Plexus Corp. — FY2018 Form 10-K
Business and period. Plexus provides electronics manufacturing and product-realization services, focusing on complex, mid-to-low-volume programs in Healthcare/Life Sciences, Industrial/Commercial, Communications, and Aerospace/Defense. Fiscal 2018 ended September 29, 2018; the filing also reports fourth-quarter results.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,873.5 million | $2,528.1 million |
| Gross profit / margin | $257.6 million / 9.0% | $255.9 million / 10.1% |
| Operating income / margin | $118.3 million / 4.1% | $129.9 million / 5.1% |
| Net income | $13.0 million | $112.1 million |
| Diluted EPS | $0.38 | $3.24 |
| Cash from operations | $66.8 million | $171.7 million |
| Capital expenditures / free cash flow | $62.8 million / $4.0 million | $38.5 million / $133.2 million |
| Cash and restricted cash at year-end | $297.7 million | $569.3 million |
| Total debt and capital lease obligations | $188.6 million | $313.1 million |
FY2018 sales rose 13.7%, but gross margin fell 110 basis points and operating income declined $11.6 million. Reported net income and EPS were sharply reduced by $85.9 million of tax expense related to U.S. Tax Reform. Excluding specified unusual items, management reported adjusted tax expense of $11.5 million, an adjusted effective tax rate of 9.5%, and adjusted diluted EPS of $3.23; these are non-GAAP measures.
Fourth quarter: Sales were $771.2 million versus $669.9 million in FY2017’s fourth quarter; gross profit was $73.3 million versus $66.5 million. Net income was $72.7 million versus $29.0 million, and diluted EPS was $2.20 versus $0.84. FY2018 Q4 results included $38.6 million in non-recurring tax benefits and a $3.6 million valuation-allowance benefit.
Material changes and balance-sheet developments
- Healthcare/Life Sciences sales increased 21.1% and Industrial/Commercial increased 16.4%; Communications declined 1.4%. APAC sales rose 17.1%, while EMEA rose 46.0% and AMER rose 4.5%.
- Inventory increased to $794.3 million from $654.6 million; inventory days rose to 104 from 99. Management cited longer component lead times and new-program ramps. Annualized cash-cycle days increased to 73 from 70.
- Operating cash flow fell to $66.8 million, primarily reflecting working-capital needs, including higher inventory, receivables, and customer-deposit movements. Receivables factoring supported cash flow; the company sold $712.9 million of receivables during FY2018.
- Cash declined during the year amid debt repayment, share repurchases, capital spending, and other financing outflows. Plexus issued $150 million of senior notes at 4.05% and 4.22% to refinance $175 million of 5.20% notes at maturity. The $300 million revolving facility had no balance outstanding at year-end; the company reported compliance with debt covenants.
- The company repatriated approximately $431.2 million of overseas cash and repurchased $137.0 million of shares in FY2018. It acquired a Cascade Controls business line for $12.4 million.
Outlook, risks, and unusual items
- Management’s stated targets include 12% organic revenue growth, a 4.7%–5.0% operating margin, and a 5.0% Economic Return goal. FY2019 capital expenditures were estimated at $70–$90 million; the expected FY2019 effective tax rate was approximately 13%–15%.
- Topic 606 revenue recognition was scheduled for adoption at the start of FY2019. Plexus expected revenue to be recognized over time for a significant portion of sales and estimated a $5–$15 million opening retained-earnings adjustment, a $45–$70 million reduction in inventory, and a $55–$80 million increase in unbilled receivables. Estimates remained subject to finalization.
- Key risks include component shortages and price increases, customer forecast changes or program losses, customer concentration, start-up and transfer costs, inventory obsolescence, tariffs and trade disputes, and dependence on international operations—particularly Malaysia. The top ten customers represented 57.2% of sales; GE alone represented 12.3%.
- Tax Reform created a substantial one-time accounting charge and $72.5 million of future tax cash payments disclosed by the company. Other risks include foreign-currency exposure, cybersecurity and ERP implementation, regulatory requirements, and the ability to execute expansions in Malaysia and Mexico.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Reconcile reported FY2018 earnings with the tax-reform charge, fourth-quarter tax benefits, and management’s non-GAAP adjusted figures.
- Assess whether sales growth can translate into improved margins and cash generation, given lower FY2018 margins and elevated inventory.
- Review the assumptions and final adoption effects of Topic 606, especially contract assets, inventory, and revenue timing.
- Monitor customer/program concentration, component availability, and execution of capacity expansions and new-program ramps.
- Verify overseas cash accessibility, scheduled tax payments, factoring-program availability and costs, and compliance with debt covenants.