UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-14824
PLEXUS CORP.
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-1344447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
55 JEWELERS PARK DRIVE
NEENAH, WISCONSIN 54957-0156
(920) 722-3451
(Address, including zip code, of principal executive offices and Registrant's
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports(s)) and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. []
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 December 1, 2004, there were 43,195,105 shares of common stock
outstanding. As of March 31, 2004, 43,038,783 shares of common stock were
outstanding, and the aggregate market value of the shares of common stock (based
upon the $17.79 closing sale price on that date, as reported on the NASDAQ Stock
Market) held by non-affiliates (excludes shares reported as beneficially owned
by directors and executive officers - does not constitute an admission as to
affiliate status) was approximately $758 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Document are Incorporated
-------- -------------------------------------
Proxy Statement for 2004 Annual
Meeting of Shareholders Part III
"SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995:
The statements contained in the Form 10-K which are not historical facts
(such as statements in the future tense and statements including "believe,"
"expect," "intend," "plan," "anticipate" 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.
In addition, see the Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7, particularly "Risk Factors" for a
further discussion of some of the factors that could affect future results.
* * *
PART 1
ITEM 1. BUSINESS
OVERVIEW
Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or
"we") is a participant in the Electronics Manufacturing Services ("EMS")
industry. We provide product realization services to original equipment
manufacturers, or OEMs, and other technology companies 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.
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 OEMs and technology companies.
Established in 1979 as a Wisconsin corporation, we have approximately
6,000 full-time employees, including approximately 300 engineers and
technologists dedicated to product development and design, operating from 19
active facilities in 15 locations, totaling approximately 1.8 million square
feet. Prior to fiscal 2003, we had expanded our capacity and geographic reach
through a series of strategic acquisitions. Through these transactions, we have
enhanced our access to, and ability to provide services within important
technology corridors in Boston, Chicago, and San Jose; established facilities in
Europe, Mexico and Asia; significantly increased the size and capabilities of
our medical services offerings. See note 13 to our consolidated financial
statements, which is incorporated herein by reference, for information as to our
foreign sales and assets.
We maintain a website at www.plexus.com. We make available through that
website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Reports on Form 8-K, and amendments to those reports, as
soon as reasonably practical after we electronically file those materials with,
or furnish them to, the
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Securities and Exchange Commission ("SEC"). You may access those reports by
following the links under "Investors" at our website.
SERVICES
Plexus offers a broad range of integrated services that provide customers
with a total design, new product introduction and manufacturing solution to take
a product from initial design through production to test/repair. Our customers
may utilize any or all of the following services and tend to use more of these
services as their outsourcing strategies mature:
Product development and design. We provide comprehensive conceptual design
and value engineering services. These services include project management,
initial feasibility studies, product concept definition, specifications for
product features and functions, product engineering specifications,
microprocessor selection, circuit design, software design, application-specific
integrated circuit design, printed circuit board layout, product housing design,
development of test specifications and product validation testing. Through our
product development and design services, we have the capabilities to provide
customers with a completed design for a product that can be manufactured
efficiently.
Prototyping and new product introduction services. We provide assembly of
prototype products within our operating sites. We supplement our prototype
assembly services with other value-added services, including printed circuit
board design, materials management, manufacturing defects analysis, analysis of
the manufacturability and testability of a design, test implementation and pilot
production runs leading to volume production. These services link our
engineering, our customers' engineering and our volume manufacturing. This link
facilitates an efficient transition from engineering to manufacturing. We
believe that these services provide significant value to our customers by
accelerating their products' time-to-market schedule.
Test development and product testing. Enhanced product functionality has
led to increasingly complex components and assembly techniques; consequently,
there is a need to design and assemble increasingly complex in-circuit and
functional test equipment for electronic products and assemblies. Our internal
development of this test equipment allows us to rapidly implement test solutions
and to efficiently test printed circuit assemblies, subassemblies, system
assemblies and finished product. We also develop and utilize specialized
equipment that allows us to environmentally stress-test products during
functional testing to assure reliability. We believe that the design and
production of test equipment is an important factor in our ability to provide
technology-driven products of consistently high quality.
Manufacturing and assembly. We provide contract manufacturing services on
either a "turnkey" basis, which means we procure some or all of the materials
required for product assembly, or on a "consignment" basis, which means the
customer supplies some, or occasionally all, of the materials necessary for
product assembly. Turnkey services include materials procurement and warehousing
in addition to manufacturing and involve greater resource investment and
potential inventory risk than consignment services. Substantially all of our
manufacturing services currently are on a turnkey basis. These services, which
we endeavor to provide on an agile and rapid basis, include developing and
implementing a materials strategy that meets customers' demand and flexibility
requirements, assembling printed circuit boards utilizing a wide range of
assembly technologies, building and configuring final product and system boxes
and testing assemblies to meet customers' requirements. We have the expertise to
assemble very complex electronic products that utilize multiple printed circuit
boards and subassemblies. These complex products are typically configured to
fulfill unique customer requirements and many are shipped directly to our
customers' end users. In addition, we have developed special processes and tools
to meet industry-specific requirements. Among these are the tools and processes
to assemble finished medical devices that meet U.S. Food and Drug Administration
Quality Systems Regulation requirements and similar regulatory requirements of
other countries.
After-market support. We provide service support for manufactured
products. In this context, supported products, which may or may not be under a
customer's warranty, may be returned for repairs or upgrades at the customer's
discretion.
CUSTOMERS AND INDUSTRIES SERVED
We provide services to a wide variety of customers, ranging from large
multinational companies to smaller emerging technology companies. During fiscal
2004, we provided services to over 150 customers. Because of the variety of
services we offer, our flexibility in design and manufacturing and our ability
to respond to customer needs in a timely fashion, we believe that we are well
positioned to offer our services to customers in most industries. For many
2
customers, we serve both a design and production function, thereby permitting
customers to concentrate on concept development, distribution and marketing,
while accelerating their time to market, reducing their investment in
engineering and manufacturing capacity and optimizing total product cost.
Juniper Networks ("Juniper") accounted for 14 percent of our net sales in
fiscal 2004, and Siemens Medical Systems, Inc. ("Siemens") accounted for 12
percent of our net sales in fiscal 2003. No other customer accounted for 10
percent or more of our net sales in fiscal 2004 or 2003. No customer represented
10 percent or more of net sales in fiscal 2002. The loss of any of our major
customers could have a significant negative impact.
Many of our large customers contract independently through multiple
divisions, subsidiaries, production facilities or locations. We believe that in
most cases our sales to one such subsidiary, division, facility or location are
not dependent on sales to others.
We provided services to the following industries in the following
proportions:
Industry 2004 2003 2002
- -------- ---- ---- ----
Networking/Datacommunications/Telecom 43% 36% 36%
Medical 31% 32% 28%
Industrial/Commercial 15% 15% 20%
Computer 6% 12% 11%
Transportation/Other 5% 5% 5%
MATERIALS AND SUPPLIERS
We primarily purchase raw materials and electronic components from
manufacturers and distribution companies. In addition, we may also purchase
components from customers. The key electronic components we purchase include
printed circuit boards, specialized components such as application-specific
integrated circuits, semiconductors, interconnect products, electronic
subassemblies (including memory modules, power supply modules and cable and wire
harnesses), inductors, resistors and capacitors. Along with these electronic
components, we also purchase components for use in higher-level assembly and
manufacturing. These components include injection-molded plastic,
pressure-formed plastics, vacuum-formed plastics, sheet metal fabrications,
aluminum extrusions, die castings and various other hardware and fastener
components. These components range from standard to highly customized, and they
vary widely in terms of market volatility and price.
From time to time, allocation of components by suppliers becomes an
integral part of the electronics industry, and shortages can occur with respect
to particular components. In response, we actively manage our business in a way
that seeks to minimize our exposure to materials and component shortages. We
have developed a corporate procurement organization whose primary purpose is to
create strong supplier alliances to ensure, as much as possible, a steady flow
of components at competitive prices. Because we design products and can
influence what components are used in some new products, manufacturers of
components often provide us with priority access to a supply of materials and
components, even during shortages. We have also established and continue to
expand our strategic relationships with international purchasing offices, and we
attempt to leverage our design position with suppliers. Beyond this, we have
undertaken a series of initiatives, including the utilization of in-plant
stores, point-of-use programs, assured supply programs and other efforts. All of
these undertakings seek to improve our overall supply chain flexibility and to
accommodate the current marketplace.
SALES AND MARKETING
We market our services primarily through our sales and marketing
organization. During fiscal 2004, we reorganized our sales and marketing efforts
around key customer end-markets, or market sectors: namely, networking/
datacommunications, medical and industrial. Each market sector is headed by a
vice president who leads dedicated resources, which include sales account
executives, strategic customer managers, market sector specialists, technology
specialists and advertising and other corporate communications personnel. Our
sales and marketing efforts focus on generating new customers and expanding
business with existing customers. We use our ability to provide a full range of
product realization services as a marketing tool, and our technology specialists
participate in marketing through direct customer contact and participation in
industry symposia and seminars.
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COMPETITION
The market for the products and services we provide is highly competitive.
We compete primarily on the basis of engineering, testing and production
capabilities, technological capabilities and the capacity for responsiveness,
quality and price. There are many competitors in the electronics design and
assembly industry. Larger and more geographically diverse competitors have
substantially more resources than we do. Other, smaller competitors compete only
in specific sectors within limited geographical areas. We also compete against
companies that design or manufacture items in-house rather than by outsourcing.
In addition, we compete against foreign, low labor cost manufacturers. This
foreign, low labor cost competition tends to focus on commodity and
consumer-related products, which is not our primary focus.
INTELLECTUAL PROPERTY
We own various service marks, including "Plexus," and "Plexus, The Product
Realization Company." Although we own certain patents, they are not currently
material to our business. We do not have any material copyrights.
INFORMATION TECHNOLOGY
We began to implement in fiscal 2001 an enterprise resource planning
("ERP") platform. This ERP platform is intended to augment our management
information systems and includes software from J.D. Edwards (now part of
Peoplesoft) and several other vendors. The ERP platform 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. We believe the related licenses are of a general
commercial character on terms customary for these types of agreements. During
fiscal 2004, we converted one additional manufacturing facility to the ERP
platform. We anticipate converting at least one more facility to the ERP
platform in fiscal 2005. The conversion timetable and remaining project scope
remain subject to change based upon our evolving needs and sales levels.
ENVIRONMENTAL COMPLIANCE
We are subject to a variety of environmental regulations relating to the
use, storage, discharge and disposal of hazardous chemicals used during our
manufacturing process. Although we believe that we are in compliance with all
federal, state and local environmental laws, and do not anticipate any
significant expenditures in maintaining our compliance, there can be no
assurances that violations will not occur which could have a material adverse
effect on our results.
EMPLOYEES
Our employees are one of our primary strengths, and we make considerable
efforts to maintain a well-qualified staff. We have been able to offer enhanced
career opportunities to many of our employees. Our human resources department
identifies career objectives and monitors specific skill development for
employees with potential for advancement. We invest at all levels of the
organization to ensure that employees are well trained. We have a policy of
involvement and consultation with employees in every facility and strive for
continuous improvement at all levels.
We employ approximately 6,000 full-time employees. Given the quick
response times required by our customers, we seek to maintain flexibility to
scale our operations as necessary to maximize efficiency. To do so, we use
skilled temporary labor in addition to our full-time employees. Our employees in
the United States, United Kingdom, China, Malaysia and Mexico are not covered by
union agreements. We have no history of labor disputes at any of our facilities.
We believe that our employee relationships are good.
ITEM 2. PROPERTIES
Our facilities comprise an integrated network of technology and
manufacturing centers with corporate headquarters located in our engineering
facility in Neenah, Wisconsin. We own or lease facilities with approximately 2.4
million square feet of capacity. This includes approximately 1.8 million square
feet in the United States, approximately 0.2 million square feet in Mexico,
approximately 0.3 million square feet in Asia and approximately 0.1 million
square feet in Europe. Approximately 0.6 million square feet of this capacity is
either vacant or subleased. Approximately 0.1 million of the U.S. capacity is
planned for closure in fiscal 2005. The geographic diversity of our technology
and manufacturing centers allows us to offer services from locations near our
customers and major
4
electronics markets. We believe that this approach reduces material and
transportation costs and simplifies logistics and communications. This enables
us to provide customers with a responsive, more complete, cost-effective
solution. Our facilities are described in the following table:
LOCATION TYPE SIZE (SQ. FT.) OWNED/LEASED
-------- ---- -------------- ------------
Penang, Malaysia (1) Manufacturing/Engineering 282,000 Owned
Neenah, Wisconsin (1) Manufacturing 277,000 Leased
Nampa, Idaho Manufacturing 216,000 Owned
Juarez, Mexico Manufacturing 210,000 Leased
Buffalo Grove, Illinois Manufacturing 141,000 Leased
Bothell, Washington (2) Manufacturing/Engineering 97,000 Leased
Appleton, Wisconsin Manufacturing 67,000 Owned
Ayer, Massachusetts Manufacturing 65,000 Leased
Xiamen, China Manufacturing 63,000 Leased
Kelso, Scotland Manufacturing 60,000 Leased
Maldon, England Manufacturing 40,000 Owned
Freemont, California Manufacturing 36,000 Leased
Neenah, Wisconsin Engineering 105,000 Owned
Louisville, Colorado Engineering 16,000 Leased
Raleigh, North Carolina Engineering 14,000 Leased
Livingston, Scotland Engineering 2,000 Leased
Neenah, Wisconsin (1) Office/Warehouse 84,000 Owned
El Paso, Texas (3) Office/Warehouse 25,000 Leased
Neenah, Wisconsin (1) Office 27,000 Leased
San Diego, California (4) Inactive/Other 198,000 Leased
Bothell, Washington (1) (5) Inactive/Other 141,000 Leased
Neenah, Wisconsin (6) Inactive/Other 93,000 Leased
Redmond, Washington (7) Inactive/Other 60,000 Leased
San Diego, California (7) Inactive/Other 36,000 Leased
Hillsboro, Oregon (8) Inactive/Other 9,000 Leased
Nashua, New Hampshire (9) Inactive/Other 5,000 Leased
(1) Includes more than one building.
(2) Engineering operations occupy approximately 30,000 square feet with
manufacturing operations occupying the remaining square footage.
This location is expected to close during fiscal year 2005. We are
seeking to sublease this space.
(3) During fiscal 2004, we amended our warehouse lease for approximately
12,000 of additional square footage.
(4) Approximately 71,000 square feet of lease space was subleased to a
third party in December 2002. We ceased operations in the remaining
part of the facility in May 2003 and are seeking to sublease that
space.
(5) Consists of two facilities that were previously used for engineering
and manufacturing operations. We have recently subleased a portion
one of the unoccupied facilities and are seeking to sublease the
other facility.
(6) We consolidated our leased warehousing space to an owned facility in
Neenah, Wisconsin in May 2003. We are seeking to sublease the leased
warehousing space.
(7) This building is subleased and no longer used in our business
operations.
5
(8) During fiscal 2004, we closed our PCB-design office in Hillsboro,
Oregon and consolidated it into another Plexus design office. We are
seeking to sublease that space. During fiscal 2004, we also sold a
small PCB-design operation in Tel Aviv, Israel eliminating a small
lease in that city.
(9) Primarily represents a former PCB design facility in Nashua, New
Hampshire ("Nashua"). During fiscal 2003, we sold the Nashua PCB
design operation and subleased the facility to a group of former
employees.
ITEM 3. 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
parties challenging the patents, thereby declaring the Lemelson patents
unenforceable and invalid. Lemelson has appealed this ruling. If the 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
Lemelson's actions in other parallel cases, it appears that Lemelson's primary
objective is to cause defendants to enter into license agreements. Although the
patents at issue would theoretically relate to a significant portion of our net
sales, even if the verdict in the other case is overturned and a judgment is
rendered in our case and/or a license fee required, it is the opinion of
management that such judgment or fee would not be material to the Company's
financial position, results of operations or cash flows. Lemelson Medical,
Educational & Research Foundation Limited Partnership vs. Esco Electronics
Corporation et al, US District Court for the District of Arizona, Case Number
CIV 000660 PHX JWS (2000).
We are party to certain other lawsuits in the ordinary course of business.
Management does not believe that these proceedings, individually or in the
aggregate, will have a material adverse effect on the Company's financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2004.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth our executive officers, their ages and the
positions currently held by each person:
NAME AGE POSITION
---- --- --------
Dean A. Foate 46 President, Chief Executive Officer and Director
F. Gordon Bitter 61 Vice President and Chief Financial Officer
David A. Clark 44 Vice President and Vice President-Materials, Plexus Electronic Assembly
Thomas J. Czajkowski 40 Vice President and Chief Information Officer
Paul L. Ehlers 48 Senior Vice President, and President of Plexus Electronic Assembly
Joseph D. Kaufman 47 Senior Vice President, Secretary and Chief Legal Officer
J. Robert Kronser 45 Executive Vice President and Chief Technology & Strategy Officer
Michael J. McGuire 49 Vice President - Worldwide Sales, Marketing and Business Development
Simon J. Painter 39 Corporate Controller and Chief Accounting Officer
David H. Rust 57 Vice President - Human Resources
George W.F. Setton 58 Corporate Treasurer and Chief Treasury Officer
Michael T. Verstegen 46 Vice President, and President of Plexus Technology Group
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Dean A. Foate joined Plexus in 1984 and has served as President and Chief
Executive Officer since 2002, and as a director since 2000; previously Chief
Operating Officer from 2001 to 2002, Executive Vice President from 1999 to 2001
and President of Plexus Technology Group prior thereto.
F. Gordon Bitter joined Plexus out of retirement in October 2002 as Vice
President and Chief Financial Officer. Previously, Mr. Bitter was the Senior
Vice President-Finance and Administration and Chief Financial Officer for Hadco
Corporation, a printed circuit board and electronics contract manufacturer, from
1998 to 2000. Prior to that, Mr. Bitter had held numerous senior financial and
operational positions in various industrial companies.
