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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the Quarter ended December 31, 2003
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-14824
PLEXUS CORP.
(Exact name of registrant as specified in charter)
Wisconsin 39-1344447
(State of Incorporation) (IRS Employer Identification No.)
55 Jewelers Park Drive
Neenah, Wisconsin 54957-0156
(Address of principal executive offices)(Zip Code)
Telephone Number (920) 722-3451
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 under the Exchange Act).
Yes (X) No ( )
As of February 9, 2004 there were 42,966,015 shares of Common Stock of
the Company outstanding.
1
PLEXUS CORP.
TABLE OF CONTENTS
December 31, 2003
PART I. FINANCIAL INFORMATION................................................................................... 3
Item 1. Consolidated Financial Statements.............................................................. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)................ 3
CONDENSED CONSOLIDATED BALANCE SHEETS.......................................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS................................................ 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 13
"SAFE HARBOR" CAUTIONARY STATEMENT............................................................. 13
OVERVIEW....................................................................................... 13
RESULTS OF OPERATIONS.......................................................................... 14
LIQUIDITY AND CAPITAL RESOURCES................................................................ 17
CONTRACTUAL OBLIGATIONS AND COMMITMENTS........................................................ 18
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES.................................................. 18
NEW ACCOUNTING PRONOUNCEMENTS.................................................................. 19
RISK FACTORS................................................................................... 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 27
Item 4. Controls and Procedures....................................................................... 27
PART II - OTHER INFORMATION...................................................................................... 28
Item 1. Legal Proceedings.............................................................................. 28
Item 6. Exhibits and Reports on Form 8-K.............................................................. 28
SIGNATURE........................................................................................................ 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Unaudited
Three Months Ended
December 31,
-----------------------
2003 2002
---------- ----------
Net sales $ 238,464 $ 205,379
Cost of sales 218,837 189,839
---------- ----------
Gross profit 19,627 15,540
Operating expenses:
Selling and administrative expenses 16,356 16,755
Restructuring and impairment costs - 31,840
---------- ----------
16,356 48,595
---------- ----------
Operating income (loss) 3,271 (33,055)
Other income (expense):
Interest expense (663) (773)
Miscellaneous 516 518
---------- ----------
Income (loss) before income taxes and cumulative
effect of change in accounting for goodwill 3,124 (33,310)
Income tax expense (benefit) 625 (12,478)
---------- ----------
Income (loss) before cumulative effect
of change in accounting for goodwill 2,499 (20,832)
Cumulative effect of change in accounting for goodwill,
net of income tax benefit of $4,755 - (23,482)
---------- ----------
Net income (loss) $ 2,499 $ (44,314)
========== ==========
Earnings per share:
Basic
Income (loss) before cumulative effect of change in accounting for goodwill $ 0.06 $ (0.49)
Cumulative effect of change in accounting for goodwill - (0.56)
---------- ----------
Net income (loss) $ 0.06 $ (1.05)
========== ==========
Diluted
Income (loss) before cumulative effect of change in accounting for goodwill $ 0.06 $ (0.49)
Cumulative effect of change in accounting for goodwill - (0.56)
---------- ----------
Net income (loss) $ 0.06 $ (1.05)
========== ==========
Weighted average shares outstanding:
Basic 42,651 42,069
========== ==========
Diluted 43,738 42,069
========== ==========
Comprehensive income (loss):
Net income (loss) $ 2,499 $ (44,314)
Foreign currency hedges and translation adjustments 4,823 1,223
---------- ----------
Comprehensive income (loss) $ 7,322 $ (43,091)
========== ==========
See notes to condensed consolidated financial statements.
3
PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
December 31, September 30,
2003 2003
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 41,176 $ 58,993
Short-term investments 18,489 19,701
Accounts receivable, net of allowance of $3,300
and $4,100, respectively 117,906 111,125
Inventories 162,889 136,515
Deferred income taxes 24,645 23,723
Prepaid expenses and other 7,750 8,326
------------ -------------
Total current assets 372,855 358,383
Property, plant and equipment, net 129,655 131,510
Goodwill 33,928 32,269
Deferred income taxes 26,293 24,921
Other 6,695 5,971
------------ -------------
Total assets $ 569,426 $ 553,054
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 1,038 $ 958
Accounts payable 97,338 91,445
Customer deposits 16,372 14,779
Accrued liabilities:
Salaries and wages 17,870 17,133
Other 24,027 23,753
------------ -------------
Total current liabilities 156,645 148,068
Capital lease obligations, net of current portion 23,625 23,502
Other liabilities 10,010 10,468
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 200,000 shares authorized, 42,679
and 42,607 shares issued and outstanding, respectively 427 426
Additional paid-in capital 262,021 261,214
Retained earnings 105,339 102,840
Accumulated other comprehensive income 11,359 6,536
------------ -------------
379,146 371,016
------------ -------------
Total liabilities and shareholders' equity $ 569,426 $ 553,054
============ =============
See notes to condensed consolidated financial statements.
