UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(mark
(mark one)
[X]
| | |
| þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 1, 2005
OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
| | |
| o | | TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-14824
PLEXUS CORP.
(Exact
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-1344447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
| | |
| Wisconsin | | 39-1344447 |
| (State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
| Incorporation or Organization) | | |
55 JEWELERS PARK DRIVE
NEENAH, WISCONSINJewelers Park Drive
Neenah, Wisconsin 54957-0156
(920) 722-3451
(Address,
(Address, including zip code, of principal executive offices and Registrant'sRegistrant’s telephone number, including area code)
| | | | |
| | Securities registered pursuant to Section 12(b) of the Act: | | None |
| | Securities registered pursuant to Section 12(g) of the Act: | | Common Stock, $.01 par value |
| | | | Preferred Stock Purchase Rights |
| | | | (Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesþ Noo
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yeso Noþ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports(s)) and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]þ No [ ]o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. []o
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 under the Exchange Act).
Yes [X]þ No [ ]o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
As of December 1, 2004,2005, there were 43,195,10543,990,038 shares of common stock outstanding. As of March 31, 2004, 43,038,783April 2, 2005, 43,330,031 shares of common stock were outstanding, and the aggregate market value of the shares of common stock (based upon the $17.79$11.39 closing sale price on that date, as reported on the NASDAQ Stock Market) held by non-affiliates (excludes shares reported as beneficially owned by directors and executive officers -— does not constitute an admission as to affiliate status) was approximately $758$487 million.
DOCUMENTS INCORPORATED BY REFERENCE
| | |
| | Part of Form 10-K Into Which |
| Document | | Portions of Document are Incorporated
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|
Proxy Statement for 20042005 Annual | | |
| Meeting of Shareholders | | Part III |
"SAFE HARBOR"
TABLE OF CONTENTS
“SAFE HARBOR” CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
The statements contained in the Form 10-K which are not historical facts (such as statements in the future tense and statements including "believe,"
"expect," "intend," "plan," "anticipate"“believe,” “expect,” “intend,” “plan,” “anticipate” and similar words and concepts) are forward-looking statements that involve risks and uncertainties, including, but not limited to:
- the continued uncertain economic outlook for the electronics and
technology industries
- the risk of customer delays, changes or cancellations in both
ongoing and new programs
- our ability to secure new customers and maintain our current
customer base
- the results of cost reduction efforts
- the impact of capacity utilization and our ability to manage fixed
and variable costs
- the effects of facilities closures and restructurings
- material cost fluctuations and the adequate availability of
components and related parts for production
- the effect of changes in average selling prices
- the effect of start-up costs of new programs and facilities
- the effect of general economic conditions and world events
- the effect of the impact of increased competition and
- other risks detailed below, especially in "Risk Factors"
| • | | the continued uncertain economic outlook for the electronics and technology industries |
|
| • | | the risk of customer delays, changes or cancellations in both ongoing and new programs |
|
| • | | our ability to secure new customers and maintain our current customer base |
|
| • | | the results of cost reduction efforts |
|
| • | | the impact of capacity utilization and our ability to manage fixed and variable costs |
|
| • | | the effects of facilities closures and restructurings |
|
| • | | material cost fluctuations and the adequate availability of components and related parts for production |
|
| • | | the effect of changes in average selling prices |
|
| • | | the effect of start-up costs of new programs and facilities |
|
| • | | the effect of general economic conditions and world events |
|
| • | | the effect of the impact of increased competition, and |
|
| • | | other risks detailed below, especially in “Risk Factors” and otherwise herein, and in our Securities and Exchange Commission filings. |
In addition, see the Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7, particularly "Risk Factors"“Risk Factors” for a further discussion of some of the factors that could affect future results.
* * *
PART 1
ITEM 1. BUSINESS
OVERVIEW
Overview
Plexus Corp. and its subsidiaries (together "Plexus,"“Plexus,” the "Company,"“Company,” or "we"“we”) is a participantparticipate in the Electronics Manufacturing Services ("EMS"(“EMS”) industry. We provide a full range of product realization services to original equipment manufacturers or OEMs,(“OEMs”) and other technology companies in the networking/datacommunications/telecom,wireline/networking, wireless infrastructure, medical, industrial/commercial, computer
and transportation/other industries. We provide advanced electronics design,
manufacturing and testing services to our customersdefense/security/aerospace industries with a focus on complex and global fulfillment solutions, high technology manufacturing and test services, and high reliability products. We offer our customers the ability to outsource all stages of product realization, including:including development and design, materials procurement and management, prototyping and new product introduction, testing, manufacturing, product configuration, direct order fulfillment, logistics and test/repair.
Our customers include both industry-leading original equipment
manufacturers and technology companies. Due to
Because of our focus on serving manufacturerscustomers in advanced electronics technology, our business is influenced by major technological and end-market trends such as the level and rate of development of telecommunications infrastructure, the expansion of network and internet use, and the federal Food and Drug Administration'sAdministration’s approval of new medical devices, anddevices. Beyond technology, our business is influenced by the overall expansion or contraction of outsourcing by OEMs and technology companies.OEMs.
Established in 1979 as a Wisconsin corporation, we have approximately 6,0006,800 full-time employees, including approximately 300360 engineers and technologists dedicated to product development and design, operatingapproximately 200 engineers and technologists dedicated to test equipment development and design, and approximately 590 engineers and technologists dedicated to manufacturing process development and control, all of whom operate from 1918 active facilities in 1514 locations, totaling approximately 1.8 million square feet. Prior to
Although the services we provide, the manufacturing processes we use, the class of customers we serve and the order fulfillment processes we use are similar and generally interchangeable across segments, we noted changes in the economic performance and related long-term expectations of our operating segments during fiscal 2003, we had expanded our capacity and geographic reach
through2005. As a series of strategic acquisitions. Through these transactions,result, we have enhancedreclassified the manner in which we previously aggregated our access to, and ability to provide services within important
technology corridors in Boston, Chicago, and San Jose; established facilities in
Europe,operating segments from one business segment into four reportable geographical segments: the United States, Asia, Mexico and Asia; significantly increased the size and capabilities of
our medical services offerings.Europe. See note 13Note 12 in Notes to our consolidated financial
statements,
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Consolidated Financial Statements, which isare incorporated herein by reference, for certain financial information about our operating segments, as to our
foreign sales and assets.reclassified.
We maintain a website at
www.plexus.com.www.plexus.com. We make available through that website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Reports on Form 8-K, and amendments to those reports, as soon as reasonably practical after we electronically file those materials with, or furnish them to, the
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Securities and Exchange Commission ("SEC"(“SEC”). Our Code of Conduct and Business Ethics is also posted on our website. You may access thosethese SEC reports and the Code of Conduct and Business Ethics by following the links under "Investors"“Investors” at our website.
SERVICESServices
Plexus offers a broad range of integrated services that provide customers
with a total design, new product introduction and manufacturing solution to take
a product from initial design through production to test/repair. Ouras more fully described below; our customers may utilize any, or all, of the following services and tend to use more of these services as their outsourcing strategies mature:
Product development and design.We provide comprehensive conceptual design and value engineering services. These product design services include project management, initial feasibility studies, product concept definition,conceptualization, specifications for product features and functions, product engineering specifications, microprocessor selection, circuit design software design,(including digital, microprocessor, power, analog, RF, optical and micro-electronics), application-specific integrated circuit design (ASIC), printed circuit board layout, embedded software design, product housing design, development of test specifications and product validation testing. ThroughWe invest in the latest design automation tools and technology. We also provide comprehensive value-engineering services for our product developmentcustomers that extend the life cycles of their products. These value-added services include engineering change-order management, cost reduction, component obsolescence, feature expansion, test enhancement and design services, we have the capabilities to provide
customers with a completed design for a product that can be manufactured
efficiently.
component re-sourcing.
Prototyping and new product introduction services.We provide assembly of prototype products within our operating sites. We supplement our prototype assembly services with other value-added services, including printed circuit
board design, materials management, manufacturing defects analysis, analysis of the manufacturability and testability of a design, test implementation and pilot production runs leading to volume production. These services link our engineering, our customers'customers’ engineering and our volume manufacturing. This link
facilitatesmanufacturing facilities. These links facilitate an efficient transition from engineering to manufacturing. We believe that these services provide significant value to our customers by accelerating their products'products’ time-to-market schedule.
Test development and product testing. equipment development.Enhanced product functionality has led to increasingly complex components and assembly techniques; consequently, there is a need to design and assemble increasingly complex in-circuit and functional test equipment for electronic products and assemblies. Our internal development of this test equipment allows us to rapidly specify, implement, maintain and enhance test solutions and tothat efficiently test printed circuit assemblies, subassemblies, system assemblies and finished product.products. We also develop and utilize specialized equipment that allows us to environmentally stress-test products during functional testing to assure reliability. We believe that the internal design and production of test equipment is an important factor in our ability to provide technology-driven products of consistently high quality.
Manufacturing
Material sourcing and assembly. procurement.We provide contract manufacturing services on either a "turnkey"“turnkey” basis, which means we source and procure some or all of the materials required for product assembly, or on a "consignment"“consignment” basis, which means the customer supplies some, or occasionally all, of the materials necessary for product assembly. Turnkey services include materials procurement and warehousing in addition to manufacturing and involve greater resource investment and potential inventory risk than consignment services. Substantially all of our manufacturing services are currently are on a turnkey basis.
Agile manufacturing services.We have the manufacturing services expertise required to assemble very complex electronic products that utilize multiple printed circuit boards and subassemblies. These manufacturing services, which we endeavor to provide on an agile and rapid basis, include developing and implementing a materials strategyand manufacturing strategies that meets customers'meet our customers’ requirements for demand and flexibility, requirements,for assembling printed circuit boards utilizing a wide range of assembly technologies, and for building and configuring final product and system boxes and testing assemblies to meet customers'customers’ requirements. We have the expertise to
assemble very complex electronic products that utilize multiple printed circuit
boards and subassemblies. These complex products are typically configured to fulfill unique customerend-customer requirements and many are shipped directly to our customers'customers’ end users.
Fulfillment and logistic services.We are increasingly providing fulfillment and logistic services to many of our customers. Direct Order Fulfillment (“DOF”) entails receiving orders from our customers that provide the final specifications required by the end customer. We then Build to Order (“BTO”) and Configure to Order (“CTO”) and deliver the product directly to the end customer. The DOF process relies on Enterprise Resource Planning (“ERP”)
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systems integrated with those of our customers to manage the overall supply chain from parts procurement through manufacturing and logistics.
After-market support.We provide service support for manufactured products requiring repair and/or upgrades, which may or may not be under a customer’s warranty. We provide in and out bound logistics required to support fulfillment and service. We also provide installation for select products.
Regulatory requirements.In addition, we have developed specialcertain processes and tools to meet industry-specific requirements. Among these are the tools and processes to assemble finished medical devices that meet U.S. Food and Drug Administration Quality Systems Regulation requirements and similar regulatory requirements ofin other countries.
After-market support.
Our manufacturing facilities are ISO certified to 9001:2000 standards. We provide service support for manufactured
products. In this context, supported products, which may have additional certifications and/or may not be under a
customer's warranty, may be returned for repairs or upgrades at the customer's
discretion.
CUSTOMERS AND INDUSTRIES SERVEDregistrations held by certain of our facilities in various geographic locations:
| • | | Medical Standard ISO 13485:2003 — United States, Asia, Mexico |
|
| • | | Environmental Standard ISO — 14001 — Asia, Europe |
|
| • | | 21 CFR part 820 (FDA) (Medical) — United States, Asia, Mexico |
|
| • | | Telecommunications Standard TL 9000 — United States, Asia |
|
| • | | Aerospace Standard AS9100 — United States, Asia |
|
| • | | ITAR (International Traffic and Arms Regulation) self-declaration — United States |
|
| • | | ANSI/ESD S20.20 — United States |
Customers and Industries Served
We provide services to a wide variety of customers, ranging from large multinational companies to smaller emerging technology companies. During fiscal
2004,2005, we provided services to over
150130 customers.
Because of the variety of
services we offer, our flexibility in design and manufacturing and our ability
to respond to customer needs in a timely fashion, we believe that we are well
positioned to offer our services to customers in most industries. For many
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customers, we serveprovide both a design and production function, thereby permittingallowing our customers to concentrate on concept development, distribution and marketing, while accelerating their time to market, reducing their investment in engineering and manufacturing capacity and thereby optimizing total product cost. Juniper Networks ("Juniper"(“Juniper”) and General Electric Corp. (“GE”) accounted for 19 percent and 12 percent, respectively, of our net sales in fiscal 2005. Juniper accounted for 14 percent of our net sales in fiscal 2004, and Siemens Medical Systems, Inc. ("Siemens"(“Siemens”) accounted for 12 percent of our net sales in fiscal 2003. No other customer accounted for 10 percent or more of our net sales in fiscal 2005, 2004 or 2003. No customer represented
10 percent or more of net sales in fiscal 2002. The loss of any of our major customers could have a significant negative impact.impact on our financial results.
Many of our large customers contract with us independently through multiple divisions, subsidiaries, production facilities or locations. We believe that in most cases our sales to any one such division, subsidiary, division, facility or location are not dependent on sales to others.
We provided services
In fiscal 2005, we redefined our end-market sectors to reflect more accurately our current business development focus:
| • | | Wireline/Networking — The manufacture and design of electronic products and technologies that transmit and store voice, data and video electronically using wire conductors and/or optical fibers. Products include routers, switches, servers, security devices, storage devices, gateways, bridges, and hubs, internet service and optimization gear. |
|
| • | | Wireless infrastructure — The manufacture and design of electronic products and technologies that support the management and delivery of wireless voice, data and video communications. Products include cellular base stations, wireless and radio access, broadband wireless access, networking gateways and devices. |
|
| • | | Medical — The manufacture and design of electronic products and technologies mainly for advanced electronic medical instruments, therapeutic devices, diagnostic devices, imaging devices and communication devices. Products include wireless implantable programmers, patient communication devices, surgical laser instruments, harmonic scalpel instruments, blood analysis instruments, wound management instruments, ultrasound systems, computed tomography (“CT”) components, and x-ray systems. |
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| • | | Industrial/Commercial — The manufacture and design of electronic products used primarily in a broad array of industrial and commercial sectors of the economy. Products include industrial controls, high-end laboratory instruments, advanced utility meters, and products that control and coordinate audio visual systems. |
|
| • | | Defense/Security/Aerospace — The manufacture and design of electronic products for the defense, homeland security and aerospace industries. Products include detection devices, secure data communications equipment, computers, vision systems and avionics systems. |
The distribution of our net sales to the
following industriessectors noted above is shown in the following
proportions:
Industry 2004 2003 2002
- -------- ---- ---- ----
Networking/Datacommunications/Telecom 43% 36% 36%
Medical 31% 32% 28%
Industrial/Commercial 15% 15% 20%
Computer 6% 12% 11%
Transportation/Other 5% 5% 5%
MATERIALS AND SUPPLIERStable: | | | | | | | | | | | | | |
| | | Fiscal years ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| Industry | | 2005 | | | 2004 | | | 2003 | |
| Wireline/Networking | | | 38 | % | | | 37 | % | | | 33 | % |
| Wireless Infrastructure | | | 10 | % | | | 10 | % | | | 9 | % |
| Medical | | | 30 | % | | | 31 | % | | | 33 | % |
| Industrial/Commercial | | | 17 | % | | | 17 | % | | | 22 | % |
| Defense/Security/Aerospace | | | 5 | % | | | 5 | % | | | 3 | % |
| | | | | | | | | | |
| | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | |
Although our current business development focus is based on the end-market sectors noted above, we evaluate our financial performance and allocate our resources on a geographic basis (see Note 12 in Notes to Consolidated Financial Statements regarding our operating segments).
Materials and Suppliers
We primarilytypically purchase raw materials, including printed circuit boards and electronic components, from manufacturers and distribution companies.as well as from electronic distributors. In addition, we may alsooccasionally purchase components from customers. The key electronic components we purchase include
printed circuit boards, specialized components such as application-specific integrated circuits, semiconductors, interconnect products, electronic subassemblies (including memory modules, power supply modules and cable and wire harnesses), inductors, resistors and capacitors. Along with these electronic components, we also purchase components for useused in higher-level assembly and manufacturing. These components include injection-molded plastic,plastics, pressure-formed plastics, vacuum-formed plastics, sheet metal fabrications, aluminum extrusions, die castings and various other hardware and fastener components. TheseAll of these components range from standard to highly customized and they
vary widely in terms of market volatilityavailability and price.
From time to time, allocation of components
Occasional component shortages and subsequent allocations by suppliers becomesare an integralinherent part of the electronics industry, and shortages can occur with respect
to particular components. In response, weindustry. We actively manage our business in a way
that seeksto try to minimize our exposure to materialsmaterial and component shortages. We have developed a corporate sourcing and procurement organization whose primary purpose is to develop supply-chain sources and create strong supplier alliances to ensure, as much as possible, a steady flow of components at competitive prices. Because we design products and therefore can influence whatthe selection of components are used in some new products, component manufacturers of
components often provide us with priority access to a supply of materials and components, even during times of shortages. We have also established and continue to
expand our strategic relationships with international purchasing offices, and we
attempt to leverage our design position with suppliers. Beyond this, we have undertaken a series of initiatives, including the utilization of in-plant stores, point-of-use programs, assured supply programs and other efforts. All of
these undertakings seekefforts to improve our overall supply chain flexibility and to
accommodate the current marketplace.
SALES AND MARKETING
We market our servicesflexibility.
New Business Development
Our new business development is directed primarily through
our sales and marketing
organization. During fiscal 2004, we reorganized our sales and marketing effortsan internal effort organized around
key customer end-markets, or market
sectors: namely, networking/
datacommunications, medical and industrial.sectors. Each market sector
is headed byhas a
team of dedicated, empowered resources including sector vice
president who leads dedicated resources, which includepresidents, customer management vice presidents, sales account executives,
strategic customer managers,
customer development directors, market sector
specialists, technology
specialistsanalysts, and
advertising and other corporate communications personnel.service specialists. Our sales and marketing efforts focus on generating
both new customers and expanding business with existing customers.
We use ourOur ability to provide a full range of product realization services
asis a marketing
tool, andadvantage; our
technologyservice specialists participate in marketing through direct customer contact and participation in industry symposia and seminars.
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COMPETITION 4
Competition
The market for the products and services we provide is highly competitive. We compete primarily on the basis of meeting the unique needs of our customers, and providing flexible solutions, timely order fulfillment and strong engineering, testing and production capabilities, technological capabilities and the capacity for responsiveness,
quality and price. There arecapabilities. We have many competitors in the electronics design and assembly industry. Larger and more geographically diverse competitors have substantially more resources than we do. Other, smaller competitors primarily compete only in specific sectors, typically within limited geographical areas. We also compete against companies that design or manufacture items in-house rather than by outsourcing.in-house. In addition, we compete against foreign, low labor costlow-labor-cost manufacturers. This foreign, low labor costlow-labor-cost competition tends to focus on commodity and consumer-related products, which is not our primary focus.
INTELLECTUAL PROPERTY
Intellectual Property
We own various service marks, including "Plexus,"“Plexus,” and "Plexus,“Plexus, The Product Realization Company."” Although we own certain patents, they are not currently material to our business. We do not have any material copyrights.
INFORMATION TECHNOLOGY
We began to implement in
Information Technology
In fiscal 2001, we began implementation of an enterprise resource planning
("ERP")ERP platform. This ERP platform is intended to augmentaugments our other management information systems and includes software from J.D. Edwards (now part of Peoplesoft)Oracle Corporation) and several other vendors. The ERP platform includes various software systems to enhance and standardize our ability to globally translate information from multiple production facilities into operational and financial information and create a consistent set of core business applications at our worldwide facilities.facilities worldwide. We believe the related software licenses are of a general commercial character on terms customary for these types of agreements. During fiscal 2004,2005, we converted one additional manufacturing facility to the common ERP platform and now manage a significant majority of our net sales on the common ERP platform. We anticipate converting at least one more facilityplan to extend the common ERP platform to the ERP
platform in fiscal 2005. Theremaining Plexus sites over the next two years; however, the conversion timetable for the remaining Plexus sites and remaining project scope remainare subject to change based upon our evolving needs and sales levels.
ENVIRONMENTAL COMPLIANCEneeds.
Environmental Compliance
We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process. Although weWe believe that we are in compliance with all federal, state and local environmental laws and do not anticipate any significant expenditures in maintaining our compliance,compliance; however, there can be no assurancesassurance that violations will not occur which could have a material adverse effect on our financial results.
EMPLOYEES
Employees
Our employees are one of our primary strengths, and we make a considerable effortseffort to maintain a well-qualified staff.and motivated work force. We have been able to offer enhanced career opportunities to many of our employees. Our human resources department identifies career objectives and monitors specific skill developmentdevelopments for employees with potential for advancement. We invest at all levels of the organization to ensure that employees are well trained. We have a policy of involvement and consultation with employees in every facility and strive for continuous improvement at all levels.
We employ approximately 6,0006,800 full-time employees. Given the quick response times required by our customers, we seek to maintain flexibility to scale our operations as necessary to maximize efficiency. To do so, we use skilled temporary labor in addition to our full-time employees. In Europe, approximately 70 of our employees are covered by union agreements. These union agreements are typically renewed at the beginning of each year, although in a few cases these agreements may last two or more years. Our employees in the United States, United Kingdom,Malaysia, China Malaysia and Mexico are not covered by union agreements. We have no history of labor disputes at any of our facilities. We believe that our employee relationships are good.
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ITEM 2. PROPERTIES
Our facilities comprise an integrated network of
technologyengineering and manufacturing centers with corporate headquarters located in our engineering facility in Neenah, Wisconsin. We own or lease facilities with approximately
2.42.3 million square feet of capacity. This includes approximately
1.81.7 million square feet in the United States, approximately 0.2 million square feet in Mexico, approximately 0.3 million square feet in Asia and approximately 0.1 million square feet in Europe. Approximately
0.60.5 million square feet of this capacity is either vacant or subleased.
Approximately 0.1 million of the U.S. capacity is
planned for closure in fiscal 2005. The geographic diversity of our technology
and manufacturing centers allows us to offer services from locations near our
customers and major
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electronics markets. We believe that this approach reduces material and
transportation costs and simplifies logistics and communications. This enables
us to provide customers with a responsive, more complete, cost-effective
solution. Our facilities are described in the following table:
LOCATION TYPE SIZE (SQ. FT. | | | | | | | | |
| Location | | Type | | Size (sq. ft.) OWNED/LEASED
-------- ---- -------------- ------------
| | | Owned/Leased |
| Neenah, Wisconsin (1) | | Manufacturing | | | 277,000 | | | Leased |
| Penang, Malaysia (1) | | Manufacturing/Engineering 282,000 | | | 276,000 | | | Owned |
| Nampa, Idaho | | Manufacturing | | | 216,000 | | | Owned |
| Juarez, Mexico | | Manufacturing | | | 210,000 | | | Leased |
| Buffalo Grove, Illinois | | Manufacturing | | | 141,000 | | | Leased |
| Appleton, Wisconsin | | Manufacturing | | | 67,000 | | | Owned |
| Ayer, Massachusetts | | Manufacturing | | | 65,000 | | | Leased |
| Xiamen, China | | Manufacturing | | | 63,000 | | | Leased |
| Kelso, Scotland | | Manufacturing | | | 60,000 | | | Leased |
| Maldon, England (2) | | Manufacturing | | | 40,000 | | | Owned |
| Fremont, California | | Manufacturing | | | 36,000 | | | Leased |
| | | | | | | | |
| Neenah, Wisconsin | | Engineering/Office | | | 105,000 | | | Owned |
| Louisville, Colorado | | Engineering | | | 19,000 | | | Leased |
| Raleigh, North Carolina | | Engineering | | | 17,000 | | | Leased |
| Livingston, Scotland | | Engineering | | | 2,000 | | | Leased |
| | | | | | | | |
| Neenah, Wisconsin (3) | | Office/Warehouse | | | 93,000 | | | Leased |
Neenah, Wisconsin (1) Manufacturing 277,000 | | Office/Warehouse | | | 84,000 | | | Owned |
| El Paso, Texas | | Office/Warehouse | | | 25,000 | | | Leased
Nampa, Idaho Manufacturing 216,000 Owned
Juarez, Mexico Manufacturing 210,000 Leased
Buffalo Grove, Illinois Manufacturing 141,000 Leased
Bothell, Washington (2) Manufacturing/Engineering 97,000 Leased
Appleton, Wisconsin Manufacturing 67,000 Owned
Ayer, Massachusetts Manufacturing 65,000 Leased
Xiamen, China Manufacturing 63,000 Leased
Kelso, Scotland Manufacturing 60,000 Leased
Maldon, England Manufacturing 40,000 Owned
Freemont, California Manufacturing 36,000 Leased
Neenah, Wisconsin Engineering 105,000 Owned
Louisville, Colorado Engineering 16,000 Leased
Raleigh, North Carolina Engineering 14,000 Leased
Livingston, Scotland Engineering 2,000 Leased
|
Neenah, Wisconsin (1) Office/Warehouse 84,000 Owned
El Paso, Texas (3) Office/Warehouse 25,000 | | Office | | | 27,000 | | | Leased
Neenah, Wisconsin (1) Office 27,000 Leased
|
| | | | | | | | |
| San Diego, California (4) | | Inactive/Other | | | 198,000 | | | Leased
Bothell, |
| Seattle, Washington (1) (5) | | Inactive/Other | | | 141,000 | | | Leased
Neenah, Wisconsin |
| Bothell, Washington (6) | | Inactive/Other 93,000 | | | 97,000 | | | Leased
Redmond, Washington (7) Inactive/Other 60,000 Leased
|
| San Diego, California (7) | | Inactive/Other | | | 36,000 | | | Leased |
Hillsboro, Oregon (8) (7) | | Inactive/Other | | | 9,000 | | | Leased |
Nashua, New Hampshire (9) (7) | | Inactive/Other | | | 5,000 | | | Leased |
(1) Includes more than one building.
(2) Engineering operations occupy approximately 30,000 square feet with
manufacturing operations occupying the remaining square footage.
This location is expected to close during fiscal year 2005. We are
seeking to sublease this space.
(3) During fiscal 2004, we amended our warehouse lease for approximately
12,000 of additional square footage.
(4) Approximately 71,000 square feet of lease space was subleased to a
third party in December 2002. We ceased operations in the remaining
part of the facility in May 2003 and are seeking to sublease that
space.
(5) Consists of two facilities that were previously used for engineering
and manufacturing operations. We have recently subleased a portion
one of the unoccupied facilities and are seeking to sublease the
other facility.
(6) We consolidated our leased warehousing space to an owned facility in
Neenah, Wisconsin in May 2003. We are seeking to sublease the leased
warehousing space.
(7) This building is subleased and no longer used in our business
operations.
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(8) During fiscal 2004, we closed our PCB-design office in Hillsboro,
Oregon and consolidated it into another Plexus design office. We are
seeking to sublease that space. During fiscal 2004, we also sold a
small PCB-design operation in Tel Aviv, Israel eliminating a small
lease in that city.
(9) Primarily represents a former PCB design facility in Nashua, New
Hampshire ("Nashua"). During fiscal 2003, we sold the Nashua PCB
design operation and subleased the facility to a group of former
employees.
| | |
| (1) | | Includes more than one building. |
|
| (2) | | In fiscal 2006, we anticipate transitioning this facility to a fulfillment and service and repair center. |
|
| (3) | | This leased warehousing space was previously abandoned (i.e. ceased use of) as part of a fiscal 2003 restructuring action; however, we reactivated use of the warehouse during fiscal 2005. |
|
| (4) | | This building is subleased and no longer used in our operations. |
|
| (5) | | Consists of two facilities previously used for engineering and manufacturing operations. During fiscal 2005, we subleased a portion of one of the unoccupied facilities and are seeking to sublease the other facility. |
|
| (6) | | We closed this facility in fiscal 2005 and are seeking to sublease the space. |
|
| (7) | | This facility is no longer used in our operations. The lease terminates in fiscal 2006. |
6
ITEM 3. LEGAL PROCEEDINGS
As we have previously disclosed, the Company (along with hundreds ofmany other companies) has been sued by the Lemelson Medical, EducationalEducation & Research Foundation Limited Partnership ("Lemelson"(“Lemelson”) forrelated to alleged possible infringement of certain Lemelson patents. The complaint, which is one of a series of complaints by Lemelson against hundreds of companies, seeks injunctive relief, treble damages (amount unspecified) and attorneys'attorneys’ fees. The Company has obtained a stay of action pending developments in other related litigation. InOn January 23, 2004, the judge in the other related litigation ruled for the
parties challenging the patents,against Lemelson, thereby declaring the Lemelson patents unenforceable and invalid. Lemelson has appealed this ruling. Ifruling and on September 9, 2005, the verdict is
upheldU.S. Court of Appeals for the Federal Circuit affirmed the lower Court’s decision ruling that the Lemelson patents are unenforceable, and on November 16, 2005 denied a petition for rehearing. Lemelson may appeal it would likely result in dismissal of claimsthis decision to the U.S. Supreme Court. The lawsuit against the Company. The Company's lawsuitCompany remains stayed pending the outcome of that
appeal. A decision on the appealoutcome.
The Company is not expected until some time in 2005, at the
earliest.
Even if the verdict is not upheld, the Company believes the vendors from
which patent-related equipment was purchased may be required to contractually
indemnify the Company. However, based upon the Company's observation of
Lemelson's actions in other parallel cases, it appears that Lemelson's primary
objective is to cause defendants to enter into license agreements. Although the
patents at issue would theoretically relate to a significant portion of our net
sales, even if the verdict in the other case is overturned and a judgment is
rendered in our case and/or a license fee required, it is the opinion of
management that such judgment or fee would not be material to the Company's
financial position, results of operations or cash flows. Lemelson Medical,
Educational & Research Foundation Limited Partnership vs. Esco Electronics
Corporation et al, US District Court for the District of Arizona, Case Number
CIV 000660 PHX JWS (2000).
We are party to other certain other lawsuits in the ordinary course of business. Management does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the Company'sCompany’s financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.
2005.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth our executive officers, their ages and the positions currently held by each person:
NAME AGE POSITION
---- --- --------
| | | | | | |
| Name | | Age | | Position |
Dean A. Foate 46 | | | 47 | | | President, Chief Executive Officer and Director |
F. Gordon Bitter 61 | | | 62 | | | Senior Vice President and Chief Financial Officer |
David A. Clark 44 | | | 45 | | | Vice President and Vice President-Materials and Supply Chain, Plexus Electronic Assembly |
Thomas J. Czajkowski 40 | | | 41 | | | Vice President and Chief Information Officer |
Paul L. Ehlers 48 | | | 49 | | | Senior Vice President, and President of Plexus Electronic Assembly |
Joseph D. Kaufman 47 | | | 48 | | | Senior Vice President, Secretary and Chief Legal Officer |
J. Robert Kronser 45 | | | 46 | | | Executive Vice President and Chief Technology & Strategy Officer
Michael J. McGuire 49 Vice President - Worldwide Sales, Marketing and Business Development
|
Simon J. Painter 39 | | | 40 | | | Corporate Controller and Chief Accounting Officer |
David H. Rust 57 | | | 58 | | | Vice President -— Human Resources |
George W.F. Setton 58 | | | 59 | | | Corporate Treasurer and Chief Treasury Officer |
Michael T. Verstegen 46 | | | 47 | | | Vice President, and President of Plexus Technology Group |
6
Dean A. Foatejoined Plexus in 1984 and has served as President and Chief Executive Officer since 2002, and as a director since 2000; previously Chief Operating Officer from 2001 to 2002, Executive Vice President from 1999 to 2001 and President of Plexus Technology Group prior thereto.
F. Gordon Bitterjoined Plexus out of retirement in October 2002 as Vice President and Chief Financial Officer. In February 2005, Mr. Bitter was promoted to Senior Vice President and Chief Financial Officer. Previously, Mr. Bitter was the Senior Vice President-Finance and Administration and Chief Financial Officer for Hadco Corporation, a printed circuit board and electronics contract manufacturer, from 1998 to 2000. Prior to that, Mr. Bitter had held numerous senior financial and operational positions in various industrial companies.
David A. Clarkjoined Plexus in 1995 and has served as Vice President since 2002. In 1999, Mr. Clark assumed the position of Vice President-Materials for Plexus Electronic Assembly, a position he continues to hold. Prior to that, he was Director of Procurement for Plexus Electronic Assembly.
7
Thomas J. Czajkowskijoined Plexus in 2001 and has served as Vice President and Chief Information Officer since 2002. Prior to that, Mr. Czajkowski served as Chief Information Officer. Prior to joining Plexus, Mr. Czajkowski was a Senior Manager at Deloitte Consulting from 1993 to 2001.
Paul L. Ehlersjoined Plexus in 1980 and has served as Senior Vice President since 2002. In 2001, Mr. Ehlers served as Vice President. In addition, Mr. Ehlers has served as President of Plexus Electronic Assembly since 2000. From 1995 to 1999, Mr. Ehlers managed various manufacturing facilities.
Joseph D. Kaufmanjoined Plexus in 1986 and has served as Senior Vice President, Secretary and Chief Legal Officer since 2001, and as Vice President, Secretary and General Counsel of Plexus from 1990 to 2001.
J. Robert Kronserjoined Plexus in 1981 serving in various engineering roles and has served as an Executive Vice President and Chief Technology and Strategy Officer since 2001. From 1999 to 2001, Mr. Kronser served as Vice President of Sales and Marketing. From 1993 to 1999, Mr. Kronser managed the Advanced Manufacturing Center.
Michael J. McGuire joined Plexus in December 2002 as Vice President-Worldwide
Sales, Marketing and Business Development. Previously, from 2000 to 2002, Mr.
McGuire served as Senior Vice President of Sales for Nu Horizons Electronics
Corp. Prior to that, Mr. McGuire served as the Midwest Regional Vice President
of Sales for Marshall Industries, Inc. from 1987 to 2000.
Simon J. Painterjoined Plexus in 2000 as Corporate Controller. In 2003, Mr. Painter was appointed to the position of Chief Accounting Officer. Prior to joining Plexus, Mr. Painter was an auditor with the firm of PricewaterhouseCoopers LLP, from 1991 to 2000, serving most recently as an Audit Manager.
David H. Rustjoined Plexus in 2001 as Vice President -— Human Resources. Previously, Mr. Rust served as Vice President and Chief Human Resources Officer from 1990 to 2001 for Menasha Corporation.
George W.F. Settonjoined Plexus in 2001 as Corporate Treasurer and Chief Treasury Officer. He was Plexus'Plexus’ Principal Accounting Officer from 2001 to 2003.
2003.Previously, from 2000 to 2001, Mr. Setton was a partner in Euram, Inc., a financial consulting firm, and from 1997 to 1999, Mr. Setton served as Group Treasurer for Carr Futures, Inc.
Michael T. Verstegenjoined Plexus in 1983 and has served as Vice-President since 2002. In addition, Mr. Verstegen served as President of Plexus Technology Group since 2001. Mr. Verstegen has held various management positions within the engineering business unit from 1995 to 2000.
7
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'SREGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
For the fiscal years ended
October 1, 2005 and September 30, 2004,
and 2003, the
Company'sCompany’s Common Stock has traded on the NASDAQ Stock Market. The price information below represents high and low sale prices of our common stock for each quarterly period.
