RESULTS OF OPERATIONS
Consolidated Performance Summary.
The following table presents selected consolidated financial data (dollars in millions, except per share data):
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Net sales
|
|
$
|
618.8
|
|
|
$
|
667.6
|
|
|
$
|
1,858.2
|
|
|
$
|
1,902.9
|
|
Cost of sales
|
|
557.6
|
|
|
605.1
|
|
|
1,668.9
|
|
|
1,737.1
|
|
Gross profit
|
|
61.2
|
|
|
62.5
|
|
|
189.3
|
|
|
165.8
|
|
Gross margin
|
|
9.9
|
%
|
|
9.4
|
%
|
|
10.2
|
%
|
|
8.7
|
%
|
Operating income
|
|
29.5
|
|
|
30.9
|
|
|
95.9
|
|
|
75.8
|
|
Operating margin
|
|
4.8
|
%
|
|
4.6
|
%
|
|
5.2
|
%
|
|
4.0
|
%
|
Net income
|
|
25.6
|
|
|
26.1
|
|
|
83.1
|
|
|
57.3
|
|
Diluted earnings per share
|
|
$
|
0.74
|
|
|
$
|
0.76
|
|
|
$
|
2.40
|
|
|
$
|
1.68
|
|
Return on invested capital*
|
|
|
|
|
|
16.1
|
%
|
|
13.0
|
%
|
Economic return*
|
|
|
|
|
|
5.6
|
%
|
|
2.0
|
%
|
* Non-GAAP metric; refer to "Return on Invested Capital ("ROIC") and Economic Return" below for more information and Exhibit 99.1 for a reconciliation.
|
Net sales.
For the three months ended
July 1, 2017
, net sales
decreased
$48.8 million
, or
7.3%
, as compared to the three months ended
July 2, 2016
. For the
nine
months ended
July 1, 2017
, net sales
decreased
$44.7 million
, or
2.3%
, as compared to the
nine
months ended
July 2, 2016
.
Net sales are analyzed by management by geographic segment, which reflects the Company's reportable segments, and by market sector. Management measures operational performance and allocates resources on a geographic segment basis. The Company’s global business development strategy is based on our targeted market sectors.
A discussion of net sales by reportable segment is presented below (in millions):
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Net sales:
|
|
|
|
|
|
|
|
AMER
|
$
|
265.2
|
|
|
$
|
359.4
|
|
|
$
|
851.9
|
|
|
$
|
994.8
|
|
APAC
|
326.0
|
|
|
292.6
|
|
|
945.7
|
|
|
862.5
|
|
EMEA
|
53.1
|
|
|
41.0
|
|
|
137.6
|
|
|
126.8
|
|
Elimination of inter-segment sales
|
(25.5
|
)
|
|
(25.4
|
)
|
|
(77.0
|
)
|
|
(81.2
|
)
|
Total net sales
|
$
|
618.8
|
|
|
$
|
667.6
|
|
|
$
|
1,858.2
|
|
|
$
|
1,902.9
|
|
AMER.
Net sales for the three months ended
July 1, 2017
decreased
$94.2 million
, or
26.2%
, as compared to the three months ended
July 2, 2016
. The reduction in net sales was driven by overall decreased customer end-market demand as well as decreases of $7.2 million from customer disengagements, $6.6 million due to a customer's decision to manufacture product internally, $4.7 million due to manufacturing transfers to our APAC segment and $4.4 million that resulted from end-of-life products. Partially offsetting these decreases were net sales increases of $15.4 million from the ramp of new programs for existing customers and $3.8 million from the ramp of production for new customers.
During the
nine
months ended
July 1, 2017
net sales
decreased
$142.9 million
, or
14.4%
, as compared to the
nine
months ended
July 2, 2016
. The reduction in net sales was driven by overall decreased customer end-market demand as well as decreases of $38.4 million from customer disengagements, $21.5 million due to manufacturing transfers to our APAC and EMEA segments, $21.0 million due to a customer's decision to manufacture product internally, $9.6 million from end-of-life products and $5.8 million that resulted from a program disengagement. Partially offsetting these decreases were net sales increases of $35.9 million from the ramp of new programs for existing customers and $8.6 million from the ramp of production for new customers.
