UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the Quarter ended June 30, 2004
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-14824
PLEXUS CORP.
(Exact name of registrant as specified in charter)
Wisconsin 39-1344447
(State of Incorporation) (IRS Employer Identification No.)
55 Jewelers Park Drive
Neenah, Wisconsin 54957-0156
(Address of principal executive offices)(Zip Code)
Telephone Number (920) 722-3451
(Registrant's telephone number, including Area Code)
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 reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 under the Exchange Act).
Yes (X) No ( )
As of August 6, 2004 there were 43,164,431 shares of Common Stock of the
Company outstanding.
1
PLEXUS CORP.
TABLE OF CONTENTS
June 30, 2004
PART I. FINANCIAL INFORMATION................................................................................ 3
Item 1. Consolidated Financial Statements........................................................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)............. 3
CONDENSED CONSOLIDATED BALANCE SHEETS....................................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS............................................. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 14
"SAFE HARBOR" CAUTIONARY STATEMENT.......................................................... 14
OVERVIEW.................................................................................... 14
RESULTS OF OPERATIONS....................................................................... 15
LIQUIDITY AND CAPITAL RESOURCES............................................................. 18
CONTRACTUAL OBLIGATIONS AND COMMITMENTS..................................................... 19
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES............................................... 20
NEW ACCOUNTING PRONOUNCEMENTS............................................................... 21
RISK FACTORS................................................................................ 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 29
Item 4. Controls and Procedures..................................................................... 29
PART II - OTHER INFORMATION................................................................................... 30
Item 1. Legal Proceedings........................................................................... 30
Item 6. Exhibits and Reports on Form 8-K............................................................ 31
SIGNATURES.................................................................................................... 32
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Unaudited
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net sales $ 274,817 $ 195,609 $ 767,552 $ 591,761
Cost of sales 251,838 183,780 703,765 554,769
---------- ---------- ---------- ----------
Gross profit 22,979 11,829 63,787 36,992
Operating expenses:
Selling and administrative expenses 17,846 16,250 50,519 49,819
Restructuring and impairment costs 5,494 19,649 5,494 51,489
---------- ---------- ---------- ----------
23,340 35,899 56,013 101,308
---------- ---------- ---------- ----------
Operating income (loss) (361) (24,070) 7,774 (64,316)
Other income (expense):
Interest expense (802) (658) (2,300) (2,144)
Miscellaneous 202 638 1,028 1,833
---------- ---------- ---------- ----------
Income (loss) before income taxes and cumulative effect
of change in accounting for goodwill (961) (24,090) 6,502 (64,627)
Income tax expense (benefit) (193) (9,343) 1,300 (24,003)
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of change in accounting
for goodwill (768) (14,747) 5,202 (40,624)
Cumulative effect of change in accounting for goodwill, net of
income tax benefit of $4,755 - - - (23,482)
---------- ---------- ---------- ----------
Net income (loss) $ (768) $ (14,747) $ 5,202 $ (64,106)
========== ========== ========== ==========
Earnings per share:
Basic
Income (loss) before cumulative effect of change in accounting
for goodwill $ (0.02) $ (0.35) $ 0.12 $ (0.96)
Cumulative effect of change in accounting for goodwill - - - (0.56)
---------- ---------- ---------- ----------
Net income (loss) $ (0.02) $ (0.35) $ 0.12 $ (1.52)
========== ========== ========== ==========
Diluted
Income (loss) before cumulative effect of change in
accounting for goodwill $ (0.02) $ (0.35) $ 0.12 $ (0.96)
Cumulative effect of change in accounting for goodwill - - - (0.56)
---------- ---------- ---------- ----------
Net income (loss) $ (0.02) $ (0.35) $ 0.12 $ (1.52)
========== ========== ========== ==========
Weighted average shares outstanding:
Basic 43,056 42,285 42,890 42,204
========== ========== ========== ==========
Diluted 43,056 42,285 43,944 42,204
========== ========== ========== ==========
Comprehensive income (loss):
Net income (loss) $ (768) $ (14,747) $ 5,202 $ (64,106)
Foreign currency hedges and translation adjustments (927) 2,874 5,648 3,391
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (1,695) $ (11,873) $ 10,850 $ (60,715)
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
3
PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
June 30, September 30,
2004 2003
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 55,703 $ 58,993
Short-term investments 79 19,701
Accounts receivable, net of allowance of $2,500 and $4,100, respectively 138,393 111,125
Inventories 166,841 136,515
Deferred income taxes 14,401 23,723
Prepaid expenses and other 7,973 8,326
---------- ----------
Total current assets 383,390 358,383
Property, plant and equipment, net 122,757 131,510
Goodwill 34,230 32,269
Deferred income taxes 26,625 24,921
Other 6,550 5,971
---------- ----------
Total assets $ 573,552 $ 553,054
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 1,038 $ 958
Accounts payable 75,605 91,445
Customer deposits 14,348 14,779
Accrued liabilities:
Salaries and wages 24,190 17,133
Other 19,873 23,753
---------- ----------
Total current liabilities 135,054 148,068
Long-term debt and capital lease obligations, net of current portion 39,248 23,502
Other liabilities 12,137 10,468
Commitments and contingencies (Note 10) - -
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 200,000 shares authorized, 43,071
and 42,607 shares issued and outstanding, respectively 431 426
Additional paid-in capital 266,456 261,214
Retained earnings 108,042 102,840
Accumulated other comprehensive income 12,184 6,536
---------- ----------
387,113 371,016
---------- ----------
Total liabilities and shareholders' equity $ 573,552 $ 553,054
========== ==========
See notes to condensed consolidated financial statements.
4
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Nine Months Ended
June 30,
------------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 5,202 $ (64,106)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization 19,202 20,647
Cumulative effect of change in accounting for goodwill - 28,237
Non-cash goodwill and asset impairments 48 32,807
Deferred income taxes, net 7,653 (20,781)
Net repayments under asset securitization facility - 686
Income tax benefit of stock option exercises 1,188 154
Changes in assets and liabilities:
Accounts receivable (25,584) 14,691
Inventories (29,011) (26,232)
Prepaid expenses and other (433) 984
Accounts payable (16,954) 7,447
Customer deposits (450) 3,304
Accrued liabilities and other 4,776 4,912
---------- ----------
Cash flows provided by (used in) operating activities (34,363) 2,750
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales and maturities of short-term investments 19,622 27,606
Payments for property, plant and equipment (9,343) (18,394)
---------- ----------
Cash flows provided by investing activities 10,279 9,212
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 159,752 -
Payments on debt (143,752) -
Payments on capital lease obligations (658) (2,619)
Proceeds from exercise of stock options 3,085 833
Issuances of common stock 974 1,042
---------- ----------
Cash flows provided by (used in) financing activities 19,401 (744)
---------- ----------
Effect of foreign currency translation on cash
and cash equivalents 1,393 1,037
---------- ----------
Net increase (decrease) in cash and cash equivalents (3,290) 12,255
Cash and cash equivalents:
Beginning of period 58,993 63,347
---------- ----------
End of period $ 55,703 $ 75,602
========== ==========
See notes to condensed consolidated financial statements.