Fiscal Year Ended September 30, 2004 Fiscal Year Ended September 30, 2003
------------------------------------ ------------------------------------
High Low High Low
---- --- ---- ---
First Quarter $19.63 $ 15.30 First Quarter $15.76 $ 7.38
Second Quarter $24.47 $ 16.15 Second Quarter $10.41 $ 7.94
Third Quarter $19.28 $ 12.35 Third Quarter $13.48 $ 8.83
Fourth Quarter $13.50 $ 9.95 Fourth Quarter $18.45 $ 11.18
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended October 1, 2005 | | | Fiscal Year Ended September 30, 2004 | |
| | | High | | | Low | | | | | | | High | | | Low | |
| First Quarter | | $ | 14.54 | | | $ | 11.05 | | | First Quarter | | $ | 19.63 | | | $ | 15.30 | |
| Second Quarter | | $ | 13.07 | | | $ | 10.13 | | | Second Quarter | | $ | 24.47 | | | $ | 16.15 | |
| Third Quarter | | $ | 14.99 | | | $ | 10.02 | | | Third Quarter | | $ | 19.28 | | | $ | 12.35 | |
| Fourth Quarter | | $ | 17.93 | | | $ | 13.50 | | | Fourth Quarter | | $ | 13.50 | | | $ | 9.95 | |
As of December 1, 2004,2005, there were approximately 1,004950 shareholders of record. We have not paid any cash dividends. We anticipate that all earnings in the foreseeable future will be retained to finance the development of our business. See also Item 7 "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations--LiquidityOperations—Liquidity and Capital Resources"Resources” for a discussion of the Company'sCompany’s intentions regarding dividends, and loan covenants which could restrict dividend intentions.
payments.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS (1) (dollars
Financial Highlights(dollars in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | October 1, | | September 30, | | September 30, | | September 30, | | September 30, |
| | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 |
Operating Statement Data | | | | | | | | | | | | | | | | | | | | |
| |
| Net sales | | $ | 1,228,882 | | | $ | 1,040,858 | | | $ | 807,837 | | | $ | 883,603 | | | $ | 1,062,304 | |
| Gross profit | | | 105,736 | | | | 86,778 | | | | 52,965 | | | | 81,320 | | | | 131,790 | |
| Gross margin percentage | | | 8.6 | % | | | 8.3 | % | | | 6.6 | % | | | 9.2 | % | | | 12.4 | % |
| Operating income (loss) | | | (9,745 | ) (1) | | | 9,216 | (2) | | | (71,531 | ) (3) | | | (3,636 | ) (4) | | | 68,388 | (5) |
| Operating margin percentage | | | (0.8 | %) | | | 0.9 | % | | | (8.9 | %) | | | (0.4 | %) | | | 6.4 | % |
| Net income (loss) | | | (12,417 | ) (1) | | | (31,580 | ) (2) | | | (67,978 | ) (3) | | | (4,073 | ) (4) | | | 39,150 | (5) |
| Earnings (loss) per share (diluted) | | $ | (0.29 | ) (1) | | $ | (0.74 | ) (2) | | $ | (1.61 | ) (3) | | $ | (0.10 | ) (4) | | $ | 0.91 | (5) |
| |
Cash Flow Statement Data | | | | | | | | | | | | | | | | | | | | |
| Cash flows provided by (used in) operations | | $ | 81,967 | | | $ | (21,352 | ) | | $ | (19,953 | ) | | $ | 130,455 | | | $ | 119,479 | |
| Capital equipment additions | | | 21,707 | | | | 18,086 | | | | 22,372 | | | | 30,760 | | | | 54,560 | |
Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
| Working capital | | $ | 239,392 | | | $ | 215,360 | | | $ | 210,315 | | | $ | 219,854 | | | $ | 277,055 | |
| Total assets | | | 600,468 | | | | 545,708 | | | | 553,054 | | | | 583,945 | | | | 602,525 | |
| Long-term debt and capital lease obligations | | | 22,310 | | | | 23,160 | | | | 23,502 | | | | 25,356 | | | | 70,016 | |
| Shareholders’ equity | | | 340,015 | | | | 351,413 | | | | 371,016 | | | | 430,689 | | | | 426,852 | |
| Return on average assets | | | (2.2 | %) | | | (5.7 | %) | | | (12.0 | %) | | | (0.7 | %) | | | 7.0 | % |
| Return on average equity | | | (3.6 | %) | | | (8.7 | %) | | | (17.0 | %) | | | (0.9 | %) | | | 12.3 | % |
| Inventory turnover ratio | | | 6.4x | | | | 6.2x | | | | 6.5x | | | | 7.0x | | | | 5.3x | |
9
FOR THE YEARS ENDED SEPTEMBER 30, | | |
| (1) | | In fiscal 2005, we recorded pre-tax restructuring and impairment costs totaling $39.2 million. The restructuring and impairment costs were associated with the impairments of goodwill related to our operations in the United Kingdom and Mexico, the closure of our Bothell, Washington (“Bothell’) facility (as previously announced in fiscal 2004), the write-off of the remaining elements of a shop floor data-collection system, and other restructuring costs. We also recorded certain adjustments to previously recognized restructuring and impairment costs. |
|
| (2) | | In fiscal 2004, 2003 2002 2001 2000
---- ---- ---- ---- ----
OPERATING STATEMENT DATA
Net sales $1,040,858 $ 807,837 $ 883,603 $1,062,304 $ 751,639
Gross profit 86,778 52,965 81,320 131,790 107,164
Gross margin percentage 8.3% 6.6% 9.2% 12.4% 14.3%
Operating income (loss) 9,216(2) (71,531)(3) (3,636)(4) 68,388(5) 69,870(6)
Operating margin percentage 0.9% (8.9%) (0.4%) 6.4% 9.3%
Net income (loss) (31,580)(2) (67,978)(3) (4,073)(4) 39,150(5) 40,196(6)
Earnings (loss) per share (diluted) $ (0.74)(2) $ (1.61)(3) $ (0.10)(4) $ 0.91(5) $ 1.04(6)
CASH FLOW STATEMENT DATA
Cash flows provided by (used in) operations $ (21,352) $ (19,953) $ 130,455 $ 119,479 $ (51,392)
Capital equipment additions 18,086 22,372 30,760 54,560 44,228
BALANCE SHEET DATA
Working capital $ 215,360 $ 210,315 $ 219,854 $ 277,055 $ 213,596
Total assets 545,708 553,054 583,945 602,525 515,608
Long-term debtwe recorded restructuring and capitalimpairment costs of approximately $9.3 million, which were primarily associated with the remaining lease obligations 23,160 23,502 25,356 70,016 141,409
Shareholders' equity 351,413 371,016 430,689 426,852 209,362
Return on averagefor two previously abandoned facilities near Seattle, Washington (the “Seattle facilities”), severance costs associated with the closure of our Bothell facility, the impairment of certain abandoned software, and the remaining lease obligation and severance costs related to the consolidation of a satellite PCB-design office in Hillsboro, Oregon into another Plexus design office. In addition, we recorded a $36.8 million valuation allowance for deferred income tax assets. |
|
| (3) | | In fiscal 2003, we recorded restructuring and impairment costs of approximately $59.3 million ($36.8 million after-tax) which primarily related to closing facilities in Richmond, Kentucky and San Diego, California. In addition, we adopted Statement of Financial Accounting Standards No. 142 for the accounting of goodwill and other intangible assets. We determined that a pre-tax transitional impairment charge of $28.2 million was required, which was recorded as a cumulative effect of a change in accounting for goodwill ($23.5 million after-tax). |
|
| (4) | | In fiscal 2002, we completed the acquisition of certain assets (5.7%of MCMS, Inc. (“MCMS”) (12.0%) (0.7%) 7.0% 10.8%
Return on average equity (8.7%) (17.0%) (0.9%) 12.3% 22.6%
Inventory turnover ratio 6.2x 6.5x 7.0x 5.3x 4.4x
|
8
(1) Historical results have not been restated for the fiscal 2001 merger
with e2E Corporation ("e2E"), as it would not differ materially from
reported results.
(2) In fiscal 2004, we recorded restructuring and impairment costs of
approximately $9.3 million associated with the lease obligations for
two previously abandoned facilities near Seattle, Washington (the
"Seattle facilities"), the severance costs associated with the
closure of the existing Bothell, Washington facility, the impairment
of certain abandoned software, and the lease obligation and
severance costs related to the consolidation of a satellite
PCB-design office in Hillsboro, Oregon into another Plexus design
office. In addition, we recorded a $36.8 million valuation allowance
related to our deferred income tax assets.
(3) In response to the reduction in our sales and reduced capacity
utilization, we recorded fiscal 2003 restructuring costs of
approximately $59.3 million. These costs totaled approximately $36.8
million after-tax. In addition, we adopted SFAS No. 142 for the
accounting of goodwill and other intangible assets. Under the
transitional provisions of Statement of Financial Accounting
Standards No. 142, we determined that a pre-tax transitional
impairment charge of $28.2 million was required, which was recorded
as a cumulative effect of a change in accounting for goodwill ($23.5
million after-tax).
(4) In January 2002, we completed the acquisition of certain assets of
MCMS, Inc. ("MCMS"). The results from operations of the assets
acquired from MCMS are reflected in our financial statements from
the date of acquisition. No goodwill resulted from the acquisition.
We incurred approximately $0.3 million of acquisition costs in
fiscal 2002 associated with the acquisition of the MCMS operations.
In response to the reduction in our sales and reduced capacity
utilization, we also recorded fiscal 2002 restructuring costs of
approximately $12.6 million. Together, these costs totaled
approximately $8.3 million after-tax.
(5) In connection with the May 2001 acquisition of Qtron Inc. ("Qtron". The results from operations of the assets acquired from MCMS are reflected in our financial statements from the date of acquisition (January 2002). No goodwill resulted from the acquisition. We incurred approximately $0.3 million of acquisition costs in fiscal 2002 associated with the acquisition of the MCMS operations. We also recorded fiscal 2002 restructuring costs of approximately $12.6 million. Together, these costs totaled approximately $8.3 million after-tax. |
| (5) | | In connection with the May 2001 acquisition of Qtron Inc. (“Qtron”) and merger with e2E, we recorded acquisition and merger costs of approximately $1.6 million ($1.4 million after-tax). In connection
with an economic slowdown, we recorded restructuring costs of
approximately $1.9 million ($1.1 million after-tax). The effects of
the acquisition of Qtron are reflected in the financial statements
from the date of acquisition.
(6) In connection with the merger with Agility and the acquisitions of
Keltek (Holdings) Limited ("Keltek"), and the turnkey electronics
manufacturing services operations of Elamex, S.A. de C.V. ("Mexico
turnkey operations"), Plexus recorded acquisition and merger costs
of $1.1 million ($0.9 million after-tax). We also recorded restructuring costs of approximately $1.9 million ($1.1 million after-tax). The effects of the acquisition of Qtron are reflected in the financial statements from the date of acquisition. |
10
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a participant
Plexus participates in the Electronics Manufacturing Services ("EMS"(“EMS”) industry. WeAs a contract manufacturer, we provide product realization services to original equipment manufacturers, or OEMs,(“OEMs”), and other technology companies in the
networking/datacommunications/telecom, medical, industrial/commercial, computer
and transportation/other industries.a number of industry sectors that are described below. We provide advanced electronics design, manufacturing and testing services to our customers with a focus on complex and global fulfillment solutions, high technology manufacturing and test services, and high reliability products. We offer our customers the ability to outsource all stages of product realization, including:including development and design, materials sourcing, procurement and management, prototyping and new product introduction, testing, manufacturing, product configuration, logistics and test/repair. We are increasingly providing fulfillment and logistic services to many of our customers. Direct Order Fulfillment (“DOF”) entails receiving orders from our customers that provide the final specifications required by the end customer. We then build to order and configure to order and deliver the product directly to the end customer. The DOF process relies on Enterprise Resource Planning (“ERP”) systems integrated with those of our customers to manage the overall supply chain from parts procurement through manufacturing and logistics. The following information should be read in conjunction with our consolidated financial statements included herein and the "Risk Factors"“Risk Factors” section beginning on page 19.24.
Our customers include both industry-leading original equipment manufacturers and technology companies. Due tocompanies that have never manufactured product internally. As a result of our focus on serving manufacturers inindustries that rely on advanced electronics technology, our business is influenced by
major technological trends such as the level and rate of development of telecommunications infrastructure and the expansion of networknetworks and internet use of the internet. In addition, the federal Food and Drug Administration'sAdministration’s approval of new medical devices andcan affect our business. Our business has also benefited from the expansion oftrend to increased outsourcing by OEM's and technology companies.OEM’s.
We provide most of our contract manufacturing services on a turnkey basis, which means that we procure some or all of the materials required for product assembly. We provide some services on a consignment basis, which means that the customer supplies
the necessary materials,
necessaryand we provide the labor and other services required for product assembly. Turnkey services
includerequire material procurement and warehousing, in addition to manufacturing, and involve greater resource
investmentinvestments than consignment
9
services. Other than certain test equipment used for internal manufacturing, we do not design or manufacture our own proprietary products.INDUSTRY SECTORS
Our business development efforts are focused on specific end-markets as follows:
| • | | Wireline/Networking — The manufacture and design of electronic products and technologies that transmit and store voice, data and video electronically using wire conductors and/or optical fibers. Products include routers, switches, servers, security devices, storage devices, gateways, bridges, and hubs, internet service and optimization gear. |
|
| • | | Wireless infrastructure— The manufacture and design of electronic products and technologies that support the management and delivery of wireless voice, data and video communications. Products include cellular base stations, wireless and radio access, broadband wireless access, networking gateways and devices. |
|
| • | | Medical — The manufacture and design of electronic products and technologies mainly for advanced electronic, medical instruments, therapeutic devices, diagnostic devices, imaging devices and communication devices. Products include wireless implantable programmers, patient communication devices, surgical laser instruments, harmonic scalpel instruments, blood analysis instruments, wound management instruments, ultrasound systems, computed tomography (“CT”) components, and x-ray systems. |
|
| • | | Industrial/Commercial — The manufacture and design of electronic products used primarily in a broad array of industrial and commercial sectors of the economy. Products include industrial controls, high-end oscilloscopes, advanced electrical meters, and products that control and coordinate audio visual systems. |
11
| • | | Defense/Security/Aerospace — The manufacture and design electronic products for the defense, homeland security and aerospace industries. Products include detection devices, secure data communications equipment, computers, vision systems and avionics systems. |
EXECUTIVE SUMMARY
Our primary objective at the outset offocus as we entered fiscal 20042005 was to returnimprove the company to profitability. The restructuring actionsCompany’s profitability primarily by attaining profitable growth in revenues while improving operational efficiencies, including better management of working capital. Revenues in fiscal 2005 increased 18 percent over the prior year, and gross margins, both in absolute dollars and as a percentage of revenues, improved quarter-over-quarter throughout the fiscal year. Gross margins in the first half of the preceding years had
lowered our cost structure and improved capacity utilization. We also
strengthened and reorganized our sales, marketing and business development
function to drive sales growth and strengthen our customer portfolio. As a
result of this focus and improved industry demand, especially within the
networking/datacommunication industry, we achieved fiscal 2004 sales growth of
29 percent, without making acquisitions. We believe this to be the highest
organic growth rate within the EMS industry. This growth rate was well above the
approximately 18 percent annual growth rate expected by various industry surveys
for the broad EMS industry, so we believe we have consequently gained market
share.
The rapid sales growth in fiscal 2004 placed additional strains on the
organization, and consequently, gross margins and overall profitabilityyear were adversely affected by manufacturing inefficiencies and material control issues in our facility in Juarez, Mexico (“Juarez”). In addition, we incurred anticipated start-up losses associated with a new facility in Penang, Malaysia (“Penang”), which attained profitability only later in the fiscal year. Profitability was enhanced by the economies of scale associated with higher new program-related transition and training
expenses,revenues than in the prior year, as well as the needcontinued application of lean manufacturing initiatives.
Better inventory management allowed us to gain experience manufacturing new programs.
Year-over-year, we addedincrease revenues without substantially increasing inventory levels, and trained approximately 1,300 new production-related
employees at sites located aroundinventory turnover increased to 6.4 from the world, principallyprior year’s 6.2. We also negotiated more favorable payment terms with many of our suppliers, which increased accounts payable balances and improved our cash conversion cycle. Our focus on improving working capital management allowed us to finance revenue growth internally and still generate positive cash flows from operations resulting in Asiaa $63.8 million increase in cash and Mexico, in
order to support our sales growth. In addition, we purchased and substantially
outfitted a second manufacturing and engineering facility in Penang, Malaysia
("Penang"). This expansion was driven by additional demand from our customers
for more production in this relatively low-cost country.short-term investments.
As we look toenter fiscal 2005, our primary objective2006, we are encouraged by the improved operational metrics achieved in the prior year. Our goal is to continue to improve profitability. We expectfinancial performance and to achieve this goal with improvements in capacity
utilization and operating efficiencies through a combination of moderate sales
expansion and lean manufacturing and inventory management initiatives. We also
recently announced restructuring plans to close our Bothell, Washington
("Bothell") manufacturing and engineering facility in mid-fiscal 2005, which we
expect will improve overall capacity utilization once the facility is closed.
Additionally, we will remain intensely focused on working capital utilization
andearn an after-tax return on capital employed.employed greater than our estimated 15 percent weighted average cost of capital. This, we believe, can be achieved by expanding operating margins and accelerating our capital employed turnover through further improvements in the management of working capital. Based on customer indications of expected demand and management estimates of new program wins, our internal projections currently anticipate full fiscal 20052006 sales growth of approximately 15 percent to 18 percent. We currently expect first quarter of fiscal 20052006 sales to be in the range of $280$315 million to $290$325 million; however, our results will ultimately depend on the actual levels of customer order levels. We anticipate thatorders.
FACILITY CLOSURES/ACQUISITIONS
In fiscal 2005, we closed our Bothell engineering and manufacturing facility and transitioned the initial stages of
production in the newremaining customer programs to other Plexus sites.
In fiscal 2004, we purchased a second manufacturing facility in Penang, will impair our overall profitability
through at leastwhich commenced manufacturing activities in the first halfquarter of fiscal 2005. Additionally, incremental costs
associated with transitioning programsThe expansion was driven by additional demand from our recently announced closure of
our Bothell facility and continued near-term weakness at a couple of our sites
will also impair our overall profitabilitycustomers for more production in the first half of fiscal 2005.
FACILITY CLOSURES/ACQUISITIONSthis relatively low-cost country. In fiscal 2004, we closed our PCB design operations in Hillsboro, Oregon ("Hillsboro"(“Hillsboro”) and announced plans to close our Bothell facility by the second
quarter ofin fiscal 2005. In addition, we sold a small PCB design operationsoperation in Tel Aviv, Israel to a group of former employees; however, this transaction did not have a material impact on our consolidated financial statements.
In fiscal 2003, we closed our manufacturing facilities in San Diego, California
("(“San
Diego"Diego”) and Richmond, Kentucky
("Richmond"(“Richmond”), and ceased production in our oldest facility in Neenah, Wisconsin
("Neenah"(“Neenah”). In addition, we sold our PCB design operations in Nashua, New Hampshire to a group of former employees; however, this transaction did not have a material impact on our consolidated financial statements.
In January 2002, we acquired certain assets of MCMS, Inc. ("MCMS"), an
electronics manufacturing services provider, for approximately $42.0 million in
cash. The assets purchased from MCMS include manufacturing operations in Penang,
Malaysia; Xiamen, China; and Nampa, Idaho. The consideration for this
acquisition did not include the assumption of any interest-bearing debt, but
included the assumption of total liabilities of approximately $7.2 million. The
results from MCMS's operations are reflected in our financial statements from
the date of acquisition. No goodwill resulted from this acquisition. We incurred
approximately $0.3 million of acquisition costs in the second quarter of fiscal
2002 associated with the acquisition of MCMS.
10
RESULTS OF OPERATIONS
Net sales.Net sales for the indicated periods were as follows (dollars in millions):
Fiscal years ended
September 30,
----------------------------------
2004 2003 2002
----------------------------------
Net Sales $ 1,040.9 $ 807.8 $ 883.6
| | | | | | | | | | | | | |
| | | Fiscal years ended |
| | | October 1, | | September 30, | | September 30, |
| | | 2005 | | 2004 | | 2003 |
| Net Sales | | $ | 1,228.9 | | | $ | 1,040.9 | | | $ | 807.8 | |
12
Net sales for the fiscal year ended October 1, 2005 increased 18 percent from the year ended September 30, 2004. The increase reflects increased growth in all sectors, particularly in the wireless infrastructure, wireline/networking, industrial and medical sectors.
The net sales growth in the wireline/networking and medical sectors was primarily associated with Juniper and GE, respectively, our largest customers. Net sales growth in the wireline/networking sector is expected to continue in fiscal 2006 based on current customer forecasts and the expected start-up of new programs. In the medical sector, we anticipate that net sales may decline in fiscal 2006 due largely to uncertainty over future manufacturing for a key customer in the United Kingdom (see further discussion below under “Fiscal 2005 Restructuring and Impairment Costs—Goodwill Impairment”).
The growth in the wireless infrastructure and industrial sectors reflect new program wins from both new and existing customers. Based on current customer forecasts, we anticipate that net sales in the industrial sector will be relatively flat in fiscal 2006. Although we achieved fiscal 2005 net sales growth in the wireless infrastructure sector, a key end-customer of one of our customers in this sector recently exercised an option to manufacture some of our customer’s product. The impact of this event on us is unknown; however, the event prompts a less optimistic outlook for the wireless infrastructure sector in the first half of fiscal 2006.
In the defense/security/aerospace sector, we obtained new programs during fiscal 2005, which we anticipate will result in fiscal 2006 net sales growth in this sector as we move beyond start-up production for these new customers.
Net sales for the fiscal year ended September 30, 2004 increased 29 percent from the year ended September 30, 2003. The increase reflects strengthened end-market demand particularly in the networking/
datacommunications,wireline/networking, wireless infrastructure, medical and industrialdefense/security/aerospace sectors, as well as new program wins from both new and existing customers.customers in all sectors. Net sales growth in the computer industry
declined to 6 percent of consolidated net sales in fiscal 2004 from 12 percent
of consolidated net sales in fiscal 2003wireline/networking sector was primarily associated with Juniper, our largest customer. The industrial/commercial sector remained relatively flat due primarily to weakened end-market demand from two customers.
Net sales for the year ended September 30, 2003 decreased 9 percent from
the year ended September 30, 2002. Our reduced sales reflected the continued
slowdown in the technology markets served by Plexus, primarily in the
network/datacommunications/ telecom, industrial/commercial and computer
industries. Net sales in fiscal 2003 compared to net sales in fiscal 2002 were
also adversely affected by the loss of the primary customer in our former San
Diego facility. The slowdown in the technology markets in fiscal 2003 was
offset, in part, by increased sales to the medical industry.one customer.
The percentages of net sales to customers representing 10 percent or more of sales and net sales to our ten largest customers for the indicated periods were as follows:
| | | | | | | | | | | | | |
| | | Fiscal years ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Juniper Networks | | | 19 | % | | | 14 | % | | | * | |
| General Electric | | | 12 | % | | | * | | | | * | |
| Siemens | | | * | | | | * | | | | 12 | % |
| Top 10 customers | | | 60 | % | | | 51 | % | | | 55 | % |
Fiscal years ended
September 30,
-------------------------------
2004 2003 2002
-------------------------------
Juniper Networks 14% | | |
* *
Siemens * 12% *
Top | | Represents less than 10 customers 51% 55% 48%
|
* Represents less than 10 percent of net sales
Sales to all of our largest customers may vary from time to time depending on the size and timing of program commencement, termination,commencements, terminations, delays, modifications and transitions. We remain dependent on continued sales to our significant customers, and weour customer concentration has increased during the year. We generally do not obtain firm, long-term purchase commitments from our customers. Customers'Customers’ forecasts can and do change as a result of their fluctuating end-market demand and other factors. Any material change in orders from these major accounts, or other customers, could materially affect our results of operations. For example, see Note 9 in Notes to Consolidated Financial Statements for matters which could affect our future sales to a significant customer in the United Kingdom. In addition, as our percentage of sales to customers in a specific industry becomes larger relative to other industries (as we are currently experiencing significant increases in the networking/datacommunications/telecomwireline/networking industry), we will become increasingly dependent upon economic and business conditions affecting that industry.
13
Our net sales by industry for the indicated periods were as follows:
Fiscal years ended
September 30,
--------------------------------
2004 2003 2002
--------------------------------
Networking/Datacommunications/Telecom 43% 36% 36%
Medical 31% 32% 28%
Industrial/Commercial 15% 15% 20%
Computer 6% 12% 11%
Transportation/Other 5% 5% 5%
11
| | | | | | | | | | | | | |
| | | Fiscal years ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Wireline/Networking | | | 38 | % | | | 37 | % | | | 33 | % |
| Wireless Infrastructure | | | 10 | % | | | 10 | % | | | 9 | % |
| Medical | | | 30 | % | | | 31 | % | | | 33 | % |
| Industrial/Commercial | | | 17 | % | | | 17 | % | | | 22 | % |
| Defense/Security/Aerospace | | | 5 | % | | | 5 | % | | | 3 | % |
| | | | | | | | | | |
| | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | |
For our significant customers, we generally manufacture product in more than one location. Net sales to Juniper, our largest customer, occur in our operating segments in the United States and Asia. Net sales to GE, a major customer, occur in our segments in the United States, Asia and Mexico. See Note 12 in Notes to Consolidated Financial Statements for certain financial information regarding our operating segments, including a detail of net sales by operating segment.
Gross profit.Gross profit and gross margins for the indicated periods were as follows (dollars in millions):
Fiscal years ended
September 30,
-----------------------------
2004 2003 2002
-----------------------------
Gross Profit $ 86.8 $ 53.0 $ 81.3
Gross Margin 8.3% 6.6% 9.2%
| | | | | | | | | | | | | |
| | | Fiscal years ended |
| | | October 1, | | September 30, | | September 30, |
| | | 2005 | | 2004 | | 2003 |
| Gross Profit | | $ | 105.7 | | | $ | 86.8 | | | $ | 53.0 | |
| Gross Margin | | | 8.6 | % | | | 8.3 | % | | | 6.6 | % |
For the fiscal year ended October 1, 2005, gross profit improvements were primarily due to higher net sales and improved operating performances at several sites arising from lean manufacturing and other cost-reduction initiatives. Gross profit forand gross margin improvements were moderated, however, as a result of manufacturing inefficiencies and material control issues in our Juarez facility. Lower sales from traditionally higher-margin engineering services, and anticipated start-up costs related to a new facility in Penang also negatively impacted gross profit and gross margin in fiscal 2005.
For the fiscal year ended September 30, 2004, increased $33.8
million from the fiscal year ended September 30, 2003, while gross margins
increased to 8.3 percent from 6.6 percent over this same period. The improvement in gross profit and gross margin was primarily due to higher net sales and the benefits of the prior yearyear’s restructuring actions that resulted in enhanced manufacturing capacity utilization and better absorption of fixed manufacturing expenses.utilization. The primary prior yearfiscal 2003 restructuring actions benefiting fiscal 2004 gross margins includeincluded the closures of the San Diego and Richmond facility closures.facilities. The gross profit and gross margin improvements were somewhatpartially offset, however, by manufacturing inefficiencies related to the start of many new programs, higher compensation and benefits costs, including variable incentive compensation, and increased amortization of capitalized costs associated with an enterprise resource planning ("ERP")our common ERP platform.
Gross profit for the fiscal year ended September 30, 2003 decreased $28.3
million from the fiscal year ended September 30, 2002, while gross margins
decreased to 6.6 percent from 9.2 percent over this same period. The decline in
gross profit and gross margin in fiscal 2003 from 2002 was due primarily to a
slowdown in end-market demand, particularly in the
networking/datacommunications/telecom and industrial/commercial industries,
which resulted in reduced utilization of manufacturing capacity. Gross margins
were also impacted by lower product pricing and higher costs incurred to
transfer customer programs to other Plexus operating sites as a result of
closing our San Diego and Richmond facilities.
Gross margins reflect a number of factors that can vary from period to period, including product and service mix, the level of new facility start-up costs, inefficiencies attendant to the transition of new programs, product life cycles, sales volumes, price erosion within the electronics industry, overall capacity utilization, labor costs and efficiencies, the management of inventories, component pricing and shortages, the mix of turnkey and consignment business, fluctuations and timing of customer orders, changing demand for our customers'customers’ products and competition within the electronics industry. Additionally, turnkey manufacturing involves the risk of inventory management, and a change in component costs can directly impact average selling prices, gross margins and net sales. Although we focus on expanding gross margins, there can be no assurance that gross margins will not decrease in future periods.
Most of the research and development we conduct is paid for by our customers and is therefore included in both sales and cost of sales. We conduct our own research and development, but that research and development is not specifically identified, and we believe such expenses are less than one percent
of our sales.
not material.
14
Operating expenses.Selling and administrative (S&A) expenses for the indicated periods were as follows (dollars in millions):
Fiscal years ended
September 30,
-----------------------------
2004 2003 2002
-----------------------------
Selling and administrative expense $ 68.3 $ 65.2 $ 66.9
Percent of sales 6.6% 8.1% 7.6%
| | | | | | | | | | | | | |
| | | Fiscal years ended |
| | | October 1, | | September 30, | | September 30, |
| | | 2005 | | 2004 | | 2003 |
| Selling and administrative expense | | $ | 76.3 | | | $ | 68.3 | | | $ | 65.2 | |
| Percent of sales | | | 6.2 | % | | | 6.6 | % | | | 8.1 | % |
The dollar increase in S&A for the fiscal year ended October 1, 2005 was due to a combination of factors including increased spending for internal and external resources to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), an increase in bad debt expense, in part due to a small customer that encountered a liquidity issue during fiscal 2005, and the expense of additional personnel and other administrative expenses to support growth in Asia. These increases were offset in part by lower variable incentive compensation. The decrease in S&A as a percent of net sales was due primarily to the 18 percent increase in net sales in fiscal 2005 over the prior year.
Through fiscal 2005, we accounted for stock option awards under the provisions of Accounting Principles Board No. 25, which resulted in no compensation expense in our consolidated results of operations. Effective in fiscal 2006, we will be required to adopt Statement of Financial Accounting Standards (“SFAS”) No 123(R), “Share-Based Payment: An Amendment of FASB Statements No. 123 and 95.” SFAS No 123(R) requires that we recognize stock-based compensation as an expense in our results of operations. The adoption of SFAS No. 123(R) is not expected to have a significant effect on our financial condition and will not affect consolidated cash flows; however, if stock options remain an important element of our long-term compensation for directors, officers and key employees, SFAS No. 123(R) is expected to have a significant adverse effect on our consolidated results of operations. Based on unvested options outstanding at October 1, 2005, the future compensation cost to be recognized as a result of the implementation of SFAS No. 123(R) is approximately $0.4 million, nearly all of which will be recognized in fiscal 2006.
The dollar increase in S&A for the fiscal year ended September 30, 2004 increased $3.1
million from the fiscal year ended September 30, 2003was primarily due to variable incentive compensation expense and additional expenses for the support of information technology systems support related to the implementation of the newour common ERP platform, offset, in part, by $1.7 million of recoveries of accounts receivable that were either written off or reserved for in prior periods. In addition, we
are currently undergoing a comprehensive effort to comply with Section 404 of
the Sarbanes Oxley Act of 2002 ("Section 404"). During fiscal 2004, we devoted substantial internal resources in accounting, information technology and legal, supplemented by the use of external consultants, to the Section 404 compliance effort. We anticipate that we will continue to address our Section 404
compliance efforts in fiscal 2005 primarily through the use of internal
resources. The significant decrease in S&A as a percent of net sales was due primarily to the highhigher level of net sales over the prior year.
Restructuring and impairment costs.The following table summarizes our restructuring and impairment costs for fiscal 2005, 2004, and 2003 (dollars in millions):
| | | | | | | | | | | | | |
| | | Fiscal years ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Goodwill impairment | | $ | 26.9 | | | $ | — | | | $ | 5.6 | |
| Lease exit costs and other | | | 6.5 | | | | 0.4 | | | | 10.9 | |
| Asset impairments | | | 3.9 | | | | 2.1 | | | | 32.4 | |
| Severance costs | | | 2.2 | | | | 2.5 | | | | 10.4 | |
| Adjustments to lease exit costs | | | (0.7 | ) | | | 4.3 | | | | — | |
| Adjustments to asset impairments | | | 0.4 | | | | — | | | | — | |
| | | | | | | | | | |
| Total restructuring and impairment costs | | $ | 39.2 | | | $ | 9.3 | | | $ | 59.3 | |
| | | | | | | | | | |
The restructuring and impairment costs were associated with various segments. Such costs are not allocated to operating segments, as management excludes such costs when assessing the performance of the operating segments. See Note 12
S&A expensesin Notes to Consolidated Financial Statements for certain financial information regarding our operating segments, including a summary of restructuring and impairment costs by operating segment. Fiscal 2005 restructuring and impairment costs:During fiscal 2005, we recorded pre-tax restructuring and impairment costs totaling $39.2 million. The restructuring and impairment costs were associated with goodwill impairment, the closure of the Bothell facility, the write-off of the remaining elements of a shop floor data-collection system, and other restructuring costs and adjustments to previously recognized restructuring and impairment actions.
15
Goodwill Impairment. We are required to perform goodwill impairment tests at a minimum on an annual basis, for which we selected the third quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the third quarter of fiscal 2005, we recorded goodwill impairment of $26.9 million, of which $16.1 million represented a partial impairment of goodwill associated with our operations in the United Kingdom (our European operating segment) and $10.8 million represented a full impairment of goodwill associated with our operations in Juarez (our Mexican operating segment). As of October 1, 2005, we have remaining goodwill of $7.0 million related to our operations in the United Kingdom.
The impairment of goodwill associated with operations in the United Kingdom arose primarily from a significant medical customer’s recently expressed intention to transfer future production by the end of fiscal 2006 from the United Kingdom to a lower-cost location. The impairment also reflects lowered expectations for the United Kingdom’s electronics manufacturing services industry, in general. The impairment of goodwill associated with operations in Juarez reflects a lowered forecast of near-term profits and cash flows associated with recent operational issues and an anticipated transfer of a major customer’s program to another Plexus manufacturing facility.
In July 2005, subsequent to our goodwill evaluation, our significant customer in the United Kingdom referred to above announced that it was under investigation by the Office of Communication (“OOC”), a government regulator in the United Kingdom, and would postpone the further installation of its product in the United Kingdom until the regulatory situation became clearer. In September 2005, the customer provided an updated announcement indicating that although the OOC’s investigation was still continuing, the investigation had appeared to diminish in scope, which the customer viewed as an encouraging step toward a positive resolution of the investigation. However, our future manufacturing for this customer remains uncertain.
Bothell Facility Closure. During fiscal year ended September 30, 2003 decreased2005, we incurred significant restructuring costs associated with the closure of the Bothell facility. We transferred key customer programs from the Bothell facility (a part of our United States operating segment) to other Plexus locations, primarily in the United States. This restructuring reduced our capacity by 97,000 square feet and affected approximately 160 employees. We completed the closure of the Bothell facility during fiscal 2005 (as previously announced in fiscal 2004). During fiscal 2005 and 2004, we incurred total restructuring and impairment costs associated with the Bothell facility closure of approximately $9.3 million, which consisted of the following elements:
| • | | $7.5 million was recorded in fiscal 2005 and consisted of $6.2 million for the facility lease, $1.1 million for employee retention costs and $0.2 million of other associated costs. The liability for the facility lease was recognized and measured at fair value for the future remaining lease payments subsequent to abandonment, less any estimated sublease income that could reasonably be obtained for the property; |
|
| • | | $1.8 million was recorded in fiscal 2004 and consisted of $1.5 million for employee severance and $0.3 million for fixed asset impairments. |
Shop Floor Data-Collection System Impairment.During fiscal 2005, we recorded a $3.8 million impairment of the remaining elements of a shop floor data-collection system. We had previously recorded a $1.7 million from the fiscal year ended September 30, 2002 primarily due to fiscal
2003 restructuring actions and reductions in corporate spending. These
reductions were offset, in part, by approximately $1.2 million of additional
expenses for information technology systems supportimpairment related to the implementationshop floor data-collection system in fiscal 2004 when it was determined that certain elements would not be utilized in any capacity. During the first quarter of fiscal 2005, we extended a maintenance and support agreement for the data-collection system through July 2005 to provide additional time to evaluate the remaining elements of the new ERP platform.
Our ERP platform is intendedsystem. Based on our evaluation, we determined that the shop floor data-collection system was impaired. We abandoned deployment of these remaining elements of the shop floor data-collection system because the anticipated business benefits could not be realized. These costs were not allocated to augment our management information systems
and includes various software systems to enhance and standardize our ability to
globally translate information from production facilities into operational and
financial information and create a consistent set of core business applications
at our worldwide facilities.specific geographic operating segment.
Other Restructuring Costs. During fiscal 2004, one additional manufacturing
facility was converted2005, we also recorded the following other restructuring and impairment costs:
| • | | $0.5 million, which consisted of $0.4 million associated with a workforce reduction and $0.1 million of asset impairments at the Juarez facility (our Mexican operating segment). The Juarez workforce reduction affected approximately 50 employees; |
|
| • | | $0.3 million for severance associated with the elimination of a corporate executive position. These costs were not allocated to a specific geographic operating segment; |
16
| • | | $0.2 million for a planned workforce reduction at a facility in Maldon, England (“Maldon”). As noted above, a significant customer in the United Kingdom intends to transfer future production from the United Kingdom to a lower-cost location by the end of fiscal 2006. As a result, we plan to consolidate the Maldon manufacturing operations into our facility in Kelso, Scotland and focus the Maldon facility on fulfillment and service and repair. This transition is anticipated to be completed by the end of fiscal 2006 and will result in a net workforce reduction of approximately 25 employees. During the transition period, we anticipate additional restructuring costs in the amount of $0.4 million to $0.6 million, most of which relates to employee retention costs; |
|
| • | | $0.3 million of other restructuring costs. These costs were not allocated to a specific geographic operating segment. |
Adjustments to the new ERP platform, which in additionProvisions: During fiscal 2005, we recorded certain adjustments to the two
manufacturing facilities converted in 2003, results in approximately 50 percent
of our net sales being managed on the new platform. We anticipate converting at
least one more facilitypreviously recognized restructuring and impairment costs. All adjustments to the new ERP platform in fiscal 2005. Training and
implementation costsprovisions are expected to continue over the next few quarters as we
make system enhancements and convert an additional facility to the new ERP
platform. The conversion timetable and project scope remain subject to change
based upon our evolving needs and sales levels. In addition to S&A expenses associated with prior actions in the new ERP system, we continue to incur capital expenditures
for hardware, softwareUnited States:
| • | | $0.4 million additional expense related to additional impairment of the closed facility in San Diego. During the first quarter of fiscal 2005, we subleased the remaining part of the San Diego facility, which resulted in the additional impairment to adjust the carrying value of the remaining part of the San Diego facility to its net present value of future sublease income; |
|
| • | | a $0.4 million reduction in an accrual for lease exit costs associated with a warehouse located in Neenah. The Neenah warehouse was previously abandoned as part of a fiscal 2003 restructuring action; however, we reactivated use of the warehouse in the second quarter of fiscal 2005; |
|
| • | | a $0.3 million reduction in an accrual for lease obligations for one of the closed facilities near Seattle. We subleased one of the two closed Seattle facilities held under operating leases. |
We currently expect that our fiscal 2005 restructuring actions will primarily benefit cost of sales through lower facilities costs and certain other costs for testing and installation. As
of September 30, 2004, net property, plant and equipment includes $26.5 million
related to the new ERP platform, including $3.9 million capitalized in fiscal
2004. We anticipate incurring at least an additional $6.0 million of capital
expenditures for the ERP platform through fiscal 2005.
employee expenses.
Fiscal 2004 restructuring and impairment actions:During fiscal 2004, we recorded pre-tax restructuring and impairment costs oftotaling $9.3 million. The restructuring and impairment costs were primarily associated with recognizingadjustments to previously recognized restructuring actions, specifically, additional lease obligations for two previously abandoned facilities near
Seattle Washington (the "Seattle facilities"),facilities. In addition, we incurred restructuring and impairment costs associated with the planned closure of our Bothell engineering and manufacturing facility, the write-down of certain software components of our ERP platform and the consolidationclosure of a satellite PCB-design office in Hillsboro, Oregon into another Plexus design office.Oregon.
Adjustments to Provisions: The estimated cost for the closure of the Seattle facilities was included in our fiscal 2003 restructuring actions. The lease-related restructuring costs recorded in fiscal 2003 were based on future lease payments subsequent to abandonment, less estimated sublease income. As of September 30, 2004, the Seattle facilities had not been subleased. Based on the remaining term available to lease these facilities and the weaker than expected conditions in the local real estate market, we determined that we would most likely not be able to sublease the Seattle facilities. Accordingly, we recorded additional lease-related restructuring costs of $4.2 million in fiscal 2004. We also recorded $0.1 million of lease-related restructuring costs on a facility in Neenah, which had also been included in restructuring actions in fiscal 2003. As part ofThese adjustments were associated with our efforts to align our service offering with the evolving
preferences of our customers, we are in the process of replicating the
capabilities of our United States operating segment.
