 409A Compliance.
This Award is intended to comply with the requirements of Section 409A, and shall be interpreted and administered in accordance with that intent. If any provision of the Plan or this Agreement would otherwise conflict with or frustrate this intent, the Committee may adopt such amendments to the Plan and the Agreement as the Committee deems necessary.
11.Wisconsin Contract.
This Agreement reflects an Award made in Wisconsin and shall be construed under the laws of that state without regard to the conflict of laws provision of any jurisdiction.
To accept this grant, logon to your E*TRADE account (www.etrade.com). By accepting this grant online you acknowledge and accept this grant and the terms and conditions. You also acknowledge receipt of this Performance Stock Unit Agreement, a copy of the 2016 Omnibus Incentive Plan, and a copy of the Insider Trading Restrictions and Policies. If this grant is not accepted online within thirty (30) days from the grant date of this Agreement, this Award will be deemed refused and may be withdrawn.
PLEXUS CORP.
By: /s/___________________________
Table 1
Determination of Performance Factor
The Performance Factor shall be determined according to the following table:
| Relative TSR | Payout | |
|---|---|---|
| Percentile Rank* | Performance Factor | |
| Below 25 | 0% | |
| 25 | 50% | |
| 30 | 60% | |
| 40 | 80% | |
| 50 | 100% | |
| 60 | 120% | |
| 70 | 140% | |
| 75 and above | 150% |
*TSR shall be based on the percentage increase/decrease from the Initial Price to the Final Price, and shall reflect the reinvestment of dividends paid (if any) to Common Shareholders during the measurement period of the Initial Price and Final Price. Payouts for performance between the percentages listed above will be interpolated.
For purposes of the foregoing calculation:
1. “Total Shareholder Return” means the quotient (expressed as a percentage) obtained by dividing (i)(A) the Final Price, plus (B) the aggregate amount of dividends paid in respect of a share of Common Stock during the measurement periods (assuming reinvestment of the dividends), minus (C) the Initial Price, by (ii) the Initial Price. The calculation of Total Shareholder Return shall be adjusted to reflect stock splits, recapitalizations and similar events.
2. “Initial Price” means the average closing price of Common Stock over the thirty calendar day measurement period ending on the trading day immediately preceding the first day of the Performance Period.
3. “Final Price” means the average closing price of Common Stock over the thirty calendar day measurement period ending on the last day of the Performance Period.
4. "Performance Period" means three years from the date of PSU grant; provided that in the event of the Grantee's termination of employment during the Performance Period due to the Grantee's death or disability, the final TSR-PSUs will be based upon a prorated number of Performance Stock Units (at target) and, in the event of a Change in Control, Total Shareholder Return shall be calculated through the date of the Change in Control.
5. The Total Shareholder Return of Plexus shall be measured against the constituent companies of the S&P 400 MidCap Index (S&P 400). The constituents of the S&P 400 shall be determined as of the date of grant, excluding any companies which were not publicly traded on a major US stock exchange (e.g., NYSE, NASDAQ, or AMEX) during the entirety of the period of time defining the Initial Price (“S&P 400 Peers”).
6. Treatment of S&P 400 Peers for certain corporate events occurring during the Performance Period.
a.If an S&P 400 Peer is acquired by another S&P 400 Peer, the TSR of the successor entity will be used for TSR calculation purposes.
b.If an S&P 400 Peer is acquired by a company not among the S&P 400 Peers or otherwise ceases to be publicly traded other than for reason of bankruptcy, such company will be removed from the S&P 400 Peers.
c.If an S&P 400 peer becomes bankrupt during the Performance Period, then its TSR will be treated as -100% TSR.
d.If S&P 400 Peers merge and none of the affected companies is the successor entity, the affected companies will be removed from the S&P 400 Peers. The newly formed company will not be added to the S&P 400 Peers.
e.If an S&P 400 Peer remains publicly traded but is not a constituent of the S&P 400 at the end of the Performance Period, (e.g., becomes an S&P 500 or 600 constituent company), such company will continue to be an S&P 400 Peer.
f.If an S&P 400 Peer has multiple issuances of stock listed, the primary issuance (as designated by S&P) shall be included as an S&P 400 Peer.