5
PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 2004
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Plexus Corp. ("Plexus" or the "Company") without audit and pursuant
to the rules and regulations of the United States Securities and Exchange
Commission. In the opinion of the Company, the financial statements reflect all
adjustments, which include normal recurring adjustments necessary to present
fairly the financial position of the Company as of June 30, 2004, and the
results of operations for the three months and nine months ended June 30, 2004
and 2003, and the cash flows for the same nine-month periods.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the SEC rules and
regulations dealing with interim financial statements. However, the Company
believes that the disclosures made in the condensed consolidated financial
statements included herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's 2003 Annual Report on Form 10-K.
NOTE 2 - INVENTORIES
The major classes of inventories are as follows (in thousands):
June 30, September 30,
2004 2003
-------- -------------
Raw materials $106,826 $ 88,562
Work-in-process 46,537 41,514
Finished goods 13,478 6,439
-------- --------
$166,841 $136,515
======== ========
NOTE 3 - CURRENT FINANCING
On October 22, 2003, the Company entered into a secured three-year
revolving credit facility (the "Secured Credit Facility") with a group of banks
that allows the Company to borrow up to $100 million. As of June 30, 2004,
borrowings of $16.0 million were outstanding at a weighted average annual
interest rate of 3.8 percent. Borrowings under the Secured Credit Facility may
be either through revolving or swing loans or letter of credit obligations. The
Secured Credit Facility is secured by substantially all of the Company's
domestic working capital assets and a pledge of 65 percent of the stock of the
Company's foreign subsidiaries. Interest on borrowings varies with usage 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. Origination fees and expenses totaled approximately $0.7
million, which have been deferred and are being amortized to interest expense
over the term of the Secured Credit Facility. The Secured Credit Facility
matures on October 22, 2006 and contains certain financial covenants. These
covenants 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. Interest expense
related to the commitment fee, amortization of deferred origination fees and
borrowings totaled approximately $0.2 million and $0.6 million for the three and
nine months ended June 30, 2004.
The Company amended the Secured Credit Facility in April, July and August
2004, to revise certain terms and/or covenants. 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 Secured Credit Facility to October 31, 2007, elimination of the
requirement to maintain a $40 million minimum balance of domestic cash or
marketable securities and modification of a minimum adjusted EBITDA. In
addition, the interest rate on borrowings will vary depending upon the Company's
then-current total leverage ratio, as defined in the agreement; before
amendment, the rate varied with usage.
6
NOTE 4 - FORMER FINANCING
In fiscal 2001, the Company entered into an amended agreement to sell up
to $50 million of trade accounts receivable without recourse to Plexus ABS Inc.
("ABS"), a wholly owned limited-purpose subsidiary of the Company. This asset
securitization facility expired in September 2003 (the "former asset
securitization facility"). ABS was a separate corporate entity that sold
participating interests in a pool of the Company's accounts receivable to
financial institutions, under a separate agreement. Accounts receivable sold to
financial institutions were reflected as a reduction to accounts receivable in
the Condensed Consolidated Balance Sheets. For the three months and nine months
ended June 30, 2004, the Company did not incur any financing costs associated
with the former asset securitization facility due to its expiration in September
2003. For the three months and nine months ended June 30, 2003, the Company
incurred financing costs of $0.1 million and $0.3 million, respectively, under
the former asset securitization facility. These financing costs are included in
interest expense in the accompanying Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss). In addition, the net repayments
under the agreement during the nine months ended June 30, 2003 are included in
the cash flows from operating activities in the accompanying Condensed
Consolidated Statements of Cash Flows.
NOTE 5 - EARNINGS 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):
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- ---------------------
2004 2003 2004 2003
-------- --------- -------- ---------
Earnings:
Income (loss) before cumulative effect of change
in accounting for goodwill $ (768) $ (14,747) $ 5,202 $ (40,624)
Cumulative effect of change in accounting
for goodwill, net of income tax benefit of $4,755 - - - (23,482)
-------- --------- -------- ---------
Net income (loss) $ (768) $ (14,747) $ 5,202 $ (64,106)
======== ========= ======== =========
Basic weighted average common shares outstanding 43,056 42,285 42,890 42,204
Dilutive effect of stock options - - 1,054 -
-------- --------- -------- ---------
Diluted weighted average shares outstanding 43,056 42,285 43,944 42,204
======== ========= ======== =========
Basic and diluted earnings per share:
Income (loss) before cumulative effect of change
in accounting for goodwill $ (0.02) $ (0.35) $ 0.12 $ (0.96)
Cumulative effect of change in accounting
for goodwill, net of income taxes - - - (0.56)
-------- --------- -------- ---------
Net income (loss) $ (0.02) $ (0.35) $ 0.12 $ (1.52)
======== ========= ======== =========
For the three months ended June 30, 2004, stock options to purchase
approximately 3.1 million shares of common stock were outstanding, but were not
included in the computation of diluted earnings per share because there was a
net loss in the period, and therefore their effect would be anti-dilutive. For
the nine months ended June 30, 2004, stock options to purchase approximately 1.9
million shares of common stock were outstanding but not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares.
For the three and nine months ended June 30, 2003, stock options to
purchase approximately 3.4 million and 3.7 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 those periods, and
therefore their effect would be anti-dilutive.
NOTE 6 - STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under the guidelines of
Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense
related to the stock option plans has been recognized in the
7
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
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 Statement of Financial Accounting Standards ("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 presents pro forma net income (loss) and per share
data as if a fair value based method had been used to account for stock-based
compensation (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- ---------------------------
2004 2003 2004 2003
--------- --------- --------- ----------
Net income (loss) as reported $ (768) $ (14,747) $ 5,202 $ (64,106)
Add: stock-based employee compensation expense included in
reported net income (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 (2,392) (3,061) (5,319) (8,512)
--------- --------- --------- ----------
Pro forma net income (loss) $ (3,160) $ (17,808) $ (117) $ (72,618)
========= ========= ========= ==========
Earnings per share:
Basic, as reported $ (0.02) $ (0.35) $ 0.12 $ (1.52)
========= ========= ========= ==========
Basic, pro forma $ (0.07) $ (0.42) $ 0.00 $ (1.72)
========= ========= ========= ==========
Diluted, as reported $ (0.02) $ (0.35) $ 0.12 $ (1.52)
========= ========= ========= ==========
Diluted, pro forma $ (0.07) $ (0.42) $ 0.00 $ (1.72)
========= ========= ========= ==========
Weighted average shares:
Basic, as reported and pro forma 43,056 42,285 42,890 42,204
========= ========= ========= ==========
Diluted, as reported 43,056 42,285 43,944 42,204
========= ========= ========= ==========
Diluted, pro forma 43,056 42,285 42,890 42,204
========= ========= ========= ==========
NOTE 7 - GOODWILL AND PURCHASED INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective October 1, 2002. Under SFAS No. 142, the Company no longer amortizes
goodwill and intangible assets with indefinite useful lives, but instead tests
those assets for impairment at least annually with any related loss recognized
in earnings when incurred. Recoverability of goodwill is measured at the
reporting unit level. The Company's goodwill was originally assigned to three
reporting units: San Diego, California ("San Diego"), Juarez, Mexico ("Juarez")
and Kelso, Scotland and Maldon, England ("United Kingdom"). As of June 30, 2004,
only the Juarez and United Kingdom reporting units have goodwill remaining.