Bothell facility at other Plexus design and manufacturing
locations that have higher productivity. We currently anticipate transferring
key customer programs from the Bothell engineering and manufacturing facility to
other Plexus locations primarily in the United States. This restructuring will
reduce our manufacturing capacity by 97,000 square feet and affect approximately
160 employees. We currently expect the consolidation efforts will be completed
by mid-fiscal 2005, subject to customer timelines.Facility Closure: In fiscal 2004, we incurred restructuring and impairment costs related to the Bothell closure of $1.8 million, which consisted of $1.5 million associated with employee terminations and $0.3 million associated with fixed asset impairments. In fiscal 2005, we
anticipate the Bothell closure will result in additional restructuring costs of
approximately $8.2 million, which will consist of $2.2 million associated with
employee terminations and $6.0 million associated with the facility lease. Our fiscal 2004 restructuring actions, combined with other factors, also led to the establishment of a $36.8 million valuation allowance on our deferred income tax assets in fiscal 2004 (see discussion below).
Shop Floor Data-Collection System Impairment: We recorded a $1.7 million impairment of certain software components of our ERP platform, which primarily resulted from a change in our deployment
strategy for a shop floor data-collection system. Someplatform. We determined that some elements of thea shop-floor data-collection system willwould not be deployed because the originally anticipated business benefits could not be realized. TheAlthough we continued to evaluate the remaining elements of the shop floor data-collection system are still under evaluation. As of
September 30, 2004, the capitalized costs of the remaining elements of the shop
floor data system totaled approximately $3.8 million. A change in the scope of
this project could result ininto fiscal 2005, an impairment of the remaining elements of the shop floor data-collection system.
Finally, wesystem was taken in fiscal 2005 after the evaluation was complete. These costs were not allocated to a specific geographic operating segment.
17
Closure of a PCB-Design Office: We incurred approximately $1.5 million of other restructuring and impairment costs in fiscal 2004 primarily related to the consolidation of the Hillsboro satellite PCB-design office into another Plexus design office. The Hillsboro related restructuring costs were primarily for employee termination costs and contract termination costs
13
associated with leased facilities and software service providers. In fiscal
2005, we anticipate incurring an additional $0.1 million of restructuring costs
related to employee relocations. Approximately 40 employees were affected by this restructuring. Fiscal 2003 restructuring and impairment actions:During fiscal 2003, we recorded pre-tax restructuring and impairment costs of $59.3 million. These costs resulted from actions taken in response to reductions in our end-market
demand. Theserestructuring actions included closingthe closure of the San Diego and Richmond the consolidation
of several leased facilities, re-focusing the PCB design group, a write-off of
remaining goodwill associated with the acquisition of the San Diego facility,
the write-down of underutilized assets to fair value at several locations, and the costs associated with reductions in work force in several manufacturing,
engineering and corporate groups.various other actions. These measures were intended to align our capabilities and resources with lower industry demand.
San Diego Facility Closure: The Richmond facility was phased out of operation and sold in September
2003. Production was shifted to other Plexus operating sites in the United
States and Mexico. The closure of Richmond resulted in a write-down of the
building, a write-down of underutilized assets to fair value, and costs relating
to the elimination of the facility's work force. Building impairment charges
related to Richmond totaled $3.7 million. San Diego facility was closed in May 2003. The closure of the San Diego facility resulted in a write-off of remaining goodwill, the write-down of underutilized assets to fair value, and costs relating to the elimination of the facility'sfacility’s work force. Building impairment charges totaled $6.3 million. During fiscal 2003, goodwill impairment for San Diego totaled approximately $20.4 million, of which $14.8 million was impaired as a result of a transitional impairment evaluation under Statement of Financial Accounting
Standards ("SFAS")SFAS No. 142 (see discussion below under "Cumulative“Cumulative effect of a change in accounting for goodwill"goodwill”) and $5.6 million was impaired as a result of our decision to close the facility.
Richmond Facility Closure: The Richmond facility was phased out of operation and sold in September 2003. Customer programs were shifted to other Plexus sites in the United States and Mexico. The closure of the Richmond facility resulted in a write-down of the building, a write-down of underutilized assets to fair value, and costs relating to severance for the facility’s work force. Building impairment charges related to Richmond totaled $3.7 million.
Other Restructuring and Impairment Costs: Other fiscal year 2003 restructuring and impairment actions included the consolidation of several leased facilities, the write-down of underutilized assets to fair value and work force reductions, which primarily affected operating sites in Juarez,
Mexico ("Juarez"); Seattle; Neenah;Seattle, Neenah, and the United
Kingdom ("UK").Kingdom. Restructuring actions also impacted our engineering and corporate organizations. Employee termination and severance costs for fiscal 2003
related to the termination ofwere for approximately 1,000 employees.
Fiscal 2002 restructuring and impairment actions: During fiscal 2002, we
recorded pre-tax restructuring and impairmentThese costs
of $12.6 million. These
charges resulted from actions taken in response to reductions in sales levels
and capacity utilization and included the reduction of our work force and the
write-off of certain underutilized assets to fair value at several locations.
The employee termination and severance costs for fiscal 2002 affected
approximately 700 employees. Thevarious operating
site closures included two owned
facilities: one located in Neenah (the oldest of our four facilities in Neenah)
and the other located in Minneapolis, Minnesota. These facilities were no longer
adequate to service the needs of our customers and would have required
significant investment to upgrade. The Neenah facility was phased out of
operation in February 2003 and is currently used for warehousing and
administrative purposes. The Minneapolis facility was phased out of operation in
July 2002 and sold in October 2002. There was no building impairment charge
associated with the closure of these two facilities. The lease termination costs
were primarily related to our facilities in Seattle and San Diego.
The following table summarizes our restructuring and impairment costs for
fiscal 2004, 2003 and 2002 (dollars in thousands):
Fiscal years ended
September 30,
-----------------------------------
2004 2003 2002
-----------------------------------
Non-cash impairment costs:
Fixed asset impairment $ 2,107 $ 32,451 $ 4,890
Write-off of goodwill - 5,595 -
------- -------- --------
2,107 38,046 4,890
------- -------- --------
Cash restructuring costs:
Severance costs 2,493 10,358 3,819
Lease termination costs 4,703 10,940 3,872
------- -------- --------
7,196 21,298 7,691
------- -------- --------
Total restructuring and impairment costs $ 9,303 $ 59,344 $ 12,581
======= ======== ========
14
segments. As of September 30, 2004,October 1, 2005, we have a remaining restructuring liability of approximately $11.8$12.0 million, of which $5.2$4.6 million is expected to be paid in fiscal 2005.2006. The remaining $6.6$7.4 million of accrued liabilities is expected to be paid through June 2008.
We currently expect that our fiscal 2004 restructuring actions will
result, when fully implemented, in annualized cost savings of approximately $2
million - $3 million. However, we currently expect that our operating
performance will be impacted in our fiscal 2005 first and second quarters as we
affect transfers from the Bothell facility to other locations. These savings
will primarily benefit cost of sales through lower facilities and employee
expenses.
Fiscal 2002 merger and acquisition activity: For the year ended September
30, 2002, we also incurred approximately $0.3 million of acquisition costs
related to the MCMS acquisition.
October 2011.
Cumulative effect of a change in accounting for goodwill.We adopted SFAS No. 142 for the accounting for goodwill and other intangible assets as of October 1, 2002. Under the transitional provisions of SFAS No. 142, we identified locations with goodwill, performed impairment tests on the net goodwill and other intangible assets associated with each location using a valuation date as of October 1, 2002, and2002. We determined that a pre-tax transitional impairment charge of $28.2 million was required related to thefor goodwill associated with operations at San Diego and Juarez locations.Juarez. The impairment charge was recorded as a cumulative effect of a change in accounting for goodwill in our Consolidated Statements of Operations.
Income taxes.Income taxes for the indicated periods were as
follows:
Fiscal years ended
September 30,
-----------------------------
2004 2003 2002
-----------------------------
Income tax expense (benefit) $ 39.2 $(27.2) $ (1.8)
Effective annual tax rate 515% 38% 30%
follows (dollars in millions): | | | | | | | | | | | | | |
| | | Fiscal years ended |
| | | October 1, | | September 30, | | September 30, |
| | | 2005 | | 2004 | | 2003 |
| Income tax expense (benefit) | | $ | 1.4 | | | $ | 39.2 | | | $ | (27.2 | ) |
| Effective annual tax rate | | | (12.9 | )% | | | 515.0 | % | | | 38.0 | % |
The reduction in fiscal 2005 income tax expense was primarily due to the inclusion of a $36.8 million valuation allowance in the prior year’s income tax expense (see further discussion below). Fiscal 2005 income tax expense of $1.4 million arose primarily from taxable income generated in the United Kingdom. Our expanding operations in Asia were profitable; however, those operations benefit from tax holidays which therefore resulted in no income tax expense for our Asian operations. Our U.S operations generated a pre-tax loss; however, a full valuation allowance against such losses eliminated any associated U.S. income tax benefit. As a result of the continued availability of deferred income tax assets, together with tax holidays in Asia, and if we are able to achieve our current profitability estimates, we anticipate that our effective tax rate for fiscal 2006 will be approximately 3 percent to 5 percent.
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The increase in fiscal 2004 income tax expense in fiscal 2004 was primarily due primarily to establishing a $36.8 million valuation allowance on all of our U.S. Federal and state deferred income tax assets. SFAS No. 109, "Accounting“Accounting for Income Taxes,"” requires that a valuation allowance be provided when it is more likely than not that the related income tax assets will not be utilized. Under SFAS No. 109, unless specific exceptions apply, historical operating results are a strong indicator of a company'scompany’s ability to generate future taxable income. In both
fiscal 2003 and 2002, we hadAs a net loss. In fiscal 2004, although we achieved
substantial sales growth and gross profit improvement, our fiscal 2004
restructuring actions resulted in only nominal operating income,result of the Company having a net loss in the U.S. for income tax purposes and anticipated additional restructuring
charges that will be recorded in fiscal 2005. Consequently,2004, 2003 and 2002, we established a full valuation allowance on our U.S. deferred income tax assets in fiscal 2004. Although this valuation allowance reduces the carrying value of theour net deferred income tax assets, on the balance sheet, we may be able to utilize these deferred income tax assets in future profitable periods to reduce future tax obligations.
As a result
The effective income tax rate in fiscal 2005 decreased from fiscal 2004 due to the establishment of the continued availability of these deferredvaluation allowance in the prior year and the mix in tax jurisdictions in which income tax assets,
together with tax holidays in Asia, and if we are able to achieve our current
profitability estimates, our effective tax rate for fiscal 2005 would be
approximately 5 percent to 8 percent.was earned. The effective income tax rate increased to 515 percent in fiscal 2004 compared to 38 percent infrom fiscal 2003 primarily due to the valuation allowance.
In July 2005, a legislative body of the United Kingdom enacted the Finance Act (the “Finance Act”), which may limit the deduction of interest expense incurred in the United Kingdom when the corresponding interest income earned by the other party is not taxable to such party. We currently extend loans from a U.S. subsidiary to a United Kingdom subsidiary, which is affected by the Finance Act. The Finance Act is effective for interest expense incurred by the United Kingdom subsidiary on these loans arising or accrued after March 16, 2005. For the fiscal year ended October 1, 2005, we provided income tax rate increasedexpense for the full effect of the Finance Act on the non-deductibility of this interest expense based on our discussions to 38 percent in fiscal 2003 compared to
30 percent in fiscal 2002. The increasedate with the tax authorities in the effective tax rate was due
primarily toUnited Kingdom regarding the absence in fiscal 2003application of non-deductible goodwill amortization
expenses that were present in fiscal 2002.
As of September 30, 2004 and 2003, we had recorded net deferred income tax
assets of $1.7 million and $48.6 million, respectively. The net deferred income
tax assets have arisen from available income tax losses and future income tax
deductions. Our ability to use these income tax losses and future income tax
deductions is dependent upon our future operations in the tax jurisdictions in
which such losses or deductions arose. The decrease in deferred income tax
assets in fiscal 2004 is due primarilyFinance Act to our recording of a $36.8 million
valuation allowance as described above and the receipt of tax refunds. The
deferred income tax assets that remain as of September 30, 2004 represent
foreign deferred income tax assets for which realization is considered more
likely than not.circumstances.
In October 2004,
the Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004
became(the “Jobs Act”) (see Note 1) was signed into law in the
U.S. This legislation
provides forUnited States. The Jobs Act includes a
numberdeduction of
changes in U.S. tax laws. In accordance with SFAS No.
109, effects85 percent of
this new legislation will be reflected in our financial
statements beginningcertain foreign earnings that are repatriated, as defined in the
periodJobs Act. We may elect to apply this provision to qualifying earnings repatriations made in fiscal 2006. During fiscal 2005, we did not repatriate any qualified earnings pursuant to the Jobs Act. We have determined that $15.1 million to $26.4 million of existing foreign earnings will meet the requirements of the
law's
15
enactment in October 2004.Jobs Act. We are presently reviewingevaluating the potential repatriation of earnings in the amounts ranging from $0 up to $15.1 million and currently estimate that a repatriation of earnings in this new legislationrange would result in income tax of up to determine the impacts on Plexus and our operations.
approximately $0.8 million (or approximately 5 percent of any amounts repatriated).LIQUIDITY AND CAPITAL RESOURCES
Cash flows used inprovided by operating activities were ($21.4)$82.0 million for the year ended September 30, 2004,October 1, 2005, compared to cash flows used in operating activities of ($20.0)21.4) and cash flows provided by operating activities of $130.5($20.0) million for the years ended September 30, 20032004 and 2002,2003, respectively. During fiscal 2004,2005, cash used inprovided by operating activities was primarily drivenprovided by increased accounts payable and higher accrued liabilities and earnings (after adjusting for the non-cash effects of depreciation and amortization expense and non-cash asset impairments); these positive cash flow effects were offset, in part, by higher accounts receivable and inventory in support of higher sales, which were offset in part
by higher earnings, after adjusting for the non-cash effect of depreciation and
amortization, and the decrease in the deferred income tax assets, which
primarily represented the establishment of a valuation allowance, and the
receipt of tax refunds.sales.
Our actual days sales outstanding in accounts receivable for the fiscal year ended September 30, 2004 increasedOctober 1, 2005 decreased to 5250 days in comparison to 50from 52 days for the prior year, primarily as a result of a higher percentage of fourth quarter
net sales being recognized in the final month of fiscal 2004 as compared to the
final month of fiscal 2003. During fiscal 2004, the allowance for losses on
accounts receivable decreased $2.1 million, primarily as a result of a
combination of collections and write-offs of accounts receivable that were
reserved for in prior periods.stronger cash collections.
Our inventory turns decreasedincreased to 6.4 turns for the year ended October 1, 2005 from 6.2 turns for the year ended September 30, 2004 from 6.5 turns for the year ended September 30, 2003.2004. Inventories increased $37.0$6.6 million from September 30, 2003,2004, primarily due to an increase in finished goods. Inventories increased as a result of certain new programs for the purchase of
raw materials to support increased sales and the build up ofwhich we maintain finished goods in support of our customers’ needs. Although net sales increased 18 percent in fiscal 2005, raw material levels at October 1, 2005 were relatively flat in comparison to supportthe prior year end due to the establishment of certain new vendor managed inventory programs, all of which had a negative
impact on inventory turns.programs.
Cash flows used in investing activities totaled ($2.4)27.5) million for the year ended September 30, 2004.October 1, 2005. The primary uses wereinvestments included $21.7 million for purchases of property, plant and equipment offset by sales and maturities$6.0 million of net purchases of short-term investments.securities. Fiscal 2005 purchases of property, plant and equipment included $9.7 million, $10.4 million, $1.0 million and $0.6 million related to our U.S., Asian, United Kingdom and Mexican operations, respectively. Property, plant and equipment purchases within the U.S. included $1.2 million related to our common ERP platform. During fiscal 2005, we converted another manufacturing facility to the common ERP platform, and now manage a significant majority of our net sales on the common platform. As of October 1, 2005, net property, plant and equipment includes $22.3 million related to the new ERP platform.
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We utilized available cash a revolving credit facility and operating leases to fundcash flows as the principal sources for funding our operating requirements during fiscal 2004.2005. Our capital
expenditures for fiscal 2004 were approximately $18.1 million. Ouractual level of capital expenditures for fiscal 20052006 will be dependentdepend on anticipated sales
levels,demand, but we currently expect them to bespend in the range of $25$30 million to $30 million.$35 million, which includes approximately $16 million to $18 million for our Asian operations. We also plan to extend the common ERP platform to the remaining Plexus sites over the next two years; however, the conversion timetable for these remaining Plexus sites and project scope is subject to change based upon our evolving needs. Our anticipated fiscal 2006 capital expenditures include approximately $4 million to $5 million of capital expenditures for the common ERP platform.
Cash flows provided by financing activities, totaling $4.2 million for the year ended September 30, 2004,October 1, 2005, primarily represent proceeds from the exercise of stock options and stock issuances under our Employee Stock Purchase Plan, and the exercise of stock options, offset by net payments on debt and capital lease obligations. We have suspended further employee stock purchases under the employee stock purchase plan as a result of SFAS No. 123(R), “Share-Based Payment an Amendment of FASB Statements No. 123 and 95.”
Our secured revolving credit facility as(as amended, (the "Amended Securedthe “Secured Credit Facility"Facility”), allows us to borrow up to $150 million from a group of banks. Borrowing under the Amended Secured Credit Facility may be either through revolving or swing loans or letters of credit. The Amended Secured Credit Facility is secured by substantially all of our domestic working capital assets and a pledge of 65 percent of the stock of each of our foreign subsidiaries. Interest on borrowings varies with our total leverage ratio, as defined in our credit agreement, and begins at the Prime rate (as defined)defined in the agreement) or LIBOR plus 1.5 percent. We also are required to pay an annual commitment fee of 0.5 percent of the unused credit commitment. The Amended Secured Credit Facility matures on October 31, 2007 and includes certain financial covenants customary in agreements of this type. These covenants include a minimum adjusted EBITDA, a maximum total leverage ratio (not to exceed 2.5 times adjusted EBITDA)EBITDA for the trailing four quarters) and a minimum tangible net worth, all as defined in the agreement. The Secured Credit Facility includes a definition of adjusted EBITDA to exclude any impairment charges that may arise from time-to-time in our assessment of our goodwill. The exclusion of impairment charges from the adjusted EBITDA definition arose from a request made by us in connection with our annual evaluation of goodwill under SFAS No. 142, which occurs for Plexus in the third quarter of each fiscal year. For the third quarter of fiscal 2005, we identified $26.9 million of impairment losses related to our Juarez and United Kingdom operations (see “Fiscal 2005 Restructuring and Impairment Costs” above). We are allowed to repurchase common shares and pay cash dividends as long as we remain in compliance with the various covenants. We may not be able to arrange similar amendments in the future in order to accommodate changes or developments in our business or operations.
We believe that our Amendedprojected cash flows from operations, cash and short-term investments, the Secured Credit Facility and leasing capabilities
and cash and short-term investments should be sufficient to meet our working capital and fixed capital requirements, as noted above, through fiscal 2005.
However, the2006. Although our net sales growth anticipated for fiscal 2005 may2006 will increase our working capital needs.needs, we currently do not anticipate having to utilize our Secured Credit Facility to finance this growth. As thoseour financing needs increase, we may need to arrange additional debt or equity financing. We, therefore, evaluate and consider from time to time various financing alternatives to supplement our capital resources. However, we cannot be surecertain that we will be able to make any such arrangements on acceptable terms.
We have not paid cash dividends in the past and do not anticipate paying them in the foreseeable future. We anticipate using
any earnings to support
the growth of our business.
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CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE SHEET OBLIGATIONS
Our disclosures regarding contractual obligations and commercial commitments are located in various parts of our regulatory filings. Information in the following table provides a summary of our contractual obligations and commercial commitments as of September 30, 2004October 1, 2005 (in thousands):
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| | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Fiscal Period | |
| | | | | | | | | | | | | | | | | | | 2011 and | |
| Contractual Obligations | | Total | | | 2006 | | | 2007-2008 | | | 2009-2010 | | | thereafter | |
| Long-Term Debt Obligations | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Capital Lease Obligations | | | 38,102 | | | | 2,991 | | | | 6,126 | | | | 6,439 | | | | 22,546 | |
| Operating Lease Obligations (1) | �� | | 58,558 | | | | 12,132 | | | | 18,305 | | | | 11,519 | | | | 16,602 | |
| Purchase Obligations (2) | | | 185,835 | | | | 185,835 | | | | — | | | | — | | | | — | |
| Other Long-Term Liabilities on the Balance Sheet (3) | | | 5,302 | | | | 540 | | | | 1,145 | | | | 1,235 | | | | 2,382 | |
| Other Long-Term Liabilities not on the Balance Sheet (4) | | | 1,890 | | | | 630 | | | | 1,260 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| Total Contractual Cash Obligations | | $ | 289,687 | | | $ | 202,128 | | | $ | 26,836 | | | $ | 19,193 | | | $ | 41.530 | |
| | | | | | | | | | | | | | | | |
Payments Due by | | |
| (1) | | As of October 1, 2005, operating lease obligations include future payments related to accrued lease costs attendant various restructurings. Fiscal Period
--------------------------------------------------------------
2010 and
Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter
------------------------- --------------------------------------------------------------
Long-Term Debt Obligations $ - $ - $ - $ - $ -
Capital Lease Obligations 43,005 2,980 5,997 6,302 27,726
Operating Lease Obligations* 78,073 14,754 23,428 15,290 24,601
Purchase Obligations** 172,755 172,755 - - -
Other Long-Term Liabilities2006 payments include $4.1 million related to accrued lease costs, which are included in accrued other liabilities on the Balance Sheet*** 16,324 5,187 5,427 1,165 4,545
Other Long-Term Liabilitiesbalance sheet. Fiscal 2007 payments and beyond include $7.4 million, which are included in other long-term liabilities on the balance sheet. |
|
| (2) | | As of October 1, 2005, purchase obligations consist of purchases of inventory and equipment in the ordinary course of business. |
|
| (3) | | As of October 1, 2005, other long-term obligations on the balance sheet include: deferred compensation obligations to certain of our former and current executive officers and other key employees and accrued lease costs attendant various restructurings. Fiscal 2007 payments and beyond exclude $7.4 million associated with accrued lease costs attendant various restructurings; however, such amount is excluded from this category in the above table due to the inclusion of such payments in the operating lease obligation category of the above table as noted in footnote (1). |
|
| (4) | | As of October 1, 2005, other long-term obligations not on the Balance Sheet**** 1,458 500 958 - -
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations $ 311,615 $ 196,176 $ 35,810 $ 22,757 $ 56,872
========== ========== ========== ========== ==========
balance sheet consist of a commitment for salary continuation in the event employment is terminated for an executive officer of the Company. We did not have, and were not subject to, any lines of credit, standby letters of credit, guarantees, standby repurchase obligations, other off-balance sheet arrangements or other commercial commitments. |
* - As of September 30, 2004, operating lease obligations include future
payments totaling $6.6 million related to lease exit costs that are included in
other long-term Liabilities on the balance sheet. The lease exit costs were
accrued as a restructuring cost.
** - As of September 30, 2004, purchase obligations consist of purchases of
inventory and equipment in the ordinary course of business.
*** - As of September 30, 2004, other long-term obligations on the balance sheet
include: deferred compensation obligations to certain of our former executives,
executive officers and other key employees and restructuring obligations for
both employee terminations and lease exit costs.
**** - As of September 30, 2004, other long-term obligations not on the balance
sheet consist of a salary commitment to an officer of the Company under an
employment agreement. We did not have, and were not subject to, any lines of
credit, standby letters of credit, guarantees, standby repurchase obligations,
or other commercial commitments.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in Note 1 to the Consolidated Financial Statements. During the year ended September 30, 2004,October 1, 2005, there were no material changes to these policies. Our more critical accounting policies are as
follows:
noted below:
Impairment of Long-Lived Assets - —We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property, plant and equipment is measured by comparing its carrying value to the projected cash flows that the property, plant and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the property exceeds its fair market value. The impairment analysis is based on significant assumptions of future results made by management, including salesrevenue and cash flow projections. Circumstances that may lead to impairment of property, plant and equipment include reductions in anticipatedreduced expectations for future performance of the asset, or industry demand and the restructuringpossible further restructurings. See Note 9 in Notes to Consolidated Financial Statements for discussion of our operations.
additional asset impairments recorded in fiscal 2005.
Intangible Assets - We adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" effective October 1, 2002. —Under SFAS No. 142, beginning“Goodwill and Other Intangible Assets,” which was effective October 1, 2002, we no longer amortize goodwill and intangible assets with indefinite useful lives, but instead we test those assets for impairment, at least annually, withand recognize any related losses recognized in earnings when incurred. We perform goodwill impairment tests annually during the third quarter of each fiscal year andor more frequently if an event or circumstance indicates that an impairment loss has occurred. See Note 9 in Notes to Consolidated Financial Statements for discussion of $26.9 million of goodwill impairment recorded in fiscal 2005.
We measure the recoverability of goodwill under the annual impairment test by comparing a reporting unit'sunit’s carrying amount, including goodwill, to the reporting unit’s estimated fair market value, which is primarily estimated
21
using the present value of
the reporting unit based on projected
17
discountedexpected future cash flows.flows, although market valuations may also be employed. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second test is performed to measure the amount of impairment. Circumstances that may lead to impairment of goodwill include, but are not limited to, the loss if any.
of a significant customer or customers and unforeseen reductions in customer demand, future operating performance or industry demand. Revenue - —Net sales from manufacturing services isare generally recognized upon shipment of the manufactured product to our customers under contractual terms, which are generally FOB shipping point. Upon shipment, title transfers and the customer assumes risks and rewards of ownership of the product. Generally, there are no formal customer acceptance requirements or further obligations related to manufacturing services; if such requirements or obligations exist, then a sale is recognized at the time when such requirements are completed and such obligations fulfilled.
Nets
Net sales from engineering design and development services, which are generally performed under contracts of twelve months or less in duration, are recognized as costs are incurred utilizing thea percentage-of-completion method; any losses are recognized when anticipated. Net sales from engineering design
and development services were less than ten percent of total sales for each of
fiscal year 2004, 2003 and 2002.
Sales are recorded net of estimated returns of manufactured product based on management'smanagement’s analysis of historical rates of returns, current economic trends and changes in customer demand. Net sales also include amounts billed to customers for shipping and handling.handling, if applicable. The corresponding shipping and handling costs are included in cost of sales.
Restructuring Costs - —From fiscal 2002 through fiscal 2004,2005, we have taken a number of actions and recorded restructuring costs in response to reductions in sales andand/or reduced capacity utilization. These restructuring costs included employee severance and benefit costs, and costs related to plant closings, including leased facilities that will bewere abandoned (and subleased, as applicable). Prior to January 1, 2003, severance and benefit costs and lease exit costs were recorded in accordance with Emerging Issues Task Force ("EITF"(“EITF”) 94-3 and for leased facilities that were abandoned and
subleased, the94-3. The estimated lease loss was accrued for future remaining lease payments subsequent to abandonment, less any estimated sublease income. As of September 30, 2004, theOctober 1, 2005, we have one significant facilities whichfacility in Seattle remaining to be subleased. If we planare able to sublease had not
yet been subleased; and, accordingly, certainthe remaining Seattle facility, we would record a favorable adjustment to restructuring costs, as we did in fiscal 2005, when we recorded a $0.3 million favorable adjustment to restructuring costs as a result of our estimatesentering into a sublease for one of expected
sublease income were changedthe Seattle facilities. See Note 9 in Notes to reflect factors that affect our ability to
sublease those facilities such as general economic conditions and the local real
estate markets. Changes in certainConsolidated Financial Statements for discussion of our estimates of sublease income resulted
in additional restructuring costs recorded in fiscal 2004. Further changes in certain
other estimates of sublease income could result in additional restructuring
costs.2005.
Subsequent to December 31, 2002, costs associated with a restructuring activity are recorded in compliance with SFAS No. 146, "Accounting“Accounting for Costs Associated with Exit or Disposal Activities."” The timing and related recognition of recording severance and benefit costs that are not presumed to be an ongoing benefit, as defined in SFAS No. 146, dependsdepend on whether employees are required to render service until they are terminated in order to receive the termination benefits and, if so, whether employees will be retained to render service beyond a minimum retention period. During fiscal 2003, we concluded that we had a substantive severance plan based upon our past severance practices; therefore, we recorded certain severance and benefit costs in accordance with SFAS No. 112, "Employer's“Employer’s Accounting for Postemployment Benefits,"” which resulted in the recognition of a liability as the severance and benefit costs arose from an existing condition or situation and the payment was both probable and reasonably estimated.
For leased facilities being abandoned and subleased, a liability is recognized and measured at fair value for the future remaining lease payments subsequent to abandonment, less any estimated sublease income that could reasonably be
reasonably obtained for the property. For contract termination costs, including costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity, a liability for future remaining payments under the contract is recognized and measured at its fair value. See Note 109 in the Notes to Consolidated Financial Statements.Statements for discussion of a lease liability recorded in fiscal 2005 associated with the closure of our Bothell facility.
The recognition of restructuring costs requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. If our actual results in exiting these facilities differ from our estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring thewhich would result in recording of additional restructuring costs or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained, no additional accruals are required and the utilization of the provisions are for their intended purpose in accordance with developed exit plans.
22
Income Taxes -— Deferred income taxes are provided for differences between the bases of assets and liabilities for financial and income tax reporting purposes.
The Company recordsWe record a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Realization of deferred income tax assets is dependent on our ability to generate sufficient future
18
taxable income. During fiscal 2004,Although we recorded a $36.8 million valuation allowance against all U.S. deferred income tax assets. See Note 5assets in fiscal 2004, we may be able to utilize these deferred income tax assets to offset future taxable income in the Notes
to Consolidated Financial Statements.
U.S. NEW ACCOUNTING PRONOUNCEMENTS
In November 2002,2004, the EITF reached a consensus regarding EITF Issue 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." The consensus
addresses not only whenFinancial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”), which requires that abnormal amounts of idle facility expense, freight, handling costs, and how an arrangement involving multiple deliverables
shouldwasted material be divided into separate unitsrecognized as current period charges. In addition, this statement requires that allocation of accounting but also howfixed production overheads to the arrangement's consideration shouldcosts of conversion be allocated among separate units. The
pronouncement was effective for us commencing with ourbased on the normal capacity of the production facilities. We will be required to adopt this statement in the first quarter of our fiscal 2004, but did2006. We do not anticipate that the implementation of this standard will have a material impact on our consolidatedfinancial position, results of operations or financial position.cash flows.
In January 2003, theDecember 2004, FASB issued Interpretation No. 46, "ConsolidationStaff Position (“FSP”) FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of Variable Interest Entities - an interpretation of ARB No. 51," which provides
guidance on the identification of and reporting for variable interest entities.
In December 2003, the FASB issued a revised Interpretation No. 46, which expands
the criteria for consideration in determining whether a variable interest entity
should be consolidated. Interpretation No. 462004” (the “Act”). The Act became effective for uslaw in the second quarterU.S. in October 2004. This legislation provides for a number of fiscal 2004. Our adoptionchanges in U.S. tax laws. FSP SFAS No. 109-2 requires recognition of Interpretationa deferred tax liability for the tax effect of the excess of book over tax basis of an investment in a foreign corporate venture that is permanent in duration, unless a company firmly asserts that such amounts are indefinitely reinvested outside the company’s home jurisdiction. However, due to the lack of clarification of certain provisions within the Act, FSP SFAS No. 46 did not
have an impact109-2 provides companies additional time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. We are presently reviewing this new legislation, in conjunction with income tax legislation enacted in July 2005 in the United Kingdom, to determine the impacts on our consolidated results of operations orand financial position.position (see “Income Taxes” above).
In May 2003,December 2004, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics123(R), “Share-Based Payment: An Amendment of Both LiabilitiesFASB Statements No. 123 and Equity,"
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Financial instruments that are within the scope95.” This statement requires measurement of the Statement, which
previously were often classified ascost of employee services received in exchange for an award of equity must now be classified as
liabilities. In November 2003, FASB Staff Position No. SFAS 150-3 deferred
indefinitelyinstruments based on the effective date of SFAS No. 150 for applying the provisionsfair value of the Statementaward at the grant date (with limited exceptions) and recognition of the compensation expense over the period during which an employee is required to provide service in exchange for certain mandatorily redeemable non-controlling interests.
However, expanded disclosures are required during the deferral period. The
Company does not have financial instruments with mandatorily redeemable
non-controlling interests.award. In December 2003,March 2005, the U.S. Securities and Exchange Commission (SEC)(“SEC”) issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition,"107 (“SAB 107”), which supercedesexpresses views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting107 provides interpretive guidance contained in SAB 101 related to multiplethe interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. We are required to adopt SFAS No. 123(R) in our first quarter of fiscal 2006. Currently, we account for stock option awards under the provisions of APB No. 25, which to date has not resulted in compensation expense in our consolidated results of operations. We have selected a transition method in which prior period financial statements would not be restated. In addition, we will use the Black-Scholes valuation model, which is the same valuation model we use to value stock options for pro forma presentation of income and per-share data for SFAS No. 148 disclosure purposes (see Note 5 in Notes to Condensed Consolidated Financial Statements). The adoption of SFAS No. 123(R) is not expected to have a significant effect on our financial condition and will not affect consolidated cash flows; however, if stock options remain an important element revenue arrangements, supercededof long-term compensation for our officers and key employees, SFAS No. 123(R) is expected to have a significant adverse effect on our consolidated results of operations. Based on unvested options outstanding as of October 1, 2005, the future compensation expense to be recognized as a result of the issuance
EITF 00-21, "Accountingimplementation of SFAS No. 123(R) is $0.4 million in fiscal 2006 and nominal amounts in each of fiscal 2007 and 2008 (Note 1 — New Accounting Pronouncements).
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB No. 29,” which eliminates the exception for Revenue Arrangementsnonmonetary exchanges of similar productive assets and replaces it with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers" document issued with SAB 101a general exception for exchanges of nonmonetary assets that had been codified in SEC Topic 13, Revenue Recognition. The adoption of
this bulletin diddo not have an impactcommercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and the fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. We are required to adopt SFAS No. 153 for nonmonetary asset exchanges occurring in the first quarter of 2006 and our adoption is not expected to have a significant effect on our consolidated results of operations or financial position.
condition.
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In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated even though uncertainty exists about the timing and/or method of settlement. We are required to adopt FIN 47 by the end of fiscal 2006. We are currently assessing the impact of FIN 47 on our results of operations and financial condition.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. We are required to adopt SFAS No. 154 for accounting changes and error corrections in fiscal 2007. Our results of operations and financial condition will only be impacted by SFAS No. 154 if we implement changes in accounting principles that are addressed by the standard or have corrections of accounting errors.
In June 2005, the FASB issued FSP No. FAS 143-1, “Accounting for Electronic Equipment Waste Obligations,” that provides guidance on how commercial users and producers of electronic equipment should recognize and measure asset retirement obligations associated with the European Directive 2002/96/EC on Waste Electrical and Electronic Equipment (“WEEE”). WEEE primarily impacts our operations in the United Kingdom. FSP No 143-1 is effective on the date that the United Kingdom adopts WEEE into law, which is anticipated sometime in fiscal 2006. We are currently assessing the impact of FSP No. 143-1 on our financial condition, results of operations and cash flows.
RISK FACTORS
OUR CUSTOMER REQUIREMENTS AND OPERATING RESULTS VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER, WHICH COULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK.
Our net sales and operating results may vary significantly from quarter to quarter, which could negatively impact the price of our common stock.
Our quarterly and annual results
and share price may vary significantly depending on various factors, many of which are beyond our control. These factors include:
- the volume of customer orders relative to our capacity
- the level and timing of customer orders, particularly in light of
the fact that some of our customers release a significant percentage
of their orders during the last few weeks of a quarter
- the typical short life cycle of our customers' products
- market acceptance of and demand for our customers' products
- customer announcements of operating results and business conditions
- changes in our sales mix to our customers
- business conditions in our customers' industries
- the timing of our expenditures in anticipation of future orders
- our effectiveness in managing manufacturing processes
- changes in cost and availability of labor and components
- local events that may affect our production volume, such as local
holidays
- credit ratings and securities analysts' reports and
- changes in economic conditions and world events.
19
| • | | the volume of customer orders relative to our capacity |
|
| • | | the level and timing of customer orders, particularly in light of the fact that some of our customers release a significant percentage of their orders during the last few weeks of a quarter |
|
| • | | the typical short life cycle of our customers’ products |
|
| • | | market acceptance and demand for our customers’ products |
|
| • | | customers’ announcements of operating results and business conditions |
|
| • | | changes in our sales mix to our customers |
|
| • | | business conditions in our customers’ industries |
|
| • | | the timing of our expenditures in anticipation of future orders |
|
| • | | our effectiveness in managing manufacturing processes |
|
| • | | changes in cost and availability of labor and components |
|
| • | | local and regional events, such as holidays, that may affect our production levels |
|
| • | | health and disease issues which could affect local, regional or global markets |
|
| • | | credit ratings and securities analysts’ reports and |
|
| • | | changes in economic conditions and world events. |
The EMS industry is impacted by the state of the U.S. and global economies and world events. A slowdown or flat performance in the U.S. or global economies,economy, or in particular in the industries served by us, may result in our customers reducing their forecasts. The demand for our services could weaken, or
decrease, which in turn would impact our sales, capacity utilization, margins and financial results. Our sales were adversely affectedHistorically, we have seen periods, such as in fiscal 2003 and 2002, when our sales were adversely affected by thea slowdown in the networking/datacommunications/telecomwireline/networking and industrial/commercial
markets,wireless infrastructure sectors, as a result of reduced end-market demand and reduced availability of venture capital to fund existing and emerging technologies. These factors substantially influencedinfluence our net sales and margins.
