Plexus Corp. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 28, 2013; fiscal 2012 ended September 29, 2012. Plexus provides electronics manufacturing and related engineering, supply-chain, fulfillment and sustaining services, focused on mid-to-low-volume, higher-complexity products.
Financial performance
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Net sales | $2,228.0 million | $2,306.7 million | Down 3.4% |
| Gross profit / margin | $213.2 million / 9.6% | $219.9 million / 9.5% | Gross profit down 3.1%; margin up 0.1 percentage point |
| Operating income / margin | $96.6 million / 4.3% | $104.2 million / 4.5% | Operating income down $7.5 million |
| Net income | $82.3 million | $62.1 million | Increase largely reflects lower tax valuation-allowance expense in FY2013 |
| Diluted EPS | $2.36 | $1.75 | Adjusted for valuation allowances and FY2013 out-of-period tax items: $2.47 vs. $2.43 |
| Operating cash flow / capital expenditures | $207.6 million / $108.1 million | $157.5 million / $63.7 million | Company-defined free cash flow was $99.5 million vs. $93.8 million |
| Cash and working capital | $341.9 million / $607.6 million | $297.6 million / $619.9 million | About 87% of FY2013 cash was held outside the U.S. |
| Debt and capital leases | $261.3 million carrying value | $270.4 million | Includes $75 million term-loan borrowings, $175 million senior notes and capital leases; company reported covenant compliance |
Fourth-quarter FY2013 sales were $567.7 million, compared with $594.8 million in the prior-year quarter. Fourth-quarter net income was $24.5 million versus $0.7 million; the comparison is substantially affected by FY2012’s deferred-tax valuation allowance. FY2013 return on invested capital was 14.0%, down from 15.5% in FY2012 (excluding the FY2012 deferred-tax asset reduction).
Material changes and business developments
- Juniper Networks, which represented 13% of FY2013 sales (16% in FY2012), disengaged during FY2013; Plexus expected no further shipments in FY2014. The top ten customers represented 55% of FY2013 sales.
- Sales fell most in Networking/Communications and Industrial/Commercial, including a $113.6 million decline from a large industrial customer and an $85.3 million decline in Juniper sales. Healthcare/Life Sciences and Defense/Security/Aerospace sales increased.
- Expansion and start-up costs at facilities in Malaysia, China and Romania, unfavorable customer mix and lower sales weighed on results. Higher capital expenditures funded footprint expansion.
- Operating cash flow improved alongside working-capital management: the annualized cash cycle fell to 53 days from 63 days, and inventory declined to $404.0 million from $457.7 million.
Outlook, risks and unusual items
- Management reduced its targeted organic revenue growth rate from 15% to 12% for FY2014 and beyond, citing opportunities in served markets. The company estimated FY2014 capital expenditures of approximately $75 million and an effective tax rate of 8%–10%.
- Consolidation into the new Neenah, Wisconsin facility was expected to generate $3–$4 million of restructuring charges in the first half of FY2014. A new Guadalajara, Mexico facility was expected to be completed in the second half of FY2014.
- FY2013 tax expense included a $7.0 million valuation-allowance increase, including a full allowance on U.K. deferred tax assets after a sales decline and losses. Fourth-quarter out-of-period tax adjustments reduced tax expense by $3.2 million ($0.09 per diluted share); management said the errors were not material to FY2013 or previously issued statements. FY2012 included a $24.1 million valuation allowance.
- Management stated that available cash, operating cash flow and potential credit-facility borrowings should meet liquidity needs for the foreseeable future. Repatriating foreign-held cash could create additional taxes; foreign subsidiary earnings were treated as permanently reinvested.
- Key risks include customer forecast changes and cancellations, customer and sector concentration, new-program start-up costs, inventory and component-supply exposure, pricing pressure, global operations and foreign exchange, regulation, and facility expansion execution. Ordinary-course litigation was not expected by management to materially affect results or financial position.
Investor verification priorities
- Review how much FY2013 earnings and EPS comparisons depend on deferred-tax valuation allowances and the $3.2 million out-of-period tax benefit.
- Assess the revenue and margin consequences of Juniper’s exit and the concentration of sales among the largest customers.
- Verify the location, accessibility and potential tax cost of the substantial overseas cash balance.
- Track FY2014 execution of the Neenah consolidation and Guadalajara expansion, including restructuring charges, capital spending and facility utilization.
- Monitor debt covenants, customer deposits and purchase commitments, as well as management’s 12% organic-growth target and 8%–10% tax-rate expectation.