David A. Clark joined Plexus in 1995 and has served as Vice President since
2002. In 1999, Mr. Clark assumed the position of Vice President-Materials for
Plexus Electronic Assembly, a position he continues to hold. Prior to that, he
was Director of Procurement for Plexus Electronic Assembly.
Thomas J. Czajkowski joined Plexus in 2001 and has served as Vice President and
Chief Information Officer since 2002. Prior to that, Mr. Czajkowski served as
Chief Information Officer. Prior to joining Plexus, Mr. Czajkowski was a Senior
Manager at Deloitte Consulting from 1993 to 2001.
Paul L. Ehlers joined Plexus in 1980 and has served as Senior Vice President
since 2002. In 2001, Mr. Ehlers served as Vice President. In addition, Mr.
Ehlers has served as President of Plexus Electronic Assembly since 2000. From
1995 to 1999, Mr. Ehlers managed various manufacturing facilities.
Joseph D. Kaufman joined Plexus in 1986 and has served as Senior Vice President,
Secretary and Chief Legal Officer since 2001, and as Vice President, Secretary
and General Counsel of Plexus from 1990 to 2001.
J. Robert Kronser joined Plexus in 1981 serving in various engineering roles and
has served as an Executive Vice President and Chief Technology and Strategy
Officer since 2001. From 1999 to 2001, Mr. Kronser served as Vice President of
Sales and Marketing. From 1993 to 1999, Mr. Kronser managed the Advanced
Manufacturing Center.
Michael J. McGuire joined Plexus in December 2002 as Vice President-Worldwide
Sales, Marketing and Business Development. Previously, from 2000 to 2002, Mr.
McGuire served as Senior Vice President of Sales for Nu Horizons Electronics
Corp. Prior to that, Mr. McGuire served as the Midwest Regional Vice President
of Sales for Marshall Industries, Inc. from 1987 to 2000.
Simon J. Painter joined Plexus in 2000 as Corporate Controller. In 2003, Mr.
Painter was appointed to the position of Chief Accounting Officer. Prior to
joining Plexus, Mr. Painter was an auditor with the firm of
PricewaterhouseCoopers LLP, from 1991 to 2000, serving most recently as an Audit
Manager.
David H. Rust joined Plexus in 2001 as Vice President - Human Resources.
Previously, Mr. Rust served as Vice President and Chief Human Resources Officer
from 1990 to 2001 for Menasha Corporation.
George W.F. Setton joined Plexus in 2001 as Corporate Treasurer and Chief
Treasury Officer. He was Plexus' Principal Accounting Officer from 2001 to 2003.
Previously, from 2000 to 2001, Mr. Setton was a partner in Euram, Inc., a
financial consulting firm, and from 1997 to 1999, Mr. Setton served as Group
Treasurer for Carr Futures, Inc.
Michael T. Verstegen joined Plexus in 1983 and has served as Vice-President
since 2002. In addition, Mr. Verstegen served as President of Plexus Technology
Group since 2001. Mr. Verstegen has held various management positions within the
engineering business unit from 1995 to 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
For the fiscal years ended September 30, 2004 and 2003, the Company's
Common Stock has traded on the NASDAQ Stock Market. The price information below
represents high and low sale prices of our common stock for each quarterly
period.
Fiscal Year Ended September 30, 2004 Fiscal Year Ended September 30, 2003
------------------------------------ ------------------------------------
High Low High Low
---- --- ---- ---
First Quarter $19.63 $ 15.30 First Quarter $15.76 $ 7.38
Second Quarter $24.47 $ 16.15 Second Quarter $10.41 $ 7.94
Third Quarter $19.28 $ 12.35 Third Quarter $13.48 $ 8.83
Fourth Quarter $13.50 $ 9.95 Fourth Quarter $18.45 $ 11.18
As of December 1, 2004, there were approximately 1,004 shareholders of
record. We have not paid any cash dividends. We anticipate that all earnings in
the foreseeable future will be retained to finance the development of our
business. See also Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for a
discussion of the Company's dividend intentions.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS (1) (dollars in thousands, except per share amounts)
FOR THE YEARS ENDED SEPTEMBER 30,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
OPERATING STATEMENT DATA
Net sales $1,040,858 $ 807,837 $ 883,603 $1,062,304 $ 751,639
Gross profit 86,778 52,965 81,320 131,790 107,164
Gross margin percentage 8.3% 6.6% 9.2% 12.4% 14.3%
Operating income (loss) 9,216(2) (71,531)(3) (3,636)(4) 68,388(5) 69,870(6)
Operating margin percentage 0.9% (8.9%) (0.4%) 6.4% 9.3%
Net income (loss) (31,580)(2) (67,978)(3) (4,073)(4) 39,150(5) 40,196(6)
Earnings (loss) per share (diluted) $ (0.74)(2) $ (1.61)(3) $ (0.10)(4) $ 0.91(5) $ 1.04(6)
CASH FLOW STATEMENT DATA
Cash flows provided by (used in) operations $ (21,352) $ (19,953) $ 130,455 $ 119,479 $ (51,392)
Capital equipment additions 18,086 22,372 30,760 54,560 44,228
BALANCE SHEET DATA
Working capital $ 215,360 $ 210,315 $ 219,854 $ 277,055 $ 213,596
Total assets 545,708 553,054 583,945 602,525 515,608
Long-term debt and capital lease obligations 23,160 23,502 25,356 70,016 141,409
Shareholders' equity 351,413 371,016 430,689 426,852 209,362
Return on average assets (5.7%) (12.0%) (0.7%) 7.0% 10.8%
Return on average equity (8.7%) (17.0%) (0.9%) 12.3% 22.6%
Inventory turnover ratio 6.2x 6.5x 7.0x 5.3x 4.4x
8
(1) Historical results have not been restated for the fiscal 2001 merger
with e2E Corporation ("e2E"), as it would not differ materially from
reported results.
(2) In fiscal 2004, we recorded restructuring and impairment costs of
approximately $9.3 million associated with the lease obligations for
two previously abandoned facilities near Seattle, Washington (the
"Seattle facilities"), the severance costs associated with the
closure of the existing Bothell, Washington facility, the impairment
of certain abandoned software, and the lease obligation and
severance costs related to the consolidation of a satellite
PCB-design office in Hillsboro, Oregon into another Plexus design
office. In addition, we recorded a $36.8 million valuation allowance
related to our deferred income tax assets.
(3) In response to the reduction in our sales and reduced capacity
utilization, we recorded fiscal 2003 restructuring costs of
approximately $59.3 million. These costs totaled approximately $36.8
million after-tax. In addition, we adopted SFAS No. 142 for the
accounting of goodwill and other intangible assets. Under the
transitional provisions of Statement of Financial Accounting
Standards No. 142, we determined that a pre-tax transitional
impairment charge of $28.2 million was required, which was recorded
as a cumulative effect of a change in accounting for goodwill ($23.5
million after-tax).
(4) In January 2002, we completed the acquisition of certain assets of
MCMS, Inc. ("MCMS"). The results from operations of the assets
acquired from MCMS are reflected in our financial statements from
the date of acquisition. No goodwill resulted from the acquisition.
We incurred approximately $0.3 million of acquisition costs in
fiscal 2002 associated with the acquisition of the MCMS operations.
In response to the reduction in our sales and reduced capacity
utilization, we also recorded fiscal 2002 restructuring costs of
approximately $12.6 million. Together, these costs totaled
approximately $8.3 million after-tax.
(5) In connection with the May 2001 acquisition of Qtron Inc. ("Qtron")
and merger with e2E, we recorded acquisition and merger costs of
approximately $1.6 million ($1.4 million after-tax). In connection
with an economic slowdown, we recorded restructuring costs of
approximately $1.9 million ($1.1 million after-tax). The effects of
the acquisition of Qtron are reflected in the financial statements
from the date of acquisition.
(6) In connection with the merger with Agility and the acquisitions of
Keltek (Holdings) Limited ("Keltek"), and the turnkey electronics
manufacturing services operations of Elamex, S.A. de C.V. ("Mexico
turnkey operations"), Plexus recorded acquisition and merger costs
of $1.1 million ($0.9 million after-tax).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a participant in the Electronics Manufacturing Services ("EMS")
industry. We provide product realization services to original equipment
manufacturers, or OEMs, and other technology companies 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
consolidated financial statements included herein and the "Risk Factors" section
beginning on page 19.
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
9
services. Other than certain test equipment used for internal manufacturing, we
do not design or manufacture our own proprietary products.
EXECUTIVE SUMMARY
Our primary objective at the outset of fiscal 2004 was to return the
company to profitability. The restructuring actions of the preceding years had
lowered our cost structure and improved capacity utilization. We also
strengthened and reorganized our sales, marketing and business development
function to drive sales growth and strengthen our customer portfolio. As a
result of this focus and improved industry demand, especially within the
networking/datacommunication industry, we achieved fiscal 2004 sales growth of
29 percent, without making acquisitions. We believe this to be the highest
organic growth rate within the EMS industry. This growth rate was well above the
approximately 18 percent annual growth rate expected by various industry surveys
for the broad EMS industry, so we believe we have consequently gained market
share.
The rapid sales growth in fiscal 2004 placed additional strains on the
organization, and consequently, gross margins and overall profitability were
adversely affected by higher, new program-related transition and training
expenses, as well as the need to gain experience manufacturing new programs.
Year-over-year, we added and trained approximately 1,300 new production-related
employees at sites located around the world, principally in Asia and Mexico, in
order to support our sales growth. In addition, we purchased and substantially
outfitted a second manufacturing and engineering facility in Penang, Malaysia
("Penang"). This expansion was driven by additional demand from our customers
for more production in this relatively low-cost country.
As we look to fiscal 2005, our primary objective is to continue to improve
profitability. We expect to achieve this goal with improvements in capacity
utilization and operating efficiencies through a combination of moderate sales
expansion and lean manufacturing and inventory management initiatives. We also
recently announced restructuring plans to close our Bothell, Washington
("Bothell") manufacturing and engineering facility in mid-fiscal 2005, which we
expect will improve overall capacity utilization once the facility is closed.
Additionally, we will remain intensely focused on working capital utilization
and return on capital employed. Based on customer indications of expected demand
and management estimates of new program wins, our internal projections currently
anticipate full fiscal 2005 sales growth of approximately 15 percent to 18
percent. We currently expect first quarter of fiscal 2005 sales to be in the
range of $280 million to $290 million; however, our results will ultimately
depend on actual customer order levels. We anticipate that the initial stages of
production in the new facility in Penang will impair our overall profitability
through at least the first half of fiscal 2005. Additionally, incremental costs
associated with transitioning programs from our recently announced closure of
our Bothell facility and continued near-term weakness at a couple of our sites
will also impair our overall profitability in the first half of fiscal 2005.
FACILITY CLOSURES/ACQUISITIONS
In fiscal 2004, we closed our PCB design operations in Hillsboro, Oregon
("Hillsboro") and announced plans to close our Bothell facility by the second
quarter of fiscal 2005. In addition, we sold a small PCB design operations in
Tel Aviv, Israel to a group of former employees; however, this transaction did
not have a material impact on our consolidated financial statements.
In fiscal 2003, we closed our manufacturing facilities in San Diego,
California ("San Diego") and Richmond, Kentucky ("Richmond"), and ceased
production in our oldest facility in Neenah, Wisconsin ("Neenah"). In addition,
we sold our PCB design operations in Nashua, New Hampshire to a group of former
employees; however, this transaction did not have a material impact on our
consolidated financial statements.
In January 2002, we acquired certain assets of MCMS, Inc. ("MCMS"), an
electronics manufacturing services provider, for approximately $42.0 million in
cash. The assets purchased from MCMS include manufacturing operations in Penang,
Malaysia; Xiamen, China; and Nampa, Idaho. The consideration for this
acquisition did not include the assumption of any interest-bearing debt, but
included the assumption of total liabilities of approximately $7.2 million. The
results from MCMS's operations are reflected in our financial statements from
the date of acquisition. No goodwill resulted from this acquisition. We incurred
approximately $0.3 million of acquisition costs in the second quarter of fiscal
2002 associated with the acquisition of MCMS.
10
RESULTS OF OPERATIONS
Net sales. Net sales for the indicated periods were as follows (dollars in
millions):
Fiscal years ended
September 30,
----------------------------------
2004 2003 2002
----------------------------------
Net Sales $ 1,040.9 $ 807.8 $ 883.6
Net sales for the fiscal year ended September 30, 2004 increased 29
percent from the year ended September 30, 2003. The increase reflects
strengthened end-market demand, particularly in the networking/
datacommunications, medical and industrial sectors, as well as new program wins
from both new and existing customers. Net sales in the computer industry
declined to 6 percent of consolidated net sales in fiscal 2004 from 12 percent
of consolidated net sales in fiscal 2003 due primarily to weakened end-market
demand from two customers.
Net sales for the year ended September 30, 2003 decreased 9 percent from
the year ended September 30, 2002. Our reduced sales reflected the continued
slowdown in the technology markets served by Plexus, primarily in the
network/datacommunications/ telecom, industrial/commercial and computer
industries. Net sales in fiscal 2003 compared to net sales in fiscal 2002 were
also adversely affected by the loss of the primary customer in our former San
Diego facility. The slowdown in the technology markets in fiscal 2003 was
offset, in part, by increased sales to the medical industry.
The percentages of net sales to customers representing 10 percent or more
of sales and net sales to our ten largest customers for the indicated periods
were as follows:
Fiscal years ended
September 30,
-------------------------------
2004 2003 2002
-------------------------------
Juniper Networks 14% * *
Siemens * 12% *
Top 10 customers 51% 55% 48%
* Represents less than 10 percent of net sales
Sales to all of our largest customers may vary from time to time depending
on the size and timing of program commencement, termination, 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 their fluctuating end-market demand and other factors. Any material
change in orders from these major accounts, or other customers, could materially
affect our results of operations. In addition, as our percentage of sales to
customers in a specific industry becomes larger relative to other industries (as
we are currently experiencing significant increases in the
networking/datacommunications/telecom industry), we will become increasingly
dependent upon economic and business conditions affecting that industry.
Our net sales by industry for the indicated periods were as follows:
Fiscal years ended
September 30,
--------------------------------
2004 2003 2002
--------------------------------
Networking/Datacommunications/Telecom 43% 36% 36%
Medical 31% 32% 28%
Industrial/Commercial 15% 15% 20%
Computer 6% 12% 11%
Transportation/Other 5% 5% 5%
11
Gross profit. Gross profit and gross margins for the indicated periods
were as follows (dollars in millions):
Fiscal years ended
September 30,
-----------------------------
2004 2003 2002
-----------------------------
Gross Profit $ 86.8 $ 53.0 $ 81.3
Gross Margin 8.3% 6.6% 9.2%
Gross profit for the fiscal year ended September 30, 2004 increased $33.8
million from the fiscal year ended September 30, 2003, while gross margins
increased to 8.3 percent from 6.6 percent over this same period. The improvement
in gross profit and gross margin was primarily due to higher net sales and prior
year restructuring actions that resulted in enhanced manufacturing capacity
utilization and better absorption of fixed manufacturing expenses. The primary
prior year restructuring actions benefiting fiscal 2004 gross margins include
the San Diego and Richmond facility closures. The gross profit and gross margin
improvements were somewhat offset, however, by manufacturing inefficiencies
related to the start of new programs, higher compensation and benefits costs,
including variable incentive compensation, and increased amortization of
capitalized costs associated with an enterprise resource planning ("ERP")
platform.
Gross profit for the fiscal year ended September 30, 2003 decreased $28.3
million from the fiscal year ended September 30, 2002, while gross margins
decreased to 6.6 percent from 9.2 percent over this same period. The decline in
gross profit and gross margin in fiscal 2003 from 2002 was due primarily to a
slowdown in end-market demand, particularly in the
networking/datacommunications/telecom and industrial/commercial industries,
which resulted in reduced utilization of manufacturing capacity. Gross margins
were also impacted by lower product pricing and higher costs incurred to
transfer customer programs to other Plexus operating sites as a result of
closing our San Diego and Richmond facilities.
Gross margins reflect a number of factors that can vary from period to
period, including product and service mix, the level of new facility start-up
costs, inefficiencies attendant the transition of new programs, product life
cycles, sales volumes, price erosion within the electronics industry, overall
capacity utilization, labor costs and efficiencies, the management of
inventories, component pricing and shortages, the mix of turnkey and consignment
business, fluctuations and timing of customer orders, changing demand for our
customers' products and competition within the electronics industry.
Additionally, turnkey manufacturing involves the risk of inventory management,
and a change in component costs can directly impact average selling prices,
gross margins and net sales. Although we focus on expanding gross margins, there
can be no assurance that gross margins will not decrease in future periods.
Most of the research and development we conduct is paid for by our
customers and is therefore included in both sales and cost of sales. We conduct
our own research and development, but that research and development is not
specifically identified, and we believe such expenses are less than one percent
of our sales.
Operating expenses. Selling and administrative (S&A) expenses for the
indicated periods were as follows (dollars in millions):
Fiscal years ended
September 30,
-----------------------------
2004 2003 2002
-----------------------------
Selling and administrative expense $ 68.3 $ 65.2 $ 66.9
Percent of sales 6.6% 8.1% 7.6%
S&A expenses for the fiscal year ended September 30, 2004 increased $3.1
million from the fiscal year ended September 30, 2003 primarily due to variable
incentive compensation expense and additional expenses for information
technology systems support related to the implementation of the new ERP
platform, offset, in part, by $1.7 million of recoveries of accounts receivable
that were either written off or reserved for in prior periods. In addition, we
are currently undergoing a comprehensive effort to comply with Section 404 of
the Sarbanes Oxley Act of 2002 ("Section 404"). During fiscal 2004, we devoted
substantial internal resources in accounting, information technology and legal,
supplemented by the use of external consultants, to the Section 404 compliance
effort. We anticipate that we will continue to address our Section 404
compliance efforts in fiscal 2005 primarily through the use of internal
resources. The significant decrease in S&A as a percent of net sales was due
primarily to the high level of net sales over the prior year.