The percentage of our
Net sales to customers in the networking/datacommunications/telecom industry haswireline/networking sector have increased significantly in recent quarters both inabsolute dollars and increased as a percentage of our net sales. When an
increasing percentage of ourtotal net sales, is made to customers in a particular
industry, we becomemaking us more dependent upon the performance of that industry and the economic and business conditions that affect it.
Our quarterly and annual results are affected by the level and timing of customer orders, fluctuations in material costs and availabilities, and the degree of capacity utilization in the manufacturing process.
THE MAJORITY OF OUR SALES COME FROM A RELATIVELY SMALL NUMBER OF CUSTOMERS AND
IF WE LOSE ANY OF THESE CUSTOMERS, OUR SALES AND OPERATING RESULTS COULD DECLINE
SIGNIFICANTLY.
24
The majority of our sales come from a relatively small number of customers, and if we lose any of these customers, our sales and operating results could decline significantly.
Sales to our largest customer for the fiscal year ended October 1, 2005 represented 1419 percent of our net sales, while net sales to our largest customer in the fiscal 2004. A differentyear ended September 30, 2004 represented 14 percent of net sales. One other customer for the fiscal year ended October 1, 2005 represented 12 percent of our net sales insales. Sales to our largest customer for the fiscal 2003.year ended September 30, 2003 represented 12 percent of our net sales. We had no other customers that represented 10 percent or more of net sales in fiscal
2002.any of the periods. Sales to our ten largest customers have represented a majority, or near majority of our net sales in recent periods. Our ten largest customers accounted for approximately 60 percent, 51 percent 55 percent and 4855 percent of our net sales for the years ended October 1, 2005, September 30, 2004 2003 and 2002,September 30, 2003, respectively. Our principal customers have varied from year to year, and our principal customers may not continue to purchase services from us at current levels, if at all. Significant reductions in sales to any of these customers, or the loss of other major customers, could seriously harm our business. If we are not ablebusiness, such as the fiscal 2005 goodwill impairment associated with our operations in the United Kingdom that resulted from a significant customer’s announced intention to replace
expired, canceledtransfer future production from our United Kingdom facility to a lower-cost location (see Note 9 in Notes Consolidated Financial Statements).
Our customers may cancel their orders, change production quantities or reduced contracts with new business on a timely basis, our
sales will decrease.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY
PRODUCTION.
Electronics manufacturing service providersdelay production.
EMS companies must provide rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers, and we continue to experience reduced
lead-times in customer orders.customers. Customers may cancel their orders, change production quantities or delay production for a number of reasons that are beyond our control. The success of our customers'customers’ products in the market and the strength of the markets themselves affect our business. Cancellations, reductions or delays by a significant customer, or by a group of customers, could seriously harm our operating results. Such cancellations, reductions or delays have occurred and may continue to occur.
In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, facility requirements, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of our customers'customers’ commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross margins and operating results.
Customers may require rapid increases in production, which can stress our resources and reduce operating margins. Although we have had a net increase in
our manufacturing capacity over the past few fiscal years, we have significantly
reduced our capacity from its peak, and weWe may not have sufficient capacity at any given time to meet all of our customers'customers’ demands or to meet the requirements of a specific program.
FAILURE TO MANAGE CONTRACTION AND GROWTH, IF ANY, MAY SERIOUSLY HARM OUR
BUSINESS.
We invest in technology to support our operations; developments may impair those assets.
We are involved in a multi-year project to install a common ERP platform and associated information systems at most of our manufacturing sites. Our ERP platform is intended to augment our management information systems and includes various software systems to enhance and standardize our ability to globally translate information from production facilities into operational and financial information and create a consistent set of core business applications at our worldwide facilities. As of October 1, 2005, facilities representing a significant majority of our net sales are currently managed on the common ERP platform. We plan to extend the common ERP platform to our remaining sites over the next two years; however, the conversion timetable and project scope for our remaining sites is subject to change based upon our evolving needs.
During the year ended October 1, 2005, we recorded a $3.8 million impairment related to the remaining elements of a shop floor data-collection system. We partially impaired the shop floor data-collection system in the fourth quarter of fiscal 2004 when we determined that certain elements would not be utilized. During the first quarter of fiscal 2005, we extended a maintenance and support agreement for the data-collection system through July 2005 to provide additional time to evaluate the remaining elements of the system. Based on our evaluation, and as part of the preparation of our financial statements, we determined that the shop floor data-collection system was impaired. We determined that we would abandon deployment of these remaining elements of the shop-floor data-collection system because the anticipated business benefits could not be realized.
As of October 1, 2005, overall ERP investments included in net property, plant and equipment totaled $22.3 million and we anticipate incurring up to an additional $4 million to $5 million of capital expenditures for the common
25
ERP platform in fiscal 2006. Changes in our technology needs may affect the utility of our common ERP platform and require additional expenditures in the future.
Failure to manage contraction and growth, if any, may seriously harm our business.
Periods of contraction or reduced sales, such as the periods that occurred from fiscal 2001 through 2003, create
tensions and challenges. We must determine whether all facilities remain productive, determine whether staffing levels need to be reduced, and determine how to respond to changing levels of customer demand. While maintaining multiple facilities or higher levels of employment increases short-term costs, reductions in employment could impair our ability to respond to later market improvements or to maintain customer relationships. Our decisions to reduce costs and capacity, such as the
recent announcement to close
thefiscal 2005 closure of our Bothell facility
in fiscal 2005 and the
fiscal year 2003 closures
20
of our San Diego and Richmond facilities and therelated reduction in the number of employees, can affect our expenses and, therefore, our short-term and long-term results.
We have announced our intention Due to close our Bothell, Washington facilitycontinued growth in fiscal 2005. The exact timing of that closure will depend upon2005 and the
arrangements for transitioning customer programs. Although we work to minimize
the potential effects of any such transition, there are inherent risks that such
a transition can result in the disruption of programs and customer
relationships.
We are involved in a multi-year project to install a common ERP platform
and associated information systems. Our ERP platform is intended to augment our
management information systems and includes various software systems to enhance
and standardize our ability to globally translate information from production
facilities into operational and financial information and create a consistent
set of core business applications at our worldwide facilities. As of September
30, 2004, facilities generating approximately 50 percent of our net sales are
being managed on the new platform. We anticipate converting at least one more
facility to the new ERP platform in fiscal 2005. The conversion timetable and
project scope remain subject to change based upon our evolving needs and sales
levels. During fiscal 2004, we recorded a $1.7 million impairment of certain
components of our ERP platform, which primarily resulted from a change in our
deployment strategy for a shop floor data-collection system. Some elements of
the shop-floor data-collection system will not be deployed because the
originally anticipated business benefits could not be realized. The remaining
elements of the shop floor data-collection system are still under evaluation. As
of September 30, 2004, the capitalized costs of the remaining elements of the
shop floor data system total approximately $3.8 million. A change in the scope
of this project could result in impairment of the remaining elements of the shop
floor data-collection system, As of September 30, 2004, overall ERP
implementation costs included in net property, plant and equipment totaled $26.5
million and we anticipate incurring at least an additional $6.0 million in
capital expenditures for the ERP platform through fiscal 2005; changes in the
scope of the ERP platform could result in impairment of these capitalized costs.
Due to recent rapid sales growth which occurred in fiscal 2004, we have experienced a
significant need forneeded additional employees and facilities. We have added many
employees aroundfacilities to meet incremental demand. In fiscal 2004, we began the world, and we are expandingexpansion of our operations in Penang, Malaysia. Our response to these changesMalaysia and added many employees, principally in business conditions in fiscal 2004,
compared to the two previous fiscal years, hasAsia. These actions resulted in additional costs to support our growth. If we are unable to effectively manage thisthe growth and any future growth
effectively,currently anticipated for fiscal 2006, our operating results could be harmed.
OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS.adversely affected.
In addition, to meet our customers’ needs, or to achieve increased efficiencies, we sometimes require additional capacity in one location while reducing capacity in another. We are currently evaluating further expansion alternatives in Asia. Since customers’ needs and market conditions can vary and change rapidly, we may find ourselves in a situation where we simultaneously experience the effects of contraction in one location while incurring the costs of expansion in another location.
Operating in foreign countries exposes us to increased risks, including foreign currency risks.
We have operations in China, Malaysia, Mexico and the United Kingdom. As noted above, we have expanded our operations in Malaysia, and we may in the future expand in these and/or into other international regions.locations. We have limited experience in managing geographically dispersed operations in these countries.operations. We also purchase a significant number of components manufactured in foreign countries. Because of theseThese international aspects of our operations we are
subject us to the following risks that could materially impact our operating results:
- economic or political instability
- transportation delays or interruptions and other effects of less
developed infrastructure in many countries
- foreign exchange rate fluctuations
- utilization of different systems and equipment
- difficulties in staffing and managing foreign personnel and diverse
cultures and
-
| • | | economic or political instability |
|
| • | | transportation delays or interruptions and other effects of the less-developed infrastructure in many countries |
|
| • | | foreign exchange rate fluctuations |
|
| • | | utilization of different systems and equipment |
|
| • | | difficulties in staffing and managing foreign personnel in diverse cultures and |
|
| • | | the effects of international political developments. |
In fiscal 2005, the Chinese and Malaysian governments revalued their currencies against the U.S. dollar. Both currencies had been relatively fixed to the U.S. dollar for the last several years, but both governments now appear to have adopted policies described as “managed floats” (that is, allowing their currencies to move in a tight range up or down from the previous day’s close). As our Asian operations expand, our failure to adequately hedge foreign currency transactions and/or currency exposures associated with assets and liabilities denominated in non-functional currencies could adversely affect our financial condition, results of operations and cash flows.
In addition, changes in policies by the U.S. or foreign governments could negatively affect our operating results due to changes in duties, tariffs, taxes or limitations on currency or fund transfers. For example, our Mexican-based
operation utilizesfacility in Mexico operates under the Mexican Maquiladora program, which provides for reduced tariffs and easeseased import regulations, andregulations; we could be adversely affected by changes in that program. Also, the Malaysian and Chinese subsidiaries currently receive favorable tax treatments from these governments which extend for approximately 29 years and 98 years, respectively, which may or may not be renewed.
WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING
PROCESS EXPERTISE.
26
We may not be able to maintain our engineering, technological and manufacturing process expertise.
The markets for our manufacturing and engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business will depend upon our
continued ability to:
21
- retain our qualified engineering and technical personnel
- maintain and enhance our technological capabilities
- develop and market manufacturing services which meet changing
customer needs
- | • | | retain our qualified engineering and technical personnel |
|
| • | | maintain and enhance our technological capabilities |
|
| • | | develop and market manufacturing services which meet changing customer needs |
|
| • | | successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. |
Although we believe that our operations utilize the assembly and testing technologies, equipment and processes that are currently required by our customers, we cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technology industry standards or customer requirements may render our equipment, inventory or processes obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing technologies and equipment to remain competitive. The acquisition and implementation of new technologies and equipment may require significant expense or capital investment that could reduce our operating margins and our operating results. Our failure to anticipate and adapt to our customers'customers’ changing technological needs and requirements could have an adverse effect on our business.
OUR MANUFACTURING SERVICES INVOLVE INVENTORY RISK.
Our manufacturing services involve inventory risk.
Most of our contract manufacturing services are provided on a turnkey basis, whereunder which we purchase some, or all, of the required materials. These services
involve greater resource investment and inventory risk than consignment
services, where the customer provides these materials. Accordingly, various component price increases and inventory obsolescence could adversely affect our selling price, gross margins and operating results.
In our turnkey operations, we need to order parts and supplies based on customer forecasts, which may be for a larger quantity of product than is included in the firm orders ultimately received from those customers. For
example, fiscal 2004 saw a significant increase in inventories to support
increased sales and expected growth in customer programs. Customers'Customers’ cancellation or reduction of orders can result in additional expense to us. While most of our customer agreements include provisions that require customers to reimburse us for excess inventory specifically ordered to meet their forecasts, we may not actually be reimbursed or be able to collect on these obligations. In that case, we could have excess inventory and/or cancellation or return charges from our suppliers.
In addition, we provide a managed inventory programprograms for some of our key customers under which we hold and manage finished goods inventory for some of our key customers. Theinventories. These managed inventory programprograms may result in higher finished goods inventory levels, further reduce our inventory turns and increase our financial riskexposure with such customers,
althoughcustomers. Even though our customers willgenerally have contractual obligations to purchase such inventories from us, we may remain subject to the inventory from us.
WE MAY NOT BE ABLE TO OBTAIN RAW MATERIALS OR COMPONENTS FOR OUR ASSEMBLIES ON A
TIMELY BASIS OR AT ALL.risk of enforcing those obligations.
We may not be able to obtain raw materials or components for our assemblies on a timely basis, or at all.
We rely on a limited number of suppliers for many of the components used in the assembly process. We do not have any long-term supply agreements. At various times, there have been shortages of some of the electronic components that we use, and suppliers of some components have lacked sufficient capacity to meet the demand for these components. At times, component shortages have been prevalent in our industry, and in certain areassuch shortages may be expected to recur from time to time. In some cases, supply shortages and delays in deliveries of particular components have resulted in curtailed production, or delays indelayed production of assemblies, using
that component, which contributed to an increase in our inventory levels. We
expect that shortages and delays in deliveries of some components will continue
from time to time, especially as demand for those components increases. An increase in economic activity could result in shortages, if manufacturers of components do not adequately anticipate the increased orders and/or have previously excessively cut back their production capability in view of reduced activity in recent years. World events, such as terrorism, armed conflict and epidemics, could also could affect supply chains. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing and shipping delays, which could harm our relationships with our customers and reduce our sales.
A significant portion of our sales is derived from turnkey manufacturing
in which we provide materials procurement.
While most of our customer contracts permit quarterly or other periodic adjustments to pricing based on
decreases and
increaseschanges in component prices and other factors, we typically bear the risk of component price increases that occur between any such repricings or, if such repricing is not permitted, during the balance of the term of the particular customer contract. Accordingly, component price increases could adversely affect our operating results.
22
START-UP COSTS AND INEFFICIENCIES RELATED TO NEW OR TRANSFERRED PROGRAMS CAN
ADVERSELY AFFECT OUR OPERATING RESULTS.
27
Start-up costs theand inefficiencies related to new or transferred programs can adversely affect our operating results.
The management of labor and equipment resourcesproduction capacity in connection with the establishment of new programs and new customer relationships, and the need to estimate required resources in advance of production can adversely affect our gross margins and operating results.margins. These factors are particularly evident in the early stages of the life cycle of new products and new programs or program transfers. The effects of these start-up costs and inefficiencies can also occur when we open new facilities, such as our additionalnew facility in Penang, Malaysia, which began production in the first quarter of fiscal 2005. These factors also affect2005, or when we transfer programs, such as those made in connection with the fiscal 2005 closure of our ability to efficiently use
labor and equipment. Due to the improved economy and ourBothell facility. Customer needs, capacity utilization rates and/or increased marketing
efforts,demand may require that we expand certain facilities, or seek larger facilities in fiscal 2006, or future years. We are currently managing a number of new programs. Consequently, our exposure to these factors has increased. In addition, if any of these new programs or new customer relationships were terminated, our operating results could be harmed,worsen, particularly in the short term.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS.
Although we try to minimize the potential losses of transitioning customer programs between Plexus facilities, there are inherent risks that such transitions can result in the disruption of programs and customer relationships.
We and our customers are subject to extensive government regulations.
We are also subject to environmental regulations relating to the use, storage, discharge, recycling and disposal of hazardous chemicals used in our manufacturing process. If we fail to comply with present and future regulations, we could be subject to future liabilities or the suspension of business. These regulations could restrict our ability to expand our facilities or require us to acquire costly equipment or incur significant expense. While we are not currently aware of any material violations, we may have to spend funds to comply with present and future regulations or be required to perform site remediation.
In addition, our
Our medical device business, which represented approximately 3130 percent of our net sales in fiscal 2004,2005, is subject to substantial government regulation, primarily from the federal FDA and similar regulatory bodies in other countries. We must comply with statutes and regulations covering the design, development, testing, manufacturing and labeling of medical devices and the reporting of certain information regarding their safety. Failure to comply with these rulesregulations can result in, among other things, our and our customers being
subject to fines, injunctions, civil penalties, criminal prosecution, recall or seizure of devices, or total or partial suspension of production. The FDA also has the authority to require repair or replacement of equipment, or refund of the cost of a device manufactured or distributed by our customers. Violations may lead to penalties or shutdowns of a program or a facility. In addition,
failureFailure or noncompliance could have an adverse effect on our reputation.
In addition, our customers’ failure to comply with applicable regulations or legal requirements, or even allegations of such failures, could affect our sales to those customers. For example, as discussed in Note 9 in Notes to Condensed Consolidated Financial Statements, a significant customer in the United Kingdom is under investigation by the Office of Communication, a government regulator in the United Kingdom. Even though our manufacturing services are not implicated in this investigation, it has delayed installations of the product and reduced our sales to that customer.
In addition, there are two European Union (“EU”) directives which could affect our business and results. The first of these is the Restriction of the use of Certain Hazardous Substances (“RoHS”). RoHS becomes effective on July 1, 2006, and restricts within the EU the distribution of products containing certain substances, lead being the most relevant restricted substance to us. Although most of the EU member countries have not yet turned the mandates into legislation, it appears that we will be required to manufacture RoHS compliant products for customers intending to sell into the EU after the effective date. In addition, industry analysts indicate that similar legislation in the U.S. and Asia will eventually follow.
The second EU directive is the Waste Electrical and Electronic Equipment directive, effective in August 2005, under which a manufacturer or importer will be required, at its own cost, to take back and recycle all of the products it either manufactured in or imported into the EU.
Since both of these directives affect the worldwide electronics supply-chain, we expect to make collaborative efforts with our suppliers and customers to develop compliant processes and products. The cost of such efforts, the degree to which we will be expected to absorb such costs, the impact that the directive may have on product shipments, and our liability for non-compliant product is not yet known, but could have a material effect on our operations and results.
28
In recent periods, our sales related to the defense industry, including
homeland security,defense/security/aerospace sector have begun to increase. Companies that design and manufacture for this industrysector face governmental, security and other requirements that could materially affect their financial condition and results of operations.
PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS THAT COULD
RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US.
Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our services and liability claims against us.
We manufacture products to our customers'customers’ specifications that are highly complex and may at times contain design or manufacturing defects. Defects have been discovered in products we manufactured in the past and, despite our quality control and quality assurance efforts, defects may occur in the future. Defects in the products we manufacture, whether caused by a design, manufacturing or component defects,defect, may result in delayed shipments to customers or reduced or cancelled customer orders. If these defects occur in large quantities or too frequently, our business reputation may also be tarnished. In addition, these defects may result in liability claims against us. Even if customers are responsible for the defects, they may or may not be able to assume responsibility for any such costs or payments.
OUR PRODUCTS ARE FOR THE ELECTRONICS INDUSTRY, WHICH PRODUCES TECHNOLOGICALLY
ADVANCED PRODUCTS WITH SHORT LIFE CYCLES.required payments to us and we occasionally incur costs defending claims.
Our products are for the electronics industry, which produces technologically advanced products with relatively short life cycles.
Factors affecting the electronics industry, in particular the short life cycle of products, could seriously harm our customers and, as a result, us. These factors include:
-
| • | | the inability of our customers to adapt to rapidly changing technology and evolving industry standards that result in short product life cycles |
|
| • | | the inability of our customers to develop and market their products, some of which are new and untested |
|
| • | | the potential that our customers’ products may become obsolete or the failure of our customers’ products to gain widespread commercial acceptance. |
Our business in the inabilitywireline/networking and wireless infrastructure sectors could be slowed by further government regulation of our customers to adapt to rapidly changing
technology and evolving industry standards that result in short
product life cycles
- the inability of our customers to develop and market their products,
some of which are new and untested
- the potential that our customers' products may become obsolete or
the failure of our customers' products to gain widespread commercial
acceptance.
23
OUR BUSINESS IN THE NETWORKING/DATACOMMUNICATION/TELECOM INDUSTRY COULD BE
SLOWED BY FURTHER GOVERNMENT REGULATION OF THE COMMUNICATIONS INDUSTRY.communications industry. The end-markets for most of our customers in the networking/datacommunication/telecom industrywireline/networking and wireless infrastructure sectors are subject to regulation by the Federal Communications Commission, as well as by various state and foreign government agencies. The policies of these agencies can directly affect both the near-term and long-term consumer and provider demand and profitability of the industrysector and therefore directly impact the demand for products that we manufacture.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES.
Increased competition may result in decreased demand or reduced prices for our services.
The electronics manufacturing services industry is highly competitive and has become more so as a result of excess capacity in the industry. We compete against numerous U.S. and foreign electronics manufacturing services providers with global operations, as well as those whowhich operate on only a local or regional basis. In addition, current and prospective customers continually evaluate the merits of manufacturing products internally. Consolidations and other changes in the electronics manufacturing services industry result in a continually changing competitive landscape. The consolidation trend in the industry also results in larger and more geographically diverse competitors that may have significantly greater resources with which to compete against us.
Some of our competitors have substantially greater managerial, manufacturing, engineering, technical, financial, systems, sales and marketing resources than we do. These competitors may:
- respond more quickly to new or emerging technologies
- have greater name recognition, critical mass and geographic and
market presence
- be better able to take advantage of acquisition opportunities
- adapt more quickly to changes in customer requirements
- devote greater resources to the development, promotion and sale of
their services
-
| • | | respond more quickly to new or emerging technologies |
|
| • | | have greater name recognition, critical mass and geographic and market presence |
|
| • | | be better able to take advantage of acquisition opportunities |
|
| • | | adapt more quickly to changes in customer requirements |
|
| • | | devote greater resources to the development, promotion and sale of their services |
|
| • | | be better positioned to compete on price for their services. |
We may be operating at a cost disadvantage compared to manufacturers who have greater direct buying power from component suppliers, distributors and raw material suppliers or who have lower cost structures. As a result,
29
competitors may have a competitive advantage and obtain business from our customers. Our manufacturing processes are generally not subject to significant proprietary protection, and companies with greater resources or a greater market presence may enter our market or increase their competition with us. Increased competition could result in price reductions, reduced sales and margins or loss of market share.
WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF KEY PERSONNEL MAY HARM OUR
BUSINESS.
We depend on certain key personnel, and the loss of key personnel may harm our business.
Our success depends in large part on the continued service of our key technical and management personnel, and on our ability to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the development of new products and processes and the manufacture of existing products. The competition for these individuals is significant, and the loss of key employees could harm our business.
WE MAY FAIL TO SUCCESSFULLY COMPLETE FUTURE ACQUISITIONS AND MAY NOT
SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
Although we have previously grown through acquisitions,
Expansion of our current focus
is on pursuing organic growth opportunities. If we were to pursue future growth
through acquisitions, however, this would involve significant risks that could
have a material adverse effect on us. These risks include:
Operating risks, such as the:
- inability to integrate successfullybusiness and operations may negatively impact our acquired operations'
businesses and personnel
- inability to realize anticipated synergies, economies of scale or
other value
- difficulties in scaling up production and coordinating management of
operations at new sites
- strain placed on our personnel, systems and resources
- possible modification or termination of an acquired business's
customer programs, including cancellation of current or anticipated
programs and
- loss of key employees of acquired businesses.
24
Financial risks, such as the:
- use of cash resources, or incurrence of additional debt and related
interest expenses
- dilutive effect of the issuance of additional equity securities
- inability to achieve expected operating margins to offset the
increased fixed costs associated with acquisitions, and/or inability
to increase margins at acquired entities to Plexus' desired levels
- incurrence of large write-offs or write-downs
- impairment of goodwill and other intangible assets
- unforeseen liabilities of the acquired businesses.
EXPANSION OF OUR BUSINESS AND OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS.business. We have expanded our presence in Malaysia and may further expand our operations by establishing or acquiring other facilities or by expanding capacity in our current facilities. We may expand both in geographical areas in which we currently operate and in new geographical areas within the United States and internationally. We may not be able to find suitable facilities on a timely basis or on terms satisfactory to us. Expansion of our business and operations involves numerous business risks, including:
-
| • | | the inability to successfully integrate additional facilities or capacity and to realize anticipated synergies, economies of scale or other value |
|
| • | | additional fixed costs which may not be fully absorbed by the new business |
|
| • | | difficulties in the timing of expansions, including delays in the implementation of construction and manufacturing plans |
|
| • | | creation of excess capacity, and the need to reduce capacity elsewhere if anticipated sales or opportunities do not materialize |
|
| • | | diversion of management’s attention from other business areas during the planning and implementation of expansions |
|
| • | | strain placed on our operational, financial, management, technical and information systems and resources |
|
| • | | disruption in manufacturing operations |
|
| • | | incurrence of significant costs and expenses |
|
| • | | inability to locate sufficient customers or employees to support the expansion. |
Our operations could be negatively affected by an epidemic.
We have a production facility in Xiamen, China, which is one of the countries that have been most at risk in the current outbreak of avian flu. We also operate in Malaysia, which is in the area in which avian flu has spread. To the best of our knowledge, concerns about the spread of avian flu have not affected our employees or operations in China or Malaysia, nor have we experienced any disruption in our supply chain as a result of these concerns. However, our production in Asia could be severely impacted by an epidemic spread of avian flu or a similar widespread disease or epidemic. Our facilities could be closed by government authorities, some or all of our workforce could be unavailable due to quarantine, fear of contagion or other factors, and transportation or other elements of the infrastructure could be affected, leading to delays or loss of production.
Concerns relating to avian flu are currently limited to Asia; however, avian flu or other outbreaks of disease or epidemics could similarly affect our other facilities. These health-related factors could also affect our suppliers and lead to a shortage of components. They could also lead to a reduction in end-customer demand.
We may fail to successfully integrate additional facilities or
capacitycomplete future acquisitions and to realize anticipated synergies, economies of scale or
other value
- additional fixed costs which may not be fully absorbed by the new
business
- difficulties in the timing of expansions, including delays in the
implementation of construction and manufacturing plans
- creation of excess capacity, and the needsuccessfully integrate acquired businesses, which could adversely affect our operating results.
Although we have previously grown through acquisitions, our current focus is on pursuing organic growth opportunities. If we were to reduce capacity
elsewhere if anticipated salespursue future growth through acquisitions, however, this would involve significant risks that could have a material adverse effect on us. These risks include:
30
Operating risks, such as the:
| • | | inability to integrate successfully our acquired operations’ businesses and personnel |
|
| • | | inability to realize anticipated synergies, economies of scale or other value |
|
| • | | difficulties in scaling up production and coordinating management of operations at new sites |
|
| • | | strain placed on our personnel, systems and resources |
|
| • | | possible modification or termination of an acquired business’s customer programs, including cancellation of current or anticipated programs |
|
| • | | loss of key employees of acquired businesses. |
Financial risks, such as the:
| • | | use of cash resources, or incurrence of additional debt and related interest expenses |
|
| • | | dilutive effect of the issuance of additional equity securities |
|
| • | | inability to achieve expected operating margins to offset the increased fixed costs associated with acquisitions, and/or inability to increase margins at acquired entities to Plexus’ desired levels |
|
| • | | incurrence of large write-offs or write-downs |
|
| • | | impairment of goodwill and other intangible assets |
|
| • | | unforeseen liabilities of the acquired businesses. |
We may fail to secure or opportunities do not materialize
- diversion of management's attention from other business areas during
the planning and implementation of expansions
- strain placed on our operational, financial, management, technical
and information systems and resources
- disruption in manufacturing operations
- incurrence of significant costs and expenses
- inability to locate sufficient customers or employees to support the
expansion.
WE MAY FAIL TO SECURE NECESSARY FINANCING.maintain necessary financing.
We maintain an Amendeda Secured Credit Facility with a group of banks, which allows us to borrow up to $150 million.million depending upon compliance with related covenants and conditions. However, we cannot be sure that the Amended Secured Credit Facility will provide all of the financing capacity that we will need in the future.future or that we will be able to amend the Secured Credit Facility or revise covenants, if necessary or appropriate in the future, to accommodate changes or developments in our business and operations.
Our future success may depend on our ability to obtain additional financing and capital to support increased sales and our possible future growth. We may seek to raise capital by:
- issuing additional common stock or other equity securities
- issuing debt securities
- modifying existing credit facilities or obtaining new credit
facilities
-
| • | | issuing additional common stock or other equity securities |
|
| • | | issuing debt securities |
|
| • | | modifying existing credit facilities or obtaining new credit facilities |
|
| • | | a combination of these methods. |
We may not be able to obtain capital when we want or need it, and capital may not be available on satisfactory terms. If we issue additional equity securities or convertible debt to raise capital, it may be dilutive to shareholders'shareholders’ ownership interests. Furthermore, any additional financing may have terms and conditions that adversely affect our business, such as restrictive financial or operating covenants, and our ability to meet any financing covenants will largely depend on our financial performance, which in turn will be subject to general economic conditions and financial, business and other factors.
RECENTLY ENACTED CHANGES IN THE SECURITIES LAWS AND REGULATIONS ARE LIKELY TO
INCREASE COSTS.
Recently enacted changes in the securities laws and regulations have increased our costs.
The Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act"“Sarbanes-Oxley Act”)
that became law
in July 2002 has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of the Sarbanes-Oxley Act, the SEC and the NASDAQ Stock Market have promulgated new rules
inon a
25
variety of subjects. Compliance with these new rules has increased our legal and
accounting costs, and we expect these increased costs to continue indefinitely.
These developments may also make it more difficult for us to attract and retain qualified members of our board of directors or qualified executive officers. IF WE RECEIVE OTHER THAN AN UNQUALIFIED OPINION ON THE ADEQUACY OF OUR INTERNAL
CONTROL OVER FINANCIAL REPORTING AS OF SEPTEMBER 30,Compliance with these new rules has increased our legal and accounting costs, most significantly in fiscal 2005, AND FUTURE YEAR-ENDS
AS REQUIRED BY THE SECTIONwhich was our first year of compliance. We expect our compliance costs to continue; however, absent significant changes in related rules (which we cannot assure), we anticipate these costs may be lower in future years as we become more efficient in our compliance processes.31
If we reach other than an affirmative conclusion on the adequacy of our internal control over financial reporting as required by the Section 404 OF THE SARBANES-OXLEY ACT, INVESTORS COULD LOSE
CONFIDENCE IN THE RELIABILITY OF OUR FINANCIAL STATEMENTS, WHICH COULD RESULT IN
A DECREASE IN THE VALUE OF THE OUR COMMON STOCK.of the Sarbanes-Oxley Act, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.
As required by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring public companies to include a report of management on the company'scompany’s internal control over financial reporting in their annual reports on Form 10-K10-K; that containsreport must contain an assessment by management of the effectiveness of the company'scompany’s internal control over financial reporting. In addition, the public accounting firm auditing a company'scompany’s financial statements must attest to and report on both management'smanagement’s assessment as to whether the company maintained effective internal control over financial reporting and on the effectiveness of the company'scompany’s internal control over financial reporting.
We are currently undergoing
In fiscal 2006, we will continue a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act. If we are unable to complete our assessment in a timely manner or if we and/or our independent auditors issue other than an unqualified
opinion ondetermine that there are material weaknesses regarding the design or operating effectiveness or management's assessment of our internal control over financial reporting, this could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our shares to decline. A weakness in Plexus' stock
The price could mean that investors will not be
able to sell their shares at or above the prices that they paid. A weakness in
stock price could also impair Plexus' ability in the future to offerof our common stock or convertible securities as a source of additional capital and/or as
consideration in the acquisition of other businesses.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.has been and may continue to be volatile.
Our stock price has fluctuated significantly in recent periods. The price of our common stock may fluctuate significantly in response to a number of events and factors relating to us, our competitors and the market for our services, many of which are beyond our control.
In addition, the stock market in general, and especially the NASDAQ Stock Market, along with share prices for technology companies in particular, have experienced extreme volatility, including weakness, that sometimes has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating results. Our stock price and the stock price of many other technology companies remain below their peaks.
Among other things, volatility and weakness in Plexus'Plexus’ stock price could mean that investors willmay not be able to sell their shares at or above the prices that they paid. Volatility and weakness could also impair Plexus'Plexus’ ability in the future to offer common stock or convertible securities as a source of additional capital and/or as consideration in the acquisition of other businesses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign exchange and interest rates. To reduce such risks, weWe selectively use financial instruments.
FOREIGN CURRENCY RISKinstruments to reduce such risks.
Foreign Currency Risk
We do not use derivative financial instruments for speculative purposes. Our policy is to selectively hedge our foreign currency denominated transactions in a manner that substantially offsets the effects of changes in foreign currency exchange rates. Presently, we use foreign currency contracts to hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. Corresponding gains and losses on the underlying transaction generally offset the gains and losses on these foreign currency hedges. Our international operations create potential foreign exchange risk. As of
September 30, 2004,October 1, 2005, we had no foreign currency contracts outstanding.
26
Our percentages of transactions denominated in currencies other than the U.S. dollar for the indicated periods were as follows:
Fiscal year
------------------------------
2004 2003 2002
------------------------------
Net Sales 10% 8% 9%
Total Costs 14% 11% 11%
INTEREST RATE RISK| | | | | | | | | | | | | |
| | | Fiscal year |
| | | 2005 | | 2004 | | 2003 |
| Net Sales | | | 9 | % | | | 10 | % | | | 8 | % |
| Total Costs | | | 13 | % | | | 14 | % | | | 11 | % |
32
Interest Rate Risk
We have financial instruments, including cash equivalents and short-term investments, which are sensitive to changes in interest rates. We consider the use of interest-rate swaps based on existing market conditions. We currently do not use any interest-rate swaps or other types of derivative financial instruments to hedge interest rate risk.
The primary objective of our investment activities is to preserve principal, while maximizing yields without significantly increasing market risk. To achieve this, we maintain our portfolio of cash equivalents and short-term investments in a variety of highly rated securities, money market funds and certificates of deposit and limit the amount of principal exposure to any one issuer.
Our only material interest rate risk is associated with our secured credit facility. A 10 percent change in our weighted average interest rate on our average long-term borrowings would have had only a nominal impact on net interest expense in fiscal 2005, 2004 2003 and 2002.
2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15 on page 28.
35.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures:The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported on awithin the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to management, as appropriate to allow timely basis.decisions regarding required disclosure. The Company'sCompany’s principal executive officer and principal financial officer have reviewed and evaluated, with the participation of the Company'sCompany’s management, the Company'sCompany’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”) as of the end of the period covered by this report (the "Evaluation Date"“Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company'sCompany’s disclosure controls and procedures are effective in bringing to their
attentioneffective.
Management’s Report on a timely basis material information relating to the Company
required to be included in the Company's periodic filings under the Exchange
Act. Internal Control Over Financial Reporting: As previously disclosed,Management of the Company commenced a phased implementation of a global Enterprise Resource
Planning (ERP) platform in fiscal 2001. Through September 30, 2004, four
facilities have been converted to the ERP platform, including one facility
converted in fiscal 2004. The conversion of the facility in fiscal 2004is responsible for establishing and the
related changes to the Company'smaintaining adequate internal control (asover financial reporting, as such term is defined in Exchange Act RulesRule 13a-15(f). Management of the Company, including its chief executive officer and 15(d)-15(f)) did not have a material effect on, nor is it
reasonably likely to materially affect,chief financial officer, has assessed the Company'seffectiveness of its internal control over financial reporting. reporting as of October 1, 2005, based on the criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its assessment and those criteria, management of the Company has concluded that, as of October 1, 2005, the Company’s internal control over financial reporting was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
PricewaterhouseCoopers LLP, independent registered public accounting firm, has audited management’s assessment of the Company’s internal control over financial reporting as of October 1, 2005, as stated in their report included herein on page 37.
Changes in Internal Control Over Financial Reporting:There have been no other changes in the Company'sCompany’s internal control over financial reporting that occurred during the Company'sCompany’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
The Company is currently undergoing a comprehensive effort to comply with
Section 404 of the Sarbanes-Oxley Act of 2002. Compliance is required for our
fiscal year-end September 30, 2005. This effort includes documenting and testing
of internal controls.
33
During the course of
these activities,the Company’s assessment of its internal control over financial reporting, the Company has identified certain internal control issues which management believes should be improved. The
Company's review continues, but to date the Company has not
identified any material weaknesses in its internal control as defined by the
Public Company Accounting Oversight Board. The Company is
nonetheless making improvements to its internal controls over financial
27
reporting as a result of its review efforts.efforts; however, management does not believe these improvements represent a significant change that would be likely to materially affect the Company’s internal control over financial reporting. These planned improvements include additional information technology system controls, further formalization of policies and procedures, improved segregation of duties and additional monitoring controls. The matters noted herein have been discussed with the Company'sCompany’s Audit Committee. The Company believes that it is taking the necessary steps to monitor and maintain appropriate internal control during periods of change.
ITEM 9B. OTHER INFORMATION.
On September 17, 2004, the Board's Compensation Committee approved the
Plexus 2005 Variable Incentive Compensation Plan (the "2005 Plan")INFORMATION. The 2005
Plan provides for incentive bonuses to executive officers based on goals set for
corporation and the individual for fiscal 2005. (Another incentive plan covers
key salaried employees.) Although different goals are set for fiscal 2005, the
2005 Plan is otherwise substantially similar in operation and concept to the
2004 Incentive Compensation Plan that was in effect for fiscal 2004. The 2005
Plan is filed as an exhibit to this report.
On November 18, 2004, the Board of Directors approved a change in
directors' compensation. The annual board fee and annual fees for committee
chairs were increased. Meeting fees were unchanged. The summary of the changes
and new compensation structure was prepared on December 7, 2004; the summary is
filed as an exhibit to this report.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this item is incorporated herein by reference to "Election“Election of Directors"Directors” in the Registrant'sRegistrant’s Proxy Statement for its 20052006 Annual Meeting of Shareholders ("2005(“2006 Proxy Statement"Statement”) and from "Security“Security Ownership of Certain Beneficial Owners and Management--SectionManagement—Section 16(a) Beneficial Ownership Reporting Compliance"Compliance” in the 20052006 Proxy Statement and "Executive“Executive Officers of the Registrant"Registrant” in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATIONCOMPENSATIONS
Incorporated herein by reference to "Election“Election of Directors - Directors'
Compensation"— Directors’ Compensation” and "Executive Compensation"“Executive Compensation” in the 2005 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to "Security“Security Ownership of Certain Beneficial Owners and Management" and Executive Compensation - Equity
Compensation Plan Information"Management” in the 2005 Proxy Statement.