4
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Three Months Ended
December 31,
--------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,499 $(44,314)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization 6,444 7,375
Cumulative effect of change in accounting for goodwill - 28,237
Non-cash goodwill and asset impairments - 16,922
Deferred income taxes (2,294) (17,385)
Net repayments under asset securitization facility - (3,614)
Income tax benefit of stock option exercises 189 249
Changes in assets and liabilities:
Accounts receivable (5,438) 8,812
Inventories (25,238) (9,814)
Prepaid expenses and other (467) (359)
Accounts payable 4,985 (1,314)
Customer deposits 1,581 (318)
Accrued liabilities and other 791 12,402
-------- --------
Cash flows used in operating activities (16,948) (3,121)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales and maturities of short-term investments 1,212 13,026
Payments for property, plant and equipment (3,612) (10,667)
-------- --------
Cash flows provided by (used in) investing activities (2,400) 2,359
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt and capital lease obligations (223) (437)
Proceeds from exercise of stock options 619 491
-------- --------
Cash flows provided by financing activities 396 54
-------- --------
Effect of foreign currency translation on cash and cash
equivalents 1,135 428
-------- --------
Net decrease in cash and cash equivalents (17,817) (280)
Cash and cash equivalents:
Beginning of period 58,993 63,347
-------- --------
End of period $ 41,176 $ 63,067
======== ========
See notes to condensed consolidated financial statements.
5
PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by Plexus Corp. ("Plexus" or the "Company") without audit and
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. In the opinion of the Company, the financial statements
reflect all adjustments, which include normal recurring adjustments necessary to
present fairly the financial position of the Company as of December 31, 2003,
and the results of operations for the three months ended December 31, 2003 and
2002, and the cash flows for the same three-month periods.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the SEC rules and
regulations dealing with interim financial statements. However, the Company
believes that the disclosures made in the condensed consolidated financial
statements included herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's 2003 Annual Report on Form 10-K.
NOTE 2 - INVENTORIES
The major classes of inventories are as follows (in thousands):
December 31, September 30,
2003 2003
------------- -------------
Raw materials $ 110,238 $ 88,562
Work-in-process 40,174 41,514
Finished goods 12,477 6,439
------------- -------------
$ 162,889 $ 136,515
============= =============
NOTE 3 - FORMER FINANCING
In fiscal 2001, the Company entered into an amended agreement to sell
up to $50 million of trade accounts receivable without recourse to Plexus ABS
Inc. ("ABS"), a wholly owned limited-purpose subsidiary of the Company. This
asset securitization facility expired in September 2003 (the "former asset
securitization facility"). ABS was a separate corporate entity that sold
participating interests in a pool of the Company's accounts receivable to
financial institutions, under a separate agreement. Accounts receivable sold to
financial institutions were reflected as a reduction to accounts receivable in
the Consolidated Balance Sheets. For the three months ended December 31, 2003,
the Company did not incur any financing costs associated with the former asset
securitization facility due to its expiration in September 2003. For the three
months ended December 31, 2002, the Company incurred financing costs of $0.1
million under the former asset securitization facility. These financing costs
are included in interest expense in the accompanying Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss). In addition, the net
repayments under the agreement during the three months ended December 31, 2002
are included in the cash flows from operating activities in the accompanying
Condensed Consolidated Statements of Cash Flows.
The Company had a previous credit facility (the "Old Credit Facility"),
which it terminated, effective December 26, 2002. No amounts were outstanding
during the first quarter of fiscal 2003. 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 in the first quarter of fiscal 2003 (see Note 11). 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 the three months ended
December 31, 2002.
6
NOTE 4 - CURRENT FINANCING
On October 22, 2003, the Company entered into a secured three-year
revolving credit facility (the "Secured Credit Facility") with a group of banks
that allows the Company to borrow up to $100 million. No amounts were
outstanding during the first quarter of fiscal 2004. Borrowings under the
Secured Credit Facility will be either through revolving or swing loans or
letters 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 the
LIBOR rate plus 1.5 percent. The Company is also required to pay an annual
commitment fee of 0.5 percent of the unused credit commitment, up to a maximum
amount of $0.5 million per year. Origination fees and expenses totaled
approximately $0.7 million, which have been deferred and are being amortized to
interest expense over the term of the Secured Credit Facility. The Secured
Credit Facility matures on October 22, 2006 and contains certain financial
covenants. These covenants include a maximum total leverage ratio, a minimum
balance of domestic cash or marketable securities, a minimum tangible net worth
and a minimum adjusted EBITDA, as defined in the agreement. Interest expense
related to the commitment fee and amortization of deferred origination fees
totaled approximately $0.1 million for the three months ended December 31, 2003.
NOTE 5 - EARNINGS PER SHARE
The following is a reconciliation of the amounts utilized in the
computation of basic and diluted earnings per share (in thousands, except per
share amounts):
Three Months Ended
December 31,
-------------------
2003 2002
-------- --------
Earnings:
Income (loss) before cumulative effect of change
in accounting for goodwill $ 2,499 $(20,832)
Cumulative effect of change in accounting
for goodwill, net of income tax benefit of $4,755 - (23,482)
-------- --------
Net income (loss) $ 2,499 $(44,314)
======== ========
Basic weighted average common shares outstanding 42,651 42,069
Dilutive effect of stock options 1,087 -
-------- --------
Diluted weighted average shares outstanding 43,738 42,069
======== ========
Basic and diluted earnings per share:
Income (loss) before cumulative effect of change
in accounting for goodwill $ 0.06 $ (0.49)
Cumulative effect of change in accounting
for goodwill, net of income taxes - (0.56)
-------- --------
Net income (loss) $ 0.06 $ (1.05)
======== ========
For the three months ended December 31, 2003, stock options to purchase
approximately 2.0 million shares of common stock were outstanding but not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the common shares.