APAC.
Net sales for the three months ended
July 1, 2017
increased
$33.4 million, or
11.4%
, as compared to the three months ended
July 2, 2016
. The increase in net sales was primarily due to a $38.8 million increase due to the ramp of new programs
for existing customers, a $4.7 million increase due to manufacturing transfers from our AMER segment and net increased customer end-market demand. These increases were partially offset by decreases of $5.2 million due to the consolidation of a customer's business, $4.9 million due to a program disengagement and $4.9 million from an end-of-life product.
During the
nine
months ended
July 1, 2017
net sales
increased
$83.2 million
, or
9.6%
, as compared to the
nine
months ended
July 2, 2016
. The increase in net sales was primarily due to a $93.5 million increase due to the ramp of new programs for existing customers, net increased customer end-market demand and $19.4 million due to manufacturing transfers from our AMER segment. These increases were partially offset by decreases of $52.3 million due to a program disengagement, $30.2 million due to the consolidation of a customer's business and $10.5 million that resulted from an end-of-life product.
EMEA.
Net sales for the three months ended
July 1, 2017
increased
$12.1 million
, or 29.5%, as compared to the three months ended
July 2, 2016
. The increase in net sales was primarily attributable to a $9.4 million increase due to the ramp of new programs for existing customers and overall increased customer end-market demand.
During the
nine
months ended
July 1, 2017
net sales
increased
$10.8 million
, or
8.5%
, as compared to the
nine
months ended
July 2, 2016
. The increase in net sales was primarily attributable to a $20.5 million increase due to the ramp of new programs for existing customers and $2.1 million due to manufacturing transfers from our AMER segment. Partially offsetting the increases was net decreased customer end-market demand.
Our net sales by market sector for the indicated periods were as follows (in millions):
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|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Market Sector
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Healthcare/Life Sciences
|
|
$
|
209.6
|
|
|
$
|
206.8
|
|
|
$
|
625.5
|
|
|
$
|
588.0
|
|
Industrial/Commercial
|
|
201.5
|
|
|
202.1
|
|
|
599.1
|
|
|
543.7
|
|
Communications
|
|
98.7
|
|
|
155.6
|
|
|
338.3
|
|
|
469.0
|
|
Defense/Security/Aerospace
|
|
109.0
|
|
|
103.1
|
|
|
295.3
|
|
|
302.2
|
|
Total net sales
|
|
$
|
618.8
|
|
|
$
|
667.6
|
|
|
$
|
1,858.2
|
|
|
$
|
1,902.9
|
|
Healthcare/Life Sciences.
Net sales in the Healthcare/Life Sciences sector
increased
$2.8 million
for the three months ended
July 1, 2017
as compared to the three months ended
July 2, 2016
. The increase was primarily driven by increases in net sales of $6.7 million due to the ramp of new programs for existing customers and net increased end-market demand. Partially offsetting the increases was a $6.6 million decrease in net sales due to a customer's decision to manufacture product internally.
During the
nine
months ended
July 1, 2017
net sales in the Healthcare/Life Sciences sector
increased
$37.5 million
as compared to the
nine
months ended
July 2, 2016
. The increase was primarily driven by increases in net sales of $39.2 million due to the ramp of new programs for existing customers and $2.5 million from the ramp of production for new customers, as well as net increased end-market demand. Partially offsetting the increases was a $21.6 million decrease in net sales due to a customer's decision to manufacture product internally.
Industrial/Commercial.
Net sales in the Industrial/Commercial sector
decreased
$0.6 million
for the three months ended
July 1, 2017
as compared to the three months ended
July 2, 2016
. The decrease was primarily driven by net decreased end-market demand and decreases in net sales of $5.2 million due to the consolidation of a customer's business. Mostly offsetting the decreases were increases in net sales of $45.8 million due to the ramp of new programs for existing customers.
During the
nine
months ended
July 1, 2017
net sales in the Industrial/Commercial sector
increased
$55.4 million
as compared to the
nine
months ended
July 2, 2016
. The increase was primarily driven by increases in net sales of $97.4 million due to the ramp of new programs for existing customers and net increased end-market demand. Partially offsetting the increases were decreases in net sales of $30.2 million due to the consolidation of a customer's business and $16.3 million related to a customer disengagement.
