Plexus Corp. — Fiscal 2014 Form 10-K
Reporting period: Fiscal year ended September 27, 2014; fiscal Q4 was the three months ended that date. Unless noted otherwise, financial amounts are U.S. dollars. Plexus provides design, engineering, manufacturing, fulfillment and aftermarket services to electronics companies, specializing in mid-to-low-volume, higher-complexity products.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $2,378.2 million | $2,228.0 million | +6.7% |
| Gross profit / margin | $225.6 million / 9.5% | $213.2 million / 9.6% | Profit +5.8%; margin -0.1 percentage point |
| Operating income / margin | $100.6 million / 4.2% | $96.6 million / 4.3% | Income +4.1%; margin -0.1 point |
| Net income | $87.2 million | $82.3 million | +6.0% |
| Diluted EPS | $2.52 | $2.36 | +6.8% |
| Cash from operations | $88.4 million | $207.6 million | Down $119.2 million |
| Capital expenditures / free cash flow | $65.3 million / $23.1 million | $108.1 million / $99.5 million | FCF down $76.4 million |
Fiscal Q4: Sales were $666.2 million versus $567.7 million in Q4 2013; gross profit was $62.6 million versus $54.5 million; net income was $26.5 million versus $24.5 million; and diluted EPS was $0.77 versus $0.71. Q4 sales rose about 17.4% year over year.
Liquidity and debt: Year-end cash and cash equivalents were $346.6 million, working capital was $683.5 million, and total assets were $1.61 billion. Balance-sheet long-term debt and capital lease obligations, net of current portion, were $262.0 million; current debt and lease obligations were $4.4 million. The company had $75 million drawn on its $235 million revolving credit facility and $175 million of 5.20% senior notes due 2018. It reported compliance with debt covenants. About 90.9% of cash was held outside the U.S.; management intends to permanently reinvest those funds, and repatriation could trigger additional taxes.
Material changes and unusual items
- Sales growth was led by Healthcare/Life Sciences, up $134.1 million (23.8%), and increases in Industrial/Commercial and Defense/Security/Aerospace. Networking/Communications sales fell $63.8 million, notwithstanding new program ramps that partly offset the exit of Juniper.
- Juniper’s disengagement created a $282.6 million year-over-year sales headwind in fiscal 2014. Arris and GE represented 12.5% and 11.2% of sales, respectively; the ten largest customers together accounted for 55.1%.
- Operating income included $11.3 million of restructuring and impairment charges associated mainly with the Fox Cities, Wisconsin facility consolidation and the move from Juarez, Mexico, to Guadalajara. Management expected another $1.5–$1.8 million of charges in Q1 fiscal 2015 for the Juarez closure.
- Operating cash flow fell substantially, principally as higher sales drove increased inventory and receivables. Inventory rose to $526.0 million from $404.0 million; inventory days increased to 80 from 72, and the annualized cash cycle lengthened to 56 days from 53.
- The reported effective tax rate was 6.5%, including a $7.9 million increase in valuation allowance for deferred tax assets in certain AMER and EMEA jurisdictions. APAC tax holidays reduced tax by about $24.1 million in FY2014. Tax benefits and the geographic mix of earnings materially affect reported net income.
Outlook, risks and contingencies
- Management expected a fiscal 2015 effective tax rate of approximately 8%–10% and capital expenditures of approximately $50 million. Its stated strategic targets include 12% organic revenue growth, a 5.0% operating margin and ROIC 500 basis points above WACC; these are targets, not a specific near-term sales or earnings forecast.
- Key risks include customer concentration and limited firm long-term commitments, forecast changes or cancellations, program start-up and transfer costs, price and product-mix pressure, inventory obsolescence, component shortages, competition, foreign currency and international operating risks, and regulatory, cybersecurity and product-liability exposure.
- Management said ordinary-course lawsuits were not expected to have a material adverse effect. The company disclosed customer indemnification and product warranties; the year-end limited warranty liability was $6.8 million. No unresolved SEC staff comments were reported.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also assessed controls as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether new customer programs and sector growth can offset Juniper’s exit and sustain revenue without weakening margins.
- Whether inventory, receivables and the cash cycle normalize, supporting recovery in operating cash flow and free cash flow.
- Execution and remaining costs of the Guadalajara transition and Wisconsin consolidation, including the expected Q1 fiscal 2015 charges.
- Customer concentration, especially the contribution and durability of Arris and GE programs and the 55.1% top-ten sales share.
- Availability and tax consequences of overseas cash, realization of deferred tax assets, and continued eligibility for tax holidays and Wisconsin credits.
- Debt levels, covenant headroom, the facility lease financing obligations, and whether announced capital spending and share repurchases remain consistent with liquidity needs.