PLEXUS CORP

RESULTS OF OPERATIONS

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

Net sales. For the three months ended December 30, 2023, net sales decreased $111.3 million, or 10.2%, as compared to the three months ended December 31, 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):

AMER. Net sales for the three months ended December 30, 2023 in the AMER segment decreased $56.0 million, or 14.4%, as compared to the three months ended December 31, 2022. The decrease in net sales was driven by overall net decreased customer end-market demand inclusive of market-driven inventory corrections at the customers as well as reductions in inflated component pricing. The decrease was partially offset by an increase of $8.7 million due to production ramps for new customers.

APAC. Net sales for the three months ended December 30, 2023 in the APAC segment decreased $89.4 million, or 13.9%, as compared to the three months ended December 31, 2022. The decrease in net sales was driven by overall net decreased customer end-market demand inclusive of market-driven inventory corrections at the customers as well as reductions in inflated component pricing, partially offset by a partial easing of supply chain constraints. The decrease was further offset by a $12.3 million increase due to production ramps of new products for existing customers.

EMEA. Net sales for the three months ended December 30, 2023 in the EMEA segment increased $32.5 million, or 36.4%, as compared to the three months ended December 31, 2022. The increase in net sales was driven by a $15.6 million increase due to production ramps for a new customer and overall net increased customer end-market demand. The increase was further driven by a $5.2 million increase in production ramps of new products for existing customers, partially offset by reductions in inflated component pricing.

Our net sales by market sector for the indicated fiscal period were as follows (in millions):

Healthcare/Life Sciences. Net sales for the three months ended December 30, 2023 in the Healthcare/Life Sciences sector decreased $107.0 million, or 21.9%, as compared to the three months ended December 31, 2022. The decrease in net sales was driven by overall net decreased customer end-market demand inclusive of market-driven inventory corrections at the customers as well as a reduction in inflated component pricing. The decrease was partially offset by an increase of $9.1 million due to production ramps of new products for existing customers.

Industrial. Net sales for the three months ended December 30, 2023 in the Industrial sector decreased $37.5 million, or 7.9%, as compared to the three months ended December 31, 2022. The decrease in net sales was driven by overall net decreased customer end-market demand inclusive of market-driven inventory corrections at the customers as well as reductions in inflated component pricing. The decrease was partially offset by an increase of $20.7 million due to production ramps for new customers.

Aerospace/Defense. Net sales for the three months ended December 30, 2023 in the Aerospace/Defense sector increased $33.2 million, or 24.8%, as compared to the three months ended December 31, 2022. The increase was driven by overall net increased customer end-market demand and an $8.0 million increase due to production ramps of new products for existing customers. The increase was partially offset by a reduction in inflated component pricing.

Cost of sales. Cost of sales for the three months ended December 30, 2023 decreased $98.2 million, or 9.9%, as compared to the three months ended December 31, 2022. Cost of sales is comprised primarily of material and component costs, labor costs and overhead. For the three months ended December 30, 2023 and December 31, 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 December 31, 2022, the decrease in cost of sales for the three months ended December 30, 2023 was primarily driven by the decrease in net sales and a positive shift in customer mix, partially offset by an increase in fixed costs.

Gross profit. Gross profit for the three months ended December 30, 2023 decreased $13.1 million, or 12.9%, as compared to the three months ended December 31, 2022. Gross margin of 9.0% for the three months ended December 30, 2023 decreased 30 basis points compared to the three months ended December 31, 2022. The primary drivers of the decrease in gross profit and gross margin as compared to the three months ended December 31, 2022 were the decrease in net sales and an increase in fixed costs to support new customer program ramps, partially offset by a positive shift in customer mix.

Operating income. Operating income for the three months ended December 30, 2023 decreased $12.1 million, or 21.1%, as compared to the three months ended December 31, 2022. Operating margin of 4.6% for the three months ended December 30, 2023 decreased 60 basis points compared to the three months ended December 31, 2022. The primary driver of the decrease in operating income and operating margin for the three months ended December 30, 2023 was the result of the decrease in gross margin partially offset by a $0.9 million decrease in selling and administrative expenses ("S&A"). The decrease in S&A was primarily due to a decrease in incentive compensation costs.

A discussion of operating income by reportable segment for the indicated fiscal period(in millions):

AMER. Operating income decreased $8.7 million for the three months ended December 30, 2023 as compared to the three months ended December 31, 2022 primarily as a result of a decrease in net sales, partially offset by a positive shift in customer mix.

APAC. Operating income decreased $7.0 million for the three months ended December 30, 2023 as compared to the three months ended December 31, 2022 primarily as a result of a decrease in net sales, partially offset by a positive shift in customer mix and a decrease in S&A.

EMEA. Operating income increased $0.4 million for the three months ended December 30, 2023 as compared to the three months ended December 31, 2022 primarily as a result of an increase in net sales, partially offset by increased fixed costs.

Other expense. Other expense for the three months ended December 30, 2023 increased $2.4 million as compared to the three months ended December 31, 2022. The increase in other expense for the three months ended December 30, 2023 was primarily driven by a decrease in other miscellaneous income of $0.9 million, an increase in interest expense of $0.7 million due to a higher average interest rate and the higher average daily borrowing levels and an increase in factoring fees of $0.6 million.

Income taxes. Income tax expense for the three months ended December 30, 2023 was $5.6 million compared to $7.2 million for the three months ended December 31, 2022. The decrease is primarily due to a decrease in 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 2024 is expected to be approximately 15.0% to 17.0% assuming no changes to tax laws.

Net Income. Net income for the three months ended December 30, 2023 decreased $13.0 million, or 30.8%, for the three months ended December 31, 2022 to $29.2 million. Net income decreased primarily as a result of the decrease in operating income and the increase in other expense, partially offset by the decrease in tax expense as previously discussed.

Diluted earnings per share. Diluted earnings per share decreased to $1.04 for the three months ended December 30, 2023 from $1.49 for the three months ended December 31, 2022 primarily as a result of decreased net income due to the factors discussed above, partially offset by a reduction in diluted shares outstanding.

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") by more than 500 basis points 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 period. Invested capital is defined as equity plus debt and operating lease liabilities, less cash and cash equivalents. Other companies may not define or calculate ROIC in the same way. ROIC and other non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").

We review our internal calculation of WACC annually. Our WACC is 8.2% for fiscal 2024 and 9.0% for fiscal 2023. 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 30, 2023, ROIC of 10.3% reflects an economic return of 2.1%, based on our WACC of 8.2%, and 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 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):