Equity Compensation Plan Information
The following table chart gives aggregate information regarding grants under all Plexus equity compensation plans through October 1, 2005:
| | | | | | | | | | | | | |
| | | | | | | | | | | Number of securities | |
| | | | | | | | | | | remaining available | |
| | | Number of securities | | | | | | | for future issuance under | |
| | | to be issued upon | | | Weighted-average | | | equity compensation | |
| | | exercise of | | | exercise price of | | | plans (excluding | |
| | | outstanding options, | | | outstanding options, | | | securities reflected | |
| Plan category | | warrants and rights (1) | | | warrants and rights | | | in 1st column) (2) | |
| Equity compensation plans approved by securityholders | | | 4,953,553 | | | $ | 17.55 | | | | 3,180,782 | |
| | | | | | | | | | | | | |
| Equity compensation plans not approved by securityholders | | | -0- | | | $ | n/a | | | | -0- | |
| | | | | | | | | | |
| |
| Total (3) | | | 4,953,553 | | | $ | 17.55 | | | | 3,180,782 | |
| | | | | | | | | | |
| | |
| (1) | | Represents options granted under the 1998 Stock Option Plan, the 1995 Directors’ Stock Option Plan or the 2005 Equity Incentive Plan (the “Option Plans”), all of which were approved by shareholders. |
|
| (2) | | Includes, in addition to options that may be granted under the 2005 Equity Incentive Plan, 1,200,000 authorized shares which have not yet been purchased by employees under the 2005 Employee Stock Purchase Plan (which has been suspended in view of SFAS No. 123(R), “Share-Based Payment an Amendment of |
34
| | |
| | FASB Statements No. 123 and 95). No further awards may be made under the 1998 Stock Option Plan or the 1995 Directors’ Stock Option Plan. |
|
| (3) | | In addition, there are outstanding options to purchase 340 shares, at a weighted average price of $18.56, under option plans of acquired companies. Options under these plans were converted into options to acquire Plexus stock in the acquisition transactions. Plexus cannot grant additional options under the plans of the acquired companies. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONTRANSACTIONS
Incorporated herein by reference to "Certain Transactions"“Certain Transactions” in the 2005 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference to the subheading "Fees“Fees and Services"Services” under "Auditors"“Auditors” in the 2005 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed
| (a) | | Documents filed |
|
| | | Financial Statements and Financial Statement Schedules. See following list of Financial Statements and Financial Statement Schedules on page 36. |
|
| (b) | | Exhibits. See Exhibit Index included as the last page of this report, which index is incorporated herein by reference |
35
PLEXUS CORP.
List of Financial Statements and Financial Statement Schedules on page 29.
(b) Exhibits. See Exhibit Index included as the last page of this
report, which index is incorporated herein by reference
28
PLEXUS CORP.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
SEPTEMBER 30, 2004
October 1, 2005
CONTENTS PAGES
- -------- -----
| | | | |
| Contents | | Pages | |
|
Report of Independent Registered Public Accounting Firm .................................... 30
| | | 37 | |
| | | | |
| Consolidated Financial Statements: | | | | |
| | | | |
Consolidated Statements of Operations for the years ended October 1, 2005, September 30, 2004 2003 and 2002 .................................................. 31
September 30, 2003 | | | 39 | |
| | | | |
Consolidated Balance Sheets as of October 1, 2005 and September 30, 2004 and 2003....................... 32
| | | 40 | |
| | | | |
Consolidated Statements of Shareholders'Shareholders’ Equity and Comprehensive Income (Loss) for the years ended October 1, 2005, September 30, 2004 2003 and 2002............................... 33
September 30, 2003 | | | 41 | |
| | | | |
Consolidated Statements of Cash Flows for the years ended October 1, 2005, September 30, 2004 2003 and 2002................................................... 34
September 30, 2003 | | | 42 | |
| | | | |
Notes to Consolidated Financial Statements ................................................. 35-55
| | | 43 | |
| | | | |
| Financial Statement Schedules: | | | | |
| | | | |
Schedule II -— Valuation and Qualifying Accounts for the years ended October 1, 2005 and September 30, 2004, 2003 and 2002................................................... 56
2003 | | | 68 | |
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
36
Report of Independent Registered Public Accounting Firm
To the Shareholders and
Board of Directors
of Plexus Corp.:
We have completed an integrated audit of Plexus Corp.’s 2005 consolidated financial statements and of its internal control over financial reporting as of October 1, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Plexus Corp. and its subsidiaries at September 30, 2004October 1, 2005 and September 30, 2003,2004, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2004October 1, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying indexpresent fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill“Goodwill and Other Intangible Assets,"” effective October 1, 2002.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of October 1, 2005 based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 1, 2005, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
37
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Milwaukee,
WI
November 17, 2004
30
Wisconsin
December 12, 2005 38
PLEXUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER
for the years ended October 1, 2005, September 30, 2004 and September 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2004 2003 2002
---- ---- ----
Net sales $ 1,040,858 $ 807,837 $ 883,603
Cost of sales 954,080 754,872 802,283
----------- --------- ----------
Gross profit 86,778 52,965 81,320
Operating expenses:
Selling and administrative expenses 68,259 65,152 66,921
Amortization of goodwill - - 5,203
Restructuring and impairment costs 9,303 59,344 12,581
Acquisition and merger costs - - 251
----------- --------- ----------
77,562 124,496 84,956
----------- --------- ----------
Operating income (loss) 9,216 (71,531) (3,636)
Other income (expense):
Interest expense (3,080) (2,817) (3,821)
Miscellaneous 1,475 2,624 1,631
----------- --------- ----------
Income (loss) before income taxes and cumulative
effect of change in accounting for goodwill 7,611 (71,724) (5,826)
Income tax expense (benefit) 39,191 (27,228) (1,753)
----------- --------- ----------
Loss before cumulative effect of change in accounting
for goodwill (31,580) (44,496) (4,073)
Cumulative effect of change in accounting for
goodwill, net of income tax benefit of $4,755 - (23,482) -
----------- --------- ----------
Net loss $ (31,580) $ (67,978) $ (4,073)
=========== ========= ==========
Earnings per share:
Basic:
Loss before cumulative effect of
change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10)
Cumulative effect of change in accounting
for goodwill - (0.56) -
----------- --------- ----------
Net loss $ (0.74) $ (1.61) $ (0.10)
=========== ========= ==========
Diluted:
Loss before cumulative effect
of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10)
Cumulative effect of change in accounting
for goodwill - (0.56) -
----------- --------- ----------
Net loss $ (0.74) $ (1.61) $ (0.10)
=========== ========= ==========
Weighted average shares outstanding:
Basic 42,961 42,284 41,895
=========== ========= ==========
Diluted 42,961 42,284 41,895
=========== ========= ==========
(in thousands, except per share data) | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| Net sales | | $ | 1,228,882 | | | $ | 1,040,858 | | | $ | 807,837 | |
| Cost of sales | | | 1,123,146 | | | | 954,080 | | | | 754,872 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Gross profit | | | 105,736 | | | | 86,778 | | | | 52,965 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Selling and administrative expenses | | | 76,319 | | | | 68,259 | | | | 65,152 | |
| Restructuring and impairment costs | | | 39,162 | | | | 9,303 | | | | 59,344 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | 115,481 | | | | 77,562 | | | | 124,496 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Operating income (loss) | | | (9,745 | ) | | | 9,216 | | | | (71,531 | ) |
| |
| Other income (expense): | | | | | | | | | | | | |
| Interest expense | | | (3,471 | ) | | | (3,080 | ) | | | (2,817 | ) |
| Miscellaneous | | | 2,218 | | | | 1,475 | | | | 2,624 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Income (loss) before income taxes and cumulative effect of change in accounting for goodwill | | | (10,998 | ) | | | 7,611 | | | | (71,724 | ) |
| | | | | | | | | | | | | |
| Income tax expense (benefit) | | | 1,419 | | | | 39,191 | | | | (27,228 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Loss before cumulative effect of change in accounting for goodwill | | | (12,417 | ) | | | (31,580 | ) | | | (44,496 | ) |
| | | | | | | | | | | | | |
| Cumulative effect of change in accounting for goodwill, net of income tax benefit of $4,755 | | | — | | | | — | | | | (23,482 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net loss | | $ | (12,417 | ) | | $ | (31,580 | ) | | $ | (67,978 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | |
| Basic and Diluted: | | | | | | | | | | | | |
| Loss before cumulative effect of change in accounting for goodwill | | $ | (0.29 | ) | | $ | (0.74 | ) | | $ | (1.05 | ) |
| |
| Cumulative effect of change in accounting for goodwill | | | — | | | | — | | | | (0.56 | ) |
| | | | | | | | | | |
| Net loss | | $ | (0.29 | ) | | $ | (0.74 | ) | | $ | (1.61 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | | | | | |
| Basic | | | 43,373 | | | | 42,961 | | | | 42,284 | |
| | | | | | | | | | |
| Diluted | | | 43,373 | | | | 42,961 | | | | 42,284 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
31
39
PLEXUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER
as of October 1, 2005 and September 30, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 40,924 $ 58,993
Short-term investments 4,005 19,701
Accounts receivable, net of allowances of $2,000 and $4,100, respectively 148,301 111,125
Inventories 173,518 136,515
Deferred income taxes 1,727 23,723
Prepaid expenses and other 5,972 8,326
-------- --------
Total current assets 374,447 358,383
Property, plant and equipment, net 129,586 131,510
Goodwill 34,179 32,269
Deferred income taxes - 24,921
Other 7,496 5,971
-------- --------
Total assets $545,708 $553,054
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 811 $ 958
Accounts payable 100,588 91,445
Customer deposits 11,952 14,779
Accrued liabilities:
Salaries and wages 26,050 17,133
Other 19,686 23,753
-------- --------
Total current liabilities 159,087 148,068
Capital lease obligations, net of current portion 23,160 23,502
Other liabilities 12,048 10,468
Commitments and contingencies (Notes 9 and 12) - -
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized, none issued
or outstanding - -
Common stock, $.01 par value, 200,000 shares authorized,
and 43,184 and 42,607 issued and outstanding, respectively 432 426
Additional paid-in capital 267,925 261,214
Retained earnings 71,260 102,840
Accumulated other comprehensive income 11,796 6,536
-------- --------
351,413 371,016
-------- --------
Total liabilities and shareholders' equity $545,708 $553,054
======== ========
(in thousands, except per share data ) | | | | | | | | | |
| | | 2005 | | | 2004 | |
ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 98,727 | | | $ | 40,924 | |
| Short-term investments | | | 10,000 | | | | 4,005 | |
| Accounts receivable, net of allowances of $3,000 and $2,000, respectively | | | 167,345 | | | | 148,301 | |
| Inventories | | | 180,098 | | | | 173,518 | |
| Deferred income taxes | | | 127 | | | | 1,727 | |
| Prepaid expenses and other | | | 5,693 | | | | 5,972 | |
| | | | | | | |
| | | | | | | | | |
| Total current assets | | | 461,990 | | | | 374,447 | |
| | | | | | | | | |
| Property, plant and equipment, net | | | 123,140 | | | | 129,586 | |
| Goodwill | | | 6,995 | | | | 34,179 | �� |
| Other | | | 8,343 | | | | 7,496 | |
| | | | | | | |
| | | | | | | | | |
| Total assets | | $ | 600,468 | | | $ | 545,708 | |
| | | | | | | |
| | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Current portion of capital lease obligations | | $ | 770 | | | $ | 811 | |
| Accounts payable | | | 159,068 | | | | 100,588 | |
| Customer deposits | | | 7,707 | | | | 8,310 | |
| Accrued liabilities: | | | | | | | | |
| Salaries and wages | | | 24,052 | | | | 26,050 | |
| Other | | | 31,001 | | | | 23,328 | |
| | | | | | | |
| | | | | | | | | |
| Total current liabilities | | | 222,598 | | | | 159,087 | |
| | | | | | | | | |
| Capital lease obligations, net of current portion | | | 22,310 | | | | 23,160 | |
| Other liabilities | | | 13,499 | | | | 12,048 | |
| Deferred income taxes | | | 2,046 | | | | — | |
| | | | | | | | | |
| Commitments and contingencies (Notes 9 and 12) | | | — | | | | — | |
| | | | | | | | | |
| Shareholders’ equity: | | | | | | | | |
| Preferred stock, $.01 par value, 5,000 shares authorized, none issued or outstanding | | | — | | | | — | |
| Common stock, $.01 par value, 200,000 shares authorized, and 43,752 and 43,184 issued and outstanding, respectively | | | 438 | | | | 432 | |
| Additional paid-in capital | | | 273,419 | | | | 267,925 | |
| Retained earnings | | | 58,843 | | | | 71,260 | |
| Accumulated other comprehensive income | | | 7,315 | | | | 11,796 | |
| | | | | | | |
| | | | 340,015 | | | | 351,413 | |
| | | | | | | |
| | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 600,468 | | | $ | 545,708 | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
32
40
PLEXUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER
for the years ended October 1, 2005, September 30, 2004 and September 30, 2003 AND 2002
(IN THOUSANDS)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ---------- -------- --------------- ---------
BALANCES, OCTOBER 1, 2001 41,757 $ 418 $251,932 $ 174,891 $ (389) $ 426,852
Comprehensive income (loss):
Net loss - - - (4,073) - (4,073)
Foreign currency hedges and translation adjustments - - - - 3,277 3,277
Other - - - - (21) (21)
---------
Total comprehensive loss (817)
Issuance of common stock under Employee Stock Purchase Plan 132 1 2,398 - - 2,399
Exercise of stock options, including tax benefits 141 1 2,254 - - 2,255
-------- -------- -------- --------- --------- ---------
BALANCES, SEPTEMBER 30, 2002 42,030 420 256,584 170,818 2,867 430,689
Comprehensive income (loss):
Net loss - - - (67,978) - (67,978)
Foreign currency hedges and translation adjustments - - - - 3,667 3,667
Other - - - - 2 2
---------
Total comprehensive loss (64,309)
Issuance of common stock under Employee Stock Purchase Plan 253 3 1,939 - - 1,942
Exercise of stock options, including tax benefits 324 3 2,691 - - 2,694
-------- -------- -------- --------- --------- ---------
BALANCES, SEPTEMBER 30, 2003 42,607 426 261,214 102,840 6,536 371,016
Comprehensive income (loss):
Net loss - - - (31,580) - (31,580)
Foreign currency translation adjustments - - - - 5,260 5,260
---------
Total comprehensive loss (26,320)
Issuance of common stock under Employee Stock Purchase Plan 186 2 1,971 - - 1,973
Exercise of stock options, including tax benefits 391 4 4,740 - - 4,744
-------- -------- -------- --------- --------- ---------
BALANCES, SEPTEMBER 30, 2004 43,184 $ 432 $267,925 $ 71,260 $ 11,796 $ 351,413
======== ======== ======== ========= ========= =========
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | Additional | | | | | | | Other | | | | |
| | | Common Stock | | | Paid-In | | | Retained | | | Comprehensive | | | | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Income (Loss) | | | Total | |
Balances, October 1, 2002 | | | 42,030 | | | $ | 420 | | | $ | 256,584 | | | $ | 170,818 | | | $ | 2,867 | | | $ | 430,689 | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | (67,978 | ) | | | — | | | | (67,978 | ) |
| Foreign currency hedges and translation adjustments | | | — | | | | — | | | | — | | | | — | | | | 3,667 | | | | 3,667 | |
| Other | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (64,309 | ) |
| Issuance of common stock under Employee Stock Purchase Plan | | | 253 | | | | 3 | | | | 1,939 | | | | — | | | | — | | | | 1,942 | |
| Exercise of stock options, including tax benefits | | | 324 | | | | 3 | | | | 2,691 | | | | — | | | | — | | | | 2,694 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances, September 30, 2003 | | | 42,607 | | | | 426 | | | | 261,214 | | | | 102,840 | | | | 6,536 | | | | 371,016 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | (31,580 | ) | | | — | | | | (31,580 | ) |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | 5,260 | | | | 5,260 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (26,320 | ) |
| Issuance of common stock under Employee Stock Purchase Plan | | | 186 | | | | 2 | | | | 1,971 | | | | — | | | | — | | | | 1,973 | |
| Exercise of stock options, including tax benefits | | | 391 | | | | 4 | | | | 4,740 | | | | — | | | | — | | | | 4,744 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances, September 30, 2004 | | | 43,184 | | | | 432 | | | | 267,925 | | | | 71,260 | | | | 11,796 | | | | 351,413 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | (12,417 | ) | | | — | | | | (12,417 | ) |
| Foreign currency translation adjustments | | | — | | | | — | | | | — | | | | — | | | | (4,481 | ) | | | (4,481 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (16,898 | ) |
| Issuance of common stock under Employee Stock Purchase Plan | | | 204 | | | | 2 | | | | 2,235 | | | | — | | | | — | | | | 2,237 | |
| Exercise of stock options, including tax benefits | | | 364 | | | | 4 | | | | 3,259 | | | | — | | | | — | | | | 3,263 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances, October 1, 2005 | | | 43,752 | | | $ | 438 | | | $ | 273,419 | | | $ | 58,843 | | | $ | 7,315 | | | $ | 340,015 | |
| | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
33
41
PLEXUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER
for the years ended October 1, 2005, September 30, 2004 and September 30, 2003 AND 2002
(IN THOUSANDS)
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (31,580) $(67,978) $ (4,073)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization 25,449 27,135 36,604
Cumulative effect of change in accounting for goodwill - 28,237 -
Non-cash goodwill and asset impairments 2,106 38,046 4,890
Net (repurchases) sales under asset securitization facility - (16,612) (6,305)
Income tax benefit of stock option exercises 1,508 926 984
Provision for accounts receivable allowances - 438 2,994
Deferred income taxes 46,946 (27,006) (4,352)
Changes in assets and liabilities:
Accounts receivable (35,492) 1,861 33,444
Inventories (35,700) (41,852) 50,610
Prepaid expenses and other 1,230 6,309 (3,462)
Accounts payable 1,526 23,554 7,504
Customer deposits (2,847) 868 (2,152)
Accrued liabilities and other 5,502 6,121 13,769
--------- -------- ---------
Cash flows provided by (used in) operating activities (21,352) (19,953) 130,455
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (86,903) (105,236) (52,550)
Sales and maturities of short-term investments 102,599 138,560 20,300
Payments for property, plant and equipment (18,086) (22,372) (30,760)
Proceeds on sale of property, plant and equipment - 2,665 561
Payments for business acquisitions, net of cash acquired - - (41,985)
--------- -------- ---------
Cash flows provided by (used in) investing activities (2,390) 13,617 (104,434)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 159,752 - 190,437
Payments on debt and capital lease obligations (160,753) (2,749) (242,797)
Proceeds from exercise of stock options 3,236 1,768 1,271
Issuances of common stock under Employee Stock Purchase Plan 1,973 1,942 2,399
--------- -------- ---------
Cash flows provided by (used in) financing activities 4,208 961 (48,690)
--------- -------- ---------
Effect of foreign currency translation on cash 1,465 1,021 1,425
--------- -------- ---------
Net decrease in cash and cash equivalents (18,069) (4,354) (21,244)
Cash and cash equivalents, beginning of year 58,993 63,347 84,591
--------- -------- ---------
Cash and cash equivalents, end of year $ 40,924 $ 58,993 $ 63,347
========= ======== =========
(in thousands) | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
Cash flows from operating activities | | | | | | | | | | | | |
| Net loss | | $ | (12,417 | ) | | $ | (31,580 | ) | | $ | (67,978 | ) |
| Adjustments to reconcile net loss to net cash flows from operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 23,890 | | | | 25,449 | | | | 27,135 | |
| Cumulative effect of change in accounting for goodwill | | | — | | | | — | | | | 28,237 | |
| Non-cash goodwill and asset impairments | | | 31,217 | | | | 2,106 | | | | 38,046 | |
| Net (repurchases) sales under asset securitization facility | | | — | | | | — | | | | (16,612 | ) |
| Income tax benefit of stock option exercises | | | — | | | | 1,508 | | | | 926 | |
| Provision for accounts receivable allowances | | | 1,094 | | | | — | | | | 438 | |
| Deferred income taxes | | | 4 | | | | 46,946 | | | | (27,006 | ) |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | (19,946 | ) | | | (35,492 | ) | | | 1,861 | |
| Inventories | | | (6,569 | ) | | | (35,700 | ) | | | (41,852 | ) |
| Prepaid expenses and other | | | (644 | ) | | | 1,230 | | | | 6,309 | |
| Accounts payable | | | 58,658 | | | | 1,526 | | | | 23,554 | |
| Customer deposits | | | (584 | ) | | | (2,847 | ) | | | 868 | |
| Accrued liabilities and other | | | 7,264 | | | | 5,502 | | | | 6,121 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash flows provided by (used in) operating activities | | | 81,967 | | | | (21,352 | ) | | | (19,953 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
| Purchases of short-term investments | | | (19,500 | ) | | | (86,903 | ) | | | (105,236 | ) |
| Sales and maturities of short-term investments | | | 13,505 | | | | 102,599 | | | | 138,560 | |
| Payments for property, plant and equipment | | | (21,707 | ) | | | (18,086 | ) | | | (22,372 | ) |
| Proceeds on sale of property, plant and equipment | | | 202 | | | | — | | | | 2,665 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash flows provided by (used in) investing activities | | | (27,500 | ) | | | (2,390 | ) | | | 13,617 | |
| | | | | | | | | | |
| |
Cash flows from financing activities | | | | | | | | | | | | |
| Proceeds from debt | | | 16,648 | | | | 159,752 | | | | — | |
| Payments on debt and capital lease obligations | | | (17,916 | ) | | | (160,753 | ) | | | (2,749 | ) |
| Proceeds from exercise of stock options | | | 3,263 | | | | 3,236 | | | | 1,768 | |
| Issuances of common stock under Employee Stock Purchase Plan | | | 2,237 | | | | 1,973 | | | | 1,942 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash flows provided by financing activities | | | 4,232 | | | | 4,208 | | | | 961 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Effect of foreign currency translation on cash | | | (896 | ) | | | 1,465 | | | | 1,021 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net decrease in cash and cash equivalents | | | 57,803 | | | | (18,069 | ) | | | (4,354 | ) |
| |
| Cash and cash equivalents, beginning of year | | | 40,924 | | | | 58,993 | | | | 63,347 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash and cash equivalents, end of year | | $ | 98,727 | | | $ | 40,924 | | | $ | 58,993 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
34
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
42
Plexus Corp.
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Description of Business and Significant Accounting Policies
Description of Business:Plexus Corp. together with its subsidiaries, (the "Company"“Company” or “Plexus”) participates in the Electronics Manufacturing Services (“EMS”) industry. The Company provides a full range of product realization services to original equipment manufacturers (OEMs)(“OEMs”) and other technology companies in the networking/ datacommunications/telecom,wireline/ networking, wireless infrastructure, medical, industrial/commercial, computer, and transportation/other industries. The
Company provides advanced electronics design, manufacturing and testing
services to its customersdefense/security/aerospace industries with a focus on complex and global fulfillment solutions, high technology manufacturing and test services, and high reliability products. The Company offers its customers the ability to outsource all stages of product realization, including:including development and design, services, materials sourcing, procurement and management, prototyping, and new product introduction, testing, manufacturing, product configuration, direct order fulfillment, logistics and test/repair.
We provide
The Company provides most of ourits contract manufacturing services on a turnkey basis, which means we procureit sources and procures some or all of the materials required for product assembly. We provideThe Company provides some services on a consignment basis, which means that the customer supplies materials necessary for product assembly. Turnkey services include material procurement and warehousing, in addition to manufacturing, and involve greater resource investment than consignment services. Other than certain test equipment used forto support internal manufacturing, we dothe Company does not design or manufacture ourits own proprietary products.
Consolidation Principles: Principles and Basis of Presentation:The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of Plexus Corp. and its subsidiaries.Plexus. All significant intercompany transactions have been eliminated.
Effective October 1, 2004, the Company’s fiscal year now ends on the Saturday closest to September 30 rather than on September 30, as was the case prior to fiscal 2005. In connection with the change to a fiscal year ending on the Saturday nearest September 30, the Company also changed the accounting for its interim periods to adopt a “4-4-5” weeks accounting system for the interim periods in each quarter. Each quarter, therefore, ends on a Saturday at the end of the 4-4-5 week period. The accounting periods for fiscal 2005 and 2004 each included 366 days.
Cash Equivalents and Short-Term Investments:Cash equivalents are highly liquid investments purchased with an original maturity of less than three months. Short-term investments include investment-grade short-term debt instruments with original maturities greater than three months. Short-term investments are generally comprised of securities with contractual maturities greater than one year but with optional or early redemption provisions or rate reset provisions within one year.
Investments in debt securities are classified as "available-for-sale."“available-for-sale.” Such investments are recorded at fair value as determined from quoted market prices, and the cost of securities sold is determined on the specific identification method. If material, unrealized gains or losses are reported as a component of comprehensive income or loss, net of the related income tax effect. For fiscal 2005, 2004 2003 and 2002,2003, unrealized or realized gains and losses were not material.
As of
October 1, 2005 and September 30, 2004,
and 2003, cash and cash equivalents included the following securities (in thousands):
2004 2003
---- ----
Money market funds and other $15,797 $22,757
U.S. corporate and bank debt 16,297 28,877
State and municipal securities - 4,000
------- -------
$32,094 $55,634
======= =======
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Money market funds and other | | $ | 26,282 | | | $ | 15,797 | |
| U.S. corporate and bank debt | | | 51,700 | | | | 16,297 | |
| | | | | | | |
| | | $ | 77,982 | | | $ | 32,094 | |
| | | | | | | |
Short-term investments as of October 1, 2005 and September 30, 2004 and 2003 consistconsisted primarily of state and municipal securities.
Inventories:Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Valuing inventories at the lower of cost or market requires the use of estimates and
43
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
judgment. Customers may cancel their orders, change production quantities or delay production for a number of reasons that are beyond the Company'sCompany’s control. Any of these, or certain additional actions, could impact the valuation of inventory. Any actions taken by the Company'sCompany’s customers that could impact the value of its inventory are considered when determining the lower of cost or market valuations.
Property, Plant and Equipment and Depreciation:These assets are stated at cost. Depreciation, determined on the straight-line method, is based on lives assigned to the major classes of depreciable assets as follows:
35
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
| | | | |
Buildings and improvements 15-50 years
| | 15-50years |
Machinery and equipment 3-10 years
| | 3-10years |
Computer hardware and software 3-10 years
| | 3-10years |
Certain facilities and equipment held under capital leases are classified as property, plant and equipment and amortized using the straight-line method over the lease terms and the related obligations are recorded as liabilities. Lease amortization is included in depreciation expense (see Note 3) and the financing component of the lease payments is classified as interest expense.
For the capitalization of software costs, the Company follows Statement of Position ("SOP"(“SOP”) 98-1, "Accounting“Accounting for the Costs of Computer Software Developed for Internal Use."” The Company capitalizes significant costs incurred in the acquisition or development of software for internal use, including the costs of the software, consultants and payroll and payroll related costs for employees directly involved in developing internal use computer software once the final selection of the software is made (see Note 3). Costs incurred prior to the final selection of software and costs not qualifying for capitalization are expensed as incurred.
Goodwill and Other Intangible Assets:Assets: The Company adopted Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets” effective October 1, 2002. Under SFAS No. 142,
beginning October 1, 2002, the Company no longer amortizes goodwill and intangible assets with indefinite useful lives, but instead, the Company tests those assets for impairment at least annually, withand recognizes any related loss recognized
in earningslosses when incurred. Recoverability of goodwill is measured at the reporting unit level. The Company'sUpon the adoption of SFAS No. 142, the Company’s goodwill was assigned to three reporting units: San Diego, California ("(“San Diego"Diego”), Juarez, Mexico ("Juarez"(“Juarez”) and Kelso, Scotland and Maldon, England ("(“United Kingdom"Kingdom”). As of September 30, 2004, only the Juarez and United Kingdom reporting units
had goodwill remaining.
SFAS No. 142 requiredOctober 1, 2005, the Company to perform a transitionalhad remaining goodwill impairment evaluation that required the Company to perform an assessment
of whether there was an indication$7.0 million, all of goodwill impairment as of the date
of adoption. The Company completed the evaluation and concluded that it
had goodwill impairmentswhich related to San Diego and Juarez, since the estimated fair value based on expected future discounted cash flows to be
generated from each reporting unit was significantly less than their
respective carrying value.
The Company then compared the respective carrying amounts of San
Diego's and Juarez's goodwill to the implied fair value of each reporting
unit's respective goodwill. The implied fair value was determined by
allocating the fair value to each respective reporting unit's assets and
liabilities in a manner similar to a purchase price allocation for an
acquired business. Both values were measured at the date of adoption. The
Company identified $28.2 million of transitional impairment losses ($23.5
million, net of income tax benefits) related to San Diego and Juarez,
which were recognized as a cumulative effect of a change in accounting for
goodwilloperations in the Consolidated Statements of Operations.United Kingdom.
The Company is required to perform goodwill impairment tests at least on an annual basis, for which the Company selected the third quarter of each fiscal year, andor whenever events or changes in circumstances indicate that the carrying value may not be recoverable from estimated
future cash flows. Inrecoverable. Since the first quarterCompany’s adoption of fiscal 2003,SFAS No. 142 and excluding the transitional goodwill impairment noted below, the Company has recorded aggregate goodwill impairment of $32.5 million, which includes $26.9 million, $0 and $5.6 million of
goodwill was impaired as a result of the Company's decision to close the
San Diego facility (see Note 10). The Company'srecorded in fiscal year2005, 2004 and 2003, annual impairment tests did not result in any further impairment. However,
norespectively (see Note 9). No assurances can be given that future impairment tests of goodwill will not result in further goodwill impairment or that changes in circumstances will not arise which result in further goodwill impairment.
We measure the recoverability of goodwill under the annual impairment test by comparing the reporting unit’s carrying amount, including goodwill, to the reporting unit’s estimated fair market value, which is primarily estimated using the present value of expected future cash flows, although market valuations may also be employed. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second test is performed to measure the amount of impairment. Circumstances that may lead to impairment of goodwill include, but are not limited to, the loss of a significant customer or customers and unforeseen reductions in customer demand, future operating performance or industry demand.
As of the adoption date of SFAS No. 142, the Company was required to perform a transitional goodwill impairment evaluation. The Company concluded that it had goodwill impairment related to its San Diego and Juarez operations, since the estimated fair value based on expected future discounted cash flows to be generated from each operation was significantly less than their respective carrying value. The Company then compared the respective carrying amounts of goodwill for the San Diego and Juarez operations to the
44
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
implied fair value of each operation’s respective goodwill. The implied fair value was determined by allocating the fair value to each respective operation’s assets and liabilities in a manner similar to a purchase price allocation for an
impairment.
The following sets forth a reconciliationacquired business. Both values were measured at the date of
net income (loss) and
earnings per share information foradoption. For fiscal
2004, 2003,
and 2002, adjusted to
exclude goodwill amortization,the Company identified $28.2 million of transitional impairment losses ($23.5 million, net of income
taxes (in thousands, except
per share data):
36
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
tax benefits) related to the San Diego and Juarez operations, which were recognized as a cumulative effect of a change in accounting for goodwill in the Consolidated Statements of Operations. For the fiscal years ended October 1, 2005 and September 30, 2004 2003 2002
---- ---- ----
Reported loss before cumulative effect
of change in accounting for goodwill $(31,580) $(44,496) $ (4,073)
Add back: goodwill amortization, net of income
taxes - - 4,375
-------- -------- ----------
Adjusted loss before cumulative effect of change
in accounting for goodwill (31,580) (44,496) 302
Cumulative effect of change in accounting
for goodwill, net of income taxes - (23,482) -
-------- -------- ----------
Adjusted net income (loss) $(31,580) $(67,978) $ 302
======== ======== ==========
Basic weighted average common shares outstanding 42,961 42,284 41,895
Dilutive effect of stock options - - 1,223
-------- -------- ----------
Diluted weighted average shares outstanding 42,961 42,284 43,118
======== ======== ==========
Basic earnings per share:
Reported loss before cumulative effect
of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10)
Add back: goodwill amortization,
net of income taxes - - 0.10
-------- -------- ----------
Adjusted income (loss) before cumulative
effect of change in accounting for
goodwill (0.74) (1.05) -
Cumulative effect of change in accounting
for goodwill, net of income taxes - (0.56) -
-------- -------- ----------
Adjusted net income (loss) $ (0.74) $ (1.61) $ -
======== ======== ==========
Diluted earnings per share:
Reported loss before cumulative effect
of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10)
Add back: goodwill amortization,
net of income taxes - - 0.10
-------- -------- ----------
Adjusted income (loss) before cumulative
effect of change in accounting for
goodwill (0.74) (1.05) -
Cumulative effect of change in accounting
for goodwill, net of income taxes - (0.56) -
-------- -------- ----------
Adjusted net income (loss) $ (0.74) $ (1.61) $ -
======== ======== ==========
The changes in the carrying amount of goodwill for fiscal years ended
September 30, 2004 and 2003the various segments are as follows (in thousands):
BALANCE AS OF OCTOBER 1, 2002 $ 64,957
Cumulative effect of change in accounting for goodwill (28,237)
Impairment charge (See Note 10) (5,595)
Foreign currency translation adjustments 1,144
--------
BALANCE AS OF SEPTEMBER 30, 2003 32,269
Foreign currency translation adjustments 1,910
--------
BALANCE AS OF SEPTEMBER 30, 2004 $ 34,179
========
37
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED | | | | | | | | | | | | | |
| | | United | | | | | | | |
| | | Kingdom | | | Mexico | | | Total | |
Balance as of October 1, 2003 | | $ | 21,417 | | | $ | 10,852 | | | $ | 32,269 | |
| Foreign currency translation adjustments | | | 1,910 | | | | — | | | | 1,910 | |
| | | | | | | | | | |
| |
Balance as of September 30, 2004 | | | 23,327 | | | | 10,852 | | | | 34,179 | |
| |
| Goodwill impairment (See Note 9) | | | (16,063 | ) | | | (10,852 | ) | | | (26,915 | ) |
| Foreign currency translation adjustment | | | (269 | ) | | | — | | | | (269 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Balance as of October 1, 2005 | | $ | 6,995 | | | $ | — | | | $ | 6,995 | |
| | | | | | | | | | |
The Company has a nominal amount of identifiable intangibles that are subject to amortization. These intangibles relate to patents with useful lives of twelve years. The Company has no intangibles, except goodwill, that are not subject to amortization. During fiscal 2004,2005, there were no additions to intangible assets. Intangible asset amortization expense was nominal for fiscal 2005, 2004 2003 and 2002.
2003.
Impairment of Long-Lived Assets: The Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" effective
October 1, 2002. SFAS No. 144 modifies and expands the financial
accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill, which is specifically addressed in SFAS No.
142. SFAS No. 144 maintains the requirement that an impairment loss be
recognized for a long-lived asset to be held and used if its carrying
value is not recoverable from its undiscounted cash flows, with the
recognized impairment being the difference between the carrying amount and
fair value of the asset. With respect to long-lived assets to be disposed
of other than by sale, SFAS No. 144 requires that the asset be considered
held and used until it is actually disposed of, but requires that its
depreciable life be revised in accordance with APB Opinion No. 20
"Accounting Changes." Impairment charges recorded in fiscal 2003 against
the carrying value of certain of the Company's long-lived assets are
discussed in Note 10.
The Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property, plant and equipment is measured by comparing its carrying value to the projected cash flows the property, plant and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the property exceeds its fair market value. The impairment analysis is based on significant assumptions of future results made by management, including sales and cash flow projections. Circumstances that may lead to impairment of property, plant and equipment include decreases inreduced expectations for future performance or industry demand and the restructuring of the Company's operations.
possible further restructurings.
Revenue Recognition:Net sales from manufacturing services are generally recognized upon shipment of the manufactured product to the Company'sCompany’s customers under contractual terms, which are generally FOB shipping point. Upon shipment, title transfers and the customer assumes risks and rewards of ownership of the product. Generally, there are no formal customer acceptance requirements or further obligations related to manufacturing services; if such requirements or obligations exist, then a sale is recognized at the time when such requirements are completed and such obligations are fulfilled.
Net sales from engineering design and development services, which are generally performed under contracts of twelve months or less duration, are recognized as costs are incurred utilizing thea percentage-of-completion method; any losses are recognized when anticipated. Progress towards completion of product design and development contracts is based on units of work for labor content and costs incurred for component content. Net sales from engineering design and development services were less than ten percent of total sales in fiscal 2005, 2004 2003
and 2002.2003.
Sales are recorded net of estimated returns of manufactured product based on management'smanagement’s analysis of historical returns, current economic trends and changes in customer demand. Net sales also include amounts billed to customers for shipping and handling. The corresponding shipping and handling costs are included in cost of sales.
45
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
Restructuring Costs:From time to time, the Company has recorded restructuring costs in response to the reduction in its sales levels and reduced capacity utilization. These restructuring charges included employee severance and benefit costs, costs related to plant closings, including leased facilities that will be abandoned (and subleased, as applicable), and impairment of equipment. Prior to January 1, 2003, severance and benefit costs were recorded in accordance with Emerging Issues Task Force
("EITF"(“EITF”) 94-3. For leased facilities that were abandoned and subleased, the
estimated lease loss wasCompany accrued for future remaining lease payments subsequent to abandonment, less any estimated sublease income. As of
September 30, 2004,October 1, 2005, certain of the
significantCompany’s facilities which
the
Companyit plans to sublease have not yet been subleased and, accordingly, the
Company'sCompany’s estimates of expected sublease income could change based on factors that affect its ability to sublease those facilities such as general economic conditions and the real estate market, among others.