Communications.
Net sales in the Communications sector
decreased
$56.9 million
for the three months ended
July 1, 2017
as compared to the three months ended
July 2, 2016
. The reduction in net sales was primarily driven by net decreased end-market demand, a $7.1 million decrease due to a customer disengagement, a $4.9 million decrease that resulted from an end-of-life product and a $4.8 million decrease due to a program disengagement. Partially offsetting the decreases was a $6.4 million increase in net sales due to the ramp of production of new products for existing customers.
During the
nine
months ended
July 1, 2017
net sales in the Communications sector
decreased
$130.7 million
as compared to the
nine
months ended
July 2, 2016
. The reduction in net sales was primarily driven by a $53.2 million decrease in net sales
due to a program disengagement, overall net decreased end-market demand, a $24.7 million decrease due to customer disengagements and a $13.5 million decrease that resulted from end-of-life products. Partially offsetting the decreases was a $13.1 million increase in net sales due to the ramp of production of new products for existing customers.
Defense/Security/Aerospace.
Net sales in the Defense/Security/Aerospace sector
increased
$5.9 million
for the three months ended
July 1, 2017
as compared to the three months ended
July 2, 2016
. The increase was primarily driven by increases in net sales of $7.6 million due to the ramp of new programs for existing customers and $3.7 million from the ramp of production for new customers. Partially offsetting the increases was a $4.3 million decrease in net sales that resulted from end-of-life products.
During the
nine
months ended
July 1, 2017
net sales in the Defense/Security/Aerospace sector
decreased
$6.9 million
as compared to the
nine
months ended
July 2, 2016
. The decrease was primarily attributable to net decreased customer end-market demand, a $6.4 million decrease from a program disengagement and a $6.1 million decrease that resulted from end-of-life products. Partially offsetting the decreases was an $8.4 million increase in net sales that resulted from the ramp of production for new customers and a $6.1 million increase due to the ramp of production of new products for existing customers.
Cost of sales.
For the three months ended
July 1, 2017
, cost of sales
decreased
$47.5 million
, or 7.8%, as compared to the three months ended
July 2, 2016
. As compared to the prior year period, the percentage decrease in cost of sales was greater than the 7.3% decrease in net sales primarily due to supply chain productivity initiatives and a positive shift in customer mix.
For the
nine
months ended
July 1, 2017
, cost of sales
decreased
$68.2 million
, or 3.9%, as compared to the
nine
months ended
July 2, 2016
. As compared to the prior year period, the percentage decrease in cost of sales was greater than the 2.3% decrease in net sales primarily due to supply chain productivity initiatives, a positive shift in customer mix and decreased warranty and inventory obsolescence expenses, which resulted from our continued focus on quality and improved inventory management.
Cost of sales is comprised primarily of material and component costs, labor costs, and overhead. For both the three and
nine
months ended
July 1, 2017
and
July 2, 2016
, approximately 89% of the total cost of sales was variable in nature and fluctuated with sales volumes. Of this amount, approximately 91% of the variable costs for both periods was related to material and component costs. As a result of using a cost-plus markup pricing arrangement with our customers, changes in costs typically result in corresponding changes in price, which generally result in an immaterial impact on gross profit.
Gross profit.
For the three months ended
July 1, 2017
, gross profit
decreased
$1.3 million
, or
2.1%
, as compared to the three months ended
July 2, 2016
. Gross margin
increased
50 basis points as compared to the three months ended
July 2, 2016
. The decrease in gross profit was due primarily to the decrease in net sales. The primary driver of the increase in gross margin was the larger percentage decrease in cost of sales as compared to the decrease in net sales, driven by the factors previously discussed, which was partially offset by the decrease in net sales.
Gross profit for the
nine
months ended
July 1, 2017
,
increased
$23.5 million
, or
14.2%
, as compared to the
nine
months ended
July 2, 2016
. Gross margin
increased
150 basis points as compared to the
nine
months ended
July 2, 2016
. The primary driver of the increase in gross profit and gross margin was the larger percentage decrease in cost of sales as compared to the decrease in net sales, driven by the factors previously discussed.