Document
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: February 3, 2023
| /s/ Todd P. Kelsey |
|---|
| Todd P. Kelsey |
| Chief Executive Officer |
Document
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: February 3, 2023
| /s/ Patrick J. Jermain |
|---|
| Patrick J. Jermain |
| Executive Vice President and Chief Financial Officer |
Document
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 December 31, 2022, as filed with the Securities and Exchange Commission on or about the date hereof (the “Report”), I, Todd P. Kelsey, 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 |
| February 3, 2023 |
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.
Document
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 December 31, 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 |
| February 3, 2023 |
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.
Document
| Exhibit 99.1 | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Return on Invested Capital ("ROIC") and Economic Return Calculations GAAP to non-GAAP reconciliation (dollars in thousands): | ||||||||||||||||||||||||||
| Three Months Ended | Twelve Months Ended | Three Months Ended | ||||||||||||||||||||||||
| Dec 31, | Oct 1, | Jan 1, | ||||||||||||||||||||||||
| 2022 | 2022 | 2022 | ||||||||||||||||||||||||
| Operating income, as reported | $ | 57,341 | $ | 178,185 | $ | 30,473 | ||||||||||||||||||||
| Restructuring and impairment charges | + | — | + | 2,021 | + | 2,021 | ||||||||||||||||||||
| Adjusted operating income | 57,341 | 180,206 | 32,494 | |||||||||||||||||||||||
| x | 4 | x | 4 | |||||||||||||||||||||||
| Adjusted annualized operating income | $ | 229,364 | $ | 180,206 | $ | 129,976 | ||||||||||||||||||||
| Adjusted effective tax rate | x | 16 | % | x | 13 | % | x | 13 | % | |||||||||||||||||
| Tax impact | $ | 36,698 | $ | 23,427 | $ | 16,897 | ||||||||||||||||||||
| Adjusted operating income (tax-effected) | $ | 192,666 | $ | 156,779 | $ | 113,079 | ||||||||||||||||||||
| Average invested capital | $ | 1,392,002 | $ | 1,207,357 | $ | 1,135,312 | ||||||||||||||||||||
| ROIC | 13.8 | % | 13.0 | % | 10.0 | % | ||||||||||||||||||||
| WACC | 9.0 | % | 9.3 | % | 9.3 | % | ||||||||||||||||||||
| Economic Return | 4.8 | % | 3.7 | % | 0.7 | % | December 31, | October 1, | July 2, | April 2, | January 1, | October 2, | ||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||||||||||
| 2022 | 2022 | 2022 | 2022 | 2022 | 2021 | |||||||||||||||||||||
| Equity | $ | 1,150,259 | $ | 1,095,731 | $ | 1,058,190 | $ | 1,040,591 | $ | 1,044,095 | $ | 1,028,232 | ||||||||||||||
| Plus: | ||||||||||||||||||||||||||
| Debt and finance lease obligations - current | 329,076 | 273,971 | 250,012 | 222,393 | 151,417 | 66,313 | ||||||||||||||||||||
| Operating lease obligations - current (1) | 8,878 | 7,948 | 8,640 | 9,266 | 9,507 | 9,877 | ||||||||||||||||||||
| Debt and finance lease obligations - long-term | 187,272 | 187,776 | 184,707 | 186,069 | 187,075 | 187,033 | ||||||||||||||||||||
| Operating lease obligations - long-term | 32,149 | 33,628 | 32,270 | 34,347 | 36,343 | 37,970 | ||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||
| Cash and cash equivalents | (247,880) | (274,805) | (276,608) | (307,964) | (217,067) | $ | (270,172) | |||||||||||||||||||
| $ | 1,459,754 | $ | 1,324,249 | $ | 1,257,211 | $ | 1,184,702 | $ | 1,211,370 | $ | 1,059,253 | |||||||||||||||
| (1) | Included in other accrued liabilities on the Consolidated Balance Sheets. | |||||||||||||||||||||||||
| --- | --- |