SFAS No. 142 required the Company to perform a transitional goodwill
impairment evaluation that assessed whether there was an indication of goodwill
impairment as of the date of adoption. The Company completed the evaluation and
concluded that it had goodwill impairments related to the San Diego and Juarez
reporting units, since the estimated fair values based on expected future
discounted cash flows to be generated from each reporting unit were
significantly less than their respective carrying values.
In the first quarter of fiscal 2003, 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 goodwill in the Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss).
8
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, and whenever events or changes in circumstances indicate that the carrying
value may not be recoverable from estimated future cash flows. In the first
quarter of fiscal 2003, an additional $5.6 million of goodwill was impaired as a
result of the Company's decision to close the San Diego facility (see Note 11).
The Company's fiscal 2004 and 2003 annual impairment tests did not result in any
further impairment. However, no assurances can be given that future impairment
tests of goodwill will not result in additional goodwill impairment.
The changes in the carrying amount of goodwill for the nine months ended
June 30, 2004 and for the fiscal year ended September 30, 2003 are as follows
(amounts in thousands):
Balance as of October 1, 2002 $ 64,957
Cumulative effect of change in accounting for goodwill (28,237)
Impairment charge (5,595)
Foreign currency translation adjustments 1,144
----------
Balance as of September 30, 2003 32,269
Foreign currency translation adjustments 1,961
----------
Balance as of June 30, 2004 $ 34,230
==========
The Company has a nominal amount of identifiable intangible assets that
are subject to amortization. These intangibles relate to patents with a
remaining useful life of 14 years. The Company has no identifiable intangibles
that are not subject to amortization. During the nine months ended June 30,
2004, there were no additions to identifiable intangible assets. Intangible
asset amortization expense was nominal for the nine months ended June 30, 2004
and 2003.
NOTE 8 - BUSINESS SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company operates in one business segment. The Company provides product
realization services to electronic original equipment manufacturers ("OEMs").
The Company has three reportable geographic regions: North America, Europe and
Asia. As of June 30, 2004, the Company had 18 active manufacturing and/or
engineering facilities in North America, Europe and Asia to serve these OEMs.
The Company uses an internal management reporting system, which provides
important financial data to evaluate performance and allocate the Company's
resources on a geographic basis. Interregion transactions are generally recorded
at amounts that approximate arm's length transactions. The accounting policies
for the regions are the same as for the Company taken as a whole. The table
below presents geographic net sales information reflecting the origin of the
product shipped and asset information based on the physical location of the
assets (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- ----------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net sales:
North America $ 215,442 $ 170,379 $ 611,448 $ 523,991
Europe 26,444 14,224 80,195 39,993
Asia 32,931 11,006 75,909 27,777
---------- ---------- ----------- ----------
$ 274,817 $ 195,609 $ 767,552 $ 591,761
========== ========== =========== ==========
June 30, September 30,
2004 2003
---------- -------------
Long-lived assets:
North America $ 101,624 $ 110,582
Europe 12,863 12,834
Asia 8,270 8,094
---------- ------------
$ 122,757 $ 131,510
========== ============
9
Long-lived assets as of June 30, 2004 and September 30, 2003 exclude
goodwill and other non-operating long-term assets totaling $40.8 million and
$38.2 million, respectively.
Juniper Networks, Inc. accounted for 14 percent and 13 percent of net
sales for the three months and nine months ended June 30, 2004. The Company's
largest customers for the three months ended June 30, 2003 were Siemens Medical
Systems, Inc. (Siemens) and Juniper Networks, Inc., which accounted for 13
percent and 10 percent of net sales, respectively. The Company's largest
customer for the nine months ended June 30, 2003 was Siemens, which accounted
for 13 percent of net sales. No other customers accounted for 10 percent or more
of net sales in either period.
NOTE 9 - GUARANTEES
The Company offers certain indemnifications under its customer
manufacturing agreements and previously offered indemnification under its former
asset securitization facility.
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. Such warranty generally provides
that products will be free from defects in the Company'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's warranty,
the Company's obligation is generally limited to correcting, at its expense, any
defect by repairing or replacing such defective product. The Company'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 revenue is recognized. These costs
primarily include labor and materials, as necessary, associated with repair or
replacement. The primary factors that affect the Company's warranty liability
include 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 accrued warranty
liabilities and adjusts the amounts as necessary.
Below is a table summarizing the activity related to the Company's limited
warranty liability for the nine months ended June 30, 2004 and 2003 (in
thousands):
Nine Months Ended
June 30,
2004 2003
------- --------
Balance at beginning of period $ 985 $ 1,246
Accruals for warranties during the period 80 96
Settlements during the period (179) (341)
------- --------
Balance at end of period $ 886 $ 1,001
======= ========
Under the Company's former asset securitization facility agreement (see
Note 4), which expired in September 2003, the Company was required to provide
indemnifications typical of those found in transactions of this sort, such as
upon a breach of the Company's representations and warranties in the facility
agreement, or upon the Company's failure to perform its obligations under such
agreement, or in the event of litigation concerning the agreement. The asset
securitization agreement also included an obligation by the Company to indemnify
participating financial institutions if regulatory changes result in either
reductions in their return on capital or increases in the costs of performing
their obligations under the funding arrangements. The Company is unable to
estimate the maximum potential amount of future payments under this
indemnification due to the uncertainties inherent in predicting potential
regulatory change. Moreover, although the Company's indemnification obligation
survived the termination of that facility in September 2003, the Company
believes that it is unlikely to have any on-going indemnification obligations
because the Company will not be engaged in further asset securitization
transactions after such date; the Company also has no reasonable basis to
believe that any unasserted indemnification obligations exist as of the date
hereof.
10
NOTE 10 - CONTINGENCIES
The Company (along with many other companies) has been sued by the
Lemelson Medical, Education & Research Foundation Limited Partnership
("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 attorneys' 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.
The lawsuit against the Company remains stayed pending the outcome of that
appeal. The Company believes the vendors from which the alleged
patent-infringing 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.
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's financial position, results of operations or cash flows.
NOTE 11 - RESTRUCTURING COSTS
Fiscal 2004 restructuring actions: For the nine months ended June 30,
2004, the Company recorded restructuring costs of $5.5 million, all of which
were recorded in the third quarter of fiscal 2004. The restructuring costs were
primarily associated with lease obligations for two previously abandoned
facilities near Seattle, Washington (the "Seattle facilities") and with the
consolidation of a satellite PCB-design office in Hillsboro, Oregon into another
Plexus design office.