38
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Subsequent to December 31, 2002, costs associated with a restructuring activity are recorded in accordance with SFAS No. 146, "Accounting“Accounting for Costs Associated with Exit or Disposal Activities."” The timing and related recognition of recording severance and benefit costs that are not presumed to be an ongoing benefit, as defined in SFAS No. 146, dependsdepend on whether employees are required to render service until they are terminated in order to receive the termination benefits and, if so, whether employees will be retained to render service beyond a minimum retention period. The Company concluded that it had a substantive severance plan based upon past severance practices; therefore, certain severance and benefit costs were recorded in accordance with SFAS No. 112, "Employer's“Employer’s Accounting for Postemployment Benefits,"” which resulted in the recognition of a liability as the severance and benefit costs arose from an existing condition or situation and the payment was both probable and reasonably estimated.
For leased facilities that will be abandoned and subleased, a liability is recognized and measured at fair value for the future remaining lease payments subsequent to abandonment, less any estimated sublease income that could be reasonably obtained for the property, is recognized and measured at its fair value.property. For contract termination costs, including costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity,Company, a liability for future remaining payments under the contract is recognized and measured at its fair value.
The recognition of restructuring costs requires that the Company make certain judgments and estimates regarding the nature, timing and amount of cost associated with the planned exit activity. If actual results in exiting these facilities differ from the Company'sCompany’s estimates and assumptions, the Company may be required to revise the estimates of future liabilities, requiring thewhich could result in recording of additional restructuring costs or the reduction of liabilities already recorded. At the end of each reporting period, the Company evaluates the remaining accrued balances to ensure that no excess accruals are retained, no additional accruals are required, and the utilization of the provisions are for their intended purpose in accordance with developed exit plans.
Income Taxes:Deferred income taxes are provided for differences between the bases of assets and liabilities for financial and income tax reporting purposes. The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized (see Note 5). Realization of deferred income tax assets is dependent on ourthe Company’s ability to generate future taxable income.
Foreign Currency:For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at year-end, with net sales, expenses and cash flows translated at the monthly exchange rates. Adjustments resulting from translation of the financial statements are recorded as a component of accumulated other comprehensive income. Exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved and remeasurement adjustments for foreign operations where the U.S. dollar is the functional currency are included in the statement of operations. Exchange gains and losses(losses) on foreign currency transactions were not significant$(0.5) million, $0.5 million and $0.3 million for the years ended October 1, 2005 and September 30, 2004 and 2003, and 2002, respectively.
Derivatives:
Derivatives: The Company periodically enters into derivative contracts, primarily foreign currency forward, call and put contracts which are designated as cash-flow hedges. The changes in fair value of these
46
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
contracts, to the extent the hedges are effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. These amounts were not material during fiscal 2005, 2004 2003 and 2002.
2003.
Earnings Per Share:The computation of basic earnings per common share is based upon the weighted average number of common shares outstanding and net income (loss). The computation of diluted earnings per common share reflects additional dilution from stock options, unless such shares are antidilutive.
Stock-based Compensation: In December 2002, SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure --
an amendment of SFAS No. 123" was issued. SFAS No. 148 provides
alternative methods of transition for an entity that voluntarily changes
to the fair-value-based method of accounting for stock-based employee
compensation and is effective for fiscal years ending after December 15,
2002. In addition, SFAS No. 148 requires prominent disclosures in both
annual and interim financial statements about the effects on reported net
income of an entity's method of accounting for stock-based employee
compensation. The disclosure provisions were effective for the Company in
the second
39
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
quarter of fiscal 2003. The Company did not effect a voluntary change in
accounting to the fair value method, and, accordingly, the adoption of
SFAS No. 148 did not have a significant impact on the Company's results of
operations or financial position.
The Company accounts for its stock option plans under the guidelines of Accounting Principles Board Opinion No. 25,
"Accounting“Accounting for Stock Issued to Employees.
"” Accordingly, no compensation expense related to the stock option plans has been recognized in the Consolidated Statements of
Operations.Operations and Comprehensive Income (Loss). The
Company'sCompany’s stock-based employee compensation plans are more fully described in Note
11.10. In December 2004, the Financial Accounting Standards Board (“FASB”) published SFAS No. 123 (R), “Share-Based Payment: An Amendment of FASB Statements No. 123 and 95.” SFAS 123R, which is effective from the first annual period that begins after June 15, 2005, will require that compensation cost related to share-based payment transactions, including stock options, be recognized in the financial statements. Accordingly, the Company will implement the revised standard in the first quarter of fiscal year 2006 (see “New Accounting Pronouncements” section below for further discussion). On May 11, 2005, in response to SFAS No. 123 (R), the Compensation/Leadership Development Committee of the Company’s Board of Directors (the “Compensation Committee”) approved the acceleration of the vesting of approximately 660,000 shares of unvested stock options outstanding under the Company’s stock option plan with exercise prices per share of $12.20 or higher. The accelerated options have a range of exercise prices of $12.25 to $27.37 and a weighted average exercise price of $15.17. The effective date of the acceleration was May 11, 2005. The primary purpose of the accelerated vesting was to avoid recognizing compensation expense associated with these options upon adoption of SFAS No. 123(R). The aggregate pre-tax expense associated with the accelerated options would have been approximately $5.0 million, of which $2.8 million and $1.0 million would have been reflected in the Company’s consolidated statements of operations in fiscal years 2006 and 2007, respectively.
On May 18, 2005, the Compensation Committee granted approximately 700,000 stock options to key officers and employees of the Company. In response to SFAS No. 123 (R), and as allowed under the Company’s 2005 Equity Incentive Plan, the Compensation Committee provided that these options would vest immediately. The primary purpose of the immediate vesting was to avoid recognizing compensation expense associated with these options upon adoption of SFAS No. 123(R). The aggregate pre-tax expense associated with the immediate vesting of these options would have been approximately $3.9 million, of which $1.3 million, $1.3 million and $0.8 million would have been reflected in the Company’s consolidated statements of operations in fiscal years 2006, 2007 and 2008, respectively.
The Company utilizes the Black-Scholes option valuation model to value stock options for pro forma presentation of income and per-share data as if the fair value-based method in SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123,” had been used to account for stock-based compensation. The following sets forthpresents pro forma net income (loss) and per-share data as if a reconciliationfair value based method had been used to account for stock-based compensation (in thousands, except per-share amounts):
47
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
| | | | | | | | | | | | | |
| | | Fiscal years ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Net loss as reported | | $ | (12,417 | ) | | $ | (31,580 | ) | | $ | (67,978 | ) |
| | | | | | | | | | | | | |
| Add: stock-based employee compensation expense included in reported net loss, net of related income tax effect | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | |
| Deduct: total stock-based employee compensation expense determined under fair value based method, net of related tax effects | | | (12,749 | ) | | | (9,542 | ) | | | (9,042 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Proforma net loss | | $ | (25,166 | ) | | $ | (41,122 | ) | | $ | (77,020 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | |
| Basic, as reported | | $ | (0.29 | ) | | $ | (0.74 | ) | | $ | (1.61 | ) |
| | | | | | | | | | |
| Basic, proforma | | $ | (0.58 | ) | | $ | (0.96 | ) | | $ | (1.82 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Diluted, as reported | | $ | (0.29 | ) | | $ | (0.74 | ) | | $ | (1.61 | ) |
| | | | | | | | | | |
| Diluted, proforma | | $ | (0.58 | ) | | $ | (0.96 | ) | | $ | (1.82 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Weighted average shares: | | | | | | | | | | | | |
| Basic | | | 43,373 | | | | 42,961 | | | | 42,284 | |
| | | | | | | | | | |
| Diluted | | | 43,373 | | | | 42,961 | | | | 42,284 | |
| | | | | | | | | | |
New Accounting Pronouncements:In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
net lossARB No. 43, Chapter 4” (“SFAS 151”), which requires that abnormal amounts of idle facility expense, freight, handling costs, and
earnings per share information for fiscal 2004, 2003 and 2002
hadwasted material be recognized as current period charges. In addition, this statement requires that allocation of fixed production overheads to the
Company recognized compensation expensecosts of conversion be based on the
fair value atnormal capacity of the
grant date for awards under the plans, estimated at the date of grant
using the Black-Scholes option pricing method (in thousands, except per
share amounts).
Years ended September 30,
-------------------------
2004 2003 2002
---- ---- ----
Net loss as reported $ (31,580) $(67,978) $ (4,073)
Add: stock-based employee compensation expense
includedproduction facilities. The Company will be required to adopt this statement in reported net loss, net of related income
tax effect - - -
Deduct: total stock-based employee
compensation expense determined under fair value
based method, net of related tax effects (9,542) (9,042) (9,947)
---------- -------- ---------
Proforma net loss $ (41,122) $(77,020) $ (14,020)
========== ======== =========
Earnings per share:
Basic, as reported $ (0.74) $ (1.61) $ (0.10)
========== ======== =========
Basic, proforma $ (0.96) $ (1.82) $ (0.33)
========== ======== =========
Diluted, as reported $ (0.74) $ (1.61) $ (0.10)
========== ======== =========
Diluted, proforma $ (0.96) $ ( 1.82) $ (0.33)
========== ======== =========
Weighted average shares:
Basic 42,961 42,284 41,895
========== ======== =========
Diluted 42,961 42,284 41,895
========== ======== =========
New Accounting Pronouncements: In November 2002, the EITF reached a
consensus regarding EITF Issue 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." The consensus addresses not only when and how
an arrangement involving multiple deliverables should be divided into
separate units of accounting, but also how the arrangement's consideration
should be allocated among separate units. The pronouncement was effective
for the Company commencing with its first quarter of fiscal
year 2004 but
did2006. The Company does not
anticipate that the implementation of this standard will have a material impact on its
financial position, results of operations or cash flows. In December 2004, the FASB issued Staff Position (“FSP”) FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” (the “Jobs Act”). The Jobs Act became law in the U.S. in October 2004. This legislation provides for a number of changes in U.S. tax laws. FSP SFAS No. 109-2 requires recognition of a deferred tax liability for the tax effect of the excess of book over tax basis of an investment in a foreign corporate venture that is permanent in duration, unless a company firmly asserts that such amounts are indefinitely reinvested outside the company’s home jurisdiction. However, due to the lack of clarification of certain provisions within the Jobs Act, FSP SFAS No. 109-2 provides companies additional time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. Management is presently reviewing this new legislation, in conjunction with income tax legislation enacted in July 2005 in the United Kingdom (see Note 12), to determine the impact on the Company’s consolidated results of operations and financial position.
In December 2004, the FASB issued SFAS No. 123(R), which requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award at the grant date (with limited exceptions) and recognition of the compensation expense over the period during which an employee is required to provide service in exchange for the award. In March 2005, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”), which expresses views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB
48
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
107 provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company is required to adopt SFAS No. 123(R) in its first quarter of fiscal 2006. Currently, the Company accounts for its stock option awards under the provisions of APB No. 25, which to date has not resulted in compensation expense in the Company’s consolidated results of operations. Management has selected a transition method in which prior period financial statements would not be restated. In addition, management will use the Black-Scholes valuation model, which is the same valuation model the Company uses to value stock options for proforma presentation of income and per-share data for SFAS No. 148 disclosure purposes. The adoption of SFAS No. 123(R) is not expected to have a significant effect on the Company’s financial condition and will not affect consolidated cash flows; however, if stock options remain an important element of the Company’s long-term compensation for its officers and key employees, SFAS No. 123(R) is expected to have a significant adverse effect on the Company’s consolidated results of operations.
Based on unvested options outstanding at October 1, 2005, the future compensation cost to be recognized as a result of the implementation of SFAS No. 123(R) is as follows (in thousands of dollars):
| | | | | |
| 2006 | | $ | 372 | |
| 2007 | | | 47 | |
| 2008 | | | 20 | |
| 2009 | | | — | |
| 2010 | | | — | |
| Thereafter | | | — | |
| | | | |
| | | $ | 439 | |
| | | | |
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB No. 29,” which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and the fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. The Company is required to adopt SFAS No. 153 for nonmonetary asset exchanges occurring in the first quarter of 2006 and its adoption is not expected to have a significant effect on the Company’s results of operations or financial position.condition.
In January 2003,March 2005, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities -47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), which clarifies that an interpretation of ARB
No. 51," which provides guidance on the identification of and reporting
for variable interest entities. In December 2003, the FASB issuedentity is required to recognize a revised Interpretation No. 46, which expands the criteria for
consideration in determining whether a variable interest entity should be
consolidated. Interpretation No. 46 became effectiveliability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated even though uncertainty exists about the timing and/or method of settlement. The Company inis required to adopt FIN 47 by the secondend of fiscal quarter2006. The Company is currently assessing the impact of 2004. The Company's adoption of
Interpretation No. 46 did not have an impactFIN 47 on its consolidated results of operations orand financial position.condition.
In May
2003,2005, the FASB issued SFAS No.
150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities154, “Accounting Changes and
Equity," which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. Financial
40
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
instruments that are within the scope of the Statement, which previously
were often classified as equity, must now be classified as liabilities. In
November 2003, Financial Accounting Standards Board Staff Position ("FSP")
No. SFAS 150-3 deferred indefinitely the effective date ofError Corrections.” SFAS No. 150154 replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for applying the provisionsaccounting for and reporting of the Statement for certain mandatorily
redeemable non-controlling interests. However expanded disclosures are
required during the deferral period.a change in accounting principle. The Company does not have financial
instruments with mandatorily redeemable non-controlling interests.
In December 2003, the Securitiesis required to adopt SFAS No. 154 for accounting changes and Exchange Commission (SEC)
issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition,"
which supercedes SAB No. 101, "Revenue Recognitionerror corrections in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of Emerging Issues
Task Force (EITF) 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." Additionally, SAB No. 104 rescinds the SEC's
"Revenue Recognition in Financial Statements Frequently Asked Questions
and Answers" document issued with SAB 101 that had been codified in SEC
Topic 13, Revenue Recognition.fiscal 2007. The adoption of this bulletin did not have
a significant impact on the Company's consolidatedCompany’s results of operations and financial condition will only be impacted by SFAS No. 154 if it implements changes in accounting principles that are addressed by the standard or corrects accounting errors in future periods. In June 2005, the FASB issued FSP No. FAS 143-1, “Accounting for Electronic Equipment Waste Obligations,” that provides guidance on how commercial users and producers of electronic equipment should recognize and measure asset retirement obligations associated with the European Directive 2002/96/EC on Waste Electrical and Electronic Equipment (“WEEE”). WEEE primarily impacts the Company’s operations in the United Kingdom. FSP No 143-1 is effective on the date that the United Kingdom adopts WEEE into law, which is anticipated sometime in fiscal 2006. The Company is currently assessing the impact of FSP No. 143-1 on its financial position.
condition, results of operations and cash flows.
49
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
Use of Estimates:The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments:Accounts payable and accrued liabilities are reflected in the consolidated financial statements at cost because of the short-term duration of these instruments. Accounts receivables are reflected at net realizable value based on anticipated losses due to potentially uncollectible balances. Anticipated losses are based on management'smanagement’s analysis of historical losses and changes in customer credit status. The fair value of capital lease obligations is approximately $25.4$24.5 million and $26.0$25.4 million as of October 1, 2005 and September 30, 2004, and
2003, respectively. The Company uses quoted market prices when available or discounted cash flows to calculate these fair values.
Business and Credit Concentrations:Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, short-term investments and trade accounts receivable. The Company'sCompany’s cash, cash equivalents and short-term investments are managed by recognized financial institutions that follow the Company'sCompany’s investment policy. Such investment policy limits the amount of credit exposure in any one issue and the maturity date of the investment securities that typically comprise investment grade short-term debt instruments. Concentrations of credit risk in accounts receivable resulting from sales to major customers are discussed in Note 13.12. The Company, at times, requires advanced cash deposits for services performed. The Company also closely monitors extensions of credit.
Related Party Transactions: The Company holds a minority equity
interest in MemoryLink Corp. ("MemoryLink"). The minority equity interest
represents less than a ten percent ownership interest in MemoryLink and is
accounted for under the cost method. The Company had nominal sales to
MemoryLink during fiscal 2004 and 2003 and no sales in fiscal 2002. The
Company received the minority equity interest in fiscal 2002, as
settlement for accounts receivable that had been previously written off.
Due to uncertainty regarding MemoryLink's financial viability, the Company
recorded the minority equity interest at a zero value.
Reclassifications:Certain amounts in prior
years'years’ consolidated financial statements have been reclassified to conform to the
20042005 presentation.
41
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. INVENTORIESInventories
Inventories as of
October 1, 2005 and September 30, 2004
and 2003, consist of (in thousands):
2004 2003
---- ----
Assembly parts $ 115,094 $ 88,562
Work-in-process 46,382 41,514
Finished goods 12,042 6,439
--------- ----------
$ 173,518 $ 136,515
========= ==========
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Assembly parts | | $ | 116,466 | | | $ | 115,094 | |
| Work-in-process | | | 30,282 | | | | 32,898 | |
| Finished goods | | | 33,350 | | | | 25,526 | |
| | | | | | | |
| | | $ | 180,098 | | | $ | 173,518 | |
| | | | | | | |
3. PROPERTY, PLANT AND EQUIPMENTProperty, Plant and Equipment
Property, plant and equipment as
ofOctober 1, 2005 and September 30, 2004,
and 2003, consist of (in thousands):
2004 2003
---- ----
Land, buildings and improvements $ 73,813 $ 66,614
Machinery, and equipment 119,761 119,788
Computer hardware and software 58,512 57,576
Construction in progress 13,812 7,079
--------- ---------
265,898 251,057
Less accumulated depreciation and amortization 136,312 119,547
--------- ---------
$ 129,586 $ 131,510
========= =========
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Land, buildings and improvements | | $ | 74,721 | | | $ | 73,813 | |
| Machinery, and equipment | | | 137,364 | | | | 119,761 | |
| Computer hardware and software | | | 63,843 | | | | 58,512 | |
| Construction in progress | | | 7,776 | | | | 13,812 | |
| | | | | | | |
| | | | 283,704 | | | | 265,898 | |
| | | | | | | | | |
| Less: accumulated depreciation and amortization | | | 160,564 | | | | 136,312 | |
| | | | | | | |
| | | $ | 123,140 | | | $ | 129,586 | |
| | | | | | | |
As of October 1, 2005 and September 30, 2004, and 2003, computer hardware and software includes $24.1$27.1 million and $21.9$24.1 million, respectively, related to a newcommon enterprise resource planning platform ("ERP"(“ERP”). As of October 1, 2005 and September 30, 2004,
and 2003, construction in process includes $6.3$2.0 million and $6.1$6.3 million, respectively, of software implementation costs related to the newcommon ERP platform. The conversion timetable and future project scope remain subject to change based upon our evolving needs and sales levels.
50
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
Fiscal 2005, 2004 2003 and 20022003 amortization of the newcommon ERP platform totaled $3.0, $2.7 $0.7 million and $0,$0.7, respectively.
Assets held under capital leases and included in property, plant and equipment as of
October 1, 2005 and September 30, 2004,
and 2003, consist of (in thousands):
2004 2003
---- ----
Buildings and improvements $ 23,945 $ 23,400
Machinery and equipment 1,775 1,834
-------- --------
25,720 25,234
Less accumulated amortization 3,914 3,240
-------- --------
$ 21,806 $ 21,994
======== ========
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Buildings and improvements | | $ | 23,830 | | | $ | 23,945 | |
| Machinery and equipment | | | 1,735 | | | | 1,775 | |
| | | | | | | |
| | | | 25,565 | | | | 25,720 | |
| Less accumulated amortization | | | 3,973 | | | | 3,914 | |
| | | | | | | |
| | | $ | 21,592 | | | $ | 21,806 | |
| | | | | | | |
The Building and improvements category in the above table includes a manufacturing facility in San Diego, which was closed during fiscal 2003 (see Note 10)9) and is no longer used for operating purposes. The Company subleased a portion of the facility during fiscal 2003 and is attempting to sublease the remaining portion.portion during fiscal 2005 (see Note 9). The portion of the San Diego facility that is subleased is recorded at the net present value of the sublease income. The portionincome, net of cash outflows for broker commissions and building improvements associated with the facility
awaiting sublease is recorded at the net present value of the estimated
sublease income.subleases. The net book value of the subleased portion of the San Diego facility is reduced on a monthly basis by the amortization of the sublease income. No amortization is recorded oncash receipts, net of certain cash outflows associated with the vacant portion of the
San Diego facility.subleases. The net book value of the San Diego facility, adjusted for impairment, is approximately $15.4$15.7 million as of September 30, 2004.October 1, 2005.
Amortization of assets held under capital leases totaled $0.7, $1.6$0.7 million and $2.7$1.6 million for fiscal 2005, 2004 2003 and 2002,2003, respectively. There were no capital lease additions in fiscal 2004 or 2003. Capital
lease additions2005 and 2004.
As of
$1.5 million for fiscal 2002 have been treated as
non-cash transactions for purposes of the Consolidated Statements of Cash
Flows.
42
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As ofOctober 1, 2005 and September 30, 2004, accounts payable includes approximately $6.2 million and $6.5 million, respectively, related to the purchase of property, plant and equipment and havehas been treated as non-cash transactions for purposes of the Consolidated Statement of Cash Flow. 4. CAPITAL LEASE OBLIGATIONS AND OTHER FINANCINGCapital Lease Obligations and Other Financing
Capital lease obligations as of
October 1, 2005 and September 30, 2004,
and 2003, consist of (in thousands):
2004 2003
---- ----
Capital lease obligations with a weighted
average interest rate of 9.2% for both years $ 23,971 $ 24,460
Less current portion 811 958
-------- --------
$ 23,160 $ 23,502
======== ========
The capital lease obligations are for certain equipment and
manufacturing facilities, located in the UK and San Diego, which have been
recorded as capital leases and expire on various dates through 2016
subject to renewal options.| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Capital lease obligations for equipment and facilities located in San Diego and the UK, expiring on various dates through 2016; weighted average interest rate of 9.2% for both years | | $ | 23,080 | | | $ | 23,971 | |
| Less current portion | | | 770 | | | | 811 | |
| | | | | | | |
| Capital lease obligations, net of current portion | | $ | 22,310 | | | $ | 23,160 | |
| | | | | | | |
The aggregate scheduled maturities of the
Company'sCompany’s debt and its obligations under capital leases as of
September
30, 2004,October 1, 2005, are as follows (in thousands):
2005 $ 2,980
2006 2,961
2007 3,036
2008 3,112
2009 3,190
Thereafter 27,726
--------
43,005
Interest portion of capital leases 19,034
--------
Total $ 23,971
========
On October 22, 2003, the| | | | | |
| 2006 | | $ | 2,991 | |
| 2007 | | | 3,025 | |
| 2008 | | | 3,101 | |
| 2009 | | | 3,179 | |
| 2010 | | | 3,260 | |
| Thereafter | | | 22,546 | |
| | | | |
| | | | 38,102 | |
| Interest portion of capital leases | | | 15,022 | |
| | | | |
| Total | | $ | 23,080 | |
| | | | |
51
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
The Company entered intois a party to a secured three-year revolving credit facility (the "Secured(as amended, the “Secured Credit Facility"Facility”) with a group of banks that allows the Company to borrow up to $100$150 million. The Secured Credit Facility expires on October 31, 2007. Borrowings under the Secured Credit Facility may be either through revolving or swing loans or letter of credit obligations. As of October 1, 2005, we had no borrowings outstanding. The Secured Credit Facility is secured by substantially all of the Company'sCompany’s domestic working capital assets and a pledge of 65 percent of the stock of the Company'sCompany’s foreign subsidiaries. The Secured Credit Facility contains certain financial covenants, which include certain minimum adjusted EBITDA amounts, maximum outstanding borrowings (not to exceed 2.5 times the adjusted EBITDA for the trailing four quarters) and a minimum tangible net worth, all as defined in the amended agreement. Interest on borrowings varies with usagedepending upon the Company’s then-current total leverage ratio and begins at the Prime rate, as defined, or LIBOR plus 1.5 percent. The Company is also required to pay an annual commitment fee of 0.5 percent of the unused credit commitment. The Secured Credit Facility contains certain financial
covenants, which include a maximum total leverage ratio, a $40.0 million
minimum balance of domestic cash or marketable securities, a minimum
tangible net worth and a minimum adjusted EBITDA, as defined in the
agreement.
The Company amended the Secured Credit Facility in October 2003, and
in April, July, August and November 2004, to revise certain terms and
covenants (the "Amended Secured Credit Facility"). The most significant
amendments occurred in July 2004, and included an increase in the maximum
borrowing amount to $150 million from $100 million, an approximate
one-year extension of the maturity of the Amended Secured Credit Facility
to October 31, 2007, elimination of the requirement to maintain a $40
million minimum balance of domestic cash or marketable securities,
modification of a minimum adjusted EBITDA and a maximum total leverage
ratio (not to exceed 2.5 times adjusted EBITDA), all as defined in the
amended agreement. In addition, the interest rate on borrowings will vary
depending upon the Company's then-current total leverage ratio; before
amendment, the rate varied with usage. Origination fees and expenses totaled approximately $1.2 million, which$1.4 million. The origination fees and expenses have been deferred and are being amortized to interest expense over the term of the Amended Secured Credit Facility. Effective December 26, 2002,Interest expense related to the commitment fee, amortization of deferred origination fees and borrowings totaled approximately $1.2 million, $1.2 million and $0 in fiscal 2005, 2004 and 2003, respectively.
On June 30, 2005, the Company amended the Secured Credit Facility to revise a financial covenant. The amendment revised the definition of adjusted EBITDA to exclude any impairment charges that may arise from time-to-time in the Company’s assessment of its goodwill. The amendment was requested by the Company in connection with its annual evaluation of goodwill under SFAS No. 142 (see Note 1), which occurs for Plexus in the third quarter of each fiscal year. For the third quarter of fiscal 2005, the Company identified $26.9 million of goodwill impairment losses related to its Juarez and United Kingdom operations (see Note 9).
In fiscal 2003, the Company terminated its prior credit facility
("(“Old Credit
Facility"Facility”). No amounts were outstanding during
the
first quarter of fiscal 2003 prior to the termination of the Old Credit Facility. Termination of the Old Credit Facility was occasioned by anticipated noncompliance with
thea minimum interest expense coverage ratio covenant
as of December 31, 2002, as a result of restructuring costs incurred in
the
43
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
first quarter of fiscal 2003 (see Note 10)9). As a result of the termination of the Old Credit Facility, the Company wrote off unamortized deferred financing costs of approximately $0.5 million.million in fiscal 2003. In fiscal 2001, the Company entered into an amended agreement to sell up to $50 million of trade accounts receivable without recourse to a wholly owned limited-purpose subsidiary of the Company. In September 2003, the asset securitization facility expired; therefore, the Company did not
incur financing costs under it in fiscal 2004.expired. During fiscal 2003, and
2002, the Company incurred financing costs of $0.4 million and $0.6
million, respectively, under the former asset securitization facility. Net borrowings/(repayments) under the agreement are included in the cash flows from operating activities in the accompanying Consolidated Statements of Cash Flows.
Cash paid for interest in fiscal 2005, 2004 2003 and 20022003 was $3.1 million, $2.8 million and $4.4$2.8 million, respectively.
52
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
5. INCOME TAXESIncome Taxes
The domestic and foreign components of income (loss) before income tax expenses for fiscal
2005, 2004
and 2003
and 2002 consistsconsist of (in thousands):
2004 2003 2002
---- ---- ----
U.S. income (loss) before $ (69) $ (66,823) $ (5,729)
income taxes
Foreign income (loss) before
income taxes 7,680 (4,901) (97)
-------- ---------- ----------
$ 7,611 $ (71,724) $ (5,826)
======== ========= ==========
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| U.S. income (loss) before income taxes | | $ | (4,336 | ) | | $ | (69 | ) | | $ | (66,823 | ) |
| Foreign income (loss) before income taxes | | | (6,662 | ) | | | 7,680 | | | | (4,901 | ) |
| | | | | | | | | | |
| | | $ | (10,998 | ) | | $ | 7,611 | | | $ | (71,724 | ) |
| | | | | | | | | | |
Income tax expense (benefit) for fiscal
2005, 2004
2003 and
20022003 consists of (in thousands):
2004 2003 2002
---- ---- ----
Currently payable (receivable):
Federal $ 563 $ 2,096 $ 1,835
State - - 97
Foreign 839 (69) 1,361
-------- ---------- --------
1,402 2,027 3,293
-------- ---------- --------
Deferred:
Federal expense (benefit) 28,531 (25,094) 322
State expense (benefit) 8,253 (3,800) (3,902)
Foreign expense (benefit) 1,005 (361) (1,466)
-------- ---------- --------
37,789 (29,255) (5,046)
-------- ---------- --------
$ 39,191 $ (27,228) $ (1,753)
======== ========== ========
44
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| Currently payable (receivable): | | | | | | | | | | | | |
| Federal | | $ | — | | | $ | 563 | | | $ | 2,096 | |
| State | | | (87 | ) | | | — | | | | — | |
| Foreign | | | 1,509 | | | | 839 | | | | (69 | ) |
| | | | | | | | | | |
| | | | 1,422 | | | | 1,402 | | | | 2,027 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Federal expense (benefit) | | | — | | | | 28,531 | | | | (25,094 | ) |
| State expense (benefit) | | | — | | | | 8,253 | | | | (3,800 | ) |
| Foreign expense (benefit) | | | (3 | ) | | | 1,005 | | | | (361 | ) |
| | | | | | | | | | |
| | | | (3 | ) | | | 37,789 | | | | (29,255 | ) |
| | | | | | | | | | |
| | | $ | 1,419 | | | $ | 39,191 | | | $ | (27,228 | ) |
| | | | | | | | | | |
Following is a reconciliation of the federal statutory income tax rate to the effective income tax rates reflected in the Consolidated Statements of Operations for fiscal
2005, 2004
2003 and
2002:
2004 2003 2002
---- ---- ----
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of Federal
income tax benefit (1.3) 4.2 26.4
Foreign income and tax rate differences (34.7) 0.3 (13.2)
Resolution of prior year tax matters and tax 30.3 (1.9) (0.6)
contingencies
Non-deductible goodwill and merger costs - 0.2 (21.8)
Valuation allowance 483.8 - -
Other, net 1.9 0.2 4.3
----- ---- ----
Effective income tax rate 515.0% 38.0% 30.1%
===== ==== ====
2003:| | | | | | | | | | | | | |
| | | 2005 | | 2004 | | 2003 |
| Federal statutory income tax rate | | | 35 | % | | | 35.0 | % | | | 35.0 | % |
| Increase (decrease) resulting from: | | | | | | | | | | | | |
| State income taxes, net of Federal income tax benefit | | | 2.2 | | | | (1.3 | ) | | | 4.2 | |
| Foreign income and tax rate differences | | | (15.8 | ) | | | (34.7 | ) | | | 0.3 | |
| Resolution of prior year tax matters and tax contingencies | | | (5.2 | ) | | | 30.3 | | | | (1.9 | ) |
| Change in valuation allowance | | | (31.4 | ) | | | 483.8 | | | | — | |
| Other, net | | | 2.3 | | | | 1.9 | | | | 0.4 | |
| | | | | | | | | | | | | |
| Effective income tax rate | | | (12.9 | )% | | | 515.0 | % | | | 38.0 | % |
| | | | | | | | | | | | | |
53
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
The components of the net deferred income tax asset as of
October 1, 2005 and September 30, 2004,
and 2003, consist of (in thousands):
2004 2003
---- ----
Deferred income tax assets:
Inventories $ 5,182 $ 6,413
Accrued benefits 4,439 4,303
Allowance for bad debts 705 1,438
Loss carryforwards 22,291 36,084
Other 6,229 5,049
-------- --------
Total gross deferred income tax assets 38,846 53,287
Less valuation allowance (36,818) -
-------- --------
Net deferred income tax assets 2,028 53,287
Deferred income tax liabilities:
Property, plant and equipment 301 4,643
-------- --------
Net deferred income tax asset $ 1,727 $ 48,644
======== ========
During the fourth quarter of fiscal 2004, the Company established a
valuation allowance on all its U.S. deferred income tax assets.| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Deferred income tax assets: | | | | | | | | |
| Loss carryforwards | | $ | 21,427 | | | $ | 22,291 | |
| Goodwill | | | 7,084 | | | | 3,747 | |
| Inventories | | | 4,799 | | | | 5,182 | |
| Accrued benefits | | | 4,415 | | | | 4,439 | |
| Allowance for bad debts | | | 1,060 | | | | 705 | |
| Other | | | 5,156 | | | | 6,229 | |
| | | | | | | |
| Total gross deferred income tax assets | | | 43,941 | | | | 42,593 | |
| Less valuation allowance | | | (40,551 | ) | | | (36,818 | ) |
| | | | | | | |
| Deferred income tax assets | | | 3,390 | | | | 5,775 | |
| | | | | | | | | |
| Deferred income tax liabilities: | | | | | | | | |
| Property, plant and equipment | | | 1,729 | | | | 4,048 | |
| Other | | | 3,580 | | | | — | |
| | | | | | | |
| | | | 5,309 | | | | 4,048 | |
| | | | | | | |
| | | | | | | | | |
| Net deferred income tax asset (liability) | | $ | (1,919 | ) | | $ | 1,727 | |
| | | | | | | |
SFAS No. 109, "Accounting“Accounting for Income Taxes"Taxes”, and relevant interpretations of SFAS No. 109, require that a valuation allowance be provided when it is more likely than not that the related income tax assets will not be utilized. Under SFAS No. 109, unless specific exceptions apply, historical operating results are a strong indicator of a company'scompany’s ability to generate future taxable income. In both fiscal 2003 and 2002,As a result of the Company had a net loss.
In fiscal 2004, although the Company achieved substantial sales and gross
profit improvement, its fiscal 2004 restructuring and impairment actions
(see Note 10) resulted in nominal operating income,having a net loss in the U.S. for income tax purposes and anticipated additional restructuring charges
that will be recorded in fiscal 2005. Consequently,years 2004, 2003 and 2002, the Company recorded a full valuation allowance on its net U.S. deferred income tax assets in fiscal 2004. In addition, the Company increased the valuation allowance in fiscal 2005 for increases in certain net deferred tax assets. The Company will continue to assess the need for a valuation allowance on these deferred income tax assets in the future.
In July 2005, a legislative body of the United Kingdom enacted the Finance Act (the “Finance Act”), which may limit the deduction of interest expense incurred in the United Kingdom when the corresponding interest income earned by the other party is not taxable to such party. The remaining
net deferredCompany currently extends loans from a U.S. subsidiary to a United Kingdom subsidiary, which will be affected by the Finance Act. The Finance Act is effective for interest expense incurred by the United Kingdom subsidiary on these loans arising or accrued after March 16, 2005. For the fiscal year ended October 1, 2005, management provided income tax assets at September 30, 2004 represent only net
foreign deferred incomeexpense for the full effect of the Finance Act on the non-deductibility of this interest expense based on discussions to date with the tax assets for which realization is considered
more likely than not.authorities in the United Kingdom regarding the application of the Finance Act to the Company’s circumstances.
The Company has been granted tax holidays for its Malaysian and Chinese subsidiaries. These tax holidays expire in 20062014 and 2013, respectively, and are subject to certain conditions with which the Company expects to comply. The Company has applied for an extensionIn fiscal 2005, these subsidiaries generated income resulting in a tax benefit of itsapproximately $1.3 million (or $0.03 per diluted share). In fiscal 2004 only the Malaysian subsidiary was profitable resulting in a tax holiday.benefit of $1.2 million (or $0.03 per diluted share). In fiscal 2003, only the Malaysian subsidiary was profitable, however, the tax benefit and diluted earnings per share effect was nominal.
The Company does not provide for taxes which would be payable if undistributed earnings of foreign subsidiaries were remitted because the Company considers these earnings to be invested for an
45
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
indefinite period. The aggregate undistributed earnings of the Company'sCompany’s foreign subsidiaries for which a deferred income tax liability has not been recorded is approximately $15.3$26.4 million as of September 30, 2004.October 1, 2005. In October 2004, the Working Families Tax ReliefJobs Act (see Note 1) was signed into law. The Jobs Act includes a deduction of 2004 and the
American Jobs Creation Act85 percent of 2004 became lawcertain foreign earnings that are repatriated, as defined in the U.S. This legislation
provides for a numberJobs Act. The Company may
54
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
elect to apply this provision to qualifying earnings repatriations made in fiscal 2006. During fiscal 2005, the Company did not repatriate any qualified earnings pursuant to the Jobs Act. The Company has determined that $15.1 million to $26.4 million of changes in U.S. tax laws. In accordance with SFAS
No. 109, effectsexisting foreign earnings will meet the requirements of this new legislation will be reflectedthe Jobs Act. The Company is evaluating the repatriation of earnings in the Company's financial statements beginningamounts of $0 to $15.1 million and currently estimates that a repatriation of earnings in the periodthis range would result in income tax of the law's
enactment in October 2004. Management is presently reviewing this new
legislationup to determine the impacts on Plexus and its operations.approximately $0.8 million.
As of September 30, 2004,October 1, 2005, the Company has approximately $135$124 million of state net operating loss carryforwards that expire between 2007 and 20242025 and $43$41 million of federal net operating loss carryforwards that expire in varying amounts in 2023 and 2024.
Cash paid for income taxes in fiscal 2005, 2004 and 2003 and 2002 was $2.2 million, $1.3 million and $0.3 million, and $5.2 million, respectively.
6. SHAREHOLDERS' EQUITYShareholders’ Equity
Pursuant to a resolution of the Board of Directors' approval,Directors, the Company has a common stock buyback program that permits it to acquire up to 6.0 million shares for an amount not to exceed $25.0 million. To date, no shares have been repurchased. The Company’s Secured Credit Facility allows the Company to repurchase its common shares and pay cash dividends as long as it remains in compliance with the various covenants (see Note 4).
Income tax benefits attributable to stock options exercised are recorded as an increase in additional paid-in capital.