For the three months ended December 31, 2002, stock options to purchase
approximately 3.5 million shares of common stock were outstanding, but were not
included in the computation of diluted earnings per share because there was a
net loss in this period, and therefore their effect would be anti-dilutive.
NOTE 6 - STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under the guidelines of
Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense
related to the stock option plans has been recognized in the Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss). The
Company utilizes the
7
Black-Scholes option valuation model to value stock options for pro forma
presentation of income and per share data as if the fair value based method in
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123"
had been used to account for stock-based compensation. The following presents
pro forma net income (loss) and per share data as if a fair value based method
had been used to account for stock-based compensation (in thousands, except per
share amounts):
Three Months Ended
December 31,
---------------------------
2003 2002
------------ ------------
Net income (loss) as reported $ 2,499 $ (44,314)
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 (1,952) (2,237)
------------ ------------
Proforma net income (loss) $ 547 $ (46,551)
============ ============
Earnings per share:
Basic, as reported $ 0.06 $ (1.05)
============ ============
Basic, proforma $ 0.01 $ (1.11)
============ ============
Diluted, as reported $ 0.06 $ (1.05)
============ ============
Diluted, proforma $ 0.01 $ (1.11)
============ ============
Weighted average shares:
Basic 42,651 42,069
============ ============
Diluted 44,409 42,069
============ ============
NOTE 7 - GOODWILL AND PURCHASED INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2002. Under SFAS No. 142, the Company no longer
amortizes goodwill and intangible assets with indefinite useful lives, but
instead tests those assets for impairment at least annually with any related
loss recognized in earnings when incurred. Recoverability of goodwill is
measured at the reporting unit level. The Company's goodwill was originally
assigned to three reporting units: San Diego, California ("San Diego"), Juarez,
Mexico ("Juarez") and Kelso, Scotland and Maldon, England ("United Kingdom"). As
of December 31, 2003, only the Juarez and United Kingdom reporting units have
goodwill remaining.
SFAS No. 142 required the Company to perform a transitional goodwill
impairment evaluation that assessed whether there was an indication of goodwill
impairment as of the date of adoption. The Company completed the evaluation and
concluded that it had goodwill impairments related to the San Diego and Juarez
reporting units, since the estimated fair values based on expected future
discounted cash flows to be generated from each reporting unit were
significantly less than their respective carrying values.
In the first quarter of fiscal 2003, the Company identified $28.2
million of transitional impairment losses ($23.5 million, net of income tax
benefits) related to San Diego and Juarez, which were recognized as a cumulative
effect of a change in accounting for goodwill in the Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss).
The Company is required to perform goodwill impairment tests at least
on an annual basis, for which the Company selected the third quarter of each
fiscal year, and whenever events or changes in circumstances indicate that the
carrying value may not be recoverable from estimated future cash flows. In the
first quarter of fiscal 2003, an additional $5.6 million of goodwill was
impaired as a result of the Company's decision to close the San Diego
8
facility (see Note 11). The Company's fiscal 2003 annual impairment test did not
result in any further impairment. However, no assurances can be given that
future impairment tests of goodwill will not result in additional goodwill
impairment.
The changes in the carrying amount of goodwill for the three months
ended December 31, 2003 and for the fiscal year ended September 30, 2003 are as
follows (amounts in thousands):
Balance as of October 1, 2002 $ 64,957
Cumulative effect of change in accounting for goodwill (28,237)
Impairment charge (5,595)
Foreign currency translation adjustments 1,144
--------
Balance as of September 30, 2003 32,269
Foreign currency translation adjustments 1,659
--------
Balance as of December 31, 2003 $ 33,928
========
The Company has a nominal amount of identifiable intangibles that are
subject to amortization. These intangibles relate to patents with a remaining
useful life of 14 years. The Company has no identifiable intangibles that are
not subject to amortization. During the three months ended December 31, 2003,
there were no additions to identifiable intangible assets. Intangible asset
amortization expense was nominal for the three months ended December 31, 2003
and 2002.
NOTE 8 - BUSINESS SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company operates in one business segment. The Company provides
product realization services to electronic original equipment manufacturers
("OEMs"). The Company has three reportable geographic regions: North America,
Europe and Asia. As of December 31, 2003, the Company has 19 active
manufacturing and/or engineering facilities in North America, Europe and Asia to
serve these OEMs. The Company uses an internal management reporting system,
which provides important financial data to evaluate performance and allocate the
Company's resources on a geographic basis. Interregion transactions are
generally recorded at amounts that approximate arm's length transactions.