Operating income.
For the three months ended
July 1, 2017
, operating income
decreased
$1.4 million
, or
4.5%
, as compared to the three months ended
July 2, 2016
, primarily due to the decrease in gross profit described above and a
$1.9 million
increase in selling and administrative (“S&A”) expenses as compared to the prior year period, primarily driven by a $0.8 million increase in share-based compensation expense. These decreases were partially offset by a
$1.8 million
decrease in restructuring and other charges.
For the
nine
months ended
July 1, 2017
, operating income
increased
$20.1 million
, or 26.6%, as compared to the
nine
months ended
July 2, 2016
, primarily due to the increase in gross profit described above and a
$5.2 million
decrease in restructuring and other charges. Partially offsetting the increases was an
$8.6 million
increase in S&A expenses as compared to the prior year, primarily driven by increases of $3.7 million in variable compensation expense and $1.6 million in share-based compensation expense.
A discussion of operating income (loss) by reportable segment is presented below (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Operating income (loss):
|
|
|
|
|
|
|
|
AMER
|
$
|
7.4
|
|
|
$
|
22.1
|
|
|
$
|
30.4
|
|
|
$
|
45.9
|
|
APAC
|
49.8
|
|
|
38.3
|
|
|
148.5
|
|
|
110.1
|
|
EMEA
|
(0.7
|
)
|
|
(1.6
|
)
|
|
(4.2
|
)
|
|
(3.0
|
)
|
Corporate expenses and other costs
|
(27.0
|
)
|
|
(27.9
|
)
|
|
(78.8
|
)
|
|
(77.2
|
)
|
Total operating income
|
$
|
29.5
|
|
|
$
|
30.9
|
|
|
$
|
95.9
|
|
|
$
|
75.8
|
|
AMER.
Operating income for the three and nine months ended
July 1, 2017
decreased
$14.7 million
and
$15.5 million
, respectively, as compared to the three and nine months ended
July 2, 2016
. The decreases in operating income were primarily due to decreased net sales and a negative shift in customer mix.
APAC.
Operating income for the three and nine months ended
July 1, 2017
increased
by
$11.5 million
and
$38.4 million
, respectively, as compared to the three and nine months ended
July 2, 2016
, primarily from the increase in net sales, higher leverage of fixed costs, a net positive shift in customer mix and supply chain productivity initiatives.
EMEA.
Operating loss for the three months ended
July 1, 2017
improved by $0.9 million as compared to the three months ended
July 2, 2016
, primarily due to the increase in net sales.
Operating loss for the
nine
months ended
July 1, 2017
increased by $1.2 million as compared to the nine months ended
July 2, 2016
, primarily due to a negative shift in customer mix, partially offset by the increase in net sales.
Other income (expense).
Other expense
decreased
by
$0.1 million
for the three months ended
July 1, 2017
as compared to the three months ended
July 2, 2016
.
Other expense
decreased
by
$5.1 million
for the
nine
months ended
July 1, 2017
as compared to the
nine
months ended
July 2, 2016
. The change was primarily due to foreign exchange volatility, primarily in the APAC segment, which was a $2.5 million loss for the
nine
months ended
July 2, 2016
, and a $2.2 million gain for the
nine
months ended
July 1, 2017
.
Income taxes.
Effective income tax rates for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
Effective tax rate
|
6.5
|
%
|
|
9.1
|
%
|
|
8.5
|
%
|
|
12.6
|
%
|
Income tax expense for the three months ended
July 1, 2017
and
July 2, 2016
was
$1.8 million
and
$2.6 million
, respectively. Income tax expense for the
nine
months ended
July 1, 2017
and
July 2, 2016
was
$7.8 million
and
$8.2 million
, respectively. The decrease in the effective tax rate for the
three and nine
months ended
July 1, 2017
compared to the
three and nine
months ended
July 2, 2016
, was due in part to an increase in pretax earnings in lower tax jurisdictions and a $1.5 million benefit related to incremental deductible expenses in our APAC segment.
