PLEXUS CORP annual report, FY2015

Abrir documento

Plexus Corp. FY2015 Form 10-K Summary

Business context and reporting period

Plexus provides electronics manufacturing and related design, commercialization, fulfillment and aftermarket services, focused on mid-to-low-volume, higher-complexity products. It serves Networking/Communications, Healthcare/Life Sciences, Industrial/Commercial, and Defense/Security/Aerospace customers. This filing covers the fiscal year ended October 3, 2015; FY2015 included 53 weeks versus 52 weeks in FY2014. Fourth-quarter figures are also noted below.

Financial performance and liquidity

  • FY2015 revenue: $2.654 billion, up 11.6% from $2.378 billion. Growth occurred across all four sectors; Industrial/Commercial and Networking/Communications contributed the largest dollar increases.
  • Profitability: Gross profit was $239.6 million, up 6.2%, while gross margin declined to 9.0% from 9.5%, reflecting lower parts and labor contribution margins. Operating income rose to $115.4 million from $100.6 million; operating margin was 4.3% versus 4.2%. Net income increased 8.2% to $94.3 million, and diluted EPS rose to $2.74 from $2.52.
  • FY2015 Q4: Revenue was $668.7 million versus $666.2 million in FY2014 Q4; gross profit was $59.3 million versus $62.6 million; net income was $23.9 million versus $26.5 million; diluted EPS was $0.70 versus $0.77.
  • Cash flow and investment: Operating cash flow was $76.6 million, down from $88.4 million. Capital expenditures were $35.1 million, down from $65.3 million; company-defined free cash flow was $41.5 million versus $23.1 million. FY2016 capital expenditures were estimated at $35–$40 million.
  • Liquidity and debt: Cash and equivalents were $357.1 million, up from $346.6 million; working capital was $765.4 million. Total debt obligations were $262.8 million, including $75 million drawn on the revolver and $175 million of 5.20% senior notes due 2018. The company reported compliance with credit and note covenants. Revolver capacity increased from $235 million to $265 million in October 2015.
  • Working capital: Inventory was $569.4 million versus $526.0 million, and accounts receivable was $384.7 million versus $324.1 million. The annualized cash cycle lengthened to 66 days from 56 days, driven mainly by higher receivable and inventory days.
  • Returns and capital allocation: ROIC was 14.0%, down from 15.2%, against an 11.0% WACC; management’s stated Economic Return was 3.0%. Plexus repurchased $30 million of stock in FY2015 and authorized another $30 million for FY2016. It has not paid cash dividends.

Material changes versus prior periods

  • FY2015 sales growth followed FY2014 growth and reflected broad sector gains. Industrial/Commercial sales rose 17.5%; Networking/Communications rose 10.8%; Healthcare/Life Sciences rose 7.6%; and Defense/Security/Aerospace rose 11.7%.
  • Despite higher sales, gross margin contracted by 0.5 percentage points. Management cited lower parts and labor contribution margins and ongoing facility investment; operating income also benefited from restructuring charges falling to $1.7 million from $11.3 million.
  • APAC operating income increased to $160.2 million from $135.5 million. AMER operating income declined to $68.6 million from $79.2 million, while EMEA’s operating loss narrowed to $8.1 million from $11.9 million.
  • Net income included a higher reported tax expense of $12.0 million versus $6.1 million. FY2015 included a $17.5 million addition to deferred-tax valuation allowances. APAC tax holidays reduced taxes by approximately $29.9 million in FY2015.
  • Other comprehensive loss was $25.1 million, including foreign-currency translation losses and derivative fair-value changes; total comprehensive income was $69.3 million versus $85.6 million.

Outlook, commentary, risks and unusual items

  • Management said softening in Industrial/Commercial and Networking/Communications began in FY2015 Q4 and was expected to continue through the first half of FY2016. The annual effective tax rate for FY2016 was expected to be approximately 12%–14%.
  • The company’s stated strategic financial objectives include a 5% operating-margin target and a 12% targeted organic revenue growth rate; these are management objectives, not specific FY2016 revenue guidance. The 5% Economic Return goal is measured as ROIC above WACC.
  • After year-end, Plexus announced plans to close its Fremont, California facility and transfer customer programs. The closure affects approximately 200 employees; expected restructuring charges were $3–$5 million by the end of FY2016 Q3.
  • Customer concentration is significant: the top ten customers generated 56.1% of sales; Arris accounted for 12.6% and GE for 10.6%. The company generally lacks firm long-term customer purchase commitments. Demand changes, customer disengagements, start-up costs, component shortages, inventory exposure and competition are key risks.
  • International exposure is material: 86.2% of cash was held outside the U.S., and management intends to permanently reinvest those funds; repatriation could trigger additional taxes. Malaysia is a major operating and cash concentration. Currency, political, regulatory and supply-chain disruptions are also risks.
  • Legal proceedings in the ordinary course were not expected by management to materially affect financial position, results or cash flows. The independent auditor reported fair presentation under GAAP and effective internal control over financial reporting.

Important facts for investors to verify

  • Whether the forecast demand softening occurred and how it affected FY2016 sales, margins and customer programs.
  • Whether facility investments delivered expected efficiency gains, and whether Fremont closure costs and program transfers stayed within the stated range and schedule.
  • Whether the elevated cash cycle and inventory levels converted to cash without excess or obsolete inventory charges.
  • How the FY2015 valuation allowance, continuing losses in certain jurisdictions, tax holidays and foreign cash reinvestment affect future reported taxes and cash availability.
  • Whether customer concentration, especially Arris and GE, and sector mix changed materially; confirm that no significant customer or program disengagements impaired results.
  • Debt maturities, revolver usage, covenant headroom and the effect of repurchases on liquidity and per-share results.