Certain corporate expenses are allocated to these regions and are included for
performance evaluation. The accounting policies for the regions are the same as
for the Company taken as a whole. The table below presents geographic net sales
information reflecting the origin of the product shipped and asset information
based on the physical location of the assets (in thousands):
Three months ended
December 31,
-------------------
2003 2002
-------- --------
Net sales:
North America $193,696 $183,418
Europe 27,153 14,075
Asia 17,615 7,886
-------- --------
$238,464 $205,379
======== ========
9
December 31, September 30,
2003 2003
------------- -------------
Long-lived assets:
North America $ 108,023 $ 110,582
Europe 13,516 12,834
Asia 8,116 8,094
------------- -------------
$ 129,655 $ 131,510
============= =============
Juniper Networks, Inc. accounted for 13 percent of net sales for the
three months ended December 31, 2003. General Electric Corp. and Siemens Medical
Systems, Inc. accounted for 13 percent and 11 percent, respectively, of net
sales for the three months ended December 31, 2002. No other customers accounted
for 10 percent or more of net sales in either period. Long-lived assets as of
December 31, 2003 and September 30, 2003 exclude goodwill and other long-term
assets totaling $40.6 million and $38.2 million, respectively.
NOTE 9 - GUARANTEES
The Company offers certain indemnifications under its customer
manufacturing agreements and previously offered limited indemnification under
the former asset securitization facility, which survives its termination.
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 ranging from 12
months to 24 months. If a product fails to comply with the Company's warranty,
the Company's obligation is generally limited to correcting, at its expense, any
defect by repairing or replacing such defective product. The Company's warranty
generally excludes defects resulting from faulty customer-supplied components,
design defects or damage caused by any party other than the Company.
The Company provides for an estimate of costs that may be incurred
under its limited warranty at the time product revenue is recognized. These
costs primarily include labor and materials, as necessary, associated with
repair or replacement. The primary factors that affect the Company's warranty
liability include the number of shipped units and historical and anticipated
rates of warranty claims. As these factors are impacted by actual experience and
future expectations, the Company assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary.
Below is a table summarizing the warranty activity for the three months
ended December 31, 2003 and for the fiscal year ended September 30, 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 28
Accruals related to pre-existing warranties -
Settlements (in cash or in kind) during the period (80)
-------
Limited warranty liability, as of December 31, 2003 $ 933
=======
Under the Company's former asset securitization facility agreement (see
Note 3), which expired in September 2003, the Company was required to provide
indemnifications typical of those found in transactions of this sort, such as
upon a breach of the Company's representations and warranties in the facility
agreement, or upon the Company's failure to perform its obligations under such
agreement, or in the event of litigation concerning the agreement. The asset
securitization agreement also included an obligation by the Company to indemnify
participating financial institutions if regulatory changes result in either
reductions in their return on capital or increases in the costs of performing
their obligations under the funding arrangements. The Company is unable to
estimate the maximum potential amount of future payments under this
indemnification due to the uncertainties inherent in predicting potential
regulatory change. Moreover, although the Company's indemnification obligation
survived the termination of that facility in September 2003, the Company
believes that it is unlikely to have any on-
10
going indemnification obligations because the Company will not be engaged in
further asset securitization transactions after such date; the Company also has
no reasonable basis to believe that any unasserted indemnification obligations
exist as of the date hereof.
NOTE 10 - CONTINGENCIES
The Company (along with many other companies) has been sued by the
Lemelson Medical, Education & Research Foundation Limited Partnership
("Lemelson") related to alleged possible infringement of certain Lemelson
patents. The complaint, which is one of a series of complaints by Lemelson
against hundreds of companies, seeks injunctive relief, treble damages (amount
unspecified) and 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 in favor of the plaintiffs, thereby
declaring the Lemelson patents unenforceable and invalid. Lemelson has stated
that it will appeal this ruling. The Company's lawsuit remains stayed pending
the outcome of that appeal. The Company believes the vendors from which the
alleged patent-infringing equipment was purchased may be required to
contractually indemnify the Company. However, based upon the Company's
observation of the plaintiff's actions in other parallel cases, it appears that
the primary objective of the plaintiff is to cause defendants to enter into
license agreements. If a judgment is rendered and/or a license fee required, it
is the opinion of management of the Company that such judgment or fee would not
be material to the Company's financial position, results of operations or cash
flows.
In addition, the Company is party to other certain lawsuits in the
ordinary course of business. Management does not believe that these proceedings,
individually or in the aggregate, will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
NOTE 11 - RESTRUCTURING COSTS
In the first quarter of fiscal 2003, the Company recorded pre-tax
restructuring costs totaling $31.8 million. The Company's most significant
restructuring in the first quarter of fiscal 2003 was the announced intention to
close its San Diego facility, which resulted in a write-off of goodwill, the
write-down of underutilized assets to fair value, and, in subsequent periods,
the elimination of the facility's work force. San Diego was phased out of
operation in May 2003. Goodwill impairment for San Diego totaled approximately
$20.4 million, of which $14.8 million was impaired as a result of the Company's
transitional impairment evaluation under SFAS No. 142 (see Note 7) and $5.6
million was impaired as a result of the Company's decision to close the
facility. Other restructuring actions in the first quarter of fiscal 2003
included the consolidation of several leased facilities, the write-down of
underutilized assets to fair value and work force reductions, which primarily
affected operating sites in Juarez, Mexico; Seattle, Washington; Neenah,
Wisconsin and the United Kingdom. For leased facilities that were abandoned and
anticipated to be subleased, the restructuring costs were based on future lease
payments subsequent to abandonment, less estimated sublease income. For the
equipment write-off, the restructuring costs were based on fair value estimated
by using market prices for similar assets less estimated selling costs. Employee
termination and severance costs in the first quarter fiscal 2003 affected
approximately 500 employees.