Our effective tax rate varies from the U.S. statutory rate of 35.0% primarily due to the geographic distribution of worldwide earnings as well as a tax holiday granted to a subsidiary within our APAC segment, where we derive a significant portion of our earnings. In addition, our effective tax rate may be impacted by changes in tax laws, disputes with taxing authorities, tax planning activities, adjustments to uncertain tax positions and changes in valuation allowances.
The estimated effective income tax rate for fiscal 2017 is expected to be between 8.0% and 9.0%.
Net income.
Net income for the three months ended
July 1, 2017
decreased
$0.5 million
as compared to the three months ended
July 2, 2016
, primarily due to the decrease in operating income discussed above.
Net income for the
nine
months ended
July 1, 2017
increased
$25.8 million
as compared to the
nine
months ended
July 2, 2016
, primarily due to the increase in operating income and decrease in other expense discussed above.
Diluted earnings per share.
Diluted earnings per share for the three months ended
July 1, 2017
was
$0.74
, a
$0.02
decrease from the three months ended
July 2, 2016
. The decrease in diluted earnings per share was primarily the result of the decrease in net income and an increase in the number of dilutive share-based awards outstanding.
Diluted earnings per share for the
nine
months ended
July 1, 2017
was
$2.40
, a
$0.72
increase from the
nine
months ended
July 2, 2016
. The increase in diluted earnings per share was primarily the result of the increase in net income.
Return on Invested Capital (“ROIC”) and Economic Return.
We use a financial model that is aligned with our business strategy and includes a ROIC goal of 500 basis points over our weighted average cost of capital (“WACC”), which we refer to as “Economic Return,” and a 4.7% to 5.0% operating margin target. Our primary focus is on our Economic Return goal of 5.0%, which is designed to create shareholder value and generate sufficient cash to self-fund our targeted organic revenue growth rate of 12.0%. ROIC and Economic Return are non-GAAP financial measures.
Non-GAAP financial measures, including ROIC and Economic Return, are used for internal management goals and decision making because such measures provide management and investors additional insight into financial performance. In particular, we provide ROIC and Economic Return because we believe they offer insight into the metrics that are driving management decisions because we view ROIC and Economic Return as important measures in evaluating the efficiency and effectiveness of our long-term capital requirements. We also use a derivative measure of ROIC as a performance criteria in determining certain elements of compensation, and certain compensation incentives are based on Economic Return.
We define ROIC as tax-effected operating income before restructuring and other charges divided by average invested capital over a rolling four-quarter period for the fiscal third quarter. Invested capital is defined as equity plus debt, less cash and cash equivalents. Other companies may not define or calculate ROIC in the same way. ROIC and other non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
We review our internal calculation of WACC annually, and our estimated WACC is 10.5% for fiscal 2017. By exercising discipline to generate ROIC in excess of our WACC, our goal is to create value for our shareholders. ROIC was
16.1%
and
13.0%
for the
nine
months ended
July 1, 2017
and
July 2, 2016
, respectively.
For a reconciliation of ROIC, Economic Return and adjusted operating income (tax effected) to our financial statements that were prepared using GAAP, see Exhibit 99.1 to this quarterly report on Form 10-Q, which exhibit is incorporated herein by reference.
Refer to the table below, which includes the calculation of ROIC and Economic Return for the indicated periods (dollars in millions):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Annualized operating income (tax effected)
|
$
|
117,690
|
|
|
$
|
96,141
|
|
Average invested capital
|
730,286
|
|
|
738,397
|
|
After-tax ROIC
|
16.1
|
%
|
|
13.0
|
%
|
WACC
|
10.5
|
%
|
|
11.0
|
%
|
Economic Return
|
5.6
|
%
|
|
2.0
|
%
|
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and restricted cash were
$520.0 million
as of
July 1, 2017
, and
$433.0 million
as of
October 1, 2016
.