The closure of the Seattle facilities was included in the Company's first
quarter of fiscal 2003 restructuring actions. The lease-related restructuring
costs in the first quarter of fiscal 2003 were based on future lease payments
subsequent to abandonment, less estimated sublease income. As of June 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. The
Company also recorded $0.1 million of lease-related restructuring costs on a
facility in Neenah, Wisconsin ("Neenah"), which was also included in
restructuring actions in the first quarter of fiscal 2003. Emerging Issue Task
Force ("EITF") Issue No. 94-3 "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.
The remaining $1.2 million of restructuring costs in the third quarter of
fiscal 2004 were primarily related to the consolidation of the Hillsboro
satellite PCB-design office into another Plexus design office. SFAS No. 146
"Accounting for Costs Associated with Exit or Disposal Activities," applies to
restructuring actions initiated subsequent to December 31, 2002. These
restructuring costs were primarily for severance and contract termination costs
associated with leased facilities and software service providers. Over the next
two quarters, we anticipate incurring an additional $0.3 million of
restructuring costs related to employee relocations. Approximately 40 employees
were affected by this restructuring.
Fiscal 2003 restructuring actions: For the nine months ended June 30,
2003, the Company recorded restructuring costs of $51.5 million, of which $19.7
million was recorded in the third quarter of fiscal 2003. The third quarter
fiscal 2003 restructuring costs were primarily associated with a program to
close the Company's Richmond, Kentucky ("Richmond") facility and to re-focus the
Company's PCB design group. Other restructuring included a write-down of
underutilized assets to fair value and a reduction in force in both the
engineering and corporate organizations. The asset write-downs affected Richmond
and other locations. These measures were largely intended to align the Company's
capabilities and resources with evolving customer demand. The Richmond facility
was phased out of operations and sold in September 2003. Production was shifted
to other Plexus locations. Approximately 400 employees were affected by this
restructuring.
11
In the first quarter of fiscal 2003, the Company recorded pre-tax
restructuring costs totaling $31.8 million. The Company's most significant
restructuring in the first quarter of fiscal 2003 was the announced intention to
close its San Diego facility, which resulted in a write-off of goodwill, the
write-down of underutilized assets to fair value, and, in subsequent periods,
the elimination of the facility's work force. The San Diego facility was phased
out of operation in May 2003. Goodwill impairment for San Diego totaled
approximately $20.4 million, of which $14.8 million was impaired as a result of
the Company's transitional impairment evaluation under SFAS No. 142 (see Note 7)
and $5.6 million was impaired as a result of the Company's decision to close the
facility. Other restructuring actions in the first quarter of fiscal 2003
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; Seattle, Washington; Neenah,
Wisconsin and the United Kingdom. Employee termination and severance costs in
the first quarter fiscal 2003 affected approximately 500 employees.
For facilities under operating leases that were abandoned and anticipated
to be subleased, the restructuring costs were based on future lease payments
subsequent to abandonment, less estimated sublease income. Facilities in Seattle
and Neenah were the primary facilities under operating leases that were included
in the Company's first quarter of fiscal 2003 restructuring actions. In the
third quarter of fiscal 2004, the Company recorded $4.3 million of additional
restructuring costs associated with the Seattle and Neenah facilities, as noted
above.
The San Diego facility, which was closed during fiscal 2003, is financed
under a capital lease, but the facility is no longer used for operating
purposes. As of June 30, 2004, the net book value of the San Diego facility is
approximately $15.4 million and is included in property, plant and equipment in
the accompanying Condensed Consolidated Balance Sheet. The Company subleased a
portion of the facility during fiscal 2003 and is attempting to sublease the
remaining portion. As of June 30, 2004, the San Diego facility has not yet been
fully subleased; accordingly, the Company's estimates of expected sublease
income may change based on factors that affect its ability to sublease this
facility such as general economic conditions and the local real estate market,
among others. Changes in the Company's estimate of sublease income could result
in additional impairment costs.
The table below summarizes the Company's restructuring obligations as of
June 30, 2004 and for the nine month period then ended (in thousands):
EMPLOYEE
TERMINATION
AND SEVERANCE LEASE OBLIGATIONS NON-CASH ASSET
COSTS AND OTHER EXIT COSTS WRITE-DOWNS TOTAL
------------- -------------------- -------------- -----------
Accrued balance,
September 30, 2003 $ 2,905 $ 7,892 $ - $ 10,797
Amounts utilized (1,875) (545) - (2,420)
-------- ---------- --------- -----------
Accrued balance,
December 31, 2003 1,030 7,347 - 8,377
Amounts utilized (326) (657) - (983)
-------- ---------- --------- -----------
Accrued balance,
March 31, 2004 704 6,690 - 7,394
Adjustment to provision - 4,310 - 4,310
Restructuring costs 743 393 48 1,184
Amounts utilized (732) (800) (48) (1,580)
-------- ---------- --------- -----------
Accrued balance,
June 30, 2004 $ 715 $ 10,593 $ - $ 11,308
======== ========== ========= ===========
12
As of June 30, 2004, most of the remaining severance costs and $3.3
million of the lease obligations are expected to be paid in the next twelve
months. The remaining liability for lease payments is expected to be paid
through June 2008.
As of September 30, 2003, the accrued liability for restructuring costs
included severance costs associated with the closure of the Richmond facility,
work force reductions for engineering, corporate and other manufacturing
locations and other costs associated with refocusing the Company's PCB design
group.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("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 2004 but did not have a material
impact on its consolidated results of operations or financial position.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 104 (SAB 104), "Revenue Recognition," which
supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 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 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. The adoption of this bulletin did not have a significant impact on
the Company's consolidated results of operations or financial position.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation 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. 46 became effective for the Company in the second fiscal
quarter of 2004. The Company's adoption of Interpretation No. 46 did not have a
significant impact on its consolidated results of operations or financial
position.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities 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 scope of the Statement, which previously were often classified as
equity, must now be classified as liabilities. In November 2003, FASB Staff
Position No. SFAS 150-3 deferred indefinitely the effective date of SFAS No. 150
for applying the provisions of the Statement 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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995:
The statements contained in the Form 10-Q that are not historical facts
(such as statements in the future tense and statements including "believe,"
"expect," "intend," "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" and
otherwise herein, and in our Securities and Exchange Commission
filings.
OVERVIEW
Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or
"we") is a participant in the Electronic Manufacturing Services ("EMS")
industry. We provide product realization services to original equipment
manufacturers, or OEMs, in the networking/datacommunications/telecom, medical,
industrial/commercial, computer and transportation/other industries. We provide
advanced electronics design, manufacturing and testing services to our customers
with a focus on complex, high technology and high reliability products. We offer
our customers the ability to outsource all stages of product realization,
including: development and design, materials procurement and management,
prototyping and new product introduction, testing, manufacturing, product
configuration, logistics and test/repair. The following information should be
read in conjunction with our condensed consolidated financial statements
included herein and the "Risk Factors" section beginning on page 22.
Our customers include both industry-leading original equipment
manufacturers and technology companies. Due to our focus on serving
manufacturers in advanced electronics technology, our business is influenced by
major technological trends such as the level and rate of development of
telecommunications infrastructure, the expansion of network and internet use,
the federal Food and Drug Administration's approval of new medical devices, and
the expansion of outsourcing by OEM's and technology companies.