12
S&A expenses for the fiscal year ended September 30, 2003 decreased $1.7
million from the fiscal year ended September 30, 2002 primarily due to fiscal
2003 restructuring actions and reductions in corporate spending. These
reductions were offset, in part, by approximately $1.2 million of additional
expenses for information technology systems support related to the
implementation of the new ERP platform.
Our ERP platform is intended to augment our management information systems
and includes various software systems to enhance and standardize our ability to
globally translate information from production facilities into operational and
financial information and create a consistent set of core business applications
at our worldwide facilities. During fiscal 2004, one additional manufacturing
facility was converted to the new ERP platform, which in addition to the two
manufacturing facilities converted in 2003, results in approximately 50 percent
of our net sales being managed on the new platform. We anticipate converting at
least one more 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 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 certain other costs for testing and installation. As
of September 30, 2004, net property, plant and equipment includes $26.5 million
related to the new ERP platform, including $3.9 million capitalized in fiscal
2004. We anticipate incurring at least an additional $6.0 million of capital
expenditures for the ERP platform through fiscal 2005.
Fiscal 2004 restructuring and impairment actions: During fiscal 2004, we
recorded pre-tax restructuring and impairment costs of $9.3 million. The
restructuring and impairment costs were primarily associated with recognizing
additional lease obligations for two previously abandoned facilities near
Seattle, Washington (the "Seattle facilities"), the planned closure of our
Bothell engineering and manufacturing facility, the write-down of certain
software components of our ERP platform and the consolidation of a satellite
PCB-design office in Hillsboro, Oregon into another Plexus design office.
The estimated cost for the closure of the Seattle facilities was included
in our fiscal 2003 restructuring actions. The lease-related restructuring costs
recorded in fiscal 2003 were based on future lease payments subsequent to
abandonment, less estimated sublease income. As of September 30, 2004, the
Seattle facilities had not been subleased. Based on the remaining term available
to lease these facilities and the weaker than expected conditions in the local
real estate market, we determined that we would most likely not be able to
sublease the Seattle facilities. Accordingly, we recorded additional
lease-related restructuring costs of $4.2 million in fiscal 2004. We also
recorded $0.1 million of lease-related restructuring costs on a facility in
Neenah, which had also been included in restructuring actions in fiscal 2003.
As part of our efforts to align our service offering with the evolving
preferences of our customers, we are in the process of replicating the
capabilities of our Bothell facility at other Plexus design and manufacturing
locations that have higher productivity. We currently anticipate transferring
key customer programs from the Bothell engineering and manufacturing facility to
other Plexus locations primarily in the United States. This restructuring will
reduce our manufacturing capacity by 97,000 square feet and affect approximately
160 employees. We currently expect the consolidation efforts will be completed
by mid-fiscal 2005, subject to customer timelines. In fiscal 2004, we incurred
restructuring and impairment costs related to the Bothell closure of $1.8
million, which consisted of $1.5 million associated with employee terminations
and $0.3 million associated with fixed asset impairments. In fiscal 2005, we
anticipate the Bothell closure will result in additional restructuring costs of
approximately $8.2 million, which will consist of $2.2 million associated with
employee terminations and $6.0 million associated with the facility lease. Our
fiscal 2004 restructuring actions, combined with other factors, also led to the
establishment of a $36.8 million valuation allowance on our deferred income tax
assets in fiscal 2004 (see discussion below).
We recorded a $1.7 million impairment of certain software components of
our ERP platform, which primarily resulted from a change in our deployment
strategy for a shop floor data-collection system. Some elements of the
shop-floor data-collection system will not be deployed because the originally
anticipated business benefits could not be realized. The remaining elements of
the shop floor data-collection system are still under evaluation. As of
September 30, 2004, the capitalized costs of the remaining elements of the shop
floor data system totaled approximately $3.8 million. A change in the scope of
this project could result in impairment of the remaining elements of the shop
floor data-collection system.
Finally, we incurred approximately $1.5 million of other restructuring and
impairment costs in fiscal 2004 primarily related to the consolidation of the
Hillsboro satellite PCB-design office into another Plexus design office. The
Hillsboro related restructuring costs were primarily for employee termination
costs and contract termination costs
13
associated with leased facilities and software service providers. In fiscal
2005, we anticipate incurring an additional $0.1 million of restructuring costs
related to employee relocations. Approximately 40 employees were affected by
this restructuring.
Fiscal 2003 restructuring and impairment actions: During fiscal 2003, we
recorded pre-tax restructuring and impairment costs of $59.3 million. These
costs resulted from actions taken in response to reductions in our end-market
demand. These actions included closing San Diego and Richmond, the consolidation
of several leased facilities, re-focusing the PCB design group, a write-off of
remaining goodwill associated with the acquisition of the San Diego facility,
the write-down of underutilized assets to fair value at several locations, and
the costs associated with reductions in work force in several manufacturing,
engineering and corporate groups. These measures were intended to align our
capabilities and resources with lower industry demand.
The Richmond facility was phased out of operation and sold in September
2003. Production was shifted to other Plexus operating sites in the United
States and Mexico. The closure of Richmond resulted in a write-down of the
building, a write-down of underutilized assets to fair value, and costs relating
to the elimination of the facility's work force. Building impairment charges
related to Richmond totaled $3.7 million. San Diego was closed in May 2003. The
closure of San Diego resulted in a write-off of remaining goodwill, the
write-down of underutilized assets to fair value, and costs relating to the
elimination of the facility's work force. Building impairment charges totaled
$6.3 million. During fiscal 2003, goodwill impairment for San Diego totaled
approximately $20.4 million, of which $14.8 million was impaired as a result of
a transitional impairment evaluation under Statement of Financial Accounting
Standards ("SFAS") No. 142 (see discussion below under "Cumulative effect of a
change in accounting for goodwill") and $5.6 million was impaired as a result of
our decision to close the facility.
Other fiscal year 2003 restructuring and impairment actions included the
consolidation of several leased facilities, the write-down of underutilized
assets to fair value and work force reductions, which primarily affected
operating sites in Juarez, Mexico ("Juarez"); Seattle; Neenah; and the United
Kingdom ("UK"). Restructuring actions also impacted our engineering and
corporate organizations. Employee termination and severance costs for fiscal
2003 related to the termination of approximately 1,000 employees.
Fiscal 2002 restructuring and impairment actions: During fiscal 2002, we
recorded pre-tax restructuring and impairment costs of $12.6 million. These
charges resulted from actions taken in response to reductions in sales levels
and capacity utilization and included the reduction of our work force and the
write-off of certain underutilized assets to fair value at several locations.
The employee termination and severance costs for fiscal 2002 affected
approximately 700 employees. The operating site closures included two owned
facilities: one located in Neenah (the oldest of our four facilities in Neenah)
and the other located in Minneapolis, Minnesota. These facilities were no longer
adequate to service the needs of our customers and would have required
significant investment to upgrade. The Neenah facility was phased out of
operation in February 2003 and is currently used for warehousing and
administrative purposes. The Minneapolis facility was phased out of operation in
July 2002 and sold in October 2002. There was no building impairment charge
associated with the closure of these two facilities. The lease termination costs
were primarily related to our facilities in Seattle and San Diego.
The following table summarizes our restructuring and impairment costs for
fiscal 2004, 2003 and 2002 (dollars in thousands):
Fiscal years ended
September 30,
-----------------------------------
2004 2003 2002
-----------------------------------
Non-cash impairment costs:
Fixed asset impairment $ 2,107 $ 32,451 $ 4,890
Write-off of goodwill - 5,595 -
------- -------- --------
2,107 38,046 4,890
------- -------- --------
Cash restructuring costs:
Severance costs 2,493 10,358 3,819
Lease termination costs 4,703 10,940 3,872
------- -------- --------
7,196 21,298 7,691
------- -------- --------
Total restructuring and impairment costs $ 9,303 $ 59,344 $ 12,581
======= ======== ========
14
As of September 30, 2004, we have a remaining restructuring liability of
approximately $11.8 million, of which $5.2 million is expected to be paid in
fiscal 2005. The remaining $6.6 million of accrued liabilities is expected to be
paid through June 2008.
We currently expect that our fiscal 2004 restructuring actions will
result, when fully implemented, in annualized cost savings of approximately $2
million - $3 million. However, we currently expect that our operating
performance will be impacted in our fiscal 2005 first and second quarters as we
affect transfers from the Bothell facility to other locations. These savings
will primarily benefit cost of sales through lower facilities and employee
expenses.
Fiscal 2002 merger and acquisition activity: For the year ended September
30, 2002, we also incurred approximately $0.3 million of acquisition costs
related to the MCMS acquisition.
Cumulative effect of a change in accounting for goodwill. We adopted SFAS
No. 142 for the accounting for goodwill and other intangible assets as of
October 1, 2002. Under the transitional provisions of SFAS No. 142, we
identified locations with goodwill, performed impairment tests on the net
goodwill and other intangible assets associated with each location using a
valuation date as of October 1, 2002, and determined that a pre-tax transitional
impairment charge of $28.2 million was required related to the San Diego and
Juarez locations. The impairment charge was recorded as a cumulative effect of a
change in accounting for goodwill in our Consolidated Statements of Operations.
Income taxes. Income taxes for the indicated periods were as follows:
Fiscal years ended
September 30,
-----------------------------
2004 2003 2002
-----------------------------
Income tax expense (benefit) $ 39.2 $(27.2) $ (1.8)
Effective annual tax rate 515% 38% 30%
The increase in income tax expense in fiscal 2004 was due primarily to
establishing a $36.8 million valuation allowance on all of our U.S. Federal and
state deferred income tax assets. SFAS No. 109, "Accounting for Income Taxes,"
requires that a valuation allowance be provided when it is more likely than not
that the related income tax assets will not be utilized. Under SFAS No. 109,
unless specific exceptions apply, historical operating results are a strong
indicator of a company's ability to generate future taxable income. In both
fiscal 2003 and 2002, we had a net loss. In fiscal 2004, although we achieved
substantial sales growth and gross profit improvement, our fiscal 2004
restructuring actions resulted in only nominal operating income, a net loss in
the U.S. for income tax purposes and anticipated additional restructuring
charges that will be recorded in fiscal 2005. Consequently, we established a
full valuation allowance on our U.S. deferred income tax assets in fiscal 2004.
Although this valuation allowance reduces the carrying value of the net deferred
income tax assets on the balance sheet, we may be able to utilize these deferred
income tax assets in future profitable periods to reduce future tax obligations.
As a result of the continued availability of these deferred income tax assets,
together with tax holidays in Asia, and if we are able to achieve our current
profitability estimates, our effective tax rate for fiscal 2005 would be
approximately 5 percent to 8 percent.
The effective income tax rate increased to 515 percent in fiscal 2004
compared to 38 percent in fiscal 2003 primarily due to the valuation allowance.
The effective income tax rate increased to 38 percent in fiscal 2003 compared to
30 percent in fiscal 2002. The increase in the effective tax rate was due
primarily to the absence in fiscal 2003 of non-deductible goodwill amortization
expenses that were present in fiscal 2002.
As of September 30, 2004 and 2003, we had recorded net deferred income tax
assets of $1.7 million and $48.6 million, respectively. The net deferred income
tax assets have arisen from available income tax losses and future income tax
deductions. Our ability to use these income tax losses and future income tax
deductions is dependent upon our future operations in the tax jurisdictions in
which such losses or deductions arose. The decrease in deferred income tax
assets in fiscal 2004 is due primarily to our recording of a $36.8 million
valuation allowance as described above and the receipt of tax refunds. The
deferred income tax assets that remain as of September 30, 2004 represent
foreign deferred income tax assets for which realization is considered more
likely than not.
In October 2004, the Working Families Tax Relief Act of 2004 and the
American Jobs Creation Act of 2004 became law in the U.S. This legislation
provides for a number of changes in U.S. tax laws. In accordance with SFAS No.
109, effects of this new legislation will be reflected in our financial
statements beginning in the period of the law's
15
enactment in October 2004. We are presently reviewing this new legislation to
determine the impacts on Plexus and our operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operating activities were ($21.4) million for the year
ended September 30, 2004, compared to cash flows used in operating activities of
($20.0) and cash flows provided by operating activities of $130.5 million for
the years ended September 30, 2003 and 2002, respectively. During fiscal 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 higher earnings, after adjusting for the non-cash effect of depreciation and
amortization, and the decrease in the deferred income tax assets, which
primarily represented the establishment of a valuation allowance, and the
receipt of tax refunds.
Our actual days sales outstanding in accounts receivable for the fiscal
year ended September 30, 2004 increased to 52 days in comparison to 50 days for
the prior year, primarily as a result of a higher percentage of fourth quarter
net sales being recognized in the final month of fiscal 2004 as compared to the
final month of fiscal 2003. During fiscal 2004, the allowance for losses on
accounts receivable decreased $2.1 million, primarily as a result of a
combination of collections and write-offs of accounts receivable that were
reserved for in prior periods.
Our inventory turns decreased to 6.2 turns for the year ended September
30, 2004 from 6.5 turns for the year ended September 30, 2003. Inventories
increased $37.0 million from September 30, 2003, primarily for the purchase of
raw materials to support increased sales and the build up of finished goods to
support certain vendor managed inventory programs, all of which had a negative
impact on inventory turns.
Cash flows used in investing activities totaled ($2.4) million for the
year ended September 30, 2004. The primary uses were purchases of property,
plant and equipment, offset by sales and maturities of short-term investments.
We utilized available cash, a revolving credit facility and operating
leases to fund our operating requirements during fiscal 2004. Our capital
expenditures for fiscal 2004 were approximately $18.1 million. Our level of
capital expenditures for fiscal 2005 will be dependent on anticipated sales
levels, but we expect them to be in the range of $25 million to $30 million.
Cash flows provided by financing activities, totaling $4.2 million for the
year ended September 30, 2004, primarily represent proceeds from stock issuances
under our Employee Stock Purchase Plan and the exercise of stock options, offset
by payments on capital lease obligations.
Our secured revolving credit facility, as amended (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 minimum adjusted EBITDA, a
maximum total leverage ratio (not to exceed 2.5 times adjusted EBITDA) and a
minimum tangible net worth, all as defined in the agreement.
We believe that our Amended Secured Credit Facility, leasing capabilities
and cash and short-term investments should be sufficient to meet our working
capital and fixed capital requirements, as noted above, through fiscal 2005.
However, the growth anticipated for fiscal 2005 may increase our working capital
needs. 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
be sure 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.
16
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE SHEET OBLIGATIONS
Our disclosures regarding contractual obligations and commercial
commitments are located in various parts of our regulatory filings. Information
in the following table provides a summary of our contractual obligations and
commercial commitments as of September 30, 2004 (in thousands):
Payments Due by Fiscal Period
--------------------------------------------------------------
2010 and
Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter
------------------------- --------------------------------------------------------------
Long-Term Debt Obligations $ - $ - $ - $ - $ -
Capital Lease Obligations 43,005 2,980 5,997 6,302 27,726
Operating Lease Obligations* 78,073 14,754 23,428 15,290 24,601
Purchase Obligations** 172,755 172,755 - - -
Other Long-Term Liabilities on the
Balance Sheet*** 16,324 5,187 5,427 1,165 4,545
Other Long-Term Liabilities not on the
Balance Sheet**** 1,458 500 958 - -
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations $ 311,615 $ 196,176 $ 35,810 $ 22,757 $ 56,872
========== ========== ========== ========== ==========
* - As of September 30, 2004, operating lease obligations include future
payments totaling $6.6 million related to lease exit costs that are included in
other long-term Liabilities on the balance sheet. The lease exit costs were
accrued as a restructuring cost.
** - As of September 30, 2004, purchase obligations consist of purchases of
inventory and equipment in the ordinary course of business.
*** - As of September 30, 2004, other long-term obligations on the balance sheet
include: deferred compensation obligations to certain of our former executives,
executive officers and other key employees and restructuring obligations for
both employee terminations and lease exit costs.
**** - As of September 30, 2004, other long-term obligations not on the balance
sheet consist of a salary commitment to an officer of the Company under an
employment agreement. We did not have, and were not subject to, any lines of
credit, standby letters of credit, guarantees, standby repurchase obligations,
or other commercial commitments.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in Note 1 to the Consolidated
Financial Statements. During the year ended September 30, 2004, 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 that the property, plant and equipment are expected to generate. If
such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying value of the property exceeds its
fair market value. The impairment analysis is based on significant assumptions
of future results made by management, including sales and cash flow projections.
Circumstances that may lead to impairment of property, plant and equipment
include reductions in anticipated future performance of the asset, or industry
demand, and the restructuring of our operations.
Intangible Assets - We adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" effective October 1, 2002. Under SFAS No. 142, beginning
October 1, 2002, we no longer 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
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
estimated fair market value of the reporting unit based on projected
17
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 - Net sales 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 a sale is recognized at the time when such requirements
are completed and such obligations fulfilled.
Nets sales from engineering design and development services, which are
generally performed under contracts of twelve months or less in duration, are
recognized as costs are incurred utilizing the percentage-of-completion method;
any losses are recognized when anticipated. Net sales from engineering design
and development services were less than ten percent of total sales for each of
fiscal year 2004, 2003 and 2002.
Sales are recorded net of estimated returns of manufactured product based
on management's analysis of historical returns, current economic trends and
changes in customer demand. Net sales also include amounts billed to customers
for shipping and handling. The corresponding shipping and handling costs are
included in cost of sales.
Restructuring Costs - From fiscal 2002 through fiscal 2004, 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
September 30, 2004, the significant facilities which we plan 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 fiscal 2004. Further changes in certain
other estimates of sublease income could result in additional restructuring
costs.
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 recording severance and benefit costs that are not presumed to be 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 Postemployment Benefits," which resulted in the
recognition of a liability as the severance and benefit costs arose from an
existing condition or situation and the payment was both probable and reasonably
estimated.