Fiscal year 2003 restructuring activities that occurred subsequent to
December 31, 2002 and for which a liability remained at September 30, 2003,
included severance costs associated with the closure of the Company's Richmond,
Kentucky, facility work force reductions for engineering, corporate and other
manufactuzring locations and other costs associated with refocusing the
Company's PCB design group.
The table below summarizes the Company's payments on its restructuring
obligations for the first fiscal quarter of fiscal 2004 (in thousands):
11
EMPLOYEE
TERMINATION AND LEASE OBLIGATIONS
SEVERANCE COSTS AND OTHER EXIT COSTS TOTAL
--------------- -------------------- ---------
Accrued balance,
September 30, 2003 $ 2,905 $ 7,892 $ 10,797
Amounts utilized (1,875) (545) (2,420)
--------------- -------------------- ---------
Accrued balance,
December 31, 2003 $ 1,030 $ 7,347 $ 8,377
=============== ==================== =========
As of December 31, 2003, most of the remaining severance costs and $2.7
million of the lease obligations are expected to be paid in the next twelve
months. The remaining liability for lease payments is expected to be paid
through June 2008.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF Issue 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The consensus addresses not only when and how an
arrangement involving multiple deliverables should be divided into separate
units of accounting, but also how the arrangement's consideration should be
allocated among separate units. The pronouncement was effective for the Company
commencing with its first quarter of fiscal 2004 but did not have a material
impact on its consolidated results of operations or financial position.
On December 17, 2003, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition, which
supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superceded as a result of the issuance
of Emerging Issues Task Force (EITF) 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
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 financial condition
or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51," which provides guidance on the identification of
and reporting for variable interest entities. In December 2003, the FASB issued
a revised Interpretation No. 46, which expands the criteria for consideration in
determining whether a variable interest entity should be consolidated.
Interpretation No. 46 is effective for the Company's second fiscal quarter of
2004. The Company's adoption of Interpretation No. 46 is not expected to have a
significant impact on its future results of operations or financial condition.
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. The pronouncement was effective for the Company commencing with its
first quarter of fiscal 2004, but did not have a material impact on its
consolidated results of operations or financial position.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995:
The statements contained in the Form 10-Q that are not historical facts
(such as statements in the future tense and statements including "believe,"
"expect," "intend," "anticipate" and similar words and concepts) are
forward-looking statements that involve risks and uncertainties, including, but
not limited to:
- the continued uncertain economic outlook for the electronics
and technology industries,
- the risk of customer delays, changes or cancellations in both
ongoing and new programs,
- our ability to secure new customers and maintain our current
customer base,
- the results of cost reduction efforts,
- the impact of capacity utilization and our ability to manage
fixed and variable costs,
- the effects of facilities closures and restructurings,
- material cost fluctuations and the adequate availability of
components and related parts for production,
- the effect of changes in average selling prices,
- the effect of start-up costs of new programs and facilities,
- the effect of general economic conditions and world events,
- the effect of the impact of increased competition and
- other risks detailed below, especially in "Risk Factors" and
otherwise herein, and in our Securities and Exchange
Commission filings.
OVERVIEW
Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or
"we") is a participant in the Electronic Manufacturing Services ("EMS")
industry. We provide product realization services to original equipment
manufacturers, or OEMs, in the networking/datacommunications/telecom, medical,
industrial/commercial, computer and transportation/other industries. We provide
advanced electronics design, manufacturing and testing services to our customers
with a focus on complex, high technology and high reliability products. We offer
our customers the ability to outsource all stages of product realization,
including: development and design, materials procurement and management,
prototyping and new product introduction, testing, manufacturing, product
configuration, logistics and test/repair. The following information should be
read in conjunction with our condensed consolidated financial statements
included herein and the "Risk Factors" section beginning on page 20.
The rapid revenue growth the EMS industry enjoyed through the late
1990's and into 2001 stalled over the past two years as a result of the bursting
of the dot com bubble and generally sluggish economic activity in the United
States and elsewhere. As a result of this reduced demand, the industry, as well
as Plexus, has faced historically low levels of capacity utilization and
consequently lower profitability, and even losses. Excess industry capacity has
also led to more competitive pricing environment, which has also lowered
profitability.
Last year, Plexus responded to these industry conditions by taking a
number of actions to reduce manufacturing capacity and lower fixed expenses. The
more important of these actions were the closures of the San Diego, California
("San Diego") and the Richmond, Kentucky sites. These and other actions, more
fully described in our 2003 Form 10-K, reduced our manufacturing capacity from
1.8 million to 1.4 million square feet (a reduction of 22 percent) and lowered
our fixed expense base (both manufacturing and selling and administrative
expense) by an estimated $30 million per year.
Although the actions taken last year reduced our fixed expense base,
other factors will increase the fixed expense base and erode the net expected
fixed expense reduction to approximately $15 million per year. These factors
include an approximately 3.5 percent across the board salary increase in the
United States at the beginning of the fiscal year, higher costs for medical
benefits, and costs for variable incentive compensation in the current year
which were not earned in the prior year because of our reported losses.
