10-Q: Plexus Q1 2026 Sales Surge 9.6%, EPS Up 12.7%

Plexus Corp. reported a strong start to fiscal 2026 with net sales increasing 9.6% and diluted earnings per share rising 12.7% year-over-year, despite a significant decline in operating cash flow.

Summary

• Net sales increased 9.6% to $1,069.9 million for the three months ended January 3, 2026, compared to $976.1 million in the prior year period.
• Diluted earnings per share rose 12.7% to $1.51, up from $1.34 in the same period last year.
• Net income increased 10.5% to $41.2 million, compared to $37.3 million in the prior year.
• Operating income grew 16.2% to $54.5 million, with operating margin improving by 30 basis points to 5.1%.
• Cash flows used in operating activities were $(15.4) million, a significant decrease from $53.6 million provided in the prior year, primarily due to increased inventory and accounts receivable.
• Free cash flow was $(50.6) million, down from $27.1 million in the prior year.
• The effective tax rate increased to 19.3% from 14.3% due to the implementation of global minimum tax.
• The company repurchased 152,987 shares for $22.4 million under its 2026 Program, with $62.6 million of authority remaining.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this as a mixed report. While top-line growth and EPS are strong, the significant decline in operating and free cash flow, coupled with lower margins and ROIC, indicates underlying operational challenges related to working capital management and fixed costs.

Positives

• Strong net sales growth of 9.6% year-over-year, reaching $1,069.9 million.
• Significant diluted EPS increase of 12.7% to $1.51.
• Net income grew 10.5% to $41.2 million.
• Operating income increased 16.2% to $54.5 million, and operating margin improved by 30 basis points to 5.1%.
• Growth across AMER (25.9%), APAC (0.8%), and EMEA (17.0%) segments.
• Strong sector growth in Healthcare/Life Sciences (24.6%) and Aerospace/Defense (11.5%).
• Reduction in restructuring and other charges by $4.7 million compared to the prior year.
• Continued share repurchase program, demonstrating commitment to shareholder returns.

Negatives

• Gross margin decreased by 40 basis points to 9.9%.
• Cash flows used in operating activities were $(15.4) million, a substantial decline from $53.6 million provided in the prior year.
• Free cash flow was negative $(50.6) million, a decrease of $77.7 million year-over-year.
• Return on Invested Capital (ROIC) decreased to 13.2% from 13.8%, falling short of the 15% goal.
• Economic return decreased to 4.2% from 4.9%.
• Industrial sector net sales decreased by 3.7% due to customer disengagement and decreased end-market demand.
• Increase in effective tax rate to 19.3% from 14.3% due to global minimum tax.
• Increase in inventory by $74.9 million and accounts receivable by $22.8 million, contributing to negative operating cash flow.
• Cash and cash equivalents decreased by $57.3 million.

Risks

• Effects of tariffs, trade disputes, trade agreements, and other trade protection measures.
• Shortages, delays, and price fluctuations in obtaining components due to economic cycles, capacity constraints, natural disasters, or other factors.
• Risk of customer delays, changes, cancellations, or forecast inaccuracies in both ongoing and new programs.
• Particular risks relative to new or recent customers, programs, or services, including start-up costs, inability to execute, and lack of a track record of order volume and timing.
• Risk that new program wins and/or customer demand may not result in expected revenue or profitability.
• Lack of visibility of future orders, particularly in view of changing economic conditions.
• Economic performance of the industries, sectors, and customers served.
• Effects of the volume of revenue from certain sectors or programs on margins.
• Ability to secure new customers, maintain current customers, and deliver product on a timely basis.
• Risks of concentration of work for certain customers.
• Effects of start-up costs of new programs and facilities or the costs associated with winding down programs or the closure or consolidation of facilities.
• Possible unexpected costs and operating disruption in transitioning programs, including transitions between Company facilities.
• Risks associated with excess and obsolete inventory, including the risk that inventory purchased on behalf of customers may not be consumed or otherwise paid for by the customer, resulting in an inventory write-off.
• The fact that customer orders may not lead to long-term relationships.
• Ability to manage successfully and execute a complex business model characterized by high product mix and demanding quality, regulatory, and other requirements.
• The outcome of litigation and regulatory investigations and proceedings, including the results of any challenges with regard to such outcomes.
• The ability to realize anticipated savings from restructuring or similar actions, as well as the adequacy of related charges as compared to actual expenses.
• Risks related to information technology systems and data security.
• 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 taxes, tax rates, and ability to use deferred tax assets and net operating losses.
• The weakness of the economy regionally or globally.
• The effect of changes in the pricing and margins of services.
• Raw materials and component cost fluctuations.
• The potential effect of fluctuations in the value of the currencies in which business is transacted.
• The effects of changes in economic conditions, political conditions, and regulatory matters in the United States and in the other countries in which business is conducted.
• The potential effect of other events outside control, such as the conflict between Russia and Ukraine, conflict in the Middle East, escalating tensions between China and Taiwan or China and the United States, tensions in or amongst countries in which operations or transactions occur, 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.

