Plexus Corp. 10-K Summary
Business and period: Plexus provides design, supply-chain, manufacturing and aftermarket services for complex, regulated electronic products. It serves Healthcare/Life Sciences, Industrial/Commercial, Communications and Aerospace/Defense customers. This 10-K covers the fiscal year ended September 30, 2017 (52 weeks); the fourth quarter ended that date.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $2,528.1 million | $2,556.0 million |
| Gross profit / margin | $255.9 million / 10.1% | $227.4 million / 8.9% |
| Operating income / margin | $129.9 million / 5.1% | $99.4 million / 3.9% |
| Net income | $112.1 million | $76.4 million |
| Diluted EPS | $3.24 | $2.24 |
| Cash from operations | $171.7 million | $127.7 million |
| Capital expenditures | $38.5 million | $31.1 million |
| Free cash flow (company-defined, non-GAAP) | $133.2 million | $96.6 million |
| Cash and restricted cash at year-end | $569.3 million | $433.0 million |
| Total debt obligations, including leases | $313.1 million | $262.5 million |
Fiscal 2017 sales declined 1.1%, while gross profit rose 12.5%, operating income rose $30.5 million, and net income increased 46.7%. Improved customer mix, supply-chain productivity and lower inventory obsolescence contributed to margin gains; FY2016 included $7.0 million of restructuring charges and $5.2 million of accelerated share-based compensation expense. No restructuring charges were recorded in FY2017.
Fourth-quarter FY2017 sales were $669.9 million, gross profit $66.5 million and net income $29.0 million; diluted EPS was $0.84. Against Q4 FY2016, sales increased from $653.1 million and net income from $19.1 million.
Cash from operations increased, aided by higher earnings, receivables factoring and customer deposits. Inventory used $86.1 million of cash as Plexus built inventory for program ramps and longer component lead times. Inventory was $654.6 million versus $564.1 million a year earlier; cash-cycle days were 70 versus 71.
Year-end debt included $175.0 million of 5.20% senior notes due June 15, 2018 and $108.0 million outstanding on the $300.0 million revolving facility. The company reported compliance with debt covenants. Approximately 95.8% of cash was held outside the U.S. The balance sheet classified $286.9 million of debt and capital-lease obligations as current. The filing’s total debt-obligation figure includes capital leases and differs from debt principal alone.
Business changes and management outlook
- AMER sales fell 12.2% to $1,166.4 million, while APAC sales rose 10.1% to $1,279.3 million and EMEA sales rose 13.1% to $192.8 million. AMER operating income declined; APAC operating income improved substantially. EMEA remained loss-making.
- Healthcare/Life Sciences sales grew 10.1%; Communications sales fell 20.0%. Industrial/Commercial grew 1.8%, and Aerospace/Defense was nearly flat.
- GE represented 12.2% of FY2017 sales; the ten largest customers represented 55.5%. No other customer besides GE exceeded 10% of sales in FY2017.
- Management’s stated financial goals include a 4.7%–5.0% operating margin, 5.0% economic return, and a 12.0% targeted organic revenue growth rate. FY2017 ROIC was 16.2%, economic return 5.7%, and WACC 10.5%; these are non-GAAP measures.
- Management expected an FY2018 effective tax rate of approximately 8%–10% and capital expenditures of approximately $80–$90 million. It intended, absent U.S. tax reform, to refinance the $175.0 million notes due in 2018; financing availability and terms were not assured.
Risks, contingencies and notable items
- Customer forecasts are changeable, and Plexus generally lacks firm long-term purchase commitments. Customer concentration, program disengagements, in-house manufacturing decisions and end-market weakness can affect sales and margins.
- Turnkey operations expose Plexus to inventory risk, component shortages, longer lead times and possible excess or obsolete stock. Customer deposits related to inventory were $106.2 million at year-end.
- International operations and cash are concentrated in APAC, particularly Malaysia; risks include currency, political, regulatory, tax and cash-access developments. A Malaysian tax holiday contributed an estimated $37.5 million of FY2017 tax reductions and expires December 31, 2024, subject to conditions.
- Receivables sold through factoring programs totaled $418.0 million in FY2017, compared with $65.6 million in FY2016. The filing says factoring materially supported receivables cash flows; the program is non-committed. The BTMU facility limit was increased after year-end from $120 million to $160 million.
- Adoption of the new revenue standard was expected in FY2019 and was projected to change recognition for a significant portion of revenue from shipment-based recognition to recognition over time as production occurs. The company anticipated contract assets to rise with a corresponding reduction in inventory; the financial-statement impact could be material.
- Ordinary-course litigation was not expected by management to have a material adverse effect. PwC issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether customer and program ramps can offset further Communications declines and AMER weakness, and whether margin improvement is sustainable.
- Inventory growth, component availability, customer deposits and the extent to which operating cash flow depends on receivables factoring.
- Completion and terms of refinancing the 2018 senior notes, as well as liquidity available in the U.S. given the offshore concentration of cash.
- Conditions and duration of the Malaysian tax holiday, potential tax-law changes, and realizability of deferred tax assets.
- Implementation costs, timing and balance-sheet effects of the FY2019 revenue-recognition standard and planned capital spending.