Plexus Corp. — FY2011 Form 10-K
Business and period: Plexus provides electronic manufacturing services and product-design, supply-chain, fulfillment, and support services to more than 130 customers. This annual report covers the fiscal year ended October 1, 2011; fiscal 2011 comprised 52 weeks. Fourth-quarter figures are also summarized below.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $2,231.2 million | $2,013.4 million |
| Gross profit / gross margin | $214.7 million / 9.6% | $206.9 million / 10.3% |
| Operating income / margin | $101.2 million / 4.5% | $99.7 million / 4.9% |
| Net income | $89.3 million | $89.5 million |
| Diluted EPS | $2.30 | $2.19 |
| Cash from operations | $161.7 million | $2.0 million |
| Capital expenditures | $74.1 million | $74.7 million |
| Working capital | $553.9 million | $523.5 million |
| Cash and cash equivalents | $242.1 million | $188.2 million |
| Long-term debt and capital leases | $270.3 million | $112.5 million |
| Shareholders’ equity | $558.9 million | $651.9 million |
Fourth-quarter FY2011 net sales were $538.1 million, gross profit $50.3 million, net income $18.3 million, and diluted EPS $0.52. In the prior-year quarter, sales were $555.6 million, gross profit $56.4 million, net income $26.6 million, and diluted EPS $0.65.
Material changes and management commentary
- Annual sales increased 10.8%, led by industrial/commercial growth, higher demand from Juniper Networks, and gains in medical and defense/security/aerospace. Wireless infrastructure sales declined; two acquired customers substantially disengaged during FY2011.
- Gross margin fell 0.7 percentage points. Management cited customer mix, higher fixed manufacturing costs and depreciation, and the nonrecurrence of a $3.2 million litigation settlement benefit recorded in FY2010.
- Net income was nearly unchanged, while diluted EPS rose 5.0%, principally because share repurchases reduced average shares outstanding. FY2011 effective tax rate was 3.1%, versus 1.0% in FY2010; the company expects approximately 8%–10% for FY2012.
- Operating cash flow rebounded from FY2010’s $2.0 million, primarily through working-capital improvement. Inventory declined $36.6 million, inventory turns improved to 4.3 from 4.1, and days inventory decreased to 85 from 90.
- After-tax ROIC declined to 15.6% from 19.5%. The company’s stated goal is ROIC 500 basis points above WACC; its estimated WACC was 12.5% at FY2011 year-end.
Outlook, risks, and unusual items
- Management estimated FY2012 capital expenditures of $90–$95 million, including planned capacity additions in Penang, Malaysia, and Xiamen, China; a larger Romania facility was also anticipated. The filing provides no clear numerical FY2012 revenue or earnings guidance.
- Cash requirements were expected to be met over the next 12 months using operating cash flow, cash, the credit facility, and leasing. The company reported $100 million available under its revolving facility, subject to covenants, and was compliant with debt covenants at year-end.
- FY2011 financing included $175 million of 5.20% senior notes due 2018, issued to support a $200 million share-repurchase authorization. The program was completed in August 2011: 6.3 million shares repurchased at a weighted-average price of $31.69.
- Key risks include customer and sector concentration (Juniper was 17% of sales; the ten largest customers were 55%), limited order visibility and cancellable forecasts, component shortages and price increases, turnkey inventory exposure, global economic and currency risks, and execution costs from expansion and new programs.
- Supply-chain disruptions linked to Japan’s earthquake and tsunami and Thailand’s floods were noted; the company said it had not yet experienced material adverse effects but the impacts were uncertain. A U.S. Customs import-compliance audit remained pending final duty and fee determination; a previously recorded accrual was described as immaterial, and management did not expect a material adverse effect.
- Tax holidays in Malaysia and Xiamen reduced FY2011 tax by approximately $21.7 million. Management noted deferred-tax-asset realizability risk if U.S. operations continue to generate losses. The FY2010 $3.2 million litigation settlement benefit did not recur; FY2011 also included a $0.9 million supplier settlement recorded in selling and administrative expenses.
Important facts for investors to verify
- Whether sales growth and expansion investments translate into improved margins and ROIC, particularly given underutilized AMER facilities and EMEA start-up costs.
- Customer concentration, Juniper demand, and the continuing effects of the two customer disengagements and sector mix shifts.
- Cash conversion and inventory exposure, including customer deposits and recovery of excess or obsolete inventory.
- Debt maturity, covenant headroom, financing costs, and the effect of the completed share repurchase program on leverage and per-share results.
- FY2012 tax-rate assumptions, the status of U.S. deferred tax assets and tax examinations, and the final outcome of the CBP import audit.