13
As we begin fiscal 2004, based on customer indications, we believe that
there is renewed strength in end-market demand, especially from the
networking/datacommunications and medical sectors; these are markets in which we
have typically generated approximately 60-70 percent of our revenues. In
addition, we have focused on improving organic growth opportunities, and our
continuing commitment to building a highly effective sales and marketing
function has resulted in winning new programs and new customers. Although
various surveys suggest that the overall EMS sector will grow 8-11 percent in
fiscal 2004, based on customer indications of expected demand and management
estimates of new program wins, our internal projections currently anticipate
revenue growth for fiscal 2004 in the range of 15-20 percent; however, actual
results may be lower and will depend upon future orders and consequent sales.
These future orders may be less than we expect due to many factors, including
those that we discuss under "Risk Factors" below.
The rapid growth anticipated for this fiscal year entails substantial
execution risks. We will have to hire and train approximately 1,000 new
employees at sites located around the world. Additionally, as the industry
rebounds, the supply chain that supports the EMS industry may tighten, and
obtaining required parts may become more difficult. Nonetheless, the new fiscal
year has begun on a positive note as more fully discussed below.
RESULTS OF OPERATIONS
Net sales. Net sales for the indicated periods were as follows (dollars
in millions):
Three months ended
December 31,
-------------------------
2003 2002 Increase/ (Decrease)
------ ------ --------------------
Sales $238.5 $205.4 $33.1 16%
Our net sales increase of 16 percent reflects the strengthening
end-market demand, particularly in the networking/datacommunications and medical
sectors, as well as new program wins from both new and existing customers.
Growth in the networking/datacommunications sector occurred despite the loss in
the comparable prior fiscal year period of programs from the primary customer of
our former San Diego facility, which was closed in May 2003. The net sales
growth in the medical sector was primarily due to strength of a medical program
in the United Kingdom. Based on customers' orders and indications of expected
demand, we currently expect second quarter sales to be in the range of $245
million to $255 million. However, our results will ultimately depend on the
actual order levels.
Our percentages of net sales to customers representing 10 percent or
more of sales and net sales to our ten largest customers for indicated periods
were as follows:
Three months ended
December 31,
--------------------
2003 2002
---- ----
Juniper Networks 13% *
GE * 13%
Siemens * 11%
Top 10 customers 60% 57%
* Represents less than 10 percent of net sales
As with sales to most of our customers, sales to our largest customers
may vary from time to time depending on the size and timing of customer program
commencement, termination, delays, modifications and transitions. We remain
dependent on continued sales to our significant customers, and we generally do
not obtain firm, long-term purchase commitments from our customers. Customer
forecasts can and do change as a result of their 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.
14
Our percentages of sales by industry for the indicated periods were as
follows:
Three months ended
December 31,
------------------
Industry 2003 2002
- -------- ---- ----
Networking/Datacommunications/Telecom 39% 35%
Medical 33% 34%
Industrial/Commercial 12% 14%
Computer 11% 12%
Transportation/Other 5% 5%
Gross profit. Gross profit and gross margins for the indicated periods
were as follows (dollars in millions):
Three months ended
December 31,
------------------
2003 2002 Increase/ (Decrease)
------ ---- --------------------
Gross Profit $19.6 $15.5 $4.1 26%
Gross Margin 8.2% 7.6%
The improvement in gross profit and gross margin was due to a
combination of higher net sales, that resulted in enhanced manufacturing
capacity utilization, and lower fixed manufacturing costs. The primary reason
for the reduction in fixed manufacturing costs was the fiscal 2003 restructuring
actions. The gross profit improvements were moderated, however, by lower pricing
on certain programs, manufacturing inefficiencies related to the start of new
programs, as well as higher compensation and benefits costs. Effective at the
beginning of fiscal 2004, Plexus raised employee salaries in the United States
by an average of approximately 3.5 percent. This salary increase was to
partially compensate for the flat base compensation of employees over the past
two years. In addition, the overall costs for employee health care costs will
continue to increase, even as we attempt to manage those costs.
Our gross margins reflect a number of factors that can vary from period
to period, including product and service mix, the level of start-up costs and
efficiencies 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,
average sales prices, the mix of turnkey and consignment business, fluctuations
and timing of customer orders, changing demand for customers' products and
competition within the electronics industry. Although we focus on maintaining
and expanding gross margins, there can be no assurance that gross margins will
not decrease in future periods.
Most of the research and development we conduct is paid for by our
customers and is, therefore, included in both sales and cost of sales. We
conduct our own research and development, but that research and development is
not specifically identified, and we believe such expenses are less than one
percent of our net sales.
Operating expenses. Selling and administrative (S&A) expenses for the
indicated periods were as follows (dollars in millions):
Three months ended
December 31,
------------------
2003 2002 Increase/(Decrease)
------ ---- -------------------
Selling and administrative
expense (S&A) $16.4 $16.8 $ (0.4) (2%)
Percent of sales 6.9% 8.2%
The dollar reduction in S&A was due primarily to the fiscal 2003
restructuring initiative offset, in part, by higher compensation and benefits
costs in the current quarter. The significant decrease in S&A as a percent of
net sales was due primarily to the 16 percent increase in net sales over the
comparable prior year period.