As of
July 1, 2017
, approximately 98.2% of our cash balance was held outside of the U.S. by our foreign subsidiaries. While our intent is to permanently reinvest the funds held in these countries, we regularly review and evaluate that strategy, particularly as the percentage of our cash balance held outside the U.S. has increased. For example, during fiscal 2016, the Company repatriated $100.0 million of that fiscal year's foreign earnings from the APAC region to the U.S., which had no income statement impact due to U.S. net operating losses, the use of U.S. tax credits and the reversal of the related valuation allowance. The Company does not have a history of repatriating foreign earnings by way of a taxable dividend and considers the fiscal 2016 remittance to be an isolated occurrence. Without tax reform, the Company does not anticipate a similar repatriation in the foreseeable future. Currently, we believe that cash held in the U.S., together with cash available under our Credit Facility, will be sufficient to meet our U.S. liquidity needs for the next twelve months and for the foreseeable future.
Cash Flows.
The table below provides a summary of cash flows for the periods presented, excluding the effect of exchange rates on cash and cash equivalents and restricted cash (in millions):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Cash provided by operating activities
|
$
|
121.9
|
|
|
$
|
122.6
|
|
Cash used in investing activities
|
$
|
(24.0
|
)
|
|
$
|
(23.7
|
)
|
Cash used in financing activities
|
$
|
(10.2
|
)
|
|
$
|
(18.5
|
)
|
Operating Activities.
Cash flows provided by operating activities during the
nine
months ended
July 1, 2017
was
$121.9 million
, a
$0.7 million
decrease as compared to the
nine
months ended
July 2, 2016
. As compared to the prior year, the decrease in cash flows provided by operating activities was primarily driven by a
$25.9 million
unfavorable change in working capital, which was substantially offset by the increase in net income.
Working capital cash flows declined as compared to the prior year primarily due to a
$76.5 million
increase in cash used for inventory driven by increased inventory levels to support the ramp of new customer programs, a
$24.6 million
increase in cash paid for accounts payable due to the timing of payments, a
$10.4 million
decrease in customer deposit cash flows driven by a significant deposit received from one customer in the prior year and a
$10.3 million
increase in cash used for other current and noncurrent assets cash flows resulting from increases in prepaid arrangements. Partially offsetting the increased use of cash were improvements in working capital cash flows of
$93.4 million
from accounts receivable cash flows, which resulted primarily from increased factoring activity discussed below.
The following table shows a summary of cash cycle days for the periods indicated (in days):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Days in accounts receivable
|
47
|
|
|
51
|
|
Days in inventory
|
107
|
|
|
87
|
|
Days in accounts payable
|
(65
|
)
|
|
(62
|
)
|
Days in cash deposits
|
(13
|
)
|
|
(13
|
)
|
Annualized cash cycle
|
76
|
|
|
63
|
|
We calculate days in accounts receivable as accounts receivable at the end of the respective quarter divided by annualized sales for the respective quarter by day. We calculate days in inventory, accounts payable, and cash deposits as each balance sheet line item at the end of the respective quarter divided by annualized cost of sales for the respective quarter by day. We calculate annualized cash cycle as the sum of days in accounts receivable and days in inventory, less days in accounts payable and days in cash deposits.
As of
July 1, 2017
, annualized cash cycle days
increased
by
13
days
as compared to
July 2, 2016
due to the following factors:
Days in accounts receivable for the three months ended
July 1, 2017
decreased
4
days
as compared to the three months ended
July 2, 2016
, due to a
$102.6 million
increase in accounts receivable sold under factoring programs, partially offset by an increase in accounts receivable that resulted from a shift in customer mix and an increase in payment terms with certain customers.
Days in inventory for the three months ended
July 1, 2017
increased
by
20
days
compared to the three months ended
July 2, 2016
, driven by the anticipated revenue growth in the fiscal fourth quarter. We are also experiencing longer lead times for certain components. In order to maintain a high level of customer service, we are procuring components earlier, which has led to the anticipated short-term increase in inventory. We anticipate a meaningful reduction in inventory in the fiscal fourth quarter and a return to more normalized inventory levels in fiscal 2018 as our supply chain solutions for these new programs mature, but we cannot provide any assurances.
Days in accounts payable for the three months ended
July 1, 2017
increased
by
three
days
compared to the three months ended
July 2, 2016
, primarily driven by increased purchasing activity to support new program ramps.
