Plexus Corp. — FY2016 Form 10-K
Reporting period: Fiscal year ended October 1, 2016 (52 weeks); fiscal 2015 had 53 weeks. The filing also reports fourth-quarter results. Plexus provides design, engineering, manufacturing, fulfillment and aftermarket services to electronics customers.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $2,556.0 million | $2,654.3 million |
| Gross profit / margin | $227.4 million / 8.9% | $239.6 million / 9.0% |
| Operating income / margin | $99.4 million / 3.9% | $115.4 million / 4.3% |
| Net income | $76.4 million | $94.3 million |
| Diluted EPS | $2.24 | $2.74 |
| Cash from operations | $127.7 million | $76.6 million |
| Capital expenditures | $31.1 million | $35.1 million |
| Free cash flow (non-GAAP) | $96.6 million | $41.5 million |
- At October 1, 2016, cash and cash equivalents were $433.0 million, working capital was $782.9 million, total assets were $1.766 billion and shareholders’ equity was $916.8 million.
- Total debt obligations were $262.5 million, including $75.0 million drawn on the revolving facility and $175.0 million of 5.20% senior notes due June 2018. The company reported compliance with debt covenants.
- Cash from operations improved year over year, while the annual cash cycle lengthened to 71 days from 66, including accounts-receivable days rising to 58 from 53.
- ROIC was 13.8%, versus 14.0%; economic return was 2.8%, versus 3.0% (both non-GAAP). Fiscal 2016 WACC was 11.0%.
Material changes versus prior year
- Sales fell 3.7%, mainly because Networking/Communications revenue declined $247.4 million (29.3%). Industrial/Commercial increased 12.9%; Healthcare/Life Sciences rose 4.0%; Defense/Security/Aerospace rose 8.1%.
- Lower gross profit, higher restructuring charges and foreign-exchange losses contributed to a 19.0% decline in net income. Operating income included $7.0 million of restructuring and other charges and $5.2 million of accelerated CEO-related stock compensation.
- Cash from operations rose by $51.2 million, principally reflecting working-capital movements compared with FY2015; capital spending declined.
- The top ten customers generated 58.8% of sales, up from 56.1%. GE, Micron and Arris each exceeded 10% of FY2016 sales. Micron represented 18.9% of year-end accounts receivable.
Outlook, commentary and risks
- Management estimated FY2017 capital expenditures of $50–$60 million and an effective tax rate of approximately 9%–11%. These are estimates, not a full-year revenue or earnings forecast.
- Management’s stated long-term model includes a 4.7%–5.0% operating-margin target, a 5.0% economic-return goal, and a targeted 12.0% organic revenue growth rate. FY2016 results were below the operating-margin and economic-return targets.
- The board authorized a multi-year share repurchase program of up to $150 million beginning in FY2017, subject to market conditions. The company did not anticipate cash dividends in the foreseeable future.
- Management said existing cash, operating cash flow and available credit were expected to cover liquidity needs for at least the next twelve months. However, 95.7% of year-end cash was held outside the U.S., and access or transfers may be subject to local restrictions or taxes.
- A typhoon affecting the Xiamen facility caused $2.9 million of cost-of-sales losses in FY2016; the filing also identifies inventory-related typhoon losses. Facility closures and transitions included Fremont, California, and partial closure of Livingston, Scotland.
- Key risks include customer and program concentration, short-notice changes or cancellations in customer forecasts, component shortages and excess inventory, start-up and transition costs, foreign exchange and international exposure, tax-holiday and transfer-pricing uncertainty, cybersecurity, regulatory compliance, and product-quality or warranty claims. Brexit implications were described as uncertain.
- The company repatriated $100 million of current-year foreign earnings in FY2016, which management characterized as isolated and not expected to recur in the foreseeable future. An APAC tax holiday is scheduled to expire December 31, 2024 and is conditional on compliance.
- CEO Dean Foate retired in September 2016 and Todd Kelsey succeeded him; Steven Frisch became COO in October 2016.
Important facts for investors to verify
- Whether Networking/Communications declines and customer disengagements stabilize, and whether new program ramps deliver expected volume and margins.
- Progress toward management’s margin, economic-return and organic-growth targets, and the assumptions behind the FY2017 capex and tax-rate estimates.
- Customer concentration and receivables exposure, especially Micron’s 18.9% share of year-end receivables.
- Cash availability outside the U.S., debt maturities—including the $175 million notes due in 2018—and the effect of share repurchases on liquidity.
- The financial and operational effects of the Xiamen typhoon, facility transitions, and the lengthening cash cycle.