Future Outlook

Plexus anticipates its annual effective tax rate for fiscal 2026 to be approximately 16.0% to 18.0%, assuming no changes to tax laws. Capital expenditures for fiscal 2026 are estimated to be between $100.0 million and $120.0 million to support new program ramps and equipment replacement. The company believes its projected cash flows from operations, available cash, potential credit facility borrowings, and leasing capabilities will be sufficient to meet working capital, fixed capital, and share repurchase requirements for the next twelve months.

Management Comments

• "At Plexus, we help create the products that build a better world. Driven by a passion for excellence, we partner with our customers to design, manufacture and service highly complex products in demanding regulatory environments."
• "We believe our balance sheet is positioned to support the potential future challenges presented by macroeconomic 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."
• "We view ROIC and economic return as important measures in evaluating the efficiency and effectiveness of our long-term capital investments."

Industry Context

StockSavvy.ai notes that Plexus's strong revenue growth in Healthcare/Life Sciences and Aerospace/Defense aligns with broader industry trends seeing increased demand for specialized, high-reliability electronics manufacturing in these sectors. The slight decline in the Industrial sector, attributed to customer disengagement and decreased end-market demand, could reflect specific client dynamics or a broader softening in certain industrial sub-segments, contrasting with the robust performance in other key areas. The increase in the effective tax rate due to global minimum tax implementation is a trend impacting many multinational corporations.

Corporate Governance

Legal Proceedings

• The company is party to lawsuits in the ordinary course of business.
• Management does not believe that any such 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.

Stakeholder Impact

• Shareholders: Positive impact from share repurchase program and increased EPS, but negative impact from declining ROIC and negative free cash flow.
• Employees: Potential impact from the Compensation Recovery Policy for Covered Officers. Prior restructuring charges in EMEA and AMER regions indicate past workforce reductions.
• Customers: Continued production ramps for new products for existing customers, but also disengagements with some customers in AMER and Industrial sectors.
• Suppliers: Timing of materials procurement and payments to suppliers impacted accounts payable cash flows.
• Creditors: Debt levels increased, but the company remains in compliance with covenants for all debt agreements.

Next Steps

• Evaluate the impact of recently issued accounting pronouncements (ASU 2023-09, ASU 2024-03, ASU 2025-06) on financial statement disclosures.
• Continue efforts to manage inventory and accounts receivable to improve cash flow from operations.
• Execute the remaining $62.6 million authority under the 2026 share repurchase program.
• Invest $100.0 million to $120.0 million in capital expenditures for fiscal 2026 to support new program ramps and equipment replacement.

Key Dates

Recommendation

While Plexus demonstrated strong top-line growth and EPS expansion, the significant negative free cash flow and decline in ROIC are concerning. The increase in working capital, particularly inventory and accounts receivable, suggests operational inefficiencies or strategic build-ups that are consuming cash. The positive revenue trends are offset by these cash flow pressures and margin compression. A 'hold' recommendation is appropriate as investors should monitor the company's ability to convert revenue growth into positive cash flow and improve capital efficiency in subsequent quarters.

Keywords

Electronics Manufacturing Services, EMS, Contract Manufacturing, Aerospace Defense, Healthcare Life Sciences, Industrial Manufacturing, Supply Chain, Global Minimum Tax, Share Repurchase, SEC 10-Q, Financial Performance, Operating Income, Net Sales, EPS, Cash Flow, Working Capital