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 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 for internal manufacturing, we do not design or
manufacture our own proprietary products.
As we enter the fourth quarter of fiscal 2004, we anticipate full fiscal
year 2004 revenue growth of approximately 28 percent to 30 percent. This is
substantially higher than the 15 percent to 20 percent annual revenue growth
that we had anticipated at the start of fiscal 2004. Our revenue growth is well
above the approximately 18 percent year-over-year growth expected for the broad
EMS industry, and consequently equates to a gain in market share for Plexus.
14
We have achieved our revenue growth organically; that is, without
acquisitions. Our higher-than-industry growth rate is due to both a high rate of
growth from our existing customers, as well as success in winning new customers
and new programs from existing customers. We have made substantial commitments
to expand and enhance the effectiveness of our business development efforts over
the last 18 months, and those efforts are in part responsible for our improved
market position.
The rapid revenue growth, however, has placed additional strains on the
organization, and consequently, gross margins and overall profitability have
been adversely affected by higher, new program-related transition and training
expenses, as well as the need to gain experience manufacturing new programs in
order to drive down costs. Year-over-year, we have hired and trained
approximately 1,200 new production-related employees at sites located around the
world, principally in Asia, in order to support our revenue growth. In addition,
we are in the process of acquiring and outfitting a second manufacturing and
engineering facility in Penang, Malaysia ("Penang"). This expansion is driven by
anticipated additional demand from our customers for higher production in this
productive, relatively low-cost country. We expect to occupy the additional
Penang facility in the fourth quarter of fiscal 2004, which will result in
approximately $0.5 million of start-up costs in that quarter; initial production
is not expected until the first quarter of fiscal 2005. Moreover, the continued
initial stages of production through at least the first half of the next fiscal
year will impair our overall profitability.
RESULTS OF OPERATIONS
Net sales. Net sales for the indicated periods were as follows (dollars in
millions):
Three months ended Nine months ended
June 30, June 30,
---------------------- -------------------------
2004 2003 Increase 2004 2003 Increase
------ ------ ---------------- ------ ------ ------------------
Sales $274.8 $195.6 $79.2 40% $767.6 $591.8 $175.8 30%
The net sales increase for both the three and nine month periods reflect
strengthening end-market demand, particularly in the
networking/datacommunications, medical and industrial sectors, as well as new
program wins from both new and existing customers. Based on customers' orders
and indications of expected demand, we currently expect sales in the fourth
quarter of fiscal 2004 to be in the range of $270 million to $280 million.
However, our results will ultimately depend on the actual level of orders
received. See Risk Factors on page 22.
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:
Three months ended Nine months ended
June 30, June 30,
---------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Juniper Networks 14% 10% 13% *
Siemens * 13% * 13%
Top 10 customers 54% 55% 54% 54%
* 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 customer program commencement, termination, delays,
modifications and transitions. We remain dependent on continued sales to our
significant customers, and we generally do not obtain firm, long-term purchase
commitments from our customers. Customers' forecasts can and do change as a
result of changes in their end-market demands and other factors. Any material
change in orders from these major accounts, or other customers, could materially
affect our results of operations. In addition, as our percentage of sales to
customers in a specific industry becomes larger relative to other industries (as
we are currently experiencing in the networking/datacommunications/telecom
industry), we become increasingly dependent upon economic and business
conditions affecting that industry.
15
Our percentages of sales by industry for the indicated periods were as
follows:
Three months ended Nine months ended
June 30, June 30,
-------------------- ---------------------
Industry 2004 2003 2004 2003
- -------- ---- ---- ---- ----
Networking/Datacommunications/Telecom 47% 37% 43% 35%
Medical 28% 32% 30% 33%
Industrial/Commercial 16% 15% 14% 15%
Computer 4% 12% 8% 11%
Transportation/Other 5% 4% 5% 6%
Gross profit. Gross profit and gross margins for the indicated periods
were as follows (dollars in millions):
Three months ended Nine months ended
June 30, June 30,
---------------------- -------------------------
2004 2003 Increase 2004 2003 Increase
------ ------ ---------------- ------ ------ ------------------
Gross Profit $ 23.0 $ 11.8 $11.2 94% $ 63.8 $ 37.0 $ 26.8 72%
Gross Margin 8.4% 6.0% 8.3% 6.3%
The improvement in gross profit and gross margin for both the three and
nine month periods was primarily due to higher net sales that resulted in
enhanced manufacturing capacity utilization and better absorbtion of fixed
manufacturing expenses. The gross profit improvements were moderated, however,
by manufacturing inefficiencies related to the start of new programs, higher
compensation and benefits costs, including variable incentive compensation, and
the amortization of capitalized costs associated with an enterprise resource
planning ("ERP") platform.
Our 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 and efficiencies attendant 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
customers' products and competition within the electronics industry. Although we
focus on maintaining and 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 net sales.
Operating expenses. Selling and administrative (S&A) expenses for the
indicated periods were as follows (dollars in millions):
Three months ended Nine months ended
June 30, June 30,
----------------------- -----------------------
2004 2003 Increase 2004 2003 Increase
------ ------ -------------- ------ ------ -------------
Sales and administrative
expense (S&A) $ 17.8 $ 16.3 $1.6 9.8% $ 50.5 $ 49.8 $0.7 1.4%
Percent of sales 6.5% 8.3% 6.6% 8.4%
The dollar increase in S&A for the three months ended June 30, 2004 was
due primarily to variable incentive compensation costs in the current period,
which were not earned in the comparable periods of the prior year because of our
reported losses. The dollar increase in S&A in the third quarter of fiscal 2004
was also affected by higher ERP support costs. The dollar increase in S&A for
the nine months ended June 30, 2004, is due to the variable incentive
compensation costs offset, in part, by $1.1 million of recoveries of accounts
receivable that were
16
either written off or reserved for in prior periods. The significant decrease in
S&A as a percent of net sales for both the three and nine month periods was due
primarily to the high level of net sales over the comparable prior year periods.
Included in S&A for both the three and nine month periods of fiscal 2004
and 2003 are expenses for information technology systems support related to the
implementation of a new ERP platform. This 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.
During the second fiscal quarter of 2004, we converted one additional
facility to the new ERP platform, which results in approximately 50 percent of
our revenues being managed on the new ERP platform. We anticipate converting at
least one more facility to the new ERP platform in fiscal 2005. Training and
implementation costs 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 future project scope remain subject to
change based upon our evolving needs and sales levels. In addition to S&A
expenses associated with the new ERP system, we continue to incur capital
expenditures for hardware, software and other costs for testing and
installation. As of June 30, 2004, net property, plant and equipment includes
$28.0 million related to the new ERP platform, including $0.7 million and $2.9
million of capital expenditures for the three and nine months ended June 30,
2004. We anticipate incurring at least an additional $3.5 million of capital
expenditures for the ERP platform through fiscal 2005.
Fiscal 2004 restructuring actions: For the nine months ended June 30,
2004, we recorded pre-tax restructuring costs of $5.5 million, all of which were
recorded in the third quarter of fiscal 2004. The restructuring costs were
primarily associated with lease obligations for two previously abandoned
facilities near Seattle, Washington (the "Seattle facilities") and with the
consolidation of a satellite PCB-design office in Hillsboro, Oregon into another
Plexus design office.