Included in S&A for both periods are expenses for information
technology systems support related to the implementation of a new enterprise
resource planning ("ERP") platform. This ERP platform is intended to augment
15
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 2003, two manufacturing facilities were converted to the
new ERP platform, which resulted in additional training and implementation
costs. During the balance of fiscal 2004, we will continue to develop
enhancements for the new ERP platform. We anticipate converting at least one
more facility to the new ERP platform during our second fiscal quarter of fiscal
2004, at which time approximately 50 percent of our revenues will be on the new
ERP platform. Training and implementation costs are expected to continue over
the next few quarters as we make system enhancements and convert the additional
facility to the new ERP platform. The conversion timetable and future project
scope remain subject to change based upon our evolving needs and sales levels.
In addition to S&A expenses associated with the new ERP system, we continue to
incur capital expenditures for hardware, software and other costs for testing
and installation. As of December 31, 2003, property, plant and equipment
includes $29.6 million related to the new ERP platform, including $1.7 million
capitalized in the first quarter of fiscal 2004. Amortization of the capitalized
costs associated with the ERP platform commenced in fiscal 2003 and totaled $0.6
million for the three months ended December 31, 2003. We anticipate incurring at
least an additional $3.3 million of capital expenditures for the ERP platform
over the rest of fiscal 2004.
During the first quarter of fiscal 2003, we recorded pre-tax
restructuring charges totaling $31.8 million. These charges were taken in
response to reductions in end-market demand, including the decision of the
largest customer of the San Diego facility to transition most of its programs
to non-Plexus facilities. Our primary restructuring actions included the closure
of the San Diego facility, which resulted in a write-off of goodwill, the
write-down of underutilized assets to fair value, and the elimination of the
facility's work force. The San Diego facility was phased out of operations in
May 2003. As of September 30, 2002, the San Diego location had unamortized
goodwill of approximately $20.4 million, of which $14.8 million was impaired as
a result of the transitional impairment evaluation under SFAS No. 142 (see
discussion below under "Cumulative effect of change in accounting for goodwill")
and $5.6 million was impaired as a result of the decision to close the facility.
Other restructuring actions in the first quarter of fiscal 2003 included the
consolidation of several leased facilities, the write-down of underutilized
assets to fair value and work force reductions, which primarily affected
operations in Seattle, Washington; Neenah, Wisconsin and in the United Kingdom.
The first quarter fiscal 2003 employee termination costs affected approximately
500 employees.
Pre-tax restructuring charges for the indicated periods are summarized
as follows (in millions):
Three months ended
December 31,
-------------------
2003 2002
-------- --------
Fixed asset impairment $ - $ 11.3
Lease exit costs - 9.7
Write-off of goodwill - 5.6
Severance costs - 5.2
-------- --------
Total restructuring costs $ - $ 31.8
======== ========
Cumulative effect of a change in accounting for goodwill. We adopted
SFAS No. 142 for the accounting of goodwill and other intangible assets on
October 1, 2002. Under the transitional provisions of SFAS No. 142, we
identified locations with goodwill, performed impairment tests on the net
goodwill and other intangible assets associated with each location using a
valuation date as of October 1, 2002, and determined that a pre-tax transitional
impairment charge of $28.2 million for the three months ended December 31, 2002,
was required at our Juarez, Mexico and San Diego locations. The impairment
charge was recorded as a cumulative effect of a change in accounting for
goodwill in the Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss).
16
Income taxes. Income taxes for the indicated periods were as follows
(dollars in millions):
Three months ended
December 31,
----------------------
2003 2002
-------- ----------
Income tax expense (benefit) $ 0.6 $ (12.5)
Effective tax rate 20% 37%
The decrease in the effective tax rate is due primarily to our
expanding operations in Asia where we benefit from tax holidays.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash flows used in operating activities were
$16.9 million for the three months ended December 31, 2003, compared to cash
flows used in operating activities of $3.1 million for the three months ended
December 31, 2002. During the three months ended December 31, 2003, cash used in
operating activities was primarily driven by increased inventory, which was
offset, in part, by increased accounts payable and accrued liabilities.
As of December 31, 2003, actual days sales outstanding represented by
our accounts receivable decreased to 45 days from 47 days as of September 30,
2003. Annualized inventory turns declined to 5.8 turns for the three months
ended December 31, 2003 from 6.2 turns for the prior year-end. Inventories
increased $26.4 million from September 30, 2003, primarily for the purchase of
raw materials to support new programs and new customers, and increased sales.
Investing Activities. Cash flows used in investing activities totaled
$2.4 million for the three months ended December 31, 2003. The primary uses were
for additions to property, plant and equipment (principally software), offset,
in part, by sales and maturities of short-term investments.
We generally utilize available cash and operating leases to finance our
operating requirements. We utilize operating leases primarily in situations
where concerns about technical obsolescence outweigh the benefits of direct
ownership. We currently estimate capital expenditures for fiscal 2004 to be
approximately $20 million to $25 million, of which $3.6 million was made during
the first quarter of fiscal 2004.
Financing Activities. Cash flows provided by financing activities
totaled $0.4 million for the three months ended December 31, 2003, and primarily
represented the proceeds from the exercise of stock options offset, in part, by
payments on capital lease obligations.