Days in cash deposits for the three months ended
July 1, 2017
, remained flat compared to the three months ended
July 2, 2016
.
Free Cash Flow.
We define free cash flow (“FCF”), a non-GAAP financial measure, as cash flows provided by operations less capital expenditures. FCF for the
nine
months ended
July 1, 2017
was
$97.5 million
, a
$1.3 million
decrease from the
$98.8 million
of free cash flow for the
nine
months ended
July 2, 2016
.
Non-GAAP financial measures, including FCF, are used for internal management assessments because such measures provide additional insight to investors into ongoing financial performance. In particular, we provide FCF because we believe it offers insight into the metrics that are driving management decisions. We view FCF as an important financial metric as it demonstrates our ability to generate cash and can allow us to pursue opportunities that enhance shareholder value. FCF is a non-GAAP financial measure that should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance with GAAP.
A reconciliation of FCF to our financial statements that were prepared using GAAP follows (in millions):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
July 1,
2017
|
|
July 2,
2016
|
Cash flows provided by operating activities
|
$
|
121.9
|
|
|
$
|
122.6
|
|
Payments for property, plant and equipment
|
(24.4
|
)
|
|
(23.8
|
)
|
Free cash flow
|
$
|
97.5
|
|
|
$
|
98.8
|
|
Investing Activities.
Cash flows used in investing activities totaled
$24.0 million
for the
nine
months ended
July 1, 2017
, a decrease of
$0.3 million
as compared to
$23.7 million
for the
nine
months ended
July 2, 2016
.
We estimate funded capital expenditures for fiscal 2017 to be approximately $45.0 to $50.0 million, of which $24.4 million was utilized through the first nine months of fiscal 2017. The remaining fiscal 2017 capital expenditures are anticipated to be used primarily to support new capabilities, new program ramps, and to replace or refresh older equipment. We believe our estimated capital expenditures will continue to be funded from cash flows provided by operations, and may be supplemented by short-term borrowings and available cash, if required.
Financing Activities.
Cash flows used by financing activities totaled
$10.2 million
for the
nine
months ended
July 1, 2017
as compared to
$18.5 million
for the
nine
months ended
July 2, 2016
. The
$8.3 million
decrease in cash flows used by financing activities for the
nine
months ended
July 1, 2017
, as compared to the
nine
months ended
July 2, 2016
, was primarily driven by a net
$13.3 million
increase in borrowings, which was partially offset by a
$3.6 million
increase in payments related to tax withholding for share-based compensation.
On June 6, 2016, the Board of Directors approved a multi-year stock repurchase program under which the Company is authorized to repurchase up to $150.0 million of its common stock, subject to market conditions and other considerations. During the
nine
months ended
July 1, 2017
, the Company repurchased
457,702
shares for approximately
$23.9 million
at an average price of
$52.12
per share.
On August 20, 2015, the Board of Directors approved a stock repurchase program under which the Company was authorized to repurchase up to
$30.0 million
of its common stock in fiscal 2016. During the
nine
months ended
July 2, 2016
, the Company repurchased
606,236
shares for approximately
$22.9 million
at an average price of
$37.80
per share. The Company completed this stock repurchase program by the end of fiscal 2016.
All shares repurchased under the repurchase programs were recorded as treasury stock.
The Company has a senior unsecured revolving credit facility (the “Credit Facility”) with a $300.0 million maximum commitment that expires on
July 5, 2021
. The Credit Facility may be further increased to
$500.0 million
, generally by mutual agreement of the Company and the lenders, subject to certain customary conditions.
Borrowings under the Credit Facility bear interest, at the Company’s option, at a eurocurrency or base rate plus, in each case, an applicable interest rate margin based on the Company’s then-current leverage ratio (as defined in the Credit Agreement). As of
July 1, 2017
, the weighted average interest rate under the Credit Agreement was
LIBOR
plus
1.125%
(or
2.221%
). The Company is required to pay an annual commitment fee based on the daily unused revolver credit commitment based on the Company's leverage ratio; the fee was
0.175%
as of
July 1, 2017
. For further information regarding the Credit Facility, see
Note 3, "Debt, Capital Lease Obligations and Other Financing,"
in Notes to Condensed Consolidated Financial Statements.
