Plexus Corp. — FY2019 Form 10-K
Business context and period: Plexus provides electronics manufacturing and product-realization services to customers in healthcare/life sciences, industrial/commercial, aerospace/defense and communications. This annual report covers the fiscal year ended September 28, 2019; fiscal Q4 is the three months ended that date.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $3,164.4 million | $2,873.5 million |
| Gross profit / margin | $291.8 million / 9.2% | $257.6 million / 9.0% |
| Operating income / margin | $142.1 million / 4.5% | $118.3 million / 4.1% |
| Net income | $108.6 million | $13.0 million |
| Diluted EPS | $3.50 | $0.38 |
| Cash from operations | $115.3 million | $66.8 million |
| Capital expenditures | $90.6 million | $62.8 million |
| Free cash flow (non-GAAP) | $24.7 million | $4.0 million |
FY2019 sales grew 10.1%. Growth was led by AMER (+17.3%), Aerospace/Defense (+32.2%) and Healthcare/Life Sciences (+17.3%); Communications fell 20.4%. GE contributed 12.4% of sales, and the ten largest customers contributed 54.6%.
FY2019 other expense was $16.1 million, versus $10.7 million. Reported tax expense was $17.3 million and the effective tax rate was 13.8%, compared with $94.6 million and 87.9% in FY2018. The prior-year result included $85.9 million of one-time tax expense from U.S. Tax Reform. FY2019 also included a $10.5 million tax benefit from a permanent-reinvestment assertion, $7.0 million of special tax expense and $1.7 million of restructuring costs.
In Q4 FY2019, sales were $810.2 million, gross profit $77.8 million, net income $36.8 million and diluted EPS $1.23. Q4 FY2018 sales were $771.2 million, gross profit $73.3 million, net income $72.7 million and diluted EPS $2.20; the prior-year quarter included substantial special tax benefits.
Liquidity, debt and capital allocation
Cash and restricted cash totaled $226.3 million at year-end, down from $297.7 million. About 96.8% of cash was held outside the U.S. Total debt obligations were $288.0 million, including $95.0 million drawn on the revolving facility; shareholders’ equity was $865.6 million. The current portion of debt and capital leases was $100.7 million. Management said cash, operating cash flow and available credit should cover anticipated needs for at least 12 months.
The company refinanced its revolving credit facility in May 2019, increasing commitments from $300 million to $350 million and extending maturity to May 2024; lender approval could raise capacity to $600 million. It reported compliance with debt covenants. FY2019 share repurchases totaled $182.1 million. A new $50 million authorization began after completion of the prior program, with $46.7 million remaining at year-end. The company has not paid cash dividends.
Changes, outlook and risks
- Operating margin improved 40 basis points year over year, supported by higher sales, favorable customer mix and the absence of the FY2018 employee bonus. APAC operating income declined $5.7 million amid unfavorable mix and ramp-related fixed costs.
- Return on invested capital was 13.1%, down from 16.1%; economic return was 4.1%, below the company’s 5.0% goal. Management’s longer-term targeted organic revenue growth rate is 12%; this is a strategic target, not a specific FY2020 sales forecast.
- Management expected an FY2020 effective tax rate of approximately 13%–15% and FY2020 capital expenditures of approximately $60–$75 million.
- Topic 606 was adopted at the start of FY2019. Approximately 90% of FY2019 revenue was recognized over time as production or services occurred. Adoption increased opening retained earnings by $7.8 million and created contract assets; FY2019 reported net income was $1.5 million higher than under the prior method. FY2018 comparative figures were not restated, limiting direct comparability.
- Subsequent to year-end, a significant customer was removed from the MUFG receivables sale program. $40.4 million of its receivables had been sold and outstanding at year-end; Plexus said it was seeking alternatives to mitigate cash-flow effects.
- Key exposures include customer concentration and nonbinding forecasts, component shortages and inventory obsolescence, start-up and facility-transition costs, international operations and trade/tariff uncertainty, foreign-cash access, tax and regulatory changes, cybersecurity, and product-quality or warranty claims. The Malaysian tax holiday expires December 31, 2024 and depends on continued compliance.
- Management reported no legal proceedings expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control; the report identified over-time revenue recognition as a critical audit matter due to contract eligibility and margin-estimation judgments.
Important facts for investors to verify
- How sales growth, margin improvement and program ramps are developing, especially in communications and APAC.
- Cash conversion and working-capital trends: annualized cash cycle rose to 80 days from 73, and receivables days increased to 55 from 47.
- The cash-flow consequences of losing the significant customer from the MUFG factoring program, and whether replacement arrangements are secured.
- Debt maturities, covenant headroom, variable-rate exposure and the extent to which offshore cash is accessible for U.S. needs.
- Revenue-recognition judgments, contract assets and customer payment rights under Topic 606, alongside reported versus comparable prior-period results.
- Whether the FY2020 tax-rate and capital-spending estimates, and the longer-term growth and economic-return targets, are achieved.