The closure of the Seattle facilities was included in our first quarter of
fiscal 2003 restructuring actions. The lease-related restructuring costs in the
first quarter of fiscal 2003 were based on future lease payments subsequent to
abandonment, less estimated sublease income. As of June 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 the third quarter of fiscal 2004. We also
recorded $0.1 million of lease-related restructuring costs on a facility in
Neenah, Wisconsin, which was also included in restructuring actions in the first
quarter of fiscal 2003.
The remaining $1.2 million of restructuring costs in the third quarter of
fiscal 2004 was primarily related to the consolidation of the Hillsboro
satellite PCB-design office into another Plexus design office. These
restructuring costs were primarily for severance and contract termination costs
associated with leased facilities and software service providers. Over the next
two quarters, we anticipate incurring an additional $0.3 million of
restructuring costs related to employee relocations. Approximately 40 employees
were affected by this restructuring.
Fiscal 2003 restructuring actions: For the nine months ended June 30,
2003, we recorded restructuring costs of $51.5 million, of which $19.7 million
was recorded in the third quarter of fiscal 2003. The third quarter fiscal 2003
restructuring costs were primarily associated with a program to close a facility
in Richmond, Kentucky (the "Richmond facility") and to re-focus our PCB design
group. Other restructuring included a write-down of underutilized assets to fair
value and a reduction in force in both the engineering and corporate
organizations. The asset write-downs affected Richmond and other locations.
These measures were largely intended to align our capabilities and resources
with evolving customer demand. The Richmond facility was phased out of
operations and sold in September 2003. Production was shifted to other Plexus
locations. Approximately 400 employees were affected by the third quarter of
fiscal 2003 restructuring actions.
In the first quarter of fiscal 2003, we recorded pre-tax restructuring
costs totaling $31.8 million. Our most significant restructuring in the first
quarter of fiscal 2003 was the announced intention to close a facility in San
Diego, California (the "San Diego facility"), which resulted in a write-off of
goodwill, the write-down of underutilized assets to fair value, and, in
subsequent periods, the termination of the facility's work force. The San Diego
facility was phased out of operation in May 2003. Goodwill impairment for the
San Diego operations totaled
17
approximately $20.4 million, of which $14.8 million was impaired as a result of
our transitional impairment evaluation under SFAS No. 142 (see Note 7) and $5.6
million was impaired as a result of our decision to close the facility. Other
restructuring actions in the first quarter of fiscal 2003 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; Seattle, Washington; Neenah, Wisconsin and
the United Kingdom. Employee termination and severance costs in the first
quarter fiscal 2003 affected approximately 500 employees.
Pre-tax restructuring charges for the indicated periods are summarized as
follows (in millions):
Three Months Ended Nine Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ------------ ------------ ------------
Non-Cash
Fixed asset impairment $ 0.1 $ 15.9 $ 0.1 $ 27.2
Write-off of goodwill - - - 5.6
----------- ------------ ------------ ------------
0.1 15.9 0.1 32.8
----------- ------------ ------------ ------------
Cash
Severance costs 0.7 2.8 0.7 8.0
Lease termination costs 4.7 1.0 4.7 10.7
----------- ------------ ------------ ------------
5.4 3.8 5.4 18.7
----------- ------------ ------------ ------------
Total restructuring and impairment costs $ 5.5 $ 19.7 $ 5.5 $ 51.5
=========== ============ ============ ============
Cumulative effect of a change in accounting for goodwill. We 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, 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, and determined that a pre-tax transitional impairment charge of
$28.2 million during the nine months ended June 30, 2003, was required at our
Juarez, Mexico and San Diego locations. The impairment charge was recorded as a
cumulative effect of a change in accounting for goodwill in the Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss).
Income taxes. Income taxes for the indicated periods were as follows
(dollars in millions):
Three months ended Nine months ended
June 30, June 30,
----------------------------- ---------------------------
2004 2003 2004 2003
-------- -------- ------ ---------
Income tax expense (benefit) $(193) $(9,343) $1,300 $(24,003)
Effective annual tax rate 20% 39% 20% 37%
The decrease in the effective tax rate is due primarily to our expanding
operations in Asia where we benefit from tax holidays.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash flows used in operating activities were $(34.4)
million for the nine months ended June 30, 2004, compared to cash flows provided
by operating activities of $2.8 million for the nine months ended June 30, 2003.
During the nine months ended June 30, 2004, cash used in operating activities
was primarily driven by increased accounts receivable and inventory in support
of higher sales, which were offset in part by net income and the non-cash effect
of depreciation and amortization.
For the nine months ended June 30, 2004, annualized days sales outstanding
represented by our accounts receivable decreased to 49 days from 50 days for the
prior year. During the nine months ended June 30, 2004, the allowance for losses
on accounts receivable decreased $1.6 million, primarily as a result of a
combination of collections and write-offs of accounts receivable that were
reserved for in prior periods.
18
Our annualized inventory turns declined to 6.2 turns for the nine months
ended June 30, 2004 from 6.5 turns for the prior year. Inventories increased
$30.3 million from September 30, 2003, primarily for the purchase of raw
materials to support increased sales; however, during the third quarter of
fiscal 2004, inventories decreased by $31.2 million as we completed certain
inter-facility program transfers and ERP implementation/upgrades, which had
affected inventories as of March 31, 2004.
Investing Activities. Cash flows provided by investing activities totaled
$10.3 million for the nine months ended June 30, 2004, which primarily
represented sales and maturities of short-term investments, reduced by additions
to property, plant and equipment.
We utilized available cash, and more recently debt, to finance our
operating requirements. We currently estimate capital expenditures for fiscal
2004 to be approximately $20 million to $22 million, of which $9.3 million was
made through the nine months ended June 30, 2004. The remaining fiscal 2004
capital expenditure estimate is for the acquisition of an additional facility in
Penang, Malaysia and the initial manufacturing equipment for that facility. We
currently estimate capital expenditures for fiscal 2005 will be approximately
$20 million.
Financing Activities. Cash flows provided by financing activities totaled
$19.4 million for the nine months ended June 30, 2004, and primarily represented
the proceeds from net borrowings on our secured revolving credit facility (the
"Secured Credit Facility").
As amended in July 2004, our secured revolving credit facility (the
"Amended Secured Credit 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) 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 maximum total leverage
ratio, a minimum tangible net worth and a minimum adjusted EBITDA, all as
defined in the agreement.