For leased facilities being abandoned and subleased, a liability is
recognized and measured at fair value for the future remaining lease payments
subsequent to abandonment, less any estimated sublease income that could 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 10 in the Notes to 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 are for their intended purpose in
accordance with developed exit plans.
Income Taxes - Deferred income taxes are provided for differences between
the bases of assets and liabilities for financial and income tax reporting
purposes. The Company records a valuation allowance against deferred income tax
assets when management believes it is more likely than not that some portion or
all of the deferred income tax assets will not be realized. Realization of
deferred income tax assets is dependent on our ability to generate sufficient
future
18
taxable income. During fiscal 2004, we recorded a $36.8 million valuation
allowance against all U.S. deferred income tax assets. See Note 5 in the Notes
to Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the EITF reached a consensus regarding EITF Issue 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." The consensus
addresses not only when and how an arrangement involving multiple deliverables
should be divided into separate units of accounting but also how the
arrangement's consideration should be allocated among separate units. The
pronouncement was effective for 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.
In January 2003, the 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 an impact on our consolidated results of operations or financial position.
In May 2003, the FASB issued 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.
In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin ("SAB") No. 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
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.
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 and share price may vary significantly
depending on various factors, many of which are beyond our control. These
factors include:
- the volume of customer orders relative to our capacity
- the level and timing of customer orders, particularly in light of
the fact that some of our customers release a significant percentage
of their orders during the last few weeks of a quarter
- the typical short life cycle of our customers' products
- market acceptance of and demand for our customers' products
- customer announcements of operating results and business conditions
- changes in our sales mix to our customers
- business conditions in our customers' industries
- the timing of our expenditures in anticipation of future orders
- our effectiveness in managing manufacturing processes
- changes in cost and availability of labor and components
- local events that may affect our production volume, such as local
holidays
- credit ratings and securities analysts' reports and
- changes in economic conditions and world events.
19
The 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. Our sales were adversely affected in fiscal 2003 and 2002 by the
slowdown in the networking/datacommunications/telecom and industrial/commercial
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 both in dollars and as a percentage of our net sales. 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 represented 14 percent of our net sales in
fiscal 2004. A different customer represented 12 percent of our net sales in
fiscal 2003. We had no customers that represented 10 percent or more in fiscal
2002. Sales to our ten largest customers have represented a majority, or near
majority, of our net sales in recent periods. Our ten largest customers
accounted for approximately 51 percent, 55 percent and 48 percent of our net
sales for the years ended September 30, 2004, 2003 and 2002, respectively. Our
principal customers have varied from year to year, and our principal customers
may not continue to purchase services from us at current levels, if at all.
Significant reductions in sales to any of these customers, or the loss of 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 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.
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 to reduce costs and capacity, such as the recent announcement to close
the Bothell facility in fiscal 2005 and the fiscal year 2003 closures
20
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.
We have announced our intention to close our Bothell, Washington facility
in fiscal 2005. The exact timing of that closure will depend upon the
arrangements for transitioning customer programs. Although we work to minimize
the potential effects of any such transition, there are inherent risks that such
a transition can result in the disruption of programs and customer
relationships.
We are involved in a multi-year project to install a common ERP platform
and associated information systems. Our ERP platform is intended to augment our
management information systems and includes various software systems to enhance
and standardize our ability to globally translate information from production
facilities into operational and financial information and create a consistent
set of core business applications at our worldwide facilities. As of September
30, 2004, facilities generating approximately 50 percent of our net sales are
being managed on the new platform. We anticipate converting at least one more
facility to the new ERP platform in fiscal 2005. The conversion timetable and
project scope remain subject to change based upon our evolving needs and sales
levels. During fiscal 2004, we recorded a $1.7 million impairment of certain
components of our ERP platform, which primarily resulted from a change in our
deployment strategy for a shop floor data-collection system. Some elements of
the shop-floor data-collection system will not be deployed because the
originally anticipated business benefits could not be realized. The remaining
elements of the shop floor data-collection system are still under evaluation. As
of September 30, 2004, the capitalized costs of the remaining elements of the
shop floor data system total approximately $3.8 million. A change in the scope
of this project could result in impairment of the remaining elements of the shop
floor data-collection system, As of September 30, 2004, overall ERP
implementation costs included in net property, plant and equipment totaled $26.5
million and we anticipate incurring at least an additional $6.0 million in
capital expenditures for the ERP platform through fiscal 2005; changes in the
scope of the ERP platform could result in impairment of these capitalized costs.
Due to recent rapid sales growth in fiscal 2004, we have experienced a
significant need for additional employees and facilities. 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 have expanded 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 Mexican-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 treatments from these governments for approximately 2 years and 9
years, respectively, 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:
21
- 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.
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, 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 that require customers
to reimburse us for excess inventory specifically ordered to meet their
forecasts, we may not actually be reimbursed or be able to collect on these
obligations. In that case, we could have excess inventory and/or cancellation or
return charges from our suppliers.
In addition, we provide a managed inventory 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.
22
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 facility in Penang, Malaysia, which began production in the first
quarter of fiscal 2005. 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.
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
31 percent of our net sales in 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.
23
OUR BUSINESS IN THE NETWORKING/DATACOMMUNICATION/TELECOM INDUSTRY COULD BE
SLOWED BY FURTHER GOVERNMENT REGULATION OF THE COMMUNICATIONS INDUSTRY.
The end-markets for most of our customers in the
networking/datacommunication/telecom industry are subject to regulation by the
Federal Communications Commission, as well as by various state agencies. The
policies of these agencies can directly affect both the near-term and long-term
profitability of the industry and therefore directly impact the demand for
products that we manufacture.
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 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 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 and
- loss of key employees of acquired businesses.
24
Financial risks, such as the:
- use of cash resources, or incurrence of additional debt and related
interest expenses
- dilutive effect of the issuance of additional equity securities
- inability to achieve expected operating margins to offset the
increased fixed costs associated with acquisitions, and/or inability
to increase margins at acquired entities to Plexus' desired levels
- incurrence of large write-offs or write-downs
- impairment of goodwill and other intangible assets
- unforeseen liabilities of the acquired businesses.
EXPANSION OF OUR BUSINESS AND OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS.
We have expanded our presence in Malaysia and may further expand our
operations by establishing or acquiring other facilities or by expanding
capacity in our current facilities. We may expand both in geographical areas in
which we currently operate and in new geographical areas within the United
States and internationally. We may not be able to find suitable facilities on a
timely basis or on terms satisfactory to us. Expansion of our business and
operations involves numerous business risks, including:
- the inability to successfully integrate additional facilities or
capacity and to realize anticipated synergies, economies of scale or
other value
- additional fixed costs which may not be fully absorbed by the new
business
- difficulties in the timing of expansions, including delays in the
implementation of construction and manufacturing plans
- creation of excess capacity, and the need to reduce capacity
elsewhere if anticipated sales or opportunities do not materialize
- diversion of management's attention from other business areas during
the planning and implementation of expansions
- strain placed on our operational, financial, management, technical
and information systems and resources
- disruption in manufacturing operations
- incurrence of significant costs and expenses
- inability to locate sufficient customers or employees to support the
expansion.
WE MAY FAIL TO SECURE NECESSARY FINANCING.
We maintain an Amended Secured Credit Facility with a group of banks,
which allows us to borrow up to $150 million. However, we cannot be sure that
the Amended Secured Credit Facility will provide all of the financing capacity
that we will need in the future.
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.
RECENTLY ENACTED CHANGES IN THE SECURITIES LAWS AND REGULATIONS ARE LIKELY TO
INCREASE COSTS.
The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") that became law
in July 2002 has required changes in some of our corporate governance,
securities disclosure and compliance practices. In response to the requirements
of the Sarbanes-Oxley Act, the SEC and the NASDAQ Stock Market have promulgated
new rules in a
25
variety of subjects. Compliance with these new rules has increased our legal and
accounting costs, and we expect these increased costs to continue indefinitely.
These developments may also make it more difficult for us to attract and retain
qualified members of our board of directors or qualified executive officers.
IF WE RECEIVE OTHER THAN AN UNQUALIFIED OPINION ON THE ADEQUACY OF OUR INTERNAL
CONTROL OVER FINANCIAL REPORTING AS OF SEPTEMBER 30, 2005 AND FUTURE YEAR-ENDS
AS REQUIRED BY THE SECTION 404 OF THE SARBANES-OXLEY ACT, INVESTORS COULD LOSE
CONFIDENCE IN THE RELIABILITY OF OUR FINANCIAL STATEMENTS, WHICH COULD RESULT IN
A DECREASE IN THE VALUE OF THE OUR COMMON STOCK.
As required by Section 404 of the Sarbanes-Oxley Act, the SEC adopted
rules requiring public companies to include a report of management on the
company's internal control over financial reporting in their annual reports on
Form 10-K that contains an assessment by management of the effectiveness of the
company's internal control over financial reporting. In addition, the public
accounting firm auditing a company's financial statements must attest to and
report on both management's assessment as to whether the company maintained
effective internal control over financial reporting and on the effectiveness of
the company's internal control over financial reporting.
We are currently undergoing a comprehensive effort to comply with Section
404 of the Sarbanes-Oxley Act. If we are unable to complete our assessment in a
timely manner or if our independent auditors issue other than an unqualified
opinion on the design, operating effectiveness or management's assessment of
internal control over financial reporting, this could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability
of our financial statements, which could cause the market price of our shares to
decline. A weakness in Plexus' stock price could mean that investors will not be
able to sell their shares at or above the prices that they paid. A weakness in
stock price could also impair Plexus' ability in the future to offer common
stock or convertible securities as a source of additional capital and/or as
consideration in the acquisition of other businesses.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our stock price has fluctuated significantly in recent periods. The price
of our common stock may fluctuate significantly in response to a number of
events and factors relating to us, our competitors and the market for our
services, many of which are beyond our control.
In addition, the stock market in general, and especially the NASDAQ Stock
Market, along with share prices for technology companies in particular, have
experienced extreme volatility, including weakness, that sometimes has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the market price of our common
stock, regardless of our operating results. Our stock price and the stock price
of many other technology companies remain below their peaks.
Among other things, volatility and weakness in Plexus' 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign exchange and
interest rates. To reduce such risks, 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 international operations create potential foreign exchange
risk. As of September 30, 2004, we had no foreign currency contracts
outstanding.
26
Our percentages of transactions denominated in currencies other than the
U.S. dollar for the indicated periods were as follows:
Fiscal year
------------------------------
2004 2003 2002
------------------------------
Net Sales 10% 8% 9%
Total Costs 14% 11% 11%
INTEREST RATE RISK
We have financial instruments, including cash equivalents and short-term
investments, which are sensitive to changes in interest rates. We consider the
use of interest-rate swaps based on existing market conditions. We currently do
not use any interest-rate swaps or other types of derivative financial
instruments to hedge interest rate risk.
The primary objective of our investment activities is to preserve
principal, while maximizing yields without significantly increasing market risk.
To achieve this, we maintain our portfolio of cash equivalents and short-term
investments in a variety of highly rated securities, money market funds and
certificates of deposit and limit the amount of principal exposure to any one
issuer.
Our only material interest rate risk is associated with our secured credit
facility. A 10 percent change in our weighted average interest rate on our
average long-term borrowings would have had only a nominal impact on net
interest expense in fiscal 2004, 2003 and 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15 on page 28.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: The Company maintains disclosure
controls and procedures designed to ensure that the information the Company must
disclose in its filings with the Securities and Exchange Commission 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.
Internal Control Over Financial Reporting: As previously disclosed, the
Company commenced a phased implementation of a global Enterprise Resource
Planning (ERP) platform in fiscal 2001. Through September 30, 2004, four
facilities have been converted to the ERP platform, including one facility
converted in fiscal 2004. The conversion of the facility in fiscal 2004 and the
related changes to the Company's internal control (as defined in Exchange Act
Rules 13a-15(f) and 15(d)-15(f)) did not have a material effect on, nor is it
reasonably likely to materially affect, the Company's internal control over
financial reporting. There have been no other changes in the Company's internal
control over financial reporting 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
27
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.
The matters noted herein have been discussed with the Company's Audit
Committee. The Company believes that it is taking the necessary steps to monitor
and maintain appropriate internal control during periods of change.
ITEM 9B. OTHER INFORMATION.
On September 17, 2004, the Board's Compensation Committee approved the
Plexus 2005 Variable Incentive Compensation Plan (the "2005 Plan"). The 2005
Plan provides for incentive bonuses to executive officers based on goals set for
corporation and the individual for fiscal 2005. (Another incentive plan covers
key salaried employees.) Although different goals are set for fiscal 2005, the
2005 Plan is otherwise substantially similar in operation and concept to the
2004 Incentive Compensation Plan that was in effect for fiscal 2004. The 2005
Plan is filed as an exhibit to this report.
On November 18, 2004, the Board of Directors approved a change in
directors' compensation. The annual board fee and annual fees for committee
chairs were increased. Meeting fees were unchanged. The summary of the changes
and new compensation structure was prepared on December 7, 2004; the summary is
filed as an exhibit to this report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this item is incorporated herein by reference
to "Election of Directors" in the Registrant's Proxy Statement for its 2005
Annual Meeting of Shareholders ("2005 Proxy Statement") and from "Security
Ownership of Certain Beneficial Owners and Management--Section 16(a) Beneficial
Ownership Reporting Compliance" in the 2005 Proxy Statement and "Executive
Officers of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to "Election of Directors - Directors'
Compensation" and "Executive Compensation" in the 2005 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to "Security Ownership of Certain
Beneficial Owners and Management" and Executive Compensation - Equity
Compensation Plan Information" in the 2005 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
Incorporated herein by reference to "Certain Transactions" in the 2005
Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference to the subheading "Fees and Services"
under "Auditors" in the 2005 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed
Financial Statements and Financial Statement Schedules. See
following list of Financial Statements and Financial Statement
Schedules on page 29.
(b) Exhibits. See Exhibit Index included as the last page of this
report, which index is incorporated herein by reference
28
PLEXUS CORP.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
SEPTEMBER 30, 2004
CONTENTS PAGES
- -------- -----
Report of Independent Registered Public Accounting Firm .................................... 30
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended
September 30, 2004, 2003 and 2002 .................................................. 31
Consolidated Balance Sheets as of September 30, 2004 and 2003....................... 32
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
for the years ended September 30, 2004, 2003 and 2002............................... 33
Consolidated Statements of Cash Flows for the years ended
September 30, 2004, 2003 and 2002................................................... 34
Notes to Consolidated Financial Statements ................................................. 35-55
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for the years ended
September 30, 2004, 2003 and 2002................................................... 56
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and
Board of Directors
of Plexus Corp.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Plexus
Corp. and its subsidiaries at September 30, 2004 and September 30, 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," effective October 1,
2002.