7. EARNINGS PER SHAREEarnings Per Share
The following is a reconciliation of the amounts utilized in the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Years ended September 30,
----------------------------------------
2004 2003 2002
---- ---- ----
Earnings:
Loss before cumulative effect of change in $ (31,580) $ (44,496) $ (4,073)
accounting for goodwill
Cumulative effect of change in accounting
for goodwill, net of income taxes - (23,482) -
---------- ---------- ---------
Net loss $ (31,580) $ (67,978) $ (4,073)
========== ========== =========
Basic weighted average common shares outstanding 42,961 42,284 41,895
Dilutive effect of stock options - - -
---------- ---------- ---------
Diluted weighted average shares outstanding 42,961 42,284 41,895
========== ========== =========
Basic earnings per share:
Loss before cumulative effect of change in $ (0.74) $ (1.05) $ (0.10)
accounting for goodwill
Cumulative effect of change in accounting
for goodwill, net of income taxes - (0.56) -
---------- ---------- ---------
Net loss $ (0.74) $ (1.61) $ (0.10)
========== ========== =========
Diluted earnings per share:
Loss before cumulative effect of change in $ (0.74) $ (1.05) $ (0.10)
accounting for goodwill
Cumulative effect of change in accounting
for goodwill, net of income taxes - (0.56) -
---------- ---------- ---------
Net loss $ (0.74) $ (1.61) $ (0.10)
========== ========== =========
46
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED| | | | | | | | | | | | | |
| | | For Years Ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Earnings: | | | | | | | | | | | | |
| Loss before cumulative effect of change in accounting for goodwill | | $ | (12,417 | ) | | $ | (31,580 | ) | | $ | (44,496 | ) |
| Cumulative effect of change in accounting for goodwill, net of income taxes | | | — | | | | — | | | | (23,482 | ) |
| | | | | | | | | | |
| Net loss | | $ | (12,417 | ) | | $ | (31,580 | ) | | $ | (67,978 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Basic weighted average common shares outstanding | | | 43,373 | | | | 42,961 | | | | 42,284 | |
| Dilutive effect of stock options | | | — | | | | — | | | | — | |
| | | | | | | | | | |
| Diluted weighted average shares outstanding | | | 43,373 | | | | 42,961 | | | | 42,284 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Basic and Diluted earnings per share: | | | | | | | | | | | | |
| Loss before cumulative effect of change in accounting for goodwill | | $ | (0.29 | ) | | $ | (0.74 | ) | | $ | (1.05 | ) |
| Cumulative effect of change in accounting for goodwill, net of income taxes | | | — | | | | — | | | | (0.56 | ) |
| | | | | | | | | | |
| Net loss | | $ | (0.29 | ) | | $ | (0.74 | ) | | $ | (1.61 | ) |
| | | | | | | | | | |
For the years ended October 1, 2005 and September 30, 2004 2003 and 2002,2003, stock options to purchase approximately 3.05.0 million, 3.24.9 million and 3.04.9 million shares of common stock, respectively, were outstanding, but were not included in the computation of diluted earnings per share because there was a net loss in these periods, and, therefore, their effectinclusion would be antidilutive.
55
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
8. ACQUISITIONS AND MERGERS
Acquisitions: In January 2002, the Company acquired certain assets
of MCMS, Inc. ("MCMS"), an electronics manufacturing services provider,
for approximately $42 million in cash. The assets purchased from MCMS
include manufacturing operations in Penang, Malaysia; Xiamen, China; and
Nampa, Idaho. The Company acquired these assets primarily to provide
electronic manufacturing services in Asia and increase its customer base.
The Company recorded the acquisition utilizing the accounting principles
promulgated by SFAS No.'s 141 and 142. The consideration for this
acquisition did not include the assumption of any interest-bearing debt
but included the assumption of total liabilities of approximately $7.2
million. The Company allocated the purchase price primarily to accounts
receivable, inventory and property, plant and equipment, based on a number
of factors, including a third-party valuation. The results from MCMS'
operations are reflected in the Company's financial statements from the
date of acquisition. No goodwill resulted from this acquisition. The
Company incurred approximately $0.3 million of acquisition costs during
fiscal 2002 associated with the acquisition of the MCMS operations. Due to
unique aspects of this acquisition, pro forma financial information is not
meaningful and is therefore not presented. The factors leading to this
determination included the selective MCMS assets acquired by the Company,
the limited assumption of liabilities and the exclusion of certain
customer relationships which were formerly significant to MCMS.
9. OPERATING LEASE COMMITMENTSOperating Lease Commitments
The Company has a number of operating lease agreements primarily involving manufacturing facilities, manufacturing equipment and computerized design equipment. These leases are non-cancelable and expire on various dates through 2016. Rent expense under all operating leases for fiscal 2005, 2004 2003 and 20022003 was approximately $11.0 million, $11.2 million $14.1 million
and $14.6$14.1 million, respectively. Renewal and purchase options are available on certain of these leases. Rental income from subleases amounted to $1.7 million, $1.5 million $1.3 million and $1.0$1.3 million in fiscal 2005, 2004 and 2003, and 2002, respectively.
Future minimum annual payments on operating leases are as follows (in thousands):
2005 $14,754
2006 12,731
2007 10,697
2008 7,972
2009 7,318
Thereafter 24,601
-------
$78,073
=======
| | | | | |
| 2006 | | $ | 12,132 | |
| 2007 | | | 9,823 | |
| 2008 | | | 8,482 | |
| 2009 | | | 6,703 | |
| 2010 | | | 4,816 | |
| Thereafter | | | 16,602 | |
| | | | |
| | | $ | 58,558 | |
| | | | |
For certain leased facilities that were abandoned as result of restructuring actions (see Note 10)9), the Company accrued estimated losses for future remaining lease payments subsequent to abandonment, less any estimated sublease income. The above table of future minimum annual payments on operating leases includes future payments totaling $9.5$11.5 million that are reflected as an obligation for lease exit costs as of September 30, 2004October 1, 2005 in the accompanying Consolidated Balance Sheets.
10. RESTRUCTURING AND IMPAIRMENT COSTS
9. Restructuring and Impairment Costs
Fiscal 2005 restructuring and impairment costs:During fiscal 2005, the Company recorded pre-tax restructuring and impairment costs totaling $39.2 million. The restructuring and impairment costs were associated with goodwill impairment, the closure of our Bothell facility, the write-off of the remaining elements of a shop floor data-collection system and other restructuring costs and adjustments to previously recognized restructuring actions.
Goodwill Impairment. The Company is required to perform goodwill impairment tests at least on an annual basis, for which it selected the third quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the third quarter of fiscal 2005, the Company recorded goodwill impairment of $26.9 million, of which $16.1 million represented a partial impairment of goodwill associated with operations in the United Kingdom and $10.8 million represented a full impairment of goodwill associated with operations in Juarez. As of October 1, 2005, the United Kingdom operations have remaining goodwill of $7.0 million.
The impairment of goodwill associated with the United Kingdom arose primarily from a significant medical customer’s recently expressed intention to transfer future production by the end of fiscal 2006 from the United Kingdom to a lower-cost location. The impairment also reflects lowered expectations for the United Kingdom’s electronics manufacturing services industry in general. The impairment of goodwill associated with Juarez reflects a lowered forecast of near-term profits and cash flow associated with recent operational issues and an anticipated transfer of a major customer program to another Plexus manufacturing facility.
Bothell Facility Closure. During fiscal 2005, the Company incurred significant restructuring costs associated with the closure of the Bothell facility. The Company transferred key customer programs from the Bothell facility to other Plexus locations, primarily in the United States. This restructuring reduced the Company’s capacity and affected approximately 160 employees. The Company completed the closure of the Bothell facility during fiscal 2005 (as previously announced in fiscal 2004). During fiscal 2005 and 2004, we incurred total restructuring and impairment costs associated with the Bothell facility closure of approximately $9.3 million, which consisted of the following elements:
56
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
| • | | $7.5 million was recorded in fiscal 2005 and consisted of $6.2 million for the facility lease, $1.1 million for employee retention costs and $0.2 million of other associated costs. The liability for the facility lease was recognized and measured at fair value for the future remaining lease payments subsequent to abandonment, less any estimated sublease income that could reasonably be obtained for the property; |
|
| • | | $1.8 million was recorded in fiscal 2004 and consisted of $1.5 million for employee severance and $0.3 million for fixed asset impairments. |
Shop Floor Data-Collection System Impairment.During fiscal 2005, the Company recorded a $3.8 million impairment of the remaining elements of a shop floor data-collection system. The Company had previously recorded a $1.7 million impairment related to the shop floor data-collection system in fiscal 2004 when it determined that certain elements would not be utilized in any capacity. During the first quarter of fiscal 2005, the Company extended a maintenance and support agreement for the data-collection system through July 2005 to provide it additional time to evaluate the remaining elements of the system. Based on the Company’s evaluation, it determined that the shop floor data-collection system was impaired. The Company determined that it would abandon deployment of these remaining elements of the shop floor data-collection system because the anticipated business benefits could not be realized.
Other Restructuring Costs. During fiscal 2005, the Company also recorded the following other restructuring and impairment costs:
| • | | $0.5 million, which consisted of $0.4 million associated with a workforce reduction and $0.1 million of asset impairments at the Juarez facility. The Juarez workforce reduction affected approximately 50 employees; |
|
| • | | $0.3 million for severance associated with the elimination of a corporate executive position; |
|
| • | | $0.2 million for a planned workforce reduction at the Maldon, England (“Maldon”) facility. As noted above, a significant customer in the United Kingdom intends to transfer future production from the United Kingdom to a lower-cost location by the end of fiscal 2006. As a result, the Company plans to consolidate its Maldon manufacturing operations into Kelso, Scotland and to focus the Maldon facility on fulfillment and service and repair. |
|
| • | | $0.3 million of other restructuring costs. |
Adjustments to Provisions: During fiscal 2005, the Company also recorded certain adjustments to previously recognized restructuring and impairment costs:
| • | | $0.4 million additional expense related to additional impairment of a closed facility in San Diego. During the first quarter of fiscal 2005, the Company subleased the remaining part of the San Diego facility, which resulted in the additional impairment to adjust the carrying value of the remaining part of the San Diego facility to its net present value of future sublease income; |
|
| • | | a $0.4 million reduction in an accrual for lease obligations associated with a warehouse located in Neenah, Wisconsin (“Neenah”). The Neenah warehouse was previously abandoned as part of a fiscal 2003 restructuring action; however, the Company reactivated use of the warehouse in the second quarter of fiscal 2005; |
|
| • | | a $0.3 million reduction in an accrual for lease obligations for one of the closed facilities near Seattle, Washington (“Seattle”). The Company was able to sublease one of the two closed Seattle facilities held under operating leases. |
57
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
On July 25, 2005, a significant customer in the United Kingdom announced that it was under investigation by the Office of Communication, a government regulator in the United Kingdom, and would postpone the further installation of its product in the United Kingdom until the regulatory situation became clearer. Consequently, future manufacturing for this customer is uncertain.
Fiscal 2004 Restructuring and Impairment Costs:During fiscal 2004, the Company recorded pre-tax restructuring and impairment costs
oftotaling $9.3 million. The restructuring
and impairment costs were primarily associated with
adjustments to previously recognized restructuring actions, specifically, additional lease obligations for two previously abandoned
facilities near Seattle
Washington (the "Seattle facilities"),facilities. In addition, we incurred restructuring and impairment costs associated with the planned closure of the
Company'sCompany’s Bothell
Washington ("Bothell") engineering and manufacturing facility, the write-down of certain
components of the Company's ERP
software and the
consolidationclosure of a satellite PCB-design office in Hillsboro, Oregon
into another Plexus design office.
47
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED(“Hillsboro”). Adjustments to Provisions: The originally estimated cost of the closure of the Seattle facilities was included in the Company'sCompany’s fiscal 2003 restructuring actions. The lease-related restructuring costs recorded in fiscal 2003 were based on future lease payments subsequent to abandonment, less estimated sublease income. As of September 30, 2004, the Seattle facilities had not been subleased. Based on the remaining term available to lease these facilities and the weaker than expected conditions in the local real estate market, the Company determined that it would most likely not be able to sublease the Seattle facilities. Accordingly, the Company recorded additional lease-related restructuring costs of $4.2 million in fiscal 2004. The Company also recorded $0.1 million of lease-related restructuring costs on a facility in Neenah, Wisconsin ("Neenah"(“Neenah”), which was also included in restructuring actions in fiscal 2003. EITF Issue No. 94-3 "Liability“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"” is applicable to restructuring activities initiated prior to January 1, 2003, including subsequent restructuring cost adjustments related to such activities.
As part of our efforts to align the Company's service offering with
the evolving preferences of the Company's customers, the Company is in the
process of replicating the focused capabilities of its
Bothell facility at
other Plexus design and manufacturing locations that have higher
productivity. The Company currently anticipates transferring key customer
programs from the Bothell engineering and manufacturing facility to other
Plexus locations primarily in the United States. This restructuring will
reduce the Company's capacity by 97,000 square feet and affect
approximately 160 employees. The Company currently expects the
consolidation efforts will be completed by mid fiscal 2005, subject to
customer timelines.Facility Closure: In fiscal 2004, the Company incurred restructuring costs of $1.8 million, which consisted of $1.5 million associated with employee terminations and $0.3 million associated with fixed asset impairments. In fiscal 2005, the Company anticipatescompleted the Bothell closure will resultwhich resulted in additional restructuring costs of $8.2$7.5 million which will
consist of $2.2 million associated with employee terminations(see Fiscal 2005 Restructuring and $6.0
million associated with the facility lease.Impairment Costs above.)
Shop Floor Data-Collection System Impairment: The Company recorded a $1.7 million impairment related to certain ERP software, which primarily resulted from the Company'sCompany’s deployment strategy for a shop floor data-collection system. Some elements of the shop-floor data-collection system will not be deployed because the originally anticipated business benefits could not be realized. TheAlthough the Company continued to evaluate the remaining elements of the shop floor data-collection system, are still
under evaluation. A change in the scope of this project could result in impairment of the remaining elements of the shop floor data-collection system. Assystem was taken in fiscal 2005.
Closure of September 30, 2004, the capitalized costs of the remaining
elements of the shop floor data system total approximately $3.8 million
and are included in Property, Plant and Equipment in the accompanying
Consolidated Balance Sheet.
Lastly, thea PCB-Design Office: The Company incurred approximately $1.5 million of other restructuring and impairment costs in fiscal 2004 primarily related to the consolidation of the Hillsboro satellite PCB-design office into another Plexus design office. The Hillsboro relatedHillsboro-related restructuring costs were primarily for employee termination costs and contract termination costs associated with leased facilities and software service providers. In
fiscal 2005, the Company anticipates incurring an additional $0.1 million
of restructuring costs related to employee relocations. Approximately 40 employees were affected by this restructuring.
Fiscal 2003 Restructuring and Impairment Costs:During fiscal 2003, the Company recorded pre-tax restructuring and impairment costs totaling $59.3 million. These
costs resulted from the Company's actions taken in
response to reductions in its end-market demand. Theserestructuring actions included
closingthe closure of the San Diego and Richmond
operating sites, the consolidation of
several leased facilities
re-focusing the PCB design group, a write-off
of goodwill associated with San Diego, the write-down of underutilized
assets to fair value at several locations, and
the costs associated with
reductions in the work force for manufacturing, engineering and corporate.various other actions. These measures were intended to align the
Company'sCompany’s capabilities and resources with its customer demand.
The Richmond facility was phased out of operations and sold in
September 2003. Production was shifted to other Plexus operating sites in
the United States and Mexico. The closure of Richmond resulted in a
write-down of the building, a write-down of underutilized assets to fair
value, and costs relating to the elimination of the facility's work force.
Building impairment charges totaled $3.7 million related to the Richmond
facility.
48
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED San Diego Facility Closure: The San Diego facility was closed in May 2003. The closure of the San Diego facility resulted in a write-off of goodwill, the write-down of underutilized assets to fair value, and costs relating to the elimination of the facility'sfacility’s work force. Building impairment charges totaled $6.3 million related to the San Diego facility. During fiscal 2003, goodwill impairment for San Diego totaled approximately $20.4 million, of which $14.8 million was impaired as a result of a transitional impairment evaluation under SFAS No. 142 (see Note 1) and $5.6 million was impaired as a result of the Company'sCompany’s decision to close the facility.
58
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
Richmond Facility Closure: The Richmond facility was phased out of operations and sold in September 2003. Customer programs were shifted to other Plexus sites in the United States and Mexico. The closure of the Richmond facility resulted in a write-down of the building, a write-down of underutilized assets to fair value, and costs relating to severance for the facility’s work force. Building impairment charges totaled $3.7 million related to the Richmond facility.
Other Restructuring and Impairment Costs: Other fiscal year 2003 restructuring actions included the consolidation of several leased facilities, the write-down of underutilized assets to fair value and work force reductions, which primarily affected operating sites such as Juarez; Seattle, Washington; Neenah and the United Kingdom. It also impacted the
Company'sCompany’s engineering and corporate organizations. The employee termination and severance costs for fiscal 2003
affectedwere for approximately 1,000 employees.
Fiscal 2002 Restructuring and Impairment Costs: During fiscal 2002,
the Company recorded restructuring and impairment costs totaling $12.6
million. These charges resulted from the Company's actions taken in
response to reductions in its sales levels and capacity utilization and
included a reduction in work force and the write-off of certain
underutilized assets to fair value at several locations. The employee
termination and severance costs for fiscal 2002 affected approximately 700
employees. The operating site closures included two owned facilities: one
located in Neenah (the oldest of the Company's four facilities in Neenah)
and the other located in Minneapolis, Minnesota ("Minneapolis"). These
facilities were no longer adequate to service the needs of the Company's
customers and would have required significant investment to upgrade. The
Neenah facility was phased out of operations in February 2003 and is
currently used for warehousing and administrative purposes. The
Minneapolis facility was phased out of operation in July 2002 and sold in
October 2002. There was no building impairment charge associated with the
closure of these two facilities. Certain lease consolidations also
occurred in fiscal 2002, which primarily affected the Company's facilities
in Seattle and San Diego.
Employee
Termination and Lease Obligations Non-cash Asset
Severance Costs and Other Exit Costs Write-downs Total
--------------- -------------------- ----------- -----
ACCRUED BALANCE,
OCTOBER 1, 2001 $ 79 $ - $ - $ 79
Restructuring costs 3,819 3,872 4,890 12,581
Adjustment to provisions - - - -
Amounts utilized (3,358) (915) (4,890) (9,163)
---------- ---------- ---------- -----------
ACCRUED BALANCE,
SEPTEMBER 30, 2002 540 2,957 - 3,497
Restructuring costs 10,358 10,940 38,696 59,994
Adjustment to provisions - - (650) (650)
Amount utilized (7,993) (6,005) (38,046) (52,044)
---------- ---------- ---------- -----------
ACCRUED BALANCE,
SEPTEMBER 30, 2003 2,905 7,892 - 10,797
Restructuring costs 2,493 393 2,107 4,993
Adjustment to provisions - 4,310 - 4,310
Amount utilized (3,379) (2,835) (2,107) (8,321)
---------- ---------- ---------- -----------
ACCRUED BALANCE
SEPTEMBER 30, 2004 $ 2,019 $ 9,760 $ - $ 11,779
========== ========== ========== ===========
49
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED | | | | | | | | | | | | | | | | | |
| | | Employee | | | Lease Obligations | | | | | | | |
| | | Termination and | | | and Other Exit | | | Non-cash Asset | | | | |
| | | Severance Costs | | | Costs | | | Impairments | | | Total | |
Accrued balance, October 1, 2002 | | $ | 540 | | | $ | 2,957 | | | $ | — | | | $ | 3,497 | |
| | | | | | | | | | | | | | | | | |
| Restructuring and impairments costs | | | 10,358 | | | | 10,940 | | | | 38,696 | | | | 59,994 | |
| Adjustment to provisions | | | — | | | | — | | | | (650 | ) | | | (650 | ) |
| Amount utilized | | | (7,993 | ) | | | (6,005 | ) | | | (38,046 | ) | | | (52,044 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Accrued balance, September 30, 2003 | | | 2,905 | | | | 7,892 | | | | — | | | | 10,797 | |
| | | | | | | | | | | | | | | | | |
| Restructuring and impairments costs | | | 2,493 | | | | 393 | | | | 2,107 | | | | 4,993 | |
| Adjustment to provisions | | | — | | | | 4,310 | | | | — | | | | 4,310 | |
| Amount utilized | | | (3,379 | ) | | | (2,835 | ) | | | (2,107 | ) | | | (8,321 | ) |
| | | | | | | | | | | | | |
Accrued balance September 30, 2004 | | | 2,019 | | | | 9,760 | | | | — | | | | 11,779 | |
| | | | | | | | | | | | | | | | | |
| Restructuring and impairments costs | | | 2,213 | | | | 6,451 | | | | 30,849 | | | | 39,513 | |
| Adjustment to provisions | | | (23 | ) | | | (697 | ) | | | 369 | | | | (351 | ) |
| Accretion of lease | | | — | | | | 138 | | | | — | | | | 138 | |
| Amount utilized | | | (3,690 | ) | | | (4,149 | ) | | | (31,218 | ) | | | (39,057 | ) |
| | | | | | | | | | | | | |
Accrued balance October 1, 2005 | | $ | 519 | | | $ | 11,503 | | | $ | — | | | $ | 12,022 | |
| | | | | | | | | | | | | |
As of September 30, 2004,October 1, 2005, all of the remaining employee termination and severance costs are expected to be paid by the end of fiscal 2005,2006, while approximately $3.2$4.1 million of the lease obligations and other exit costs are expected to be paid in the next twelve months. The remaining liability for lease payments is expected to be paid through June 2008.
11. BENEFIT PLANS
October 2011.
For a detail of restructuring and impairment costs by operating segment, See Note 12 — Business Segment, Geographic Information and Major Customers.
10. Benefit Plans
Employee Stock Purchase Plan: On March 1, 2000,Plans:In February 2005, the Company
established a qualifiedshareholders approved the 2005 Employee Stock Purchase Plan (the "2000“2005 Purchase Plan"Plan”), under which the Company may issue up to 1.2 million shares of its common stock. The terms of whichthe 2005 Purchase Plan allow for qualified employees to participate in the purchase of the Company'sCompany’s common stock at a price equal to the lower of 85 percent of the average high and low stock price at the beginning or end of each semi-annual stock purchase period. The Company may issue up to
2.0 million shares of its common stock under the ESPP. During fiscal 2004,
2003 and 2002, the Company issued approximately 186,000, 253,000 and
132,000 shares of common stock, respectively, under the 2000 Purchase
Plan, which were issued for $2.0 million, $1.9 million, and $2.4 million,
respectively. The 2000 Purchase Plan expires on June 30, 2005.
In July 2004, the Board of Directors approved the 2005 Employee
Stock Purchase Plan (the "2005 Purchase Plan"), subject to shareholder
approval at the Company's annual meeting. If approved, the Company may
issue up to 1.5 million shares of its common stock under the 2005 Purchase
Plan. The terms of the 2005 Purchase Plan are substantially similar to the
2000 Purchase Plan. Upon shareholder approval, the 2005 Purchase Plan
would bewas effective July 1, 2005 and terminateterminates on June 30, 2010, unless all shares authorized under the 2005 Purchase Plan have been issued prior to that date. 401(k)No shares have been issued under the 2005 Purchase Plan
59
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
as the Company has suspended employee stock purchases under this plan as a result of the accounting implications of SFAS No. 123(R).
Prior to the adoption of the 2005 Purchase Plan, the Company had established a qualified Employee Stock Purchase Plan (the “2000 Purchase Plan”), the terms of which were substantially similar to the 2005 Purchase Plan. The 2000 Purchase Plan allowed for the Company to issue up to 2.0 million shares of its common stock under it. During fiscal 2005, 2004 and 2003, the Company issued approximately 204,000, 186,000 and 253,000 shares of common stock, respectively, under the 2000 Purchase Plan, which were issued for $2.2 million, $2.0 million, and $1.9 million, respectively. The 2000 Purchase Plan expired on June 30, 2005.
401(k) Savings Plans: Plan:The Company'sCompany’s 401(k) savings plans coverplan covers all eligible U.S. employees. The Company matches employee contributions, after one year of service, up to 2.5 percent of eligible earnings. The Company'sCompany’s contributions for fiscal 2005, 2004 and 2003 and 2002 totaled $2.3 million, $2.2 million and $2.3 million, and $2.2 million, respectively.
Stock Option Plans:In February 2005, the Company’s shareholders adopted the 2005 Equity Incentive Plan (the “2005 Plan”). The 2005 Plan constitutes a stock-based incentive plan for the Company and includes provisions by which the Company may grant stock-based awards to directors, executive officers and other officers and key employees. The maximum number of shares of Plexus common stock that may be issued pursuant to the 2005 Plan is 2.7 million shares, all of which may be issued pursuant to stock options, although up to 1.2 million shares may be issued pursuant to the following: up to 0.6 million shares as stock appreciation rights (“SARs”) and up to 0.6 million shares as restricted stock awards. The exercise price of each stock option granted must not be less than the fair market value on the date of grant. The Compensation Committee of the Board of Directors may establish the term and vesting period of stock options (see Note 1), as well as accelerate the vesting of stock options. Unless otherwise directed by the Compensation Committee, stock options vest over a three-year period from date of grant and have a term of ten years. Under the Company's2005 Plan, the Company has granted options to purchase 0.7 million shares of the Company’s common stock in fiscal 2005. No SARs or restricted stock awards were granted in fiscal 2005.
Under the Company’s 1998 Option Plan (the "1998
Plan"“1998 Plan”), the Company hashad reserved 12.0 million shares of common stock for grant to officers and key employees under an employee stock option plan, of which 11.511.2 million shares, net of cancellations, have beenwere granted. The exercise price of each option granted must not be less than the fair market value on the date of grant. OptionsUnder the 1998 Plan, the Compensation Committee was authorized to establish the term and vesting period of stock options, as well as to accelerate the vesting of stock options (see Note 1). Unless otherwise directed by the Compensation Committee, stock options vest over a three-year period from date of grant and have a term of ten years. The plan also authorizesAs a result of the Company to grant 600,000 stock appreciation rights (in lieuadoption of options
for 600,000 shares), none of which have been granted.the 2005 Plan, no additional awards will be made under the 1998 Plan.
Under the Company'sCompany’s 1995 Directors Plan (the "1995 Plan"“1995 Plan”), each outside director of the Company is granted 3,000 stock options each December 1, with the option pricing similar to the employee plan. Commencing in fiscal 2004, to reflect an adjustment for a prior stock split, the 1995 Plan provided that each outside director of the Company willwould be granted 6,000 stock options each December 1. These options vestvested immediately and can be exercised after a minimum six-month holding period. The 400,000 shares of
common stock authorized under this plan may come from any combination of
authorized but unissued shares, treasury stock or the open market. As of
September 30, 2004, options for approximately 182,000 shares have been
granted and options for approximately 218,000 shares are available for
grant under this plan. The 1995 Plan expiresexpired on December 31, 2004. In July 2004,Under the Board1995 Plan, the Company granted options to purchase 42,000 shares of Directors adoptedthe Company’s common stock in fiscal 2005 prior to the 1995 Plan’s expiration. As noted above, the 2005 Equity
Incentive Plan (the "2005 Plan"), subject to shareholder approval at the
Company's annual meeting. The 2005 Plan is intended to constitute a
stock-based incentive plan for the Company and includes provisions by which the Company may grant stock-based awards to directors, as well as executive officers and other officers and key employees. If approved, the maximum
number of shares of
60
Plexus common stock that may be issued pursuantCorp.
Notes to the
2005 Plan is 2.7 million shares, all of which may be issued pursuant to
stock options, although up to 600,000 shares may be issued pursuant to
stock appreciation rights and no more than 400,000 shares may be issued
pursuant to restricted stock awards. No stock-based awards have been
issued under the 2005 Plan and none will be granted prior to shareholder
approval of the 2005 Plan. If the 2005 Plan is approved, no further awards
will be made under the 1998 Option Plan.
50
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUEDConsolidated Financial Statements — Continued A summary of the
Company'sCompany’s stock option activity follows:
SHARES WEIGHTED AVERAGE
(IN THOUSANDS) EXERCISE PRICE
-------------- --------------
Options outstanding as of October 1, 2001 3,871 $ 18.04
Granted 915 25.23
Cancelled (163) 29.43
Exercised (141) 9.01
-------
Options outstanding as of September 30, 2002 4,482 $ 19.40
Granted 1,145 10.87
Cancelled (391) 23.74
Exercised (324) 5.46
-------
Options outstanding as of September 30, 2003 4,912 $ 17.99
Granted 749 15.94
Cancelled (341) 24.26
Exercised (391) 8.37
-------
Options outstanding as of September 30, 2004 4,929 $ 18.00
Options exercisable as of:
September 30, 2002 2,954 $ 15.55
======= =======
September 30, 2003 3,131 $ 18.97
======= =======
September 30, 2004 3,365 $ 19.34
======= =======
| | | | | | | | | |
| | | Shares | | | Weighted Average | |
| | | (in thousands) | | | Exercise Price | |
| Options outstanding as of October 1, 2002 | | | 4,482 | | | $ | 19.40 | |
| | | | | | | | | |
| Granted | | | 1,145 | | | | 10.87 | |
| Cancelled | | | (391 | ) | | | 23.74 | |
| Exercised | | | (324 | ) | | | 5.46 | |
| | | | | | | | |
| Options outstanding as of September 30, 2003 | | | 4,912 | | | $ | 17.99 | |
| | | | | | | | | |
| Granted | | | 749 | | | | 15.94 | |
| Cancelled | | | (341 | ) | | | 24.26 | |
| Exercised | | | (391 | ) | | | 8.37 | |
| | | | | | | | |
| Options outstanding as of September 30, 2004 | | | 4,929 | | | $ | 18.00 | |
| | | | | | | | | |
| Granted | | | 764 | | | | 13.02 | |
| Cancelled | | | (375 | ) | | | 21.85 | |
| Exercised | | | (364 | ) | | | 8.98 | |
| | | | | | | | |
| Options outstanding as of October 1, 2005 | | | 4,954 | | | $ | 17.55 | |
| | | | | | | | |
| | | | | | | | | |
| | | Shares | | | Weighted Average | |
| | | (in thousands) | | | Exercise Price | |
| Options exercisable as of: | | | | | | | | |
| September 30, 2003 | | | 3,131 | | | $ | 18.97 | |
| | | | | | | |
| September 30, 2004 | | | 3,365 | | | $ | 19.34 | |
| | | | | | | |
| October 1, 2005 | | | 4,527 | | | $ | 18.12 | |
| | | | | | | |
The following table summarizes outstanding stock option information as of
September 30, 2004October 1, 2005 (shares in thousands):
Number of Number of Weighted
Range of shares Weighted Average Weighted Average shares Average
Exercise Prices Outstanding Exercise Price Remaining Life Exercisable Exercise Price
- --------------- ----------- -------------- -------------- ----------- --------------
$ 0.63- $ 7.86 558 $ 5.19 2.2 558 $ 5.19
$ 7.87- $15.71 1,868 $12.11 6.4 1,210 $12.72
$15.72- $23.57 1,181 $18.76 8.2 485 $22.89
$23.58- $31.43 662 $25.54 7.4 452 $25.58
$31.44- $47.14 639 $35.76 5.2 639 $35.76
$47.15- $70.71 21 $60.32 5.6 21 $60.32
$ 0.63- $70.71 4,929 $18.00 6.4 3,365 $19.34
| | | | | | | | | | | | | | | | | | | | | |
| Range of | | Number of Shares | | Weighted Average | | Weighted Average | | Number of Shares | | Weighted Average |
| Exercise Prices | | Outstanding | | Exercise Price | | Remaining Life | | Exercisable | | Exercise Price |
| $ 3.38-$ 5.07 | | | 128 | | | $ | 3.38 | | | | 0.9 | | | | 128 | | | $ | 3.38 | |
| $ 5.08-$ 7.62 | | | 292 | | | $ | 6.16 | | | | 1.5 | | | | 292 | | | $ | 6.16 | |
| $ 7.63-$11.45 | | | 756 | | | $ | 9.58 | | | | 5.7 | | | | 584 | | | $ | 9.73 | |
| $11.46-$17.19 | | | 2,171 | | | $ | 14.44 | | | | 7.6 | | | | 1,916 | | | $ | 14.62 | |
| $17.20-$25.80 | | | 987 | | | $ | 24.24 | | | | 6.2 | | | | 987 | | | $ | 24.24 | |
| $25.81-$38.72 | | | 592 | | | $ | 35.17 | | | | 4.7 | | | | 592 | | | $ | 35.17 | |
| $38.73-$63.88 | | | 28 | | | $ | 49.31 | | | | 4.8 | | | | 28 | | | $ | 49.31 | |
| | | | | | | | | | | | | | | | | | | | | |
$3.38- $63.88 | | | 4,954 | | | $ | 17.55 | | | | 6.1 | | | | 4,527 | | | $ | 18.12 | |
The weighted average fair value of options granted per share during fiscal
2005, 2004
and 2003
is $5.72, $9.56 and
2002 is $9.56, $7.46,
and $15.55, respectively. The fair value of each option grant is estimated at the date of grant using the Black-Scholes option-pricing method with the following assumption ranges:
6651 percent to
6766 percent volatility, risk-free interest rates ranging from
2.83.7 percent to
4.64.5 percent, expected option life of
5.33.75 to 9.1 years, and no expected dividends.
51
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
61
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
Deferred Compensation Plan:In September 1996, the Company entered into agreements with certain of its former executive officers under a nonqualified deferred compensation plan. Under the plan, the Company agreed to pay to these former executives, or their designated beneficiaries upon such executives'executives’ death, certain amounts annually for the first 15 years subsequent to their retirement. Life insurance contracts owned by the Company will fund this plan. Expense for this plan
totaled approximately $0.4 million, $0.4 million and $1.8 million in
fiscal 2004, 2003, and 2002, respectively.
In fiscal 2000, the Company established an additional deferred compensation plan for its executive officers and other key employees (the "Executive“Executive Deferred Compensation Plan"Plan”). Under the Executive Deferred Compensation Plan, a covered executive may elect to defer some or all of his or her compensation into the plan, and the Company may credit the participant'sparticipant’s account with a discretionary employer contribution. Participants are entitled to payment of deferred amounts and any earnings, which may be credited thereon upon termination or retirement from Plexus.
From fiscal 2000 through fiscal 2002, key employee salary deferrals
in and discretionary contributions of the Company to the Executive
Deferred Compensation Plan were effected through a split-dollar life
insurance program, whereby Plexus entered into split-dollar life insurance
agreements with various executive officers and key employees. Under these
agreements, Plexus paid a minimum annual premium of $13,500 per policy,
and such additional premiums as it determined. Upon the death of the
covered employee, Plexus had an interest in the proceeds of the policy
equal to the premiums paid. Premium payments made by the Company totaled
approximately $0.1 million in fiscal 2002.
In fiscal 2003, due to changes in the law, Plexus terminated thea split-dollar life insurance program and replaced it with a rabbi trust arrangement (the "Trust"“Trust”). The Trust allows investment of deferred compensation, held on behalf of the participants, into individual accounts and, within these accounts, into one or more designated investments. Investment choices do not include Plexus stock. During fiscal 2003, the cash value proceeds that were received upon the surrender of the split-dollar life insurance policies attributable to each plan participant totaled approximately $0.4 million and were placed into the Trust. In each
of fiscal 2005, 2004 and 2003, the Company made a contributioncontributions to the participants'participants’ accounts in the amount of $13,500 per participant, or approximately $0.1 million in total in each period. The Trust assets are subject to the claims of the Company'sCompany’s creditors. As of October 1, 2005 and September 30, 2004,
and 2003, the Trust assets totaled $1.1$1.9 million and $0.7$1.1 million, respectively and the related liability to the participants totaled approximately $1.2$2.1 million and $0.7$1.2 million, respectively. The Trust assets and the related liability to the participants are included in Other assets and Other liabilities, respectively, in the accompanying Consolidated Balance Sheets.
Other:The Company is not obligated to provide any post-retirement medical or life insurance benefits to employees.
12. CONTINGENCIES
11. Contingencies
The Company (along with many other companies) has been sued by the Lemelson Medical, Education & Research Foundation Limited Partnership ("Lemelson"(“Lemelson”) related to alleged possible infringement of certain Lemelson patents. The complaint, which is one of a series of complaints by Lemelson against hundreds of companies, seeks injunctive relief, treble damages (amount unspecified) and attorney'sattorney’s fees. The Company has obtained a stay of action pending developments in other related litigation. On January 23, 2004, the judge in the other related litigation ruled against Lemelson, thereby declaring the Lemelson patents unenforceable and invalid. Lemelson has appealed this ruling.ruling, and on September 9, 2005 the U.S. Court of Appeals for the Federal Circuit affirmed the lower Court’s decision ruling that the Lemelson patents are unenforceable, and on November 16, 2005 denied a petition for rehearing. Lemelson may appeal this decision to the U.S. Supreme Court. The lawsuit against the Company remains stayed pending the outcome of that appeal. The Company believes the vendors from
whom the patent equipment was purchased may be required to contractually
indemnify the Company. However, based upon the Company's observation of
Lemelson's actions in other parallel cases, it appears that the primary
objective of Lemelson is to cause other parties to enter into license
agreements. If a judgment is rendered and/or a license fee required, it is
the opinion of management of the Company that such judgment, or fee, would
not be material to the Company's financial position, results of operations
or cash flows.outcome.
In addition, the Company is party to other certain lawsuits in the ordinary course of business. Management does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the
Company'sCompany’s financial position, results of operations or cash flows.
52
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. BUSINESS SEGMENT, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The12. Business Segment, Geographic Information and Major Customers
Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”) establishes standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in assessing performance and allocating resources.
62
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
As part of its annual assessment under SFAS No. 131, the Company operatesnoted changes in the economic performance and related long-term expectations of its operating segments during fiscal year 2005. This was especially acute in Europe and Mexico as evidenced by the $26.9 million goodwill impairment recorded in the third quarter of fiscal 2005 related to the Company’s UK and Mexico operations (See Note 9 — Restructuring and Impairment Costs). In addition, the Company continued to experience rapid sales growth in its Asian region during fiscal 2005. As a result, the Company has reclassified the manner in which it previously aggregated its operating segments from one business segment. Thesegment into four reportable geographical segments: United States, Asia, Mexico and Europe. As of October 1, 2005, the Company provides
product realization services to electronic OEMs. The Company has three
reportable geographic regions: North America, Europe and Asia. The Company
has 19had 18 active manufacturing andand/or engineering facilities in North America,
Europethe United States, Asia, Mexico and Asia to serve these OEMs.Europe.