We believe that our Amended Secured Credit Facility, leasing capabilities,
cash and short-term investments and projected cash from operations should be
sufficient to meet our working capital and fixed capital requirements, as noted
above, through fiscal 2005. However, the growth anticipated for fiscal 2005 may
increase our working capital needs and strain our available resources. As those
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 assure 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 our
business.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
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 June 30, 2004 (in thousands):
19
Payments Due by Fiscal Period
------------------------------------------------------------------------------
Remaining in 2009 and
Contractual Obligations Total 2004 2005-2006 2007-2008 thereafter
- ----------------------- ---------- ------------ ---------- --------- ----------
Long-Term Debt* $ 16,000 $ - $ - $ 16,000 $ -
Capital Lease Obligations 42,090 1,366 5,893 6,084 28,747
Operating Leases 75,464 3,604 25,215 17,167 29,478
Unconditional Purchase Obligations** 5,263 5,263 - - -
Other Long-Term Obligations*** 1,393 202 1,191 - -
---------- --------- ---------- --------- ---------
Total Contractual Cash Obligations $ 140,210 $ 10,435 $ 32,299 $ 39,251 $ 58,225
========== ========= ========== ========= =========
*- As of June 30, 2004, long-term debt consists of borrowings outstanding under
our Secured Credit Facility.
** - Unconditional purchase obligations consist of a purchase commitment on a
manufacturing facility in Penang, Malaysia. There are no other unconditional
purchase obligations other than purchases of inventory and equipment in the
ordinary course of business. All such unconditional purchase obligations of
inventory and equipment have a term of less than one year.
*** - As of June 30, 2004, other long-term obligations consist of salary
commitments under employment agreements. We did not have, and were not subject
to, any lines of credit, standby letters of credit, guarantees, standby
repurchase obligations, other commercial commitments or off-balance sheet
financing arrangements.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in our 2003 Report on Form 10-K.
During the three and nine months ended June 30, 2004, there were no material
changes to these policies. Our more critical accounting policies are as follows:
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 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 revenue and cash flow
projections. Circumstances that may lead to impairment of property, plant and
equipment include decreases in future performance or industry demand and the
restructuring of our operations.
Intangible Assets - We do not amortize goodwill and intangible assets with
indefinite useful lives, but, instead, test those assets for impairment at least
annually with any related losses recognized in earnings when incurred. We will
perform goodwill impairment tests annually during the third quarter of each
fiscal year and more frequently if an event or circumstance indicates that an
impairment loss has occurred.
We measure the recoverability of goodwill under the annual impairment test
by comparing a reporting unit's carrying amount, including goodwill, to the fair
market value of the reporting unit based on projected discounted future cash
flows. 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 loss, if any.
Revenue - Revenue from manufacturing services is 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 revenue
is recognized at the time when such requirements are completed and such
obligations fulfilled.
20
Revenue from engineering design and development services, which are
generally performed under contracts of twelve months or less in duration, is
recognized as costs are incurred utilizing the percentage-of-completion method;
any losses are recognized when anticipated. Revenue from engineering design and
development services is less than ten percent of total revenue.
Revenue is recorded net of estimated returns of manufactured product based
on management's analysis of historical returns, current economic trends and
changes in customer demand. Revenue also includes amounts billed to customers
for shipping and handling. The corresponding shipping and handling costs are
included in cost of sales.
Restructuring Costs - From fiscal 2001 through fiscal 2003, we recorded
restructuring costs in response to reductions in sales and reduced capacity
utilization. These restructuring costs included employee severance and benefit
costs, and costs related to plant closings, including leased facilities that
will be abandoned (and subleased, as applicable). Prior to January 1, 2003,
severance and benefit costs were recorded in accordance with Emerging Issues
Task Force ("EITF") 94-3 and for leased facilities that were abandoned and
subleased, the estimated lease loss was accrued for future remaining lease
payments subsequent to abandonment, less any estimated sublease income. As of
June 30, 2004, the significant facilities which we planned to sublease had not
yet been subleased; and, accordingly, certain of our estimates of expected
sublease income were changed to reflect factors that affect our ability to
sublease those facilities such as general economic conditions and the local real
estate markets. Changes in certain of our estimates of sublease income resulted
in additional restructuring costs in the third quarter of fiscal 2004. Further
changes in certain other estimates of sublease income could result in additional
restructuring costs. For equipment, the impairment losses recognized were based
on the fair value estimated using existing market prices for similar assets,
less estimated costs to sell. See Note 11 in the Notes to Condensed Consolidated
Financial Statements.
Subsequent to December 31, 2002, costs associated with a restructuring
activity are recorded in compliance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The timing and related recognition
of severance and benefit costs that are not presumed to provide an ongoing
benefit, as defined in SFAS No. 146, depends 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 Accounting for Post-employment 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 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 11 in the Notes to Condensed Consolidated Financial Statements.
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 the 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 is for their intended purpose in
accordance with developed exit plans.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("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 us
commencing with our first quarter of fiscal 2004, but did not have a material
impact on our consolidated results of operations or financial position.
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In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 104 (SAB 104), "Revenue Recognition," which
supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 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 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. The adoption of this bulletin did not have an impact on our
consolidated results of operations or financial position.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation 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. 46 became effective for us in the second quarter of fiscal
2004. Our adoption of Interpretation No. 46 did not have a significant impact on
our consolidated results of operations or financial position.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities 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 scope of the Statement, which previously were often classified as
equity, must now be classified as liabilities. In November 2003, FASB Staff
Position No. SFAS 150-3 deferred indefinitely the effective date of SFAS No. 150
for applying the provisions of the Statement 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.
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 quarterly and annual results 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 stock analyst 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, 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 results. Over the previous two years, our sales were adversely affected by
the slowdown in the networking/datacommunications/telecom and
industrial/commercial
22
markets, as a result of reduced end-market demand and reduced availability of
venture capital to fund existing and emerging technologies. These factors
substantially influenced our net sales and margins.
The percentage of our sales to customers in the
networking/datacommunications/telecom industry has increased significantly in
recent quarters. When an increasing percentage of our net sales is made to
customers in a particular industry, we become 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.
Sales to our largest customer for the three months ended June 30, 2004
represented 14 percent of our net sales. Our two largest customers in the
comparable quarter of fiscal 2003 represented 13 percent and 10 percent of our
net sales, respectively. No other customers represented 10 percent or more of
our net sales in either period. Sales to our ten largest customers have
represented a majority of our net sales in recent periods. Our ten largest
customers accounted for approximately 54 percent and 55 percent for the three
months ended June 30, 2004 and 2003, respectively. Our principal customers have
varied from year to year, and our principal customers may not continue to
purchase from us at current levels, if at all. Significant reductions in sales
to any of these customers, or the loss of major customers, could seriously harm
our business. If we are not able to replace expired, canceled 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 providers 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 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' 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 response to a slowdown in the overall
economy.
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' 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.
As we have experienced recently, 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
we may not have sufficient capacity at any given time to meet all of our
customers' demands or to meet the requirements of a specific program.
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 as to how to reduce costs and capacity, such as the fiscal year 2003
closure of our San Diego and Richmond facilities and the reduction in the number
of employees, can affect our expenses, and therefore our short-term and
long-term results.
23
We are involved in a multi-year project to install a common ERP platform
and associated information systems. The project was begun at a time when
anticipated sales growth and profitability were expected to be much higher than
actually occurred in the past two fiscal years. Although our recent financial
performance has improved, we continue to review a number of alternatives to this
project, including curtailment or slow-down in the rate of implementation. As of
June 30, 2004, ERP implementation costs included in net property, plant and
equipment totaled $28.0 million and we anticipate incurring at least an
additional $3.5 million in capital expenditures for the ERP platform through
fiscal 2005; changes in the scope of this project could result in impairment of
these capitalized costs.