PricewaterhouseCoopers LLP
Milwaukee, WI
November 17, 2004
30
PLEXUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2004 2003 2002
---- ---- ----
Net sales $ 1,040,858 $ 807,837 $ 883,603
Cost of sales 954,080 754,872 802,283
----------- --------- ----------
Gross profit 86,778 52,965 81,320
Operating expenses:
Selling and administrative expenses 68,259 65,152 66,921
Amortization of goodwill - - 5,203
Restructuring and impairment costs 9,303 59,344 12,581
Acquisition and merger costs - - 251
----------- --------- ----------
77,562 124,496 84,956
----------- --------- ----------
Operating income (loss) 9,216 (71,531) (3,636)
Other income (expense):
Interest expense (3,080) (2,817) (3,821)
Miscellaneous 1,475 2,624 1,631
----------- --------- ----------
Income (loss) before income taxes and cumulative
effect of change in accounting for goodwill 7,611 (71,724) (5,826)
Income tax expense (benefit) 39,191 (27,228) (1,753)
----------- --------- ----------
Loss before cumulative effect of change in accounting
for goodwill (31,580) (44,496) (4,073)
Cumulative effect of change in accounting for
goodwill, net of income tax benefit of $4,755 - (23,482) -
----------- --------- ----------
Net loss $ (31,580) $ (67,978) $ (4,073)
=========== ========= ==========
Earnings per share:
Basic:
Loss before cumulative effect of
change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10)
Cumulative effect of change in accounting
for goodwill - (0.56) -
----------- --------- ----------
Net loss $ (0.74) $ (1.61) $ (0.10)
=========== ========= ==========
Diluted:
Loss before cumulative effect
of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10)
Cumulative effect of change in accounting
for goodwill - (0.56) -
----------- --------- ----------
Net loss $ (0.74) $ (1.61) $ (0.10)
=========== ========= ==========
Weighted average shares outstanding:
Basic 42,961 42,284 41,895
=========== ========= ==========
Diluted 42,961 42,284 41,895
=========== ========= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
31
PLEXUS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 40,924 $ 58,993
Short-term investments 4,005 19,701
Accounts receivable, net of allowances of $2,000 and $4,100, respectively 148,301 111,125
Inventories 173,518 136,515
Deferred income taxes 1,727 23,723
Prepaid expenses and other 5,972 8,326
-------- --------
Total current assets 374,447 358,383
Property, plant and equipment, net 129,586 131,510
Goodwill 34,179 32,269
Deferred income taxes - 24,921
Other 7,496 5,971
-------- --------
Total assets $545,708 $553,054
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 811 $ 958
Accounts payable 100,588 91,445
Customer deposits 11,952 14,779
Accrued liabilities:
Salaries and wages 26,050 17,133
Other 19,686 23,753
-------- --------
Total current liabilities 159,087 148,068
Capital lease obligations, net of current portion 23,160 23,502
Other liabilities 12,048 10,468
Commitments and contingencies (Notes 9 and 12) - -
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized, none issued
or outstanding - -
Common stock, $.01 par value, 200,000 shares authorized,
and 43,184 and 42,607 issued and outstanding, respectively 432 426
Additional paid-in capital 267,925 261,214
Retained earnings 71,260 102,840
Accumulated other comprehensive income 11,796 6,536
-------- --------
351,413 371,016
-------- --------
Total liabilities and shareholders' equity $545,708 $553,054
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
32
PLEXUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
(IN THOUSANDS)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ---------- -------- --------------- ---------
BALANCES, OCTOBER 1, 2001 41,757 $ 418 $251,932 $ 174,891 $ (389) $ 426,852
Comprehensive income (loss):
Net loss - - - (4,073) - (4,073)
Foreign currency hedges and translation adjustments - - - - 3,277 3,277
Other - - - - (21) (21)
---------
Total comprehensive loss (817)
Issuance of common stock under Employee Stock Purchase Plan 132 1 2,398 - - 2,399
Exercise of stock options, including tax benefits 141 1 2,254 - - 2,255
-------- -------- -------- --------- --------- ---------
BALANCES, SEPTEMBER 30, 2002 42,030 420 256,584 170,818 2,867 430,689
Comprehensive income (loss):
Net loss - - - (67,978) - (67,978)
Foreign currency hedges and translation adjustments - - - - 3,667 3,667
Other - - - - 2 2
---------
Total comprehensive loss (64,309)
Issuance of common stock under Employee Stock Purchase Plan 253 3 1,939 - - 1,942
Exercise of stock options, including tax benefits 324 3 2,691 - - 2,694
-------- -------- -------- --------- --------- ---------
BALANCES, SEPTEMBER 30, 2003 42,607 426 261,214 102,840 6,536 371,016
Comprehensive income (loss):
Net loss - - - (31,580) - (31,580)
Foreign currency translation adjustments - - - - 5,260 5,260
---------
Total comprehensive loss (26,320)
Issuance of common stock under Employee Stock Purchase Plan 186 2 1,971 - - 1,973
Exercise of stock options, including tax benefits 391 4 4,740 - - 4,744
-------- -------- -------- --------- --------- ---------
BALANCES, SEPTEMBER 30, 2004 43,184 $ 432 $267,925 $ 71,260 $ 11,796 $ 351,413
======== ======== ======== ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
33
PLEXUS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
(IN THOUSANDS)
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (31,580) $(67,978) $ (4,073)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization 25,449 27,135 36,604
Cumulative effect of change in accounting for goodwill - 28,237 -
Non-cash goodwill and asset impairments 2,106 38,046 4,890
Net (repurchases) sales under asset securitization facility - (16,612) (6,305)
Income tax benefit of stock option exercises 1,508 926 984
Provision for accounts receivable allowances - 438 2,994
Deferred income taxes 46,946 (27,006) (4,352)
Changes in assets and liabilities:
Accounts receivable (35,492) 1,861 33,444
Inventories (35,700) (41,852) 50,610
Prepaid expenses and other 1,230 6,309 (3,462)
Accounts payable 1,526 23,554 7,504
Customer deposits (2,847) 868 (2,152)
Accrued liabilities and other 5,502 6,121 13,769
--------- -------- ---------
Cash flows provided by (used in) operating activities (21,352) (19,953) 130,455
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (86,903) (105,236) (52,550)
Sales and maturities of short-term investments 102,599 138,560 20,300
Payments for property, plant and equipment (18,086) (22,372) (30,760)
Proceeds on sale of property, plant and equipment - 2,665 561
Payments for business acquisitions, net of cash acquired - - (41,985)
--------- -------- ---------
Cash flows provided by (used in) investing activities (2,390) 13,617 (104,434)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 159,752 - 190,437
Payments on debt and capital lease obligations (160,753) (2,749) (242,797)
Proceeds from exercise of stock options 3,236 1,768 1,271
Issuances of common stock under Employee Stock Purchase Plan 1,973 1,942 2,399
--------- -------- ---------
Cash flows provided by (used in) financing activities 4,208 961 (48,690)
--------- -------- ---------
Effect of foreign currency translation on cash 1,465 1,021 1,425
--------- -------- ---------
Net decrease in cash and cash equivalents (18,069) (4,354) (21,244)
Cash and cash equivalents, beginning of year 58,993 63,347 84,591
--------- -------- ---------
Cash and cash equivalents, end of year $ 40,924 $ 58,993 $ 63,347
========= ======== =========
The accompanying notes are an integral part of these consolidated
financial statements.
34
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Plexus Corp. together with its
subsidiaries, (the "Company") provides product realization services to
original equipment manufacturers (OEMs) and other technology companies in
the networking/ datacommunications/telecom, medical,
industrial/commercial, computer, and transportation/other industries. The
Company provides advanced electronics design, manufacturing and testing
services to its customers with a focus on complex, high technology and
high reliability products. The Company offers its customers the ability to
outsource all stages of product realization, including: development and
design services, materials procurement and management, prototyping, and
new product introduction, testing, manufacturing, configuration, logistics
and test/repair.
We provide most of our contract manufacturing services on a turnkey
basis, which means 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.
Consolidation Principles: The consolidated financial statements
include the accounts of Plexus Corp. and its subsidiaries. All significant
intercompany transactions have been eliminated.
Cash Equivalents and Short-Term Investments: Cash equivalents are
highly liquid investments purchased with an original maturity of less than
three months. Short-term investments include investment-grade short-term
debt instruments with original maturities greater than three months.
Short-term investments are generally comprised of securities with
contractual maturities greater than one year but with optional or early
redemption provisions or rate reset provisions within one year.
Investments in debt securities are classified as
"available-for-sale." Such investments are recorded at fair value as
determined from quoted market prices, and the cost of securities sold is
determined on the specific identification method. If material, unrealized
gains or losses are reported as a component of comprehensive income or
loss, net of the related income tax effect. For fiscal 2004, 2003 and
2002, unrealized or realized gains and losses were not material.
As of September 30, 2004 and 2003, cash and cash equivalents
included the following securities (in thousands):
2004 2003
---- ----
Money market funds and other $15,797 $22,757
U.S. corporate and bank debt 16,297 28,877
State and municipal securities - 4,000
------- -------
$32,094 $55,634
======= =======
Short-term investments as of September 30, 2004 and 2003 consist
primarily of state and municipal securities.
Inventories: Inventories are valued at the lower of cost or market.
Cost is determined by the first-in, first-out (FIFO) method. Valuing
inventories at the lower of cost or market requires the use of estimates
and judgment. Customers may cancel their orders, change production
quantities or delay production for a number of reasons that are beyond the
Company's control. Any of these, or certain additional actions, could
impact the valuation of inventory. Any actions taken by the Company's
customers that could impact the value of its inventory are considered when
determining the lower of cost or market valuations.
Property, Plant and Equipment and Depreciation: These assets are
stated at cost. Depreciation, determined on the straight-line method, is
based on lives assigned to the major classes of depreciable assets as
follows:
35
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Buildings and improvements 15-50 years
Machinery and equipment 3-10 years
Computer hardware and software 3-10 years
Certain facilities and equipment held under capital leases are
classified as property, plant and equipment and amortized using the
straight-line method over the lease terms and the related obligations are
recorded as liabilities. Lease amortization is included in depreciation
expense (see Note 3) and the financing component of the lease payments is
classified as interest expense.
For the capitalization of software costs, the Company follows
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed for Internal Use." The Company capitalizes significant
costs incurred in the acquisition or development of software for internal
use, including the costs of the software, consultants and payroll and
payroll related costs for employees directly involved in developing
internal use computer software once the final selection of the software is
made (see Note 3). Costs incurred prior to the final selection of software
and costs not qualifying for capitalization are expensed as incurred.
Goodwill and Other Intangible Assets: The Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets" effective October 1, 2002. Under SFAS No. 142,
beginning October 1, 2002, the Company no longer amortizes goodwill and
intangible assets with indefinite useful lives, but instead, 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 assigned to three
reporting units: San Diego, California ("San Diego"), Juarez, Mexico
("Juarez") and Kelso, Scotland and Maldon, England ("United Kingdom"). As
of September 30, 2004, only the Juarez and United Kingdom reporting units
had goodwill remaining.
SFAS No. 142 required the Company to perform a transitional goodwill
impairment evaluation that required the Company to perform an assessment
of 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 San Diego and Juarez, since the
estimated fair value based on expected future discounted cash flows to be
generated from each reporting unit was significantly less than their
respective carrying value.
The Company then compared the respective carrying amounts of San
Diego's and Juarez's goodwill to the implied fair value of each reporting
unit's respective goodwill. The implied fair value was determined by
allocating the fair value to each respective reporting unit's assets and
liabilities in a manner similar to a purchase price allocation for an
acquired business. Both values were measured at the date of adoption. The
Company identified $28.2 million of transitional impairment losses ($23.5
million, net of income tax benefits) related to San Diego and Juarez,
which were recognized as a cumulative effect of a change in accounting for
goodwill in the Consolidated Statements of Operations.
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, $5.6 million of
goodwill was impaired as a result of the Company's decision to close the
San Diego facility (see Note 10). The Company's fiscal year 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 an impairment.
The following sets forth a reconciliation of net income (loss) and
earnings per share information for fiscal 2004, 2003 and 2002, adjusted to
exclude goodwill amortization, net of income taxes (in thousands, except
per share data):
36
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2004 2003 2002
---- ---- ----
Reported loss before cumulative effect
of change in accounting for goodwill $(31,580) $(44,496) $ (4,073)
Add back: goodwill amortization, net of income
taxes - - 4,375
-------- -------- ----------
Adjusted loss before cumulative effect of change
in accounting for goodwill (31,580) (44,496) 302
Cumulative effect of change in accounting
for goodwill, net of income taxes - (23,482) -
-------- -------- ----------
Adjusted net income (loss) $(31,580) $(67,978) $ 302
======== ======== ==========
Basic weighted average common shares outstanding 42,961 42,284 41,895
Dilutive effect of stock options - - 1,223
-------- -------- ----------
Diluted weighted average shares outstanding 42,961 42,284 43,118
======== ======== ==========
Basic earnings per share:
Reported loss before cumulative effect
of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10)
Add back: goodwill amortization,
net of income taxes - - 0.10
-------- -------- ----------
Adjusted income (loss) before cumulative
effect of change in accounting for
goodwill (0.74) (1.05) -
Cumulative effect of change in accounting
for goodwill, net of income taxes - (0.56) -
-------- -------- ----------
Adjusted net income (loss) $ (0.74) $ (1.61) $ -
======== ======== ==========
Diluted earnings per share:
Reported loss before cumulative effect
of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10)
Add back: goodwill amortization,
net of income taxes - - 0.10
-------- -------- ----------
Adjusted income (loss) before cumulative
effect of change in accounting for
goodwill (0.74) (1.05) -
Cumulative effect of change in accounting
for goodwill, net of income taxes - (0.56) -
-------- -------- ----------
Adjusted net income (loss) $ (0.74) $ (1.61) $ -
======== ======== ==========
The changes in the carrying amount of goodwill for fiscal years ended
September 30, 2004 and 2003 are as follows (in thousands):
BALANCE AS OF OCTOBER 1, 2002 $ 64,957
Cumulative effect of change in accounting for goodwill (28,237)
Impairment charge (See Note 10) (5,595)
Foreign currency translation adjustments 1,144
--------
BALANCE AS OF SEPTEMBER 30, 2003 32,269
Foreign currency translation adjustments 1,910
--------
BALANCE AS OF SEPTEMBER 30, 2004 $ 34,179
========
37
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company has a nominal amount of identifiable intangibles that
are subject to amortization. These intangibles relate to patents with
useful lives of twelve years. The Company has no intangibles, except
goodwill, that are not subject to amortization. During fiscal 2004, there
were no additions to intangible assets. Intangible asset amortization
expense was nominal for fiscal 2004, 2003 and 2002.
Impairment of Long-Lived Assets: The Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" effective
October 1, 2002. SFAS No. 144 modifies and expands the financial
accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill, which is specifically addressed in SFAS No.
142. SFAS No. 144 maintains the requirement that an impairment loss be
recognized for a long-lived asset to be held and used if its carrying
value is not recoverable from its undiscounted cash flows, with the
recognized impairment being the difference between the carrying amount and
fair value of the asset. With respect to long-lived assets to be disposed
of other than by sale, SFAS No. 144 requires that the asset be considered
held and used until it is actually disposed of, but requires that its
depreciable life be revised in accordance with APB Opinion No. 20
"Accounting Changes." Impairment charges recorded in fiscal 2003 against
the carrying value of certain of the Company's long-lived assets are
discussed in Note 10.
The Company reviews property, plant and equipment for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of property,
plant and equipment is measured by comparing its carrying value to the
projected cash flows the property, plant and equipment are expected to
generate. If such assets are considered to be impaired, the impairment to
be recognized is measured as the amount by which the carrying value of the
property exceeds its fair market value. The impairment analysis is based
on significant assumptions of future results made by management, including
sales and cash flow projections. Circumstances that may lead to impairment
of property, plant and equipment include decreases in future performance
or industry demand and the restructuring of the Company's operations.
Revenue Recognition: Net sales from manufacturing services are
generally recognized upon shipment of the manufactured product to the
Company's customers, under contractual terms, which are generally FOB
shipping point. Upon shipment, title transfers and the customer assumes
risks and rewards of ownership of the product. Generally, there are no
formal customer acceptance requirements or further obligations related to
manufacturing services; if such requirements or obligations exist, then a
sale is recognized at the time when such requirements are completed and
such obligations are fulfilled.
Net sales from engineering design and development services, which
are generally performed under contracts of twelve months or less duration,
are recognized as costs are incurred utilizing the
percentage-of-completion method; any losses are recognized when
anticipated. Progress towards completion of product design and development
contracts is based on units of work for labor content and costs incurred
for component content. Net sales from engineering design and development
services were less than ten percent of total sales in fiscal 2004, 2003
and 2002.
Sales are recorded net of estimated returns of manufactured product
based on management's analysis of historical returns, current economic
trends and changes in customer demand. Net sales also include amounts
billed to customers for shipping and handling. The corresponding shipping
and handling costs are included in cost of sales.
Restructuring Costs: From time to time, the Company has recorded
restructuring costs in response to the reduction in its sales levels and
reduced capacity utilization. These restructuring charges included
employee severance and benefit costs, costs related to plant closings,
including leased facilities that will be abandoned (and subleased, as
applicable), and impairment of equipment. Prior to January 1, 2003,
severance and benefit costs were recorded in accordance with Emerging
Issues Task Force ("EITF") 94-3. 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 September 30, 2004, the significant facilities which the
Company plans to sublease have not yet been subleased and, accordingly,
the Company's estimates of expected sublease income could change based on
factors that affect its ability to sublease those facilities such as
general economic conditions and the real estate market, among others.
38
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Subsequent to December 31, 2002, costs associated with a
restructuring activity are recorded in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." The
timing and related recognition of recording severance and benefit costs
that are not presumed to be an ongoing benefit as defined in SFAS No. 146,
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. The Company concluded that it had a substantive
severance plan based upon past severance practices; therefore, certain
severance and benefit costs were recorded in accordance with SFAS No. 112,
"Employer's Accounting for Postemployment Benefits," which resulted in the
recognition of a liability as the severance and benefit costs arose from
an existing condition or situation and the payment was both probable and
reasonably estimated.
For leased facilities that will be abandoned and subleased, a
liability for the future remaining lease payments subsequent to
abandonment, less any estimated sublease income that could be reasonably
obtained for the property, is recognized and measured at its fair value.
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.
The recognition of restructuring costs requires that the Company
make certain judgments and estimates regarding the nature, timing and
amount of cost associated with the planned exit activity. If actual
results in exiting these facilities differ from the Company's estimates
and assumptions, the Company 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, the Company evaluates the remaining accrued balances to
ensure that no excess accruals are retained and the utilization of the
provisions are for their intended purpose in accordance with developed
exit plans.
Income Taxes: Deferred income taxes are provided for differences
between the bases of assets and liabilities for financial and income tax
reporting purposes. The Company records a valuation allowance against
deferred income tax assets when management believes it is more likely than
not that some portion or all of the deferred income tax assets will not be
realized (see Note 5). Realization of deferred income tax assets is
dependent on our ability to generate future taxable income.
Foreign Currency: For foreign subsidiaries using the local currency
as their functional currency, assets and liabilities are translated at
exchange rates in effect at year-end, with net sales, expenses and cash
flows translated at the monthly exchange rates. Adjustments resulting from
translation of the financial statements are recorded as a component of
accumulated other comprehensive income. Exchange gains and losses arising
from transactions denominated in a currency other than the functional
currency of the entity involved and remeasurement adjustments for foreign
operations where the U.S. dollar is the functional currency are included
in the statement of operations. Exchange gains and losses on foreign
currency transactions were not significant for the years ended September
30, 2004, 2003 and 2002, respectively.
Derivatives: The Company periodically enters into derivative
contracts, primarily foreign currency forward, call and put contracts
which are designated as cash-flow hedges. The changes in fair value of
these contracts, to the extent the hedges are effective, are recognized in
other comprehensive income until the hedged item is recognized in
earnings. These amounts were not material during fiscal 2004, 2003 and
2002.
Earnings Per Share: The computation of basic earnings per common
share is based upon the weighted average number of common shares
outstanding and net income (loss). The computation of diluted earnings per
common share reflects additional dilution from stock options, unless such
shares are antidilutive.
Stock-based Compensation: In December 2002, SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure --
an amendment of SFAS No. 123" was issued. SFAS No. 148 provides
alternative methods of transition for an entity that voluntarily changes
to the fair-value-based method of accounting for stock-based employee
compensation and is effective for fiscal years ending after December 15,
2002. In addition, SFAS No. 148 requires prominent disclosures in both
annual and interim financial statements about the effects on reported net
income of an entity's method of accounting for stock-based employee
compensation. The disclosure provisions were effective for the Company in
the second
39
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
quarter of fiscal 2003. The Company did not effect a voluntary change in
accounting to the fair value method, and, accordingly, the adoption of
SFAS No. 148 did not have a significant impact on the Company's results of
operations or financial position.