On October 22, 2003, we entered into a secured revolving credit
facility (the "Secured Credit Facility") with a group of banks that allows us to
borrow up to $100 million. Borrowing under the Secured Credit Facility will be
either through revolving or swing loans or letters of credit. The 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 usage and begins at the Prime rate (as
defined) or the LIBOR rate plus 1.5 percent. We also are required to pay an
annual commitment fee of 0.5 percent of the unused credit commitment, a maximum
of $0.5 million per year. The Secured Credit Facility matures on October 22,
2006 and includes certain financial covenants customary in agreements of this
type. These covenants include a maximum total leverage ratio, a minimum balance
of domestic cash or marketable securities, a minimum tangible net worth and a
minimum adjusted EBITDA, as defined in the agreement.
We believe that our Secured Credit Facility, leasing capabilities, cash
and short-term investments and projected cash from operations should be
sufficient to meet our working and fixed capital requirements through fiscal
2004. However, a continuing increase in our sales would increase our working
capital needs, particularly as we acquire additional inventory to support those
sales and our accounts receivable increase. As those needs increase, we may need
to arrange additional debt or equity financing. However, we cannot assure that
we will be able to make any such arrangements on acceptable terms.
17
We have not paid cash dividends in the past and do not anticipate
paying them in the foreseeable future. We anticipate using any earnings to
support our business.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Our disclosures regarding contractual obligations and commercial
commitments are located in various parts of our regulatory filings. Information
in the following table provides a summary of our contractual obligations and
commercial commitments as of December 31, 2003 (in thousands):
Payments Due by Fiscal Period
------------------------------------------------------------------------
Remaining in 2009 and
Total 2004 2005-2006 2007-2008 thereafter
------------ ------------ ------------ ------------ ------------
Contractual Obligations
Capital Lease Obligations $ 43,910 $ 3,411 $ 5,847 $ 6,042 $ 28,610
Operating Leases 77,782 10,286 23,060 15,865 28,571
Unconditional Purchase Obligations* - - - - -
Other Long-Term Obligations** 1,797 606 1,191 - -
------------ ------------ ------------ ------------ ------------
Total Contractual Cash Obligations $ 123,489 $ 14,303 $ 30,098 $ 21,907 $ 57,181
============ ============ ============ ============ ============
* - There are no unconditional purchase obligations other than purchases of
inventory and equipment in the ordinary course of business. All such
unconditional purchase obligations of inventory and equipment have a term of
less than one year.
** - As of December 31, 2003, other long-term obligations consist of salary
commitments under employment agreements. We did not have, and were not subject
to, any lines of credit, standby letters of credit, guarantees, standby
repurchase obligations, or other commercial commitments.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in our 2003 Report on Form 10-K.
During the first quarter of fiscal 2004, there were no material changes to these
policies. Our more critical accounting policies are as follows:
Impairment of Long-Lived Assets - We review property, plant and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
property, plant and equipment is measured by comparing its carrying value to the
projected cash flows the property, plant and equipment are expected to generate.
If such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying value of the property exceeds its
fair market value. The impairment analysis is based on significant assumptions
of future results made by management, including revenue and cash flow
projections. Circumstances that may lead to impairment of property, plant and
equipment include decreases in future performance or industry demand and the
restructuring of our operations.
Intangible Assets - We do not amortize goodwill and intangible assets
with indefinite useful lives, but, instead, test those assets for impairment at
least annually with any related losses recognized in earnings when incurred. We
will perform goodwill impairment tests annually during the third quarter of each
fiscal year and more frequently if an event or circumstance indicates that an
impairment loss has occurred.
We measure the recoverability of goodwill under the annual impairment
test by comparing a reporting unit's carrying amount, including goodwill, to the
fair market value of the reporting unit based on projected discounted future
cash flows. If the carrying amount of the reporting unit exceeds its fair value,
goodwill is considered impaired and a second test is performed to measure the
amount of impairment loss, if any.
Revenue - Revenue from manufacturing services is generally recognized
upon shipment of the manufactured product to our customers, under contractual
terms, which are generally FOB shipping point. Upon shipment, title transfers
and the customer assumes risks and rewards of ownership of the product.
Generally, there are no formal customer acceptance requirements or further
obligations related to manufacturing services; if such
18
requirements or obligations exist, then revenue is recognized at the time when
such requirements are completed and such obligations fulfilled.
Revenue from engineering design and development services, which are
generally performed under contracts of twelve months or less duration, is
recognized as costs are incurred utilizing the percentage-of-completion method;
any losses are recognized when anticipated. Revenue from engineering design and
development services is less than ten percent of total revenue.
Revenue is recorded net of estimated returns of manufactured product
based on management's analysis of historical returns, current economic trends
and changes in customer demand. Revenue also includes amounts billed to
customers for shipping and handling. The corresponding shipping and handling
costs are included in cost of sales.
Restructuring Costs - From fiscal 2001 through fiscal 2003, we recorded
restructuring costs in response to reductions in sales and reduced capacity
utilization. These restructuring costs included employee severance and benefit
costs, and costs related to plant closings, including leased facilities that
will be abandoned (and subleased, as applicable). Prior to January 1, 2003,
severance and benefit costs were recorded in accordance with Emerging Issues
Task Force ("EITF") 94-3 and for leased