The financial covenants under the Credit Agreement require, among other covenants, that the Company maintain, as of each fiscal quarter end, a maximum total leverage ratio and a minimum interest coverage ratio. As of
July 1, 2017
, the Company was in compliance with all financial covenants of the Credit Agreement.
In fiscal 2011, Plexus issued $175.0 million in principal amount of 5.20% Senior Notes, due on June 15, 2018 (the "Notes"). The related Note Purchase Agreement contains certain financial covenants, which include a maximum total leverage ratio, a minimum interest coverage ratio and a minimum net worth test, all as defined in the agreement. As of
July 1, 2017
, the Company was in compliance with all such covenants relating to the Notes and the Note Purchase Agreement. Assuming no U.S. tax reform within the next year, our intention is to refinance the Notes with a similar long-term product, although we can provide no assurances of the availability of such financing on attractive, or any, terms. In such case the company might still be able to fulfill its financial obligation as it has access to sufficient cash and other sources of liquidity.
The Credit Agreement and the Note Purchase Agreement allow for the future payment of cash dividends or the repurchase of shares provided that no event of default (including any failure to comply with a financial covenant) exists at the time of, or would be caused by, the dividend payment or the stock repurchases. We have not paid cash dividends in the past and do not currently anticipate paying them in the future. However, we evaluate from time to time potential uses of excess cash, which in the future may include stock repurchases above those already authorized, a special dividend or recurring dividends.
The Company has a Master Accounts Receivable Purchase Agreement (the “BTMU RPA”) with The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (the “BTMU Purchaser”), with a maximum facility amount of
$120.0 million
. Pursuant to the BTMU RPA, the Company and certain of its subsidiaries (each, a “Seller”) may sell to the BTMU Purchaser up to an aggregate of
$120.0 million
in accounts receivable owed to such Sellers by specified customers. In exchange, the BTMU Purchaser pays a purchase price for each purchased receivable equal to the net face value of the receivable less an agreed-upon discount. The BTMU RPA represents a non-committed facility. The BTMU Purchaser pays an agreed-upon servicing fee to each Seller with respect to each purchased receivable sold by such Seller, consistent with common market practices. The BTMU RPA contains representations, warranties, covenants, and termination events that are customary for factoring transactions of this type. The BTMU RPA is subject to expiration on October 3, 2017, but will be automatically extended each year unless any party gives no less than 10 days prior notice that the agreement should not be extended.
The Company also has a Master Accounts Receivable Purchase Agreement (the "HSBC RPA") with HSBC Bank (China) Company Limited, Xiamen branch (the “HSBC Purchaser”). Pursuant to the HSBC RPA, the Company and certain of its subsidiaries (each, a “Seller”) may sell to the HSBC Purchaser up to an aggregate of $40.0 million in accounts receivable owed to such Sellers by specified customers. The terms of the HSBC RPA are generally consistent with the terms of the BTMU RPA discussed above.
We sold
$115.3 million
and
$284.6 million
of trade accounts receivable under these programs during the respective three and
nine
months ended
July 1, 2017
, and in exchange, received cash proceeds of
$114.6 million
and
$283.1 million
, respectively.
During the respective three and
nine
months ended
July 2, 2016
, we sold
$12.7 million
and
$54.2 million
of trade accounts receivable under a prior program, and in exchange, received cash proceeds of
$12.6 million
and
$53.7 million
, respectively.
In all cases, the sale discount was recorded within "Miscellaneous expense" in the Condensed Consolidated Statements of Comprehensive Income in the period of the sale. For further information regarding the receivable sale programs, see
Note 12, "Trade Accounts Receivable Sale Programs,"
in Notes to Condensed Consolidated Financial Statements.
Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents, potential borrowings under the Credit Facility, and our leasing capabilities, should be sufficient to meet our working capital and fixed capital requirements for the next twelve months. See above with respect to our plans for the Notes. If our future financing needs increase, we may need to arrange additional debt or equity financing. Accordingly, we evaluate and consider from time to time various financing alternatives to supplement our financial resources. However, we cannot be assured that we will be able to make any such arrangements on acceptable terms.