Due to recent rapid sales growth, we have experienced a significant need
for additional employees and facilities in fiscal 2004. We have added many
employees around the world and we are expanding our operations in Penang,
Malaysia. Our response to these changes in business conditions in fiscal 2004,
compared to the two previous fiscal years, has resulted in additional costs to
support our growth. If we are unable to manage this growth and any future growth
effectively, our operating results could be harmed.
OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS.
We have operations in China, Malaysia, Mexico and the United Kingdom. As
noted above, we are in the process of expanding our operations in Malaysia, and
we may in the future expand in these and/or into other international regions. We
have limited experience in managing geographically dispersed operations in these
countries. We also purchase a significant number of components manufactured in
foreign countries. Because of these international aspects of our operations, we
are subject 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
- the effects of international political developments.
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 Mexico-based
operation utilizes the Maquiladora program, which provides reduced tariffs and
eases import regulations, and we could be adversely affected by changes in that
program. Also, the Malaysian and Chinese subsidiaries currently receive
favorable tax treatment from the governments in those countries for
approximately 2 to 10 years, which may or may not be renewed.
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 ability to:
- 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' changing technological needs and requirements could have an adverse
effect on our business.
24
OUR MANUFACTURING SERVICES INVOLVE INVENTORY RISK.
Most of our contract manufacturing services are provided on a turnkey
basis, where 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, the first six months of fiscal 2004 saw a significant increase in
inventories to support increased sales and expected growth in customer programs.
Customers' cancellation or reduction of orders can result in additional expense
to us. While most of our customer agreements include provisions which 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 program under which we hold
and manage finished goods inventory for some of our key customers. The managed
inventory program may result in higher finished goods inventory levels, further
reduce our inventory turns and increase our financial risk with such customers,
although our customers will have contractual obligations to purchase 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.
We rely on a limited number of suppliers for many 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 areas recur from time to time. In some
cases, supply shortages and delays in deliveries of particular components have
resulted in curtailed production, or delays in 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, 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 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
increases 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.
START-UP COSTS AND INEFFICIENCIES RELATED TO NEW OR TRANSFERRED PROGRAMS CAN
ADVERSELY AFFECT OUR OPERATING RESULTS.
Start-up costs, the management of labor and equipment resources in
connection with the establishment of new programs and new customer
relationships, and the need to estimate required resources in advance can
adversely affect our gross margins and operating results. 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
additional planned facility in Penang, Malaysia, which is expected to begin
production in the first quarter of fiscal 2005 (see the Overview section
beginning on page 14). These factors also affect our ability to efficiently use
labor and equipment. Due to the improved economy and our increased marketing
efforts, 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, particularly in the short term.
25
WE 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 medical device business, which represented approximately
28 percent of our net sales in the third quarter of fiscal 2004, 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 rules 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, failure or noncompliance
could have an adverse effect on our reputation.
In recent periods, our sales related to the defense industry, including
homeland security, have begun to increase. Companies that design and manufacture
for this industry face governmental 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.
We manufacture products to our 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, 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 costs or payments.
OUR PRODUCTS ARE FOR THE ELECTRONICS INDUSTRY, WHICH PRODUCES TECHNOLOGICALLY
ADVANCED PRODUCTS WITH 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.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR 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 who operate on 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
26
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
- 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, 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.
Our future 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, 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 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 and
- impairment of goodwill and other intangible assets
- unforeseen liabilities of the acquired businesses.
27
EXPANSION OF OUR BUSINESS AND OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS.
We are expanding 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.
WE MAY FAIL TO SECURE NECESSARY FINANCING.
On July 13, 2004, we amended our Secured Credit Facility with a group of
banks. As amended, the Secured Credit Facility allows us to borrow up to $150
million. However, we cannot assure that the Secured Credit Facility will provide
all of the financing capacity that we will need in the future.
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
- 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' 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.
THE PRICE OF OUR COMMON STOCK 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.
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Among other things, volatility and weakness in Plexus' stock price could
mean that investors will not be able to sell their shares at or above the prices
that they paid. Volatility and weakness could also impair 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 3. 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, we selectively use financial instruments.
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 presence in international markets increases the complexity
and size of our foreign exchange risk. As of June 30, 2004, we had no foreign
currency contracts outstanding.
Our percentages of transactions denominated in currencies other than the
U.S. dollar for the indicated periods were as follows:
Three months ended Nine months ended
June 30, June 30,
---------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Sales 10% 7% 10% 7%
Total Costs 13% 11% 14% 10%
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 average
long-term borrowings would have had a nominal impact on net interest expense for
both the three months and nine months ended June 30, 2004 and 2003.
ITEM 4. 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 is recorded,
processed, summarized and reported on a timely basis. The Company's principal
executive officer and principal financial officer have reviewed and evaluated,
with the participation of the Company's management, the Company'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") as of the end
of the period covered by this report (the "Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in bringing to their
attention on a timely basis material information relating to the Company
required to be included in the Company's periodic filings under the Exchange
Act.
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Internal Control Over Financial Reporting: There have not been any changes
in the Company's internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company's
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company'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. During the course of these activities, 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 reporting as a result of
its review efforts. These planned improvements include additional information
technology system controls, further formalization of policies and procedures,
improved segregation of duties and additional monitoring controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As we have previously disclosed, the Company (along with hundreds of other
companies) has been sued by the Lemelson Medical, Educational & Research
Foundation Limited Partnership ("Lemelson") for 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' fees. The Company has obtained a
stay of action pending developments in other related litigation.
In January 2004, the judge in the other related litigation ruled for the
plaintiffs (the parties challenging the patents), thereby declaring the Lemelson
patents unenforceable and invalid. Lemelson has appealed that ruling. If that
verdict is upheld on appeal, it would likely result in dismissal of claims
against the Company. The Company's lawsuit remains stayed pending the outcome of
that appeal. A decision on the appeal 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 the
plaintiff's actions in other parallel cases, it appears that the primary
objective of the plaintiff 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).
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Amendment to Credit Agreement, dated as of
April 29, 2004
10.2 Third Amendment to Credit Agreement, dated as of
July 13, 2004
10.3 Fourth Amendment to Credit Agreement, dated as of
August 5, 2004
31.1 Certification of Chief Executive Officer pursuant to
Section 302(a) of the Sarbanes Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
section 302(a) of the Sarbanes Oxley Act of 2002.
32.1 Certification of the CEO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K during this period.
No reports were filed during the three months ended June 30, 2004.
However, Plexus furnished reports (which are not to be deemed incorporated by
reference into other filings) dated April 21, 2004, and July 21, 2004 which
furnished certain earnings information.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
8/13 /04 /s/ Dean A. Foate
- --------- ---------------------------------------
Date Dean A. Foate
President and Chief Executive Officer
8/13/04 /s/ F. Gordon Bitter
- -------- ---------------------------------------
Date F. Gordon Bitter
Vice President and
Chief Financial Officer
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