The Company accounts for its stock option plans under the guidelines
of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, no compensation expense related to the
stock option plans has been recognized in the Consolidated Statements of
Operations. The Company's stock-based employee compensation plans are more
fully described in Note 11. The following sets forth a reconciliation of
net loss and earnings per share information for fiscal 2004, 2003 and 2002
had the Company recognized compensation expense based on the fair value at
the grant date for awards under the plans, estimated at the date of grant
using the Black-Scholes option pricing method (in thousands, except per
share amounts).
Years ended September 30,
-------------------------
2004 2003 2002
---- ---- ----
Net loss as reported $ (31,580) $(67,978) $ (4,073)
Add: stock-based employee compensation expense
included in reported net loss, net of related income
tax effect - - -
Deduct: total stock-based employee
compensation expense determined under fair value
based method, net of related tax effects (9,542) (9,042) (9,947)
---------- -------- ---------
Proforma net loss $ (41,122) $(77,020) $ (14,020)
========== ======== =========
Earnings per share:
Basic, as reported $ (0.74) $ (1.61) $ (0.10)
========== ======== =========
Basic, proforma $ (0.96) $ (1.82) $ (0.33)
========== ======== =========
Diluted, as reported $ (0.74) $ (1.61) $ (0.10)
========== ======== =========
Diluted, proforma $ (0.96) $ ( 1.82) $ (0.33)
========== ======== =========
Weighted average shares:
Basic 42,961 42,284 41,895
========== ======== =========
Diluted 42,961 42,284 41,895
========== ======== =========
New Accounting Pronouncements: In November 2002, the EITF reached a
consensus regarding EITF Issue 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." The consensus addresses not only when and how
an arrangement involving multiple deliverables should be divided into
separate units of accounting, but also how the arrangement's consideration
should be allocated among separate units. The pronouncement was effective
for the Company commencing with its first quarter of fiscal year 2004 but
did not have a material impact on its consolidated results of operations
or financial position.
In January 2003, the 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 an impact on its consolidated results
of operations or financial position.
In May 2003, the FASB issued 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
40
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
instruments that are within the scope of the Statement, which previously
were often classified as equity, must now be classified as liabilities. In
November 2003, Financial Accounting Standards Board Staff Position ("FSP")
No. SFAS 150-3 deferred indefinitely the effective date 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.
In December 2003, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition,"
which supercedes SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of Emerging Issues
Task Force (EITF) 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." Additionally, SAB No. 104 rescinds the SEC's
"Revenue Recognition in Financial Statements Frequently Asked Questions
and Answers" document issued with SAB 101 that had been codified in SEC
Topic 13, Revenue Recognition. The adoption of this bulletin did not have
a significant impact on the Company's consolidated results of operations
or financial position.
Use of Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments: Accounts payable and accrued
liabilities are reflected in the consolidated financial statements at cost
because of the short-term duration of these instruments. Accounts
receivables are reflected at net realizable value based on anticipated
losses due to potentially uncollectible balances. Anticipated losses are
based on management's analysis of historical losses and changes in
customer credit status. The fair value of capital lease obligations is
approximately $25.4 million and $26.0 million as of September 30, 2004 and
2003, respectively. The Company uses quoted market prices when available
or discounted cash flows to calculate these fair values.
Business and Credit Concentrations: Financial instruments that
potentially subject the Company to concentrations of credit risk consist
of cash, cash equivalents, short-term investments and trade accounts
receivable. The Company's cash, cash equivalents and short-term
investments are managed by recognized financial institutions that follow
the Company's investment policy. Such investment policy limits the amount
of credit exposure in any one issue and the maturity date of the
investment securities that typically comprise investment grade short-term
debt instruments. Concentrations of credit risk in accounts receivable
resulting from sales to major customers are discussed in Note 13. The
Company, at times, requires advanced cash deposits for services performed.
The Company also closely monitors extensions of credit.
Related Party Transactions: The Company holds a minority equity
interest in MemoryLink Corp. ("MemoryLink"). The minority equity interest
represents less than a ten percent ownership interest in MemoryLink and is
accounted for under the cost method. The Company had nominal sales to
MemoryLink during fiscal 2004 and 2003 and no sales in fiscal 2002. The
Company received the minority equity interest in fiscal 2002, as
settlement for accounts receivable that had been previously written off.
Due to uncertainty regarding MemoryLink's financial viability, the Company
recorded the minority equity interest at a zero value.
Reclassifications: Certain amounts in prior years' consolidated
financial statements have been reclassified to conform to the 2004
presentation.
41
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. INVENTORIES
Inventories as of September 30, 2004 and 2003, consist of (in
thousands):
2004 2003
---- ----
Assembly parts $ 115,094 $ 88,562
Work-in-process 46,382 41,514
Finished goods 12,042 6,439
--------- ----------
$ 173,518 $ 136,515
========= ==========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of September 30, 2004 and 2003,
consist of (in thousands):
2004 2003
---- ----
Land, buildings and improvements $ 73,813 $ 66,614
Machinery, and equipment 119,761 119,788
Computer hardware and software 58,512 57,576
Construction in progress 13,812 7,079
--------- ---------
265,898 251,057
Less accumulated depreciation and amortization 136,312 119,547
--------- ---------
$ 129,586 $ 131,510
========= =========
As of September 30, 2004 and 2003, computer hardware and software
includes $24.1 million and $21.9 million, respectively, related to a new
enterprise resource planning platform ("ERP"). As of September 30, 2004
and 2003, construction in process includes $6.3 million and $6.1 million,
respectively, of software implementation costs related to the new ERP
platform. The conversion timetable and future project scope remain subject
to change based upon our evolving needs and sales levels. Fiscal 2004,
2003 and 2002 amortization of the new ERP platform totaled $2.7, $0.7
million and $0, respectively.
Assets held under capital leases and included in property, plant and
equipment as of September 30, 2004 and 2003, consist of (in thousands):
2004 2003
---- ----
Buildings and improvements $ 23,945 $ 23,400
Machinery and equipment 1,775 1,834
-------- --------
25,720 25,234
Less accumulated amortization 3,914 3,240
-------- --------
$ 21,806 $ 21,994
======== ========
The above table includes a manufacturing facility in San Diego,
which was closed during fiscal 2003 (see Note 10) and is no longer used
for operating purposes. The Company subleased a portion of the facility
during fiscal 2003 and is attempting to sublease the remaining portion.
The portion of the San Diego facility that is subleased is recorded at the
net present value of the sublease income. The portion of the facility
awaiting sublease is recorded at the net present value of the estimated
sublease income. The net book value of the subleased portion of the San
Diego facility is reduced on a monthly basis by the amortization of the
sublease income. No amortization is recorded on the vacant portion of the
San Diego facility. The net book value of the San Diego facility, adjusted
for impairment, is approximately $15.4 million as of September 30, 2004.
Amortization of assets held under capital leases totaled $0.7, $1.6
million and $2.7 million for fiscal 2004, 2003 and 2002, respectively.
There were no capital lease additions in fiscal 2004 or 2003. Capital
lease additions of $1.5 million for fiscal 2002 have been treated as
non-cash transactions for purposes of the Consolidated Statements of Cash
Flows.
42
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of September 30, 2004, accounts payable includes approximately
$6.5 million related to the purchase of property, plant and equipment and
have been treated as non-cash transactions for purposes of the
Consolidated Statement of Cash Flow.
4. CAPITAL LEASE OBLIGATIONS AND OTHER FINANCING
Capital lease obligations as of September 30, 2004 and 2003, consist
of (in thousands):
2004 2003
---- ----
Capital lease obligations with a weighted
average interest rate of 9.2% for both years $ 23,971 $ 24,460
Less current portion 811 958
-------- --------
$ 23,160 $ 23,502
======== ========
The capital lease obligations are for certain equipment and
manufacturing facilities, located in the UK and San Diego, which have been
recorded as capital leases and expire on various dates through 2016
subject to renewal options. The aggregate scheduled maturities of the
Company's debt and its obligations under capital leases as of September
30, 2004, are as follows (in thousands):
2005 $ 2,980
2006 2,961
2007 3,036
2008 3,112
2009 3,190
Thereafter 27,726
--------
43,005
Interest portion of capital leases 19,034
--------
Total $ 23,971
========
On October 22, 2003, the 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. 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. The Secured Credit Facility contains certain financial
covenants, which include a maximum total leverage ratio, a $40.0 million
minimum balance of domestic cash or marketable securities, a minimum
tangible net worth and a minimum adjusted EBITDA, as defined in the
agreement.
The Company amended the Secured Credit Facility in October 2003, and
in April, July, August and November 2004, to revise certain terms and
covenants (the "Amended Secured Credit Facility"). The most significant
amendments occurred in July 2004, and included an increase in the maximum
borrowing amount to $150 million from $100 million, an approximate
one-year extension of the maturity of the Amended Secured Credit Facility
to October 31, 2007, elimination of the requirement to maintain a $40
million minimum balance of domestic cash or marketable securities,
modification of a minimum adjusted EBITDA and a maximum total leverage
ratio (not to exceed 2.5 times adjusted EBITDA), all as defined in the
amended agreement. In addition, the interest rate on borrowings will vary
depending upon the Company's then-current total leverage ratio; before
amendment, the rate varied with usage. Origination fees and expenses
totaled approximately $1.2 million, which have been deferred and are being
amortized to interest expense over the term of the Amended Secured Credit
Facility.
Effective December 26, 2002, the Company terminated its prior credit
facility ("Old Credit Facility"). No amounts were outstanding during the
first quarter of fiscal 2003 prior to the termination of the Old Credit
Facility. Termination of the Old Credit Facility was occasioned by
anticipated noncompliance with the minimum interest expense coverage ratio
covenant as of December 31, 2002, as a result of restructuring costs
incurred in the
43
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
first quarter of fiscal 2003 (see Note 10). As a result of the termination
of the Old Credit Facility, the Company wrote off unamortized deferred
financing costs of approximately $0.5 million.
In fiscal 2001, the Company entered into an amended agreement to
sell up to $50 million of trade accounts receivable without recourse to a
wholly owned limited-purpose subsidiary of the Company. In September 2003,
the asset securitization facility expired; therefore, the Company did not
incur financing costs under it in fiscal 2004. During fiscal 2003 and
2002, the Company incurred financing costs of $0.4 million and $0.6
million, respectively, under the former asset securitization facility. Net
borrowings/(repayments) under the agreement are included in the cash flows
from operating activities in the accompanying Consolidated Statements of
Cash Flows.
Cash paid for interest in fiscal 2004, 2003 and 2002 was $3.1
million, $2.8 million and $4.4 million, respectively.
5. INCOME TAXES
The domestic and foreign components of income (loss) before income
tax expenses for fiscal 2004, 2003 and 2002 consists of (in thousands):
2004 2003 2002
---- ---- ----
U.S. income (loss) before $ (69) $ (66,823) $ (5,729)
income taxes
Foreign income (loss) before
income taxes 7,680 (4,901) (97)
-------- ---------- ----------
$ 7,611 $ (71,724) $ (5,826)
======== ========= ==========
Income tax expense (benefit) for fiscal 2004, 2003 and 2002 consists
of (in thousands):
2004 2003 2002
---- ---- ----
Currently payable (receivable):
Federal $ 563 $ 2,096 $ 1,835
State - - 97
Foreign 839 (69) 1,361
-------- ---------- --------
1,402 2,027 3,293
-------- ---------- --------
Deferred:
Federal expense (benefit) 28,531 (25,094) 322
State expense (benefit) 8,253 (3,800) (3,902)
Foreign expense (benefit) 1,005 (361) (1,466)
-------- ---------- --------
37,789 (29,255) (5,046)
-------- ---------- --------
$ 39,191 $ (27,228) $ (1,753)
======== ========== ========
44
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Following is a reconciliation of the federal statutory income tax
rate to the effective income tax rates reflected in the Consolidated
Statements of Operations for fiscal 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of Federal
income tax benefit (1.3) 4.2 26.4
Foreign income and tax rate differences (34.7) 0.3 (13.2)
Resolution of prior year tax matters and tax 30.3 (1.9) (0.6)
contingencies
Non-deductible goodwill and merger costs - 0.2 (21.8)
Valuation allowance 483.8 - -
Other, net 1.9 0.2 4.3
----- ---- ----
Effective income tax rate 515.0% 38.0% 30.1%
===== ==== ====
The components of the net deferred income tax asset as of September
30, 2004 and 2003, consist of (in thousands):
2004 2003
---- ----
Deferred income tax assets:
Inventories $ 5,182 $ 6,413
Accrued benefits 4,439 4,303
Allowance for bad debts 705 1,438
Loss carryforwards 22,291 36,084
Other 6,229 5,049
-------- --------
Total gross deferred income tax assets 38,846 53,287
Less valuation allowance (36,818) -
-------- --------
Net deferred income tax assets 2,028 53,287
Deferred income tax liabilities:
Property, plant and equipment 301 4,643
-------- --------
Net deferred income tax asset $ 1,727 $ 48,644
======== ========
During the fourth quarter of fiscal 2004, the Company established a
valuation allowance on all its U.S. deferred income tax assets. SFAS No.
109, "Accounting for Income Taxes", and relevant interpretations of SFAS
No. 109, require that a valuation allowance be provided when it is more
likely than not that the related income tax assets will not be utilized.
Under SFAS No. 109, unless specific exceptions apply, historical operating
results are a strong indicator of a company's ability to generate future
taxable income. In both fiscal 2003 and 2002, the Company had a net loss.
In fiscal 2004, although the Company achieved substantial sales and gross
profit improvement, its fiscal 2004 restructuring and impairment actions
(see Note 10) resulted in nominal operating income, a net loss in the U.S.
for income tax purposes and anticipated additional restructuring charges
that will be recorded in fiscal 2005. Consequently, the Company recorded a
full valuation allowance on its net U.S. deferred income tax assets in
fiscal 2004. The Company will continue to assess the need for a valuation
allowance on these deferred income tax assets in the future. The remaining
net deferred income tax assets at September 30, 2004 represent only net
foreign deferred income tax assets for which realization is considered
more likely than not.
The Company has been granted tax holidays for its Malaysian and
Chinese subsidiaries. These tax holidays expire in 2006 and 2013,
respectively, and are subject to certain conditions with which the Company
expects to comply. The Company has applied for an extension of its
Malaysian tax holiday.
The Company does not provide for taxes which would be payable if
undistributed earnings of foreign subsidiaries were remitted because the
Company considers these earnings to be invested for an
45
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
indefinite period. The aggregate undistributed earnings of the Company's
foreign subsidiaries for which a deferred income tax liability has not
been recorded is approximately $15.3 million as of September 30, 2004.
In October 2004, the Working Families Tax Relief Act of 2004 and the
American Jobs Creation Act of 2004 became law in the U.S. This legislation
provides for a number of changes in U.S. tax laws. In accordance with SFAS
No. 109, effects of this new legislation will be reflected in the
Company's financial statements beginning in the period of the law's
enactment in October 2004. Management is presently reviewing this new
legislation to determine the impacts on Plexus and its operations.
As of September 30, 2004, the Company has approximately $135 million
of state net operating loss carryforwards that expire between 2007 and
2024 and $43 million of federal net operating loss carryforwards that
expire in varying amounts in 2023 and 2024.
Cash paid for income taxes in fiscal 2004, 2003 and 2002 was $1.3
million, $0.3 million and $5.2 million, respectively.
6. SHAREHOLDERS' EQUITY
Pursuant to Board of Directors' approval, the Company has a common
stock buyback program that permits it to acquire up to 6.0 million shares
for an amount not to exceed $25.0 million. To date, no shares have been
repurchased.
Income tax benefits attributable to stock options exercised are
recorded as an increase in additional paid-in capital.
7. 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):
Years ended September 30,
----------------------------------------
2004 2003 2002
---- ---- ----
Earnings:
Loss before cumulative effect of change in $ (31,580) $ (44,496) $ (4,073)
accounting for goodwill
Cumulative effect of change in accounting
for goodwill, net of income taxes - (23,482) -
---------- ---------- ---------
Net loss $ (31,580) $ (67,978) $ (4,073)
========== ========== =========
Basic weighted average common shares outstanding 42,961 42,284 41,895
Dilutive effect of stock options - - -
---------- ---------- ---------
Diluted weighted average shares outstanding 42,961 42,284 41,895
========== ========== =========
Basic earnings per share:
Loss before cumulative effect of change in $ (0.74) $ (1.05) $ (0.10)
accounting for goodwill
Cumulative effect of change in accounting
for goodwill, net of income taxes - (0.56) -
---------- ---------- ---------
Net loss $ (0.74) $ (1.61) $ (0.10)
========== ========== =========
Diluted earnings per share:
Loss before cumulative effect of change in $ (0.74) $ (1.05) $ (0.10)
accounting for goodwill
Cumulative effect of change in accounting
for goodwill, net of income taxes - (0.56) -
---------- ---------- ---------
Net loss $ (0.74) $ (1.61) $ (0.10)
========== ========== =========
46
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
For the years ended September 30, 2004, 2003 and 2002, stock options
to purchase approximately 3.0 million, 3.2 million and 3.0 million shares
of common stock, respectively, were outstanding, but were not included in
the computation of diluted earnings per share because their effect would
be antidilutive.
8. ACQUISITIONS AND MERGERS
Acquisitions: In January 2002, the Company acquired certain assets
of MCMS, Inc. ("MCMS"), an electronics manufacturing services provider,
for approximately $42 million in cash. The assets purchased from MCMS
include manufacturing operations in Penang, Malaysia; Xiamen, China; and
Nampa, Idaho. The Company acquired these assets primarily to provide
electronic manufacturing services in Asia and increase its customer base.
The Company recorded the acquisition utilizing the accounting principles
promulgated by SFAS No.'s 141 and 142. The consideration for this
acquisition did not include the assumption of any interest-bearing debt
but included the assumption of total liabilities of approximately $7.2
million. The Company allocated the purchase price primarily to accounts
receivable, inventory and property, plant and equipment, based on a number
of factors, including a third-party valuation. The results from MCMS'
operations are reflected in the Company's financial statements from the
date of acquisition. No goodwill resulted from this acquisition. The
Company incurred approximately $0.3 million of acquisition costs during
fiscal 2002 associated with the acquisition of the MCMS operations. Due to
unique aspects of this acquisition, pro forma financial information is not
meaningful and is therefore not presented. The factors leading to this
determination included the selective MCMS assets acquired by the Company,
the limited assumption of liabilities and the exclusion of certain
customer relationships which were formerly significant to MCMS.