The Company uses an internal management reporting system, which provides important financial data to evaluate performance and allocate the Company'sCompany’s resources on a geographic basis. InterregionalNet revenues for segments are attributed to the region in which the product is manufactured or service is performed. The services provided, manufacturing processes used, class of customers serviced and order fulfillment processes used are similar and generally interchangeable across the segments. A segment’s performance is evaluated based upon its operating income (loss). A segment’s operating income (loss) includes its net sales less cost of sales and selling, general and administrative expenses, but excludes corporate and other costs, interest expense, other income (loss), and income tax expense. Corporate and other costs primarily represent corporate selling, general and administrative expenses, and restructuring and impairment costs. These costs are not allocated to the segments, as management excludes such costs when assessing the performance of the segments. Inter-segment transactions are generally recorded at amounts that approximate arm'sarm’s length transactions. The accounting policies for the regions are the same as for the Company taken as a whole.
Information about the Company’s four operating segments for the fiscal years ended October 1, 2005, September 30, 2004 and September 30, 2003 were as follows (in thousands):
| | | | | | | | | | | | | |
| | | Years ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Net sales: | | | | | | | | | | | | |
| United States | | $ | 920,096 | | | $ | 754,718 | | | $ | 633,662 | |
| Asia | | | 165,057 | | | | 105,103 | | | | 41,353 | |
| Mexico | | | 122,161 | | | | 98,950 | | | | 78,080 | |
| Europe | | | 104,318 | | | | 107,237 | | | | 62,522 | |
| Elimination of inter-segment sales | | | (82,750 | ) | | | (25,150 | ) | | | (7,780 | ) |
| | | | | | | | | | |
| | | $ | 1,228,882 | | | $ | 1,040,858 | | | $ | 807,837 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Depreciation and amortization: | | | | | | | | | | | | |
| United States | | $ | 11,395 | | | $ | 13,355 | | | $ | 16,884 | |
| Asia | | | 3,043 | | | | 2,571 | | | | 2,276 | |
| Mexico | | | 1,295 | | | | 1,492 | | | | 1,914 | |
| Europe | | | 1,956 | | | | 2,015 | | | | 2,047 | |
| Corporate | | | 6,201 | | | | 6,016 | | | | 4,014 | |
| | | | | | | | | | |
| | | $ | 23,890 | | | $ | 25,449 | | | $ | 27,135 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Operating income (loss): | | | | | | | | | | | | |
| United States | | $ | 67,150 | | | $ | 58,135 | | | $ | 31,149 | |
| Asia | | | 7,847 | | | | 4,418 | | | | (712 | ) |
| Mexico | | | (3,394 | ) | | | 3,206 | | | | 399 | |
| Europe | | | 6,552 | | | | 8,690 | | | | 2,097 | |
| Corporate and other costs | | | (87,900 | ) | | | (65,233 | ) | | | (104,464 | ) |
| | | | | | | | | | |
| | | $ | (9,745 | ) | | $ | 9,216 | | | $ | (71,531 | ) |
| | | | | | | | | | |
63
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
| | | | | | | | | | | | | |
| | | Years ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Capital expenditures: | | | | | | | | | | | | |
| United States | | $ | 8,551 | | | $ | 2,408 | | | $ | 4,437 | |
| Asia | | | 10,363 | | | | 8,471 | | | | 4,335 | |
| Mexico | | | 633 | | | | 509 | | | | 1,115 | |
| Europe | | | 973 | | | | 480 | | | | 588 | |
| Corporate | | | 1,187 | | | | 6,218 | | | | 11,897 | |
| | | | | | | | | | |
| | | $ | 21,707 | | | $ | 18,086 | | | $ | 22,372 | |
| | | | | | | | | | |
| | | | | | | | | |
| | | October 1, | | | September 30, | |
| | | 2005 | | | 2004 | |
| Total assets: | | | | | | | | |
| United States | | $ | 264,848 | | | $ | 239,994 | |
| Asia | | | 82,050 | | | | 56,128 | |
| Mexico | | | 40,908 | | | | 63,810 | |
| Europe | | | 81,549 | | | | 98,051 | |
| Corporate | | | 131,113 | | | | 87,725 | |
| | | | | | | |
| | | $ | 600,468 | | | $ | 545,708 | |
| | | | | | | |
The
table below
presents geographic net salesfollowing enterprise-wide information
reflecting the origin of the
product shipped and asset informationis provided in accordance with SFAS No. 131. Sales to unaffiliated customers are based on the
physicalCompany’s location
of
the assetsproviding product or services (in thousands):
Years ended September 30,
----------------------------------------
2004 2003 2002
---- ---- ----
Net sales:
North America $ 828,354 $ 704,057 $ 783,660
Europe 107,802 62,522 78,826
Asia 104,702 41,258 21,117
----------- --------- ---------
$ 1,040,858 $ 807,837 $ 883,603
=========== ========= =========
As of September 30,
-------------------------------
2004 2003
---- ----
Long-lived assets:
North America $ 108,697 $ 121,434
Europe 35,837 34,251
Asia 19,231 8,094
----------- ---------
$ 163,765 $ 163,779
=========== =========
| | | | | | | | | | | | | |
| | | Years ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Net sales: | | | | | | | | | | | | |
| United States | | $ | 920,096 | | | $ | 754,718 | | | $ | 633,662 | |
| Malaysia | | | 130,939 | | | | 86,984 | | | | 37,833 | |
| Mexico | | | 122,161 | | | | 98,950 | | | | 78,080 | |
| United Kingdom | | | 104,318 | | | | 107,237 | | | | 62,522 | |
| China | | | 34,118 | | | | 18,119 | | | | 3,520 | |
| Elimination of inter-segment sales | | | (82,750 | ) | | | (25,150 | ) | | | (7,780 | ) |
| | | | | | | | | | |
| | | $ | 1,228,882 | | | $ | 1,040,858 | | | $ | 807,837 | |
| | | | | | | | | | |
| | | | | | | | | |
| | | October 1, | | | September 30, | |
| | | 2005 | | | 2004 | |
| Long-lived assets: | | | | | | | | |
| United States | | $ | 32,912 | | | $ | 35,060 | |
| Malaysia | | | 22,095 | | | | 17,432 | |
| Mexico | | | 3,571 | | | | 15,338 | |
| United Kingdom | | | 18,410 | | | | 35,837 | |
| China | | | 1,992 | | | | 1,798 | |
| Corporate | | | 51,155 | | | | 58,300 | |
| | | | | | | |
| | | $ | 130,135 | | | $ | 163,765 | |
| | | | | | | |
Long-lived assets as of October 1, 2005 and September 30, 2004 and 2003 exclude other non-operating, long-term assets totaling $8.3 million and $7.5 million, and $30.9 million,
respectively.
Juniper Networks, Inc. ("Juniper") accounted for 14 percent
64
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
The percentages of our net sales in fiscal 2004 and Siemens Medical Systems, Inc. accounted for
12 percent of our net sales in fiscal 2003. No other customer accounted
forto customers representing 10 percent or more of our net sales in fiscal 2004 or 2003. No
customer accounted for the indicated periods were as follows:
| | | | | | | | | | | | | |
| | | Fiscal years ended |
| | | October 1, | | September 30, | | September 30, |
| | | 2005 | | 2004 | | 2003 |
| Juniper Networks | | | 19 | % | | | 14 | % | | | * | |
| General Electric | | | 12 | % | | | * | | | | * | |
| Siemens | | | * | | | | * | | | | 12 | % |
| | |
| * | | Represents less than 10 percent of net sales |
The percentages of accounts receivable from customers representing 10 percent or more of net sales in fiscal 2002.
Accounts receivable related to Juniper represented approximately 15
percent and 12 percent, respectively, of the Company's total accounts receivable balancefor the indicated periods were as of September 30, 2004 and 2003.follows:
| | | | | | | | | |
| | | October 1, | | September 30, |
| | | 2005 | | 2004 |
| Juniper Networks | | | 21 | % | | | 15 | % |
| General Electric | | | 12 | % | | | * | |
| | |
| * | | Represents less than 10 percent of total accounts receivable |
No other customercustomers represented ten percent or more of the Company'sCompany’s total net sales or total trade receivable balance as of October 1, 2005 and September 30, 2004 or 2003.
14. GUARANTEES
In November 2002, Financial Accounting Standards Interpretation
("FIN") No. 45, "Guarantor's Accounting2004.
Restructuring and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" was
issued. FIN No. 45 requires a Company, atimpairment costs are not allocated to operating segments, as management excludes such costs when assessing the time it issues a guarantee,
to recognize an initial liability for the fair value of obligations
assumed under the guarantee and to elaborate on existing disclosure
requirements. The initial recognition requirements of FIN No. 45 are
effective for guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN No. 45 were effective in the Company's
first quarter of fiscal 2003. Adoptionperformance of the initial recognition
provisionsoperating segments, but rather includes such costs within the Corporate and other costs section of FIN No. 45 did not have a material impact on these
Consolidated Financial Statements.the above table of operating income (loss). In fiscal 2005, 2004 and 2003, the Company incurred restructuring and impairment costs (see Note 9) which were associated with various segments (in thousands):
| | | | | | | | | | | | | |
| | | Years ended | |
| | | October 1, | | | September 30, | | | September 30, | |
| | | 2005 | | | 2004 | | | 2003 | |
| Restructuring and impairment costs: | | | | | | | | | | | | |
| United States | | $ | 7,296 | | | $ | 7,164 | | | $ | 50,534 | |
| Asia | | | — | | | | — | | | | — | |
| Mexico | | | 11,414 | | | | 50 | | | | 3,034 | |
| Europe | | | 16,212 | | | | 193 | | | | 1,660 | |
| Corporate | | | 4,240 | | | | 1,896 | | | | 4,116 | |
| | | | | | | | | | |
| | | $ | 39,162 | | | $ | 9,303 | | | $ | 59,344 | |
| | | | | | | | | | |
13. Guarantees
The Company offers certain indemnifications under its customer manufacturing agreements. In the normal course of business, the Company may from time to time be obligated to indemnify its customers or its
customers'customers’ customers against damages or liabilities arising out of the
Company'sCompany’s negligence, breach of contract, or infringement of third party intellectual property rights relating to its manufacturing processes. Certain of the manufacturing agreements have extended broader indemnification and while most agreements have contractual limits, some do not. However, the Company generally excludes from such indemnities, and seeks indemnification from its customers for damages or liabilities arising out of the
Company'sCompany’s adherence
53
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
to customers'customers’ specifications or designs or use of materials furnished, or directed to be used, by its customers. The Company does not believe its obligations under such indemnities are material.65
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
In the normal course of business, the Company also provides its customers a limited warranty covering workmanship, and in some cases materials, on products manufactured by the Company for them.Company. Such warranty generally provides that products will be free from defects in the Company'sCompany’s workmanship and meet mutually agreed upon testing criteria for periods generally ranging from 12 months to 24 months. If a product fails to comply with the Company'sCompany’s warranty, the Company'sCompany’s obligation is generally limited to correcting, at its expense, any defect by repairing or replacing such defective product. The Company'sCompany’s warranty generally excludes defects resulting from faulty customer-supplied components, design defects or damage caused by any party other than the Company.
The Company provides for an estimate of costs that may be incurred under its limited warranty at the time product sales are recognized.recognized and establishes reserves for specifically identified product issues. These costs primarily include labor and materials, as necessary, associated with repair or replacement. The primary factors that affect the Company'sCompany’s warranty liability include the value and the number of shipped units and historical and anticipated rates of warranty claims. As these factors are impacted by actual experience and future expectations, the Company assesses the adequacy of its accruedrecorded warranty liabilities and adjusts the amounts as necessary.
Below is a table summarizing the activity related to the
Company'sCompany’s limited warranty liability for
the fiscal
20042005 and
20032004 (in thousands):
Limited warranty liability, as of October 1, 2002 $ 1,246
Accruals for warranties issued during the period 150
Accruals related to pre-existing warranties (20)
Settlements (in cash or in kind) during the period (391)
---------
Limited warranty liability, as of September 30, 2003 985
Accruals for warranties issued during the period 148
Settlements (in cash or in kind) during the period (200)
---------
Limited warranty liability, as of September 30, 2004 $ 933
=========
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
| | | | | |
| Limited warranty liability, as of October 1, 2003 | | $ | 985 | |
| Accruals for warranties issued during the period | | | 148 | |
| Settlements (in cash or in kind) during the period | | | (200 | ) |
| | | | |
| | | | | |
| Limited warranty liability, as of September 30, 2004 | | | 933 | |
| Accruals for warranties issued during the period | | | 112 | |
| Settlements (in cash or in kind) during the period | | | (20 | ) |
| | | | |
| | | | | |
| Limited warranty liability, as of October 1, 2005 | | $ | 1,025 | |
| | | | |
14. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for fiscal
20042005 and
20032004 consists of (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
2004 QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------- ------- ------- ------- -----
Net sales $ 238,464 $ 254,272 $ 274,817 $ 273,305 $ 1,040,858
Gross profit 19,627 21,181 22,979 22,991 86,778
Net loss 2,499 3,471 (768) (36,782) (31,580)
Earnings per share:
Basic $ 0.06 $ 0.08 $ (0.02) $ (0.85) $ (0.74)
Diluted $ 0.06 $ 0.08 $ (0.02) $ (0.85) $ (0.74)
54
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FIRST SECOND THIRD FOURTH
2003 QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------- ------- ------- ------- -----
Net sales $ 205,379 $ 190,773 $ 195,609 $ 216,076 $ 807,837
Gross profit 15,540 9,623 11,829 15,973 52,965
Loss before cumulative
effect of change in
accounting for
goodwill (20,832) (5,044) (14,747) (3,873) (44,496)
Cumulative effect of
change in accounting
for goodwill, net of
tax (23,482) - - - (23,482)
Net loss (44,314) (5,044) (14,747) (3,873) (67,978)
Earnings per share:
Basic and Diluted:
Loss before
cumulative effect of
change in accounting
for goodwill $ (0.49) $ (0.12) $ (0.35) $ (0.09) $ (1.05)
Cumulative effect of
change in accounting
for goodwill, net of
tax (0.56) - - - (0.56)
Net loss $ (1.05) $ (0.12) $ (0.35) $ (0.09) $ (1.61)
| | | | | | | | | | | | | | | | | | | | | |
| | | First | | | Second | | | Third | | | Fourth | | | | |
| 2005 | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Total | |
| Net sales | | $ | 287,480 | | | $ | 305,486 | | | $ | 313,709 | | | $ | 322,207 | | | $ | 1,228,882 | |
| Gross profit | | | 22,295 | | | | 25,545 | | | | 27,137 | | | | 30,759 | | | | 105,736 | |
| Net income (loss) | | | 3,022 | | | | (4,459 | ) | | | (21,498 | ) | | | 10,518 | | | | (12,417 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.07 | | | $ | (0.10 | ) | | $ | (0.50 | ) | | $ | 0.24 | | | $ | (0.29 | ) |
| Diluted | | $ | 0.07 | | | $ | (0.10 | ) | | $ | (0.50 | ) | | $ | 0.24 | | | $ | (0.29 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | First | | | Second | | | Third | | | Fourth | | | | |
| 2004 | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Total | |
| Net sales | | $ | 238,464 | | | $ | 254,272 | | | $ | 274,817 | | | $ | 273,305 | | | $ | 1,040,858 | |
| Gross profit | | | 19,627 | | | | 21,181 | | | | 22,979 | | | | 22,991 | | | | 86,778 | |
| Net income (loss) | | | 2,499 | | | | 3,471 | | | | (768 | ) | | | (36,782 | ) | | | (31,580 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.06 | | | $ | 0.08 | | | $ | (0.02 | ) | | $ | (0.85 | ) | | $ | (0.74 | ) |
| Diluted | | $ | 0.06 | | | $ | 0.08 | | | $ | (0.02 | ) | | $ | (0.85 | ) | | $ | (0.74 | ) |
66
Plexus Corp.
Notes to Consolidated Financial Statements — Continued
Earnings per share is computed independently for each quarter. The annual total amounts may not equal the sum of the quarterly amounts due to rounding.
In the first, second and third quarters of fiscal 2005, the Company recorded pre-tax restructuring and impairment costs of $0.9 million, $10.6 million and $27.7 million, respectively. These costs were primarily associated with goodwill impairment, the closure of the Bothell facility and the write-down of certain ERP software.
In the third and fourth quarters of fiscal 2004, the Company recorded pre-tax restructuring and impairment costs of $5.5 million and $3.8 million, respectively. These costs were primarily associated with lease obligations for two previously abandoned facilities near Seattle, Washington, the planned closure of the Bothell engineering and manufacturing facility, the write-down of certain ERP software and the consolidation of a satellite PCB-design office in Hillsboro, Oregon into another Plexus design office. In the fourth quarter of fiscal 2004, the Company also recorded a full valuation allowance on all of its U.S. deferred income tax assets.
In the first, third and fourth quarters of fiscal 2003, the Company
recorded pre-tax restructuring and impairment costs of $31.8 million, $19.6
million and $7.9 million, respectively. These costs resulted from our actions
taken in response to reductions in our end-market demand. These actions included
closing our San Diego and Richmond operating sites, the consolidation of several
leased facilities, re-focusing our PCB design group, a write-off of goodwill
associated with the San Diego operating site, the write-down of underutilized
assets to fair value at several locations, and the costs associated with a
reduction in work force in several operating sites, engineering and corporate
groups. These measures were intended to align the Company's capabilities and
resources with its lower demand.
In addition, the Company adopted SFAS No. 142 for the accounting of
goodwill and other intangible assets on October 1, 2002. Under the transitional
provisions of SFAS No. 142, the Company identified reporting units with
goodwill, performed impairment tests on the net goodwill and other
indefinite-lived intangible assets associated with each reporting unit using a
valuation date as of October 1, 2002, and determined that a pre-tax transitional
impairment charge of $28.2 million was required at the San Diego and Juarez
operating sites. The impairment charge was recorded in the first quarter of
fiscal 2003 as a cumulative effect of a change in accounting for goodwill.
* * * * *
55
PLEXUS CORP. AND SUBSIDIARIES
SCHEDULE67
Plexus Corp. and Subsidiaries
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
— Valuation and Qualifying Accounts
For the years ended
October 1, 2005, September 30, 2004
2003 and
2002 (inSeptember 30, 2003(in thousands)
ADDITIONS
BALANCE AT ADDITIONS FROM CHARGED TO
BEGINNING OF MERGERS/ COSTS AND BALANCE AT END
DESCRIPTIONS PERIOD ACQUISITIONS EXPENSES DEDUCTIONS OF PERIOD
------------ ------------ ------------ -------- ---------- ---------
Fiscal Year 2004:
Allowance for losses on accounts receivable
(deducted from the asset to which it relates) $ 4,100 $ - $ - $ 2,100 $ 2,000
Valuation allowance on deferred income tax
assets (deducted from the asset to which it
relates) $ - $ - $ 36,818 $ - $ 36,818
Fiscal Year 2003:
Allowance for losses on accounts receivable
(deducted from the asset to which it relates) $ 4,200 $ - $ 438 $ 538 $ 4,100
Valuation allowance on deferred income tax
assets (deducted from the asset to which it
relates) $ - $ - - $ - $ -
Fiscal Year 2002:
Allowance for losses on accounts receivable
(deducted from the asset to which it relates) $ 6,500 $ 51 $ 2,994 $ 5,345 $ 4,200
Valuation allowance on deferred income tax
assets (deducted from the asset to which it
relates) $ - $ - - $ - $ -
56
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Additions charged | | | | | | | | | | | |
| | | Balance at | | | to costs and | | | Additions charged | | | | | | | Balance at end of | |
| Descriptions | | beginning of period | | | expenses | | | to other accounts | | | Deductions | | | period | |
| Fiscal Year 2005: | | | | | | | | | | | | | | | | | | | | |
| Allowance for losses on accounts receivable (deducted from the asset to which it relates) | | $ | 2,000 | | | $ | 1,094 | | | $ | — | | | $ | 94 | | | $ | 3,000 | |
| Valuation allowance on deferred income tax assets (deducted from the asset to which it relates) | | $ | 36,818 | | | $ | — | | | $ | 3,733 | | | $ | — | | | $ | 40,551 | |
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2004: | | | | | | | | | | | | | | | | | | | | |
| Allowance for losses on accounts receivable (deducted from the asset to which it relates) | | $ | 4,100 | | | $ | — | | | $ | — | | | $ | 2,100 | | | $ | 2,000 | |
| Valuation allowance on deferred income tax assets (deducted from the asset to which it relates) | | $ | — | | | $ | 36,818 | | | $ | — | | | $ | — | | | $ | 36,818 | |
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year 2003: | | | | | | | | | | | | | | | | | | | | |
| Allowance for losses on accounts receivable (deducted from the asset to which it relates) | | $ | 4,200 | | | $ | 438 | | | $ | — | | | $ | 538 | | | $ | 4,100 | |
| Valuation allowance on deferred income tax assets (deducted from the asset to which it relates) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: PLEXUS CORP. (Registrant)
/s/ Dean A. Foate
------------------------------------
Dean A. Foate, President and Chief Executive Officer
| | | | |
| By: | | PLEXUS CORP. (Registrant) | | |
| | | | |
| | /s/ Dean A. Foate | | |
| | | | |
| | Dean A. Foate, President and Chief Executive Officer |
December 8, 2004
15, 2005
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dean A. Foate, F. Gordon Bitter and Joseph D. Kaufman, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and any other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirement of the Security Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.*
SIGNATURE AND TITLE
/s/ | | |
/s/ Dean A. Foate /s/ Steven | | /s/ Stephen P. Cortinovis
- ------------------------------------------------------------ --------------------------------------------------
|
| | |
Dean A. Foate, President, Chief Executive Officer, and Steven P. Cortinovis, Director
Director (Principal Executive Officer)
/s/ | | Stephen P. Cortinovis, Director |
| | |
/s/ F. Gordon Bitter /s/ | | /s/ David J. Drury
- ------------------------------------------------------------ --------------------------------------------------
|
| | |
F. Gordon Bitter, Senior Vice President and Chief
Financial Officer (Principal Financial Officer) | | David J. Drury, Director
Officer (Principal Financial Officer)
/s/ |
| | |
/s/ Simon J. Painter /s/ Thomas J. Prosser
- ------------------------------------------------------------ --------------------------------------------------
| | /s/ Peter Kelly |
| | |
Simon J. Painter, Corporate Controller (Principal
Accounting Officer) | | Peter Kelly, Director |
| | |
| /s/ John L. Nussbaum | | /s/ Thomas J. Prosser Director
Accounting Officer)
/s/ John L. Nussbaum /s/ Dr. Charles M. Strother
- ------------------------------------------------------------ --------------------------------------------------
|
| | |
| John L. Nussbaum, Chairman and Director | | Thomas J. Prosser, Director |
| | |
| /s/ Ralf R. Böer | | /s/ Dr. Charles M. Strother |
| | |
| Ralf R. Böer, Director | | Dr. Charles M. Strother, Director
/s/ Ralf R. Boer /s/ Jan K. Ver Hagen
- ------------------------------------------------------------ --------------------------------------------------
Ralf R. Boer, Director Jan K. Ver Hagen, Director
|
* Each of the above signatures is affixed as of December 8, 2004.
57
| | |
| * | | Each of the above signatures is affixed as of December 15, 2005. |
69
EXHIBIT INDEX
PLEXUS CORP.
10-K FOR YEAR ENDED SEPTEMBER 30, 2004
for Year Ended October 1, 2005
INCORPORATED BY FILED
EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH
----------- ------- --------------- --------
| | | | | | |
| | | | Incorporated By | | Filed |
| Exhibit No. | | Exhibit | | Reference To | | Herewith |
|
| 3(i) | | Restated Articles of Incorporation of Exhibit 3(i) to Plexus' Report on Form 10-Q Plexus Corp., as amended through March 13, 2001 | | Exhibit 3(i) to Plexus’ Report on Form 10-Q for the quarter ended March 31, 2004
13, 2001 ("3/31/01")
| | |
| | | | | | |
| 3(ii) | | Bylaws of Plexus Corp., as amended through March 7, 2001 | | Exhibit 3(ii) to Plexus'Plexus’ Report on Form 10-Q
through March 7, 2001 for the quarter ended March 31, 2001 | | |
| | | | | | |
| 4.1 | | Restated Articles of Incorporation of Plexus Corp. | | Exhibit 3(i) above
Plexus Corp.
| | |
| | | | | | |
| 4.2 | | (a) Amended and Restated Shareholder Exhibit 1 to Plexus'
Rights Agreement, dated as of Form 8-A/A filed August 13, 1998, (as amended through on December 6, 2000 November 14, 2000) between Plexus and Firstar Bank, N.A. (n/k/a US Bank, N.A.) as Rights Agent, including form of Rights Certificates | | Exhibit 1 to Plexus’ Form 8-A/A filed on December 6, 2000 | | |
| | | | | | |
| | (b) Agreement of Substitution and First Exhibit 4.2 (b) to Plexus' Annual Report on
Amendment to the Amended and Restated Form 10-K for the fiscal year ended September
Shareholder Rights Agreement dated as 30, 2002
of December 5, 2002
10.1 (a) Supplemental Executive Retirement | | Exhibit 10.14.2 (b) to Plexus'Plexus’ Report on Form
Agreements with John Nussbaum dated as 10-K for the fiscal year ended September 30,
of September 19, 1996**: 1996
(b) First Amendment Agreement to Exhibit 10.1 to Plexus' Quarterly Report on
Supplemental Retirement Agreement Form 10-Q for the quarter ended December 31,
between Plexus and John Nussbaum, dated 2000
as of September 1, 1999
10.2 Forms of Change of Control Agreements Exhibit 10.2(a) to Plexus Annual Report on
dated October 1, 2003 with ** Form 10-K for the fiscal year ended September 30, 2003 ("2003 10-K")
(a) Dean A. Foate
F. Gordon Bitter
David A. Clark
Thomas J. Czajkowski
Paul L. Ehlers
Joseph D. Kaufman
Michael J. McGuire
J. Robert Kronser
David H. Rust
Michael T. Verstegen
|
INCORPORATED BY FILED
EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH
----------- ------- --------------- --------
Exhibit 10.2(b) to 2003 10-K
(b) George W.F. Setton
Simon J. Painter
10.3 Plexus Corp. 1998 Option Plan** Exhibit A to Plexus' definitive proxy
statement for its 1998 Annual Meeting of
Shareholders
10.4 (a) Plexus Corp. 1995 Directors' Stock Exhibit 10.10 to 1994 10-K
Option Plan**
10.4 (b) Summary of Directors' Compensation X
(12/04)**
10.5 Plexus Corp. 2005 Equity Incentive Plan Exhibit A to Plexus' definitive proxy
(subject to shareholder approval) statement for its 2005 Annual Meeting of
Shareholders
10.6 2002 | | | | | | | | |
| 10.1 | | (a) Credit Agreement dated as of Exhibit 10.6 to 2003 10-K October 22, 2003 among Plexus, certain Plexus subsidiaries and various lending institutions whose Administrative Agent is Harris Trust and Savings Bank | | Exhibit 10.6(a) to Plexus’ Report on Form 10-K for the fiscal year ended September 30, 2003 (“2003 10-K”) | | |
| | | | | | |
| | (b) First Amendment and Waiver to Exhibit 10.6(b) to 2003 10-K
Credit Agreement;Agreement, dated as of October 31, 2003 | | Exhibit 10.6(b) to 2003 10-K | | |
| | | | | | |
| | (c) Second Amendment to Credit Exhibit 10.1 to Plexus' Report on Form 10-Q Agreement, dated as of April 29, 2004 | | Exhibit 10.1 to Plexus’ Report on Form 10-Q for the quarter ended June 30, 2004 ("(“6/30/04 10-Q"10-Q”) | | |
| | | | | | |
| | (d) Third Amendment to Credit Exhibit 10.2 to 6/30/04 10-Q Agreement, dated as of July 13, 2004 | | Exhibit 10.2 to 6/30/04 10-Q | | |
| | | | | | |
| | (e) Fourth Amendment to Credit Exhibit 10.3 to 6/30/04 10-Q Agreement, dated as of August 5, 2004 | | Exhibit 10.3 to 6/30/04 10-Q | | |
| | | | | | |
| | (f) Fifth Amendment to Credit Exhibit 10.1 to Plexus' Current Report on Agreement, dated as of November 8, 2004 | | Exhibit 10.1 to Plexus’ Report on Form 8-K dated November 8, 2004
10.7 | | |
EI-70
| | | | | | |
| | | | Incorporated By | | Filed |
| Exhibit No. | | Exhibit | | Reference To | | Herewith |
|
| | (g) Sixth Amendment to Credit Agreement, dated as of June 30, 2005 | | Exhibit 10.1 to Plexus’ Report on Form 8-K dated June 30, 2005 | | |
| | | | | | |
| 10.2 | | (a) Lease Agreement between Neenah (WI) QRS 11-31, Inc. (“QRS: 11-31”) and Electronic Assembly Corp. (n/k/a Plexus Services Corp.), dated August 11, 1994 | | Exhibit 10.8(a) to Plexus'Plexus’ Report on Form
QRS 11-31, Inc. ("QRS: 11-31") and 10-K for the year ended September 30, 1994 Electronic Assembly Corp. (n/k/a Plexus ("(“1994 10-K"10-K”)
Services Corp.), dated August 11, 1994
| | |
| | | | | | |
| | (b) Guaranty and Suretyship Agreement Exhibit 10.8(c) to 1994 10-K between Plexus Corp. and QRS: 11-31 dated August 11, 1994, together with related Guarantor'sGuarantor’s Certificate
10.8 | | Exhibit 10.8(c) to 1994 10-K | | |
| | | | | | |
| 10.3 | | (a) Supplemental Executive Retirement Agreements with John Nussbaum dated as of September 19, 1996* | | Exhibit 10.1 (b) to Plexus’ Report on Form 10-K for the fiscal year ended September 30, 1996 | | |
| | | | | | |
| | (b) First Amendment Agreement to Supplemental Retirement Agreement between Plexus and John Nussbaum, dated as of September 1, 1999* | | Exhibit 10.1 to Plexus’ Report on Form 10-Q for the quarter ended December 31, 2000 | | |
| | | | | | |
| 10.4 | | Amended and Restated Employment Agreement dated as of September 1, 2003 between Plexus Corp. and Dean A. Foate* | | Exhibit 10.15(a) to 2003 10-K | | |
| | | | | | |
| 10.5 | | Forms of Change of Control Agreements dated October 1, 2003 with* | | Exhibit 10.2(a) to 2003 10-K | | |
| | | | | | |
| | (a) Dean A. Foate
F. Gordon Bitter
David A. Clark
Thomas J. Czajkowski
Paul L. Ehlers
Joseph D. Kaufman
J. Robert Kronser
David H. Rust
Michael T. Verstegen | | | | |
| | | | | | |
| | (b) George W.F. Setton
Simon J. Painter | | Exhibit 10.2(b) to 2003 10-K | | |
| | | | | | |
| 10.6 | | Plexus Corp. 1998 Option Plan*
[superceded] | | Exhibit A to Plexus’ definitive proxy statement for its 1998 Annual Meeting of Shareholders | | |
| | | | | | |
| 10.7(a) | | Plexus Corp. 1995 Directors’ Stock Option Plan* [superceded] | | Exhibit 10.10 to 1994 10-K | | |
EI-71
| | | | | | |
| | | | Incorporated By | | Filed |
| Exhibit No. | | Exhibit | | Reference To | | Herewith |
|
| 10.7(b) | | (i) Summary of Directors’ Compensation (12/04)* (Superceded) | | Exhibit 10.4(b) to Plexus’ Report on Form 10-K for the fiscal year ended September 30, 2004 (“2004 10-K”) | | |
| | | | | | |
| | (ii) Summary of Directors’ Compensation (11/05)* | | Exhibit 10.1 to Plexus’ Report on Form 8-K dated November 17, 2005 (“11/17/05 8-K”) | | |
| | | | | | |
| 10.8(a) | | Plexus Corp. 2005 Equity Incentive Plan (as amended)*, + | | | | X |
| | | | | | |
| 10.8(b) | | Forms of award agreements thereunder* | | | | |
| | | | | | |
| | (i) Form of Option Grant (Officer or Employee) | | Exhibit 10.1 to Plexus’ Report on Form 8-K dated April 1, 2005 (“4/1/05 8-K”) | | |
| | | | | | |
| | (ii) Form of Option Grant (Director) | | Exhibit 10.2 to 11/17/05 8-K | | |
| | | | | | |
| | (iii) Form of Restricted Stock Award with True Vesting | | Exhibit 10.3 to 4/1/05 8-K | | |
| | | | | | |
| | (iv) Form of Restricted Stock Unit Award with Time Vesting | | Exhibit 10.4 to 4/1/05 8-K | | |
| | | | | | |
| 10.9(a) | | Plexus Corp. 2004 Incentive Exhibit 10.8(b) to 2003 10-K Compensation Plan- Executive Leadership Team **
|
INCORPORATED BY FILED
EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH
----------- ------- --------------- --------
10.8 (b)* [superceded] | Exhibit 10.8(b) to 2003 10-K | | | | | | | | | |
| 10.9(b) | | (i) Plexus Corp. 2005 Variable Incentive X
Compensation Plan -— Executive Leadership Team **
10.9 * [superceded version] | | Exhibit 10.8(b) to 2004 10-K | | |
| | | | | | |
| | (ii) Plexus Corp. 2005 Variable Incentive Compensation Plan — Executive Leadership Team (as amended and restated as of August 31, 2005)* | | | | X |
| | | | | | |
| 10.10(a) | | Plexus Corp. Executive Deferred Compensation Plan* | | Exhibit 10.17 to 2000Plexus’ Report on Form 10-K Compensation Plan**
10.10 Form of Split Dollar Life Insurance Exhibit 10.18 tofor the fiscal year ended September 30, 2000 10-K
Agreements between Plexus and each of
[superceded]: **
Dean A. Foate
J. Robert Kronser
Joseph D. Kaufman
Paul L. Ehlers
Michael T. Verstegen
David A. Clark
10.11 | | |
| | | | | | |
| 10.10(b) | | Plexus Corp Executive Deferred Exhibit 10.14 to 2003 10-K Compensation Plan Trust dated April 1, 2003 between Plexus Corp. and Bankers Trust Company**
10.12 (a) Employment Agreement dated as of Exhibit 10.3 to 6/30/02 10-Q
July 1, 2002, between Plexus Corp. and
Dean A. Foate** [superceded]
(b) Amended and Restated Employment | | Exhibit 10.14 to 2003 10-K
Agreement dated as of September 1, 2003
between Plexus Corp and Dean A. Foate * *
10.13 (a) Amended and Restated Receivables Exhibit 10.1 to Plexus' Quarterly Report on
Sale Agreement, dated July 1, 2001, Form 10-Q for the quarter ended June 30,
between Plexus Services Corp. and 2001 ("6/30/01 10-Q")
Plexus ABS, Inc.
Exhibit 10.1 to Plexus' Quarterly Report on
(b) First Amendment to amended and Form 10-Q for the quarter ended June 30,
Restated Receivables Sale Agreement, 2002 ("6/30/02 10-Q")
dated June 28, 2002, between Plexus
Services Corp. and Plexus ABS, Inc.
10.14 (a) Receivables Purchase Agreement Exhibit 10.10(a) to 2000 10-K
dated as of October 6, 2000, among
Plexus, Preferred Receivables Funding
Corporation and Bank One, NA
(b) First Amendment to Receivables Exhibit 10.2 to 6/30/01 10-Q
Purchase Agreement, dated July 1, 2001
(c) Second Amendment to Receivables
Purchase Agreement, dated October 3, Exhibit 10.2(a) to 6/30/02 10-Q
2001
(d) Limited Waiver and Third Amendment
to Receivables Purchase Agreement, Exhibit 10.2(b) to 6/30/02
dated April 25, 2002 10-Q
(e) Fourth Amendment to Receivables Exhibit 10.2(c) to 6/30/02
|
INCORPORATED BY FILED
EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH
----------- ------- --------------- --------
Purchase Agreement, dated June 28, 2002 10-Q
(f) Fifth Amendment to Receivables Exhibit 10.2(f) to 2002 10-K
Purchase Agreement, dated September 30,
2002
(g) Limited Waiver and Sixth Amendment Exhibit 10.2(g) to 2002 10-K
to Receivables Purchase Agreement,
dated December 4, 2002
(h) Limited Waiver and Seventh Exhibit 10.2 to 12/31/02 10-Q.
Amendment to Receivables Purchase
Agreement, dated January 28, 2003
(i) Limited Waiver and Seventh Exhibit 10.4 to Plexus' Quarterly Report on
Amendment to Receivables Purchase Form 10-Q for the quarter ended December 31,
Agreement, dated January 28, 2003 2002
Note: All agreements included in Exhibit 10.13 and 10.14 were terminated in September 2003
| | | | | | | | |
| 21 | | List of Subsidiaries | | | | X |
| | | | | | |
| 23 | | Consent of PricewaterhouseCoopers LLP | | | | X |
EI-72
| | | | | | |
| | | | Incorporated By | | Filed |
| Exhibit No. | | Exhibit | | Reference To | | Herewith |
|
24 Power | | Powers of Attorney (Signature | | (Signature Page Hereto) | | |
| | | | | | |
| 31.1 | | Certification of Chief Executive Officer X pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | | | | X |
| | | | | | |
| 31.2 | | Certification of Chief Financial Officer X pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | | | | X |
| | | | | | |
| 32.1 | | Certification of the CEO pursuant to 18 X U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | X |
| | | | | | |
| 32.2 | | Certification of the CFO pursuant to 18 X U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | X |
- ----------------------
**Designates management compensatory plans or agreements.
| | |
| * | | Designates management compensatory plans or agreements
|
|
| + | | Reflects a non-material change |
EI-73