9. OPERATING LEASE COMMITMENTS
The Company has a number of operating lease agreements primarily
involving manufacturing facilities, manufacturing equipment and
computerized design equipment. These leases are non-cancelable and expire
on various dates through 2016. Rent expense under all operating leases for
fiscal 2004, 2003 and 2002 was approximately $11.2 million, $14.1 million
and $14.6 million, respectively. Renewal and purchase options are
available on certain of these leases. Rental income from subleases
amounted to $1.5 million, $1.3 million and $1.0 million in fiscal 2004,
2003 and 2002, respectively.
Future minimum annual payments on operating leases are as follows
(in thousands):
2005 $14,754
2006 12,731
2007 10,697
2008 7,972
2009 7,318
Thereafter 24,601
-------
$78,073
=======
For certain leased facilities that were abandoned as result of
restructuring actions (see Note 10), the Company accrued estimated losses
for future remaining lease payments subsequent to abandonment, less any
estimated sublease income. The above table of future minimum annual
payments on operating leases includes future payments totaling $9.5
million that are reflected as an obligation for lease exit costs as of
September 30, 2004 in the accompanying Consolidated Balance Sheets.
10. RESTRUCTURING AND IMPAIRMENT COSTS
Fiscal 2004 Restructuring and Impairment Costs: During fiscal 2004,
the Company recorded pre-tax restructuring and impairment costs of $9.3
million. The restructuring costs were primarily associated with additional
lease obligations for two previously abandoned facilities near Seattle,
Washington (the "Seattle facilities"), the planned closure of the
Company's Bothell, Washington ("Bothell") engineering and manufacturing
facility, the write-down of certain components of the Company's ERP
software and the consolidation of a satellite PCB-design office in
Hillsboro, Oregon into another Plexus design office.
47
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The originally estimated cost of the closure of the Seattle
facilities was included in the Company's fiscal 2003 restructuring
actions. The lease-related restructuring costs recorded in fiscal 2003
were based on future lease payments subsequent to abandonment, less
estimated sublease income. As of September 30, 2004, the Seattle
facilities had not been subleased. Based on the remaining term available
to lease these facilities and the weaker than expected conditions in the
local real estate market, the Company determined that it would most likely
not be able to sublease the Seattle facilities. Accordingly, the Company
recorded additional lease-related restructuring costs of $4.2 million in
fiscal 2004. The Company also recorded $0.1 million of lease-related
restructuring costs on a facility in Neenah, Wisconsin ("Neenah"), which
was also included in restructuring actions in fiscal 2003. 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.
As part of our efforts to align the Company's service offering with
the evolving preferences of the Company's customers, the Company is in the
process of replicating the focused capabilities of its Bothell facility at
other Plexus design and manufacturing locations that have higher
productivity. The Company currently anticipates transferring key customer
programs from the Bothell engineering and manufacturing facility to other
Plexus locations primarily in the United States. This restructuring will
reduce the Company's capacity by 97,000 square feet and affect
approximately 160 employees. The Company currently expects the
consolidation efforts will be completed by mid fiscal 2005, subject to
customer timelines. In fiscal 2004, the Company incurred restructuring
costs of $1.8 million, which consisted of $1.5 million associated with
employee terminations and $0.3 million associated with fixed asset
impairments. In fiscal 2005, the Company anticipates the Bothell closure
will result in additional restructuring costs of $8.2 million, which will
consist of $2.2 million associated with employee terminations and $6.0
million associated with the facility lease.
The Company recorded a $1.7 million impairment related to certain
ERP software, which primarily resulted from the Company's deployment
strategy for a shop floor data-collection system. Some elements of the
shop-floor data-collection system will not be deployed because the
originally anticipated business benefits could not be realized. The
remaining elements of the shop floor data-collection system are still
under evaluation. A change in the scope of this project could result in
impairment of the remaining elements of the shop floor data-collection
system. As of September 30, 2004, the capitalized costs of the remaining
elements of the shop floor data system total approximately $3.8 million
and are included in Property, Plant and Equipment in the accompanying
Consolidated Balance Sheet.
Lastly, the Company incurred approximately $1.5 million of other
restructuring and impairment costs in fiscal 2004 primarily related to the
consolidation of the Hillsboro satellite PCB-design office into another
Plexus design office. The Hillsboro related restructuring costs were
primarily for employee termination costs and contract termination costs
associated with leased facilities and software service providers. In
fiscal 2005, the Company anticipates incurring an additional $0.1 million
of restructuring costs related to employee relocations. Approximately 40
employees were affected by this restructuring.
Fiscal 2003 Restructuring and Impairment Costs: During fiscal 2003,
the Company recorded pre-tax restructuring and impairment costs totaling
$59.3 million. These costs resulted from the Company's actions taken in
response to reductions in its end-market demand. These actions included
closing the San Diego and Richmond operating sites, the consolidation of
several leased facilities, re-focusing the PCB design group, a write-off
of goodwill associated with San Diego, the write-down of underutilized
assets to fair value at several locations, and the costs associated with
reductions in the work force for manufacturing, engineering and corporate.
These measures were intended to align the Company's capabilities and
resources with its customer demand.
The Richmond facility was phased out of operations and sold in
September 2003. Production was shifted to other Plexus operating sites in
the United States and Mexico. The closure of Richmond resulted in a
write-down of the building, a write-down of underutilized assets to fair
value, and costs relating to the elimination of the facility's work force.
Building impairment charges totaled $3.7 million related to the Richmond
facility.
48
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The San Diego facility was closed in May 2003. The closure of San
Diego resulted in a write-off of goodwill, the write-down of underutilized
assets to fair value, and costs relating to the elimination of the
facility's work force. Building impairment charges totaled $6.3 million
related to the San Diego facility. During fiscal 2003, goodwill impairment
for San Diego totaled approximately $20.4 million, of which $14.8 million
was impaired as a result of a transitional impairment evaluation under
SFAS No. 142 (see Note 1) and $5.6 million was impaired as a result of the
Company's decision to close the facility.
Other fiscal year 2003 restructuring actions included the
consolidation of several leased facilities, the write-down of
underutilized assets to fair value and work force reductions, which
primarily affected operating sites such as Juarez; Seattle, Washington;
Neenah and the United Kingdom. It also impacted the Company's engineering
and corporate organizations. The employee termination and severance costs
for fiscal 2003 affected approximately 1,000 employees.
Fiscal 2002 Restructuring and Impairment Costs: During fiscal 2002,
the Company recorded restructuring and impairment costs totaling $12.6
million. These charges resulted from the Company's actions taken in
response to reductions in its sales levels and capacity utilization and
included a reduction in work force and the write-off of certain
underutilized assets to fair value at several locations. The employee
termination and severance costs for fiscal 2002 affected approximately 700
employees. The operating site closures included two owned facilities: one
located in Neenah (the oldest of the Company's four facilities in Neenah)
and the other located in Minneapolis, Minnesota ("Minneapolis"). These
facilities were no longer adequate to service the needs of the Company's
customers and would have required significant investment to upgrade. The
Neenah facility was phased out of operations in February 2003 and is
currently used for warehousing and administrative purposes. The
Minneapolis facility was phased out of operation in July 2002 and sold in
October 2002. There was no building impairment charge associated with the
closure of these two facilities. Certain lease consolidations also
occurred in fiscal 2002, which primarily affected the Company's facilities
in Seattle and San Diego.
Employee
Termination and Lease Obligations Non-cash Asset
Severance Costs and Other Exit Costs Write-downs Total
--------------- -------------------- ----------- -----
ACCRUED BALANCE,
OCTOBER 1, 2001 $ 79 $ - $ - $ 79
Restructuring costs 3,819 3,872 4,890 12,581
Adjustment to provisions - - - -
Amounts utilized (3,358) (915) (4,890) (9,163)
---------- ---------- ---------- -----------
ACCRUED BALANCE,
SEPTEMBER 30, 2002 540 2,957 - 3,497
Restructuring costs 10,358 10,940 38,696 59,994
Adjustment to provisions - - (650) (650)
Amount utilized (7,993) (6,005) (38,046) (52,044)
---------- ---------- ---------- -----------
ACCRUED BALANCE,
SEPTEMBER 30, 2003 2,905 7,892 - 10,797
Restructuring costs 2,493 393 2,107 4,993
Adjustment to provisions - 4,310 - 4,310
Amount utilized (3,379) (2,835) (2,107) (8,321)
---------- ---------- ---------- -----------
ACCRUED BALANCE
SEPTEMBER 30, 2004 $ 2,019 $ 9,760 $ - $ 11,779
========== ========== ========== ===========
49
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of September 30, 2004, all of the remaining employee termination
and severance costs are expected to be paid by the end of fiscal 2005,
while approximately $3.2 million of the lease obligations and other exit
costs are expected to be paid in the next twelve months. The remaining
liability for lease payments is expected to be paid through June 2008.
11. BENEFIT PLANS
Employee Stock Purchase Plan: On March 1, 2000, the Company
established a qualified Employee Stock Purchase Plan (the "2000 Purchase
Plan"), the terms of which allow for qualified employees to participate in
the purchase of the Company's common stock at a price equal to the lower
of 85 percent of the average high and low stock price at the beginning or
end of each semi-annual stock purchase period. The Company may issue up to
2.0 million shares of its common stock under the ESPP. During fiscal 2004,
2003 and 2002, the Company issued approximately 186,000, 253,000 and
132,000 shares of common stock, respectively, under the 2000 Purchase
Plan, which were issued for $2.0 million, $1.9 million, and $2.4 million,
respectively. The 2000 Purchase Plan expires on June 30, 2005.
In July 2004, the Board of Directors approved the 2005 Employee
Stock Purchase Plan (the "2005 Purchase Plan"), subject to shareholder
approval at the Company's annual meeting. If approved, the Company may
issue up to 1.5 million shares of its common stock under the 2005 Purchase
Plan. The terms of the 2005 Purchase Plan are substantially similar to the
2000 Purchase Plan. Upon shareholder approval, the 2005 Purchase Plan
would be effective July 1, 2005 and terminate on June 30, 2010, unless all
shares authorized under the 2005 Purchase Plan have been issued prior to
that date.
401(k) Savings Plans: The Company's 401(k) savings plans cover all
eligible employees. The Company matches employee contributions, after one
year of service, up to 2.5 percent of eligible earnings. The Company's
contributions for fiscal 2004, 2003 and 2002 totaled $2.2 million, $2.3
million and $2.2 million, respectively.
Stock Option Plans: Under the Company's 1998 Option Plan (the "1998
Plan"), the Company has reserved 12.0 million shares of common stock for
grant to officers and key employees under an employee stock option plan,
of which 11.5 million shares, net of cancellations, have been granted. The
exercise price of each option granted must not be less than the fair
market value on the date of grant. Options vest over a three-year period
from date of grant and have a term of ten years. The plan also authorizes
the Company to grant 600,000 stock appreciation rights (in lieu of options
for 600,000 shares), none of which have been granted.
Under the Company's 1995 Directors Plan (the "1995 Plan"), each
outside director of the Company is granted 3,000 stock options each
December 1, with the option pricing similar to the employee plan.
Commencing in fiscal 2004, to reflect an adjustment for a prior stock
split, each outside director of the Company will be granted 6,000 stock
options each December 1. These options vest immediately and can be
exercised after a minimum six-month holding period. The 400,000 shares of
common stock authorized under this plan may come from any combination of
authorized but unissued shares, treasury stock or the open market. As of
September 30, 2004, options for approximately 182,000 shares have been
granted and options for approximately 218,000 shares are available for
grant under this plan. The 1995 Plan expires on December 31, 2004.
In July 2004, the Board of Directors adopted the 2005 Equity
Incentive Plan (the "2005 Plan"), subject to shareholder approval at the
Company's annual meeting. The 2005 Plan is intended to constitute a
stock-based incentive plan for the Company and includes provisions by
which the Company may grant stock-based awards to directors, executive
officers and other officers and key employees. If approved, the maximum
number of shares of Plexus common stock that may be issued pursuant to the
2005 Plan is 2.7 million shares, all of which may be issued pursuant to
stock options, although up to 600,000 shares may be issued pursuant to
stock appreciation rights and no more than 400,000 shares may be issued
pursuant to restricted stock awards. No stock-based awards have been
issued under the 2005 Plan and none will be granted prior to shareholder
approval of the 2005 Plan. If the 2005 Plan is approved, no further awards
will be made under the 1998 Option Plan.
50
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of the Company's stock option activity follows:
SHARES WEIGHTED AVERAGE
(IN THOUSANDS) EXERCISE PRICE
-------------- --------------
Options outstanding as of October 1, 2001 3,871 $ 18.04
Granted 915 25.23
Cancelled (163) 29.43
Exercised (141) 9.01
-------
Options outstanding as of September 30, 2002 4,482 $ 19.40
Granted 1,145 10.87
Cancelled (391) 23.74
Exercised (324) 5.46
-------
Options outstanding as of September 30, 2003 4,912 $ 17.99
Granted 749 15.94
Cancelled (341) 24.26
Exercised (391) 8.37
-------
Options outstanding as of September 30, 2004 4,929 $ 18.00
Options exercisable as of:
September 30, 2002 2,954 $ 15.55
======= =======
September 30, 2003 3,131 $ 18.97
======= =======
September 30, 2004 3,365 $ 19.34
======= =======
The following table summarizes outstanding stock option information
as of September 30, 2004 (shares in thousands):
Number of Number of Weighted
Range of shares Weighted Average Weighted Average shares Average
Exercise Prices Outstanding Exercise Price Remaining Life Exercisable Exercise Price
- --------------- ----------- -------------- -------------- ----------- --------------
$ 0.63- $ 7.86 558 $ 5.19 2.2 558 $ 5.19
$ 7.87- $15.71 1,868 $12.11 6.4 1,210 $12.72
$15.72- $23.57 1,181 $18.76 8.2 485 $22.89
$23.58- $31.43 662 $25.54 7.4 452 $25.58
$31.44- $47.14 639 $35.76 5.2 639 $35.76
$47.15- $70.71 21 $60.32 5.6 21 $60.32
$ 0.63- $70.71 4,929 $18.00 6.4 3,365 $19.34
The weighted average fair value of options granted per share during
fiscal 2004, 2003 and 2002 is $9.56, $7.46 and $15.55, respectively. The
fair value of each option grant is estimated at the date of grant using
the Black-Scholes option-pricing method with the following assumption
ranges: 66 percent to 67 percent volatility, risk-free interest rates
ranging from 2.8 percent to 4.6 percent, expected option life of 5.3 to
9.1 years, and no expected dividends.
51
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred Compensation Plan: In September 1996, the Company entered
into agreements with certain of its former executive officers under a
nonqualified deferred compensation plan. Under the plan, the Company
agreed to pay to these former executives, or their designated
beneficiaries upon such executives' death, certain amounts annually for
the first 15 years subsequent to their retirement. Life insurance
contracts owned by the Company will fund this plan. Expense for this plan
totaled approximately $0.4 million, $0.4 million and $1.8 million in
fiscal 2004, 2003, and 2002, respectively.
In fiscal 2000, the Company established an additional deferred
compensation plan for its executive officers and other key employees (the
"Executive Deferred Compensation Plan"). Under the Executive Deferred
Compensation Plan, a covered executive may elect to defer some or all of
his or her compensation into the plan, and the Company may credit the
participant's account with a discretionary employer contribution.
Participants are entitled to payment of deferred amounts and any earnings,
which may be credited thereon upon termination or retirement from Plexus.
From fiscal 2000 through fiscal 2002, key employee salary deferrals
in and discretionary contributions of the Company to the Executive
Deferred Compensation Plan were effected through a split-dollar life
insurance program, whereby Plexus entered into split-dollar life insurance
agreements with various executive officers and key employees. Under these
agreements, Plexus paid a minimum annual premium of $13,500 per policy,
and such additional premiums as it determined. Upon the death of the
covered employee, Plexus had an interest in the proceeds of the policy
equal to the premiums paid. Premium payments made by the Company totaled
approximately $0.1 million in fiscal 2002.
In fiscal 2003, due to changes in law, Plexus terminated the
split-dollar life insurance program and replaced it with a rabbi trust
arrangement (the "Trust"). The Trust allows investment of deferred
compensation, held on behalf of the participants, into individual accounts
and, within these accounts, into one or more designated investments.
Investment choices do not include Plexus stock. During fiscal 2003, the
cash value proceeds that were received upon the surrender of the
split-dollar life insurance policies attributable to each plan participant
totaled approximately $0.4 million and were placed into the Trust. In each
of fiscal 2004 and 2003, the Company made a contribution to the
participants' accounts in the amount of $13,500 per participant, or
approximately $0.1 million in total in each period. The Trust assets are
subject to the claims of the Company's creditors. As of September 30, 2004
and 2003, the Trust assets totaled $1.1 million and $0.7 million,
respectively and the related liability to the participants totaled
approximately $1.2 million and $0.7 million, respectively. The Trust
assets and the related liability to the participants are included in Other
assets and Other liabilities, respectively, in the accompanying
Consolidated Balance Sheets.
Other: The Company is not obligated to provide any post-retirement
medical or life insurance benefits to employees.
12. CONTINGENCIES
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 attorney's fees. The Company has obtained a stay
of action pending developments in other related litigation. On January 23,
2004, the judge in the other related litigation ruled against Lemelson,
thereby declaring the Lemelson patents unenforceable and invalid. Lemelson
has appealed this ruling. The lawsuit against the Company remains stayed
pending the outcome of that appeal. The Company believes the vendors from
whom the patent equipment was purchased may be required to contractually
indemnify the Company. However, based upon the Company's observation of
Lemelson's actions in other parallel cases, it appears that the primary
objective of Lemelson is to cause other parties to enter into license
agreements. If a judgment is rendered and/or a license fee required, it is
the opinion of management of the Company that such judgment, or fee, would
not be material to the Company's financial position, results of operations
or cash flows.
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.
52
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. BUSINESS SEGMENT, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
The Company operates in one business segment. The Company provides
product realization services to electronic OEMs. The Company has three
reportable geographic regions: North America, Europe and Asia. The Company
has 19 active manufacturing and 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. Interregional 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):
Years ended September 30,
----------------------------------------
2004 2003 2002
---- ---- ----
Net sales:
North America $ 828,354 $ 704,057 $ 783,660
Europe 107,802 62,522 78,826
Asia 104,702 41,258 21,117
----------- --------- ---------
$ 1,040,858 $ 807,837 $ 883,603
=========== ========= =========
As of September 30,
-------------------------------
2004 2003
---- ----
Long-lived assets:
North America $ 108,697 $ 121,434
Europe 35,837 34,251
Asia 19,231 8,094
----------- ---------
$ 163,765 $ 163,779
=========== =========
Long-lived assets as of September 30, 2004 and 2003 exclude other
non-operating long-term assets totaling $7.5 million and $30.9 million,
respectively.
Juniper Networks, Inc. ("Juniper") accounted for 14 percent of our
net sales in fiscal 2004 and Siemens Medical Systems, Inc. accounted for
12 percent of our net sales in fiscal 2003. No other customer accounted
for 10 percent or more of our net sales in fiscal 2004 or 2003. No
customer accounted for 10 percent or more of net sales in fiscal 2002.
Accounts receivable related to Juniper represented approximately 15
percent and 12 percent, respectively, of the Company's total accounts
receivable balance as of September 30, 2004 and 2003. No other customer
represented ten percent or more of the Company's total trade receivable
balance as of September 30, 2004 or 2003.
14. GUARANTEES
In November 2002, Financial Accounting Standards Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" was
issued. FIN No. 45 requires a Company, at the time it issues a guarantee,
to recognize an initial liability for the fair value of obligations
assumed under the guarantee and to elaborate on existing disclosure
requirements. The initial recognition requirements of FIN No. 45 are
effective for guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN No. 45 were effective in the Company's
first quarter of fiscal 2003. Adoption of the initial recognition
provisions of FIN No. 45 did not have a material impact on these
Consolidated Financial Statements.
The Company offers certain indemnifications under its customer
manufacturing agreements. In the normal course of business, the Company
may from time to time be obligated to indemnify its customers or its
customers' customers against damages or liabilities arising out of the
Company's negligence, breach of contract, or infringement of third party
intellectual property rights relating to its manufacturing processes.
Certain of the manufacturing agreements have extended broader
indemnification and while most agreements have contractual limits, some do
not. However, the Company generally excludes from such indemnities, and
seeks indemnification from its customers for, damages or liabilities
arising out of the Company's adherence
53
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
to customers' specifications or designs or use of materials furnished, or
directed to be used, by its customers. The Company does not believe its
obligations under such indemnities are material.
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 sales are 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 fiscal 2004 and 2003 (in thousands):
Limited warranty liability, as of October 1, 2002 $ 1,246
Accruals for warranties issued during the period 150
Accruals related to pre-existing warranties (20)
Settlements (in cash or in kind) during the period (391)
---------
Limited warranty liability, as of September 30, 2003 985
Accruals for warranties issued during the period 148
Settlements (in cash or in kind) during the period (200)
---------
Limited warranty liability, as of September 30, 2004 $ 933
=========
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 2004 and 2003 consists of
(in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
2004 QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------- ------- ------- ------- -----
Net sales $ 238,464 $ 254,272 $ 274,817 $ 273,305 $ 1,040,858
Gross profit 19,627 21,181 22,979 22,991 86,778
Net loss 2,499 3,471 (768) (36,782) (31,580)
Earnings per share:
Basic $ 0.06 $ 0.08 $ (0.02) $ (0.85) $ (0.74)
Diluted $ 0.06 $ 0.08 $ (0.02) $ (0.85) $ (0.74)
54
PLEXUS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FIRST SECOND THIRD FOURTH
2003 QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------- ------- ------- ------- -----
Net sales $ 205,379 $ 190,773 $ 195,609 $ 216,076 $ 807,837
Gross profit 15,540 9,623 11,829 15,973 52,965
Loss before cumulative
effect of change in
accounting for
goodwill (20,832) (5,044) (14,747) (3,873) (44,496)
Cumulative effect of
change in accounting
for goodwill, net of
tax (23,482) - - - (23,482)
Net loss (44,314) (5,044) (14,747) (3,873) (67,978)
Earnings per share:
Basic and Diluted:
Loss before
cumulative effect of
change in accounting
for goodwill $ (0.49) $ (0.12) $ (0.35) $ (0.09) $ (1.05)
Cumulative effect of
change in accounting
for goodwill, net of
tax (0.56) - - - (0.56)
Net loss $ (1.05) $ (0.12) $ (0.35) $ (0.09) $ (1.61)
Earnings per share is computed independently for each quarter. The annual
total amounts may not equal the sum of the quarterly amounts due to rounding.
In the third and fourth quarters of fiscal 2004, the Company recorded
pre-tax restructuring and impairment costs of $5.5 million and $3.8 million,
respectively. These costs were primarily associated with lease obligations for
two previously abandoned facilities near Seattle, Washington, the planned
closure of the Bothell engineering and manufacturing facility, the write-down of
certain ERP software and the consolidation of a satellite PCB-design office in
Hillsboro, Oregon into another Plexus design office. In the fourth quarter of
fiscal 2004, the Company also recorded a full valuation allowance on all of its
U.S. deferred income tax assets.
In the first, third and fourth quarters of fiscal 2003, the Company
recorded pre-tax restructuring and impairment costs of $31.8 million, $19.6
million and $7.9 million, respectively. These costs resulted from our actions
taken in response to reductions in our end-market demand. These actions included
closing our San Diego and Richmond operating sites, the consolidation of several
leased facilities, re-focusing our PCB design group, a write-off of goodwill
associated with the San Diego operating site, the write-down of underutilized
assets to fair value at several locations, and the costs associated with a
reduction in work force in several operating sites, engineering and corporate
groups. These measures were intended to align the Company's capabilities and
resources with its lower demand.
In addition, the Company adopted SFAS No. 142 for the accounting of
goodwill and other intangible assets on October 1, 2002. Under the transitional
provisions of SFAS No. 142, the Company identified reporting units with
goodwill, performed impairment tests on the net goodwill and other
indefinite-lived intangible assets associated with each reporting unit using a
valuation date as of October 1, 2002, and determined that a pre-tax transitional
impairment charge of $28.2 million was required at the San Diego and Juarez
operating sites. The impairment charge was recorded in the first quarter of
fiscal 2003 as a cumulative effect of a change in accounting for goodwill.
* * * * *
55
PLEXUS CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended September 30, 2004, 2003 and 2002 (in thousands)
ADDITIONS
BALANCE AT ADDITIONS FROM CHARGED TO
BEGINNING OF MERGERS/ COSTS AND BALANCE AT END
DESCRIPTIONS PERIOD ACQUISITIONS EXPENSES DEDUCTIONS OF PERIOD
------------ ------------ ------------ -------- ---------- ---------
Fiscal Year 2004:
Allowance for losses on accounts receivable
(deducted from the asset to which it relates) $ 4,100 $ - $ - $ 2,100 $ 2,000
Valuation allowance on deferred income tax
assets (deducted from the asset to which it
relates) $ - $ - $ 36,818 $ - $ 36,818
Fiscal Year 2003:
Allowance for losses on accounts receivable
(deducted from the asset to which it relates) $ 4,200 $ - $ 438 $ 538 $ 4,100
Valuation allowance on deferred income tax
assets (deducted from the asset to which it
relates) $ - $ - - $ - $ -
Fiscal Year 2002:
Allowance for losses on accounts receivable
(deducted from the asset to which it relates) $ 6,500 $ 51 $ 2,994 $ 5,345 $ 4,200
Valuation allowance on deferred income tax
assets (deducted from the asset to which it
relates) $ - $ - - $ - $ -
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By: PLEXUS CORP. (Registrant)
/s/ Dean A. Foate
------------------------------------
Dean A. Foate, President and Chief Executive Officer
December 8, 2004
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dean A. Foate, F. Gordon Bitter and Joseph D.
Kaufman, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this report, and to file the same with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, and any
other regulatory authority, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirement of the Security Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.*
SIGNATURE AND TITLE
/s/ Dean A. Foate /s/ Steven P. Cortinovis
- ------------------------------------------------------------ --------------------------------------------------
Dean A. Foate, President, Chief Executive Officer, and Steven P. Cortinovis, Director
Director (Principal Executive Officer)
/s/ F. Gordon Bitter /s/ David J. Drury
- ------------------------------------------------------------ --------------------------------------------------
F. Gordon Bitter, Vice President and Chief Financial David J. Drury, Director
Officer (Principal Financial Officer)
/s/ Simon J. Painter /s/ Thomas J. Prosser
- ------------------------------------------------------------ --------------------------------------------------
Simon J. Painter, Corporate Controller (Principal Thomas J. Prosser, Director
Accounting Officer)
/s/ John L. Nussbaum /s/ Dr. Charles M. Strother
- ------------------------------------------------------------ --------------------------------------------------
John L. Nussbaum, Chairman and Director Dr. Charles M. Strother, Director
/s/ Ralf R. Boer /s/ Jan K. Ver Hagen
- ------------------------------------------------------------ --------------------------------------------------
Ralf R. Boer, Director Jan K. Ver Hagen, Director
* Each of the above signatures is affixed as of December 8, 2004.
57
EXHIBIT INDEX
PLEXUS CORP.
10-K FOR YEAR ENDED SEPTEMBER 30, 2004
INCORPORATED BY FILED
EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH
----------- ------- --------------- --------
3(i) Restated Articles of Incorporation of Exhibit 3(i) to Plexus' Report on Form 10-Q
Plexus Corp., as amended through March for the quarter ended March 31, 2004
13, 2001 ("3/31/01")
3(ii) Bylaws of Plexus Corp., as amended Exhibit 3(ii) to Plexus' Report on Form 10-Q
through March 7, 2001 for the quarter ended March 31, 2001
4.1 Restated Articles of Incorporation of Exhibit 3(i) above
Plexus Corp.
4.2 (a) Amended and Restated Shareholder Exhibit 1 to Plexus'
Rights Agreement, dated as of Form 8-A/A filed
August 13, 1998, (as amended through on December 6, 2000
November 14, 2000) between Plexus and
Firstar Bank, N.A. (n/k/a US Bank,
N.A.) as Rights Agent, including form
of Rights Certificates
(b) Agreement of Substitution and First Exhibit 4.2 (b) to Plexus' Annual Report on
Amendment to the Amended and Restated Form 10-K for the fiscal year ended September
Shareholder Rights Agreement dated as 30, 2002
of December 5, 2002
10.1 (a) Supplemental Executive Retirement Exhibit 10.1 (b) to Plexus' Report on Form
Agreements with John Nussbaum dated as 10-K for the fiscal year ended September 30,
of September 19, 1996**: 1996
(b) First Amendment Agreement to Exhibit 10.1 to Plexus' Quarterly Report on
Supplemental Retirement Agreement Form 10-Q for the quarter ended December 31,
between Plexus and John Nussbaum, dated 2000
as of September 1, 1999
10.2 Forms of Change of Control Agreements Exhibit 10.2(a) to Plexus Annual Report on
dated October 1, 2003 with ** Form 10-K for the fiscal year ended September
30, 2003 ("2003 10-K")
(a) Dean A. Foate
F. Gordon Bitter
David A. Clark
Thomas J. Czajkowski
Paul L. Ehlers
Joseph D. Kaufman
Michael J. McGuire
J. Robert Kronser
David H. Rust
Michael T. Verstegen
INCORPORATED BY FILED
EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH
----------- ------- --------------- --------
Exhibit 10.2(b) to 2003 10-K
(b) George W.F. Setton
Simon J. Painter
10.3 Plexus Corp. 1998 Option Plan** Exhibit A to Plexus' definitive proxy
statement for its 1998 Annual Meeting of
Shareholders
10.4 (a) Plexus Corp. 1995 Directors' Stock Exhibit 10.10 to 1994 10-K
Option Plan**
10.4 (b) Summary of Directors' Compensation X
(12/04)**
10.5 Plexus Corp. 2005 Equity Incentive Plan Exhibit A to Plexus' definitive proxy
(subject to shareholder approval) statement for its 2005 Annual Meeting of
Shareholders
10.6 (a) Credit Agreement dated as of Exhibit 10.6 to 2003 10-K
October 22, 2003 among Plexus, certain
Plexus subsidiaries and various lending
institutions whose Administrative Agent
is Harris Trust and Savings Bank
(b) First Amendment and Waiver to Exhibit 10.6(b) to 2003 10-K
Credit Agreement; dated as of
October 31, 2003
(c) Second Amendment to Credit Exhibit 10.1 to Plexus' Report on Form 10-Q
Agreement, dated as of April 29, 2004 for the quarter ended June 30, 2004
("6/30/04 10-Q")
(d) Third Amendment to Credit Exhibit 10.2 to 6/30/04 10-Q
Agreement, dated as of July 13, 2004
(e) Fourth Amendment to Credit Exhibit 10.3 to 6/30/04 10-Q
Agreement, dated as of August 5, 2004
(f) Fifth Amendment to Credit Exhibit 10.1 to Plexus' Current Report on
Agreement, dated as of November 8, 2004 Form 8-K dated November 8, 2004
10.7 (a) Lease Agreement between Neenah (WI) Exhibit 10.8(a) to Plexus' Report on Form
QRS 11-31, Inc. ("QRS: 11-31") and 10-K for the year ended September 30, 1994
Electronic Assembly Corp. (n/k/a Plexus ("1994 10-K")
Services Corp.), dated August 11, 1994
(b) Guaranty and Suretyship Agreement Exhibit 10.8(c) to 1994 10-K
between Plexus Corp. and QRS: 11-31
dated August 11, 1994, together with
related Guarantor's Certificate
10.8 (a) Plexus Corp. 2004 Incentive Exhibit 10.8(b) to 2003 10-K
Compensation Plan- Executive Leadership
Team **
INCORPORATED BY FILED
EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH
----------- ------- --------------- --------
10.8 (b) Plexus Corp. 2005 Variable Incentive X
Compensation Plan - Executive
Leadership Team **
10.9 Plexus Corp. Executive Deferred Exhibit 10.17 to 2000 10-K
Compensation Plan**
10.10 Form of Split Dollar Life Insurance Exhibit 10.18 to 2000 10-K
Agreements between Plexus and each of
[superceded]: **
Dean A. Foate
J. Robert Kronser
Joseph D. Kaufman
Paul L. Ehlers
Michael T. Verstegen
David A. Clark
10.11 Plexus Corp Executive Deferred Exhibit 10.14 to 2003 10-K
Compensation Plan Trust dated April 1,
2003 between Plexus Corp. and Bankers
Trust Company**
10.12 (a) Employment Agreement dated as of Exhibit 10.3 to 6/30/02 10-Q
July 1, 2002, between Plexus Corp. and
Dean A. Foate** [superceded]
(b) Amended and Restated Employment Exhibit 10.14 to 2003 10-K
Agreement dated as of September 1, 2003
between Plexus Corp and Dean A. Foate * *
10.13 (a) Amended and Restated Receivables Exhibit 10.1 to Plexus' Quarterly Report on
Sale Agreement, dated July 1, 2001, Form 10-Q for the quarter ended June 30,
between Plexus Services Corp. and 2001 ("6/30/01 10-Q")
Plexus ABS, Inc.
Exhibit 10.1 to Plexus' Quarterly Report on
(b) First Amendment to amended and Form 10-Q for the quarter ended June 30,
Restated Receivables Sale Agreement, 2002 ("6/30/02 10-Q")
dated June 28, 2002, between Plexus
Services Corp. and Plexus ABS, Inc.
10.14 (a) Receivables Purchase Agreement Exhibit 10.10(a) to 2000 10-K
dated as of October 6, 2000, among
Plexus, Preferred Receivables Funding
Corporation and Bank One, NA
(b) First Amendment to Receivables Exhibit 10.2 to 6/30/01 10-Q
Purchase Agreement, dated July 1, 2001
(c) Second Amendment to Receivables
Purchase Agreement, dated October 3, Exhibit 10.2(a) to 6/30/02 10-Q
2001
(d) Limited Waiver and Third Amendment
to Receivables Purchase Agreement, Exhibit 10.2(b) to 6/30/02
dated April 25, 2002 10-Q
(e) Fourth Amendment to Receivables Exhibit 10.2(c) to 6/30/02
INCORPORATED BY FILED
EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH
----------- ------- --------------- --------
Purchase Agreement, dated June 28, 2002 10-Q
(f) Fifth Amendment to Receivables Exhibit 10.2(f) to 2002 10-K
Purchase Agreement, dated September 30,
2002
(g) Limited Waiver and Sixth Amendment Exhibit 10.2(g) to 2002 10-K
to Receivables Purchase Agreement,
dated December 4, 2002
(h) Limited Waiver and Seventh Exhibit 10.2 to 12/31/02 10-Q.
Amendment to Receivables Purchase
Agreement, dated January 28, 2003
(i) Limited Waiver and Seventh Exhibit 10.4 to Plexus' Quarterly Report on
Amendment to Receivables Purchase Form 10-Q for the quarter ended December 31,
Agreement, dated January 28, 2003 2002
Note: All agreements included in Exhibit 10.13 and 10.14 were terminated in September 2003
21 List of Subsidiaries X
23 Consent of PricewaterhouseCoopers LLP X
24 Power of Attorney (Signature Page Hereto)
31.1 Certification of Chief Executive Officer X
pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer X
pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the CEO pursuant to 18 X
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the CFO pursuant to 18 X
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------------------
**Designates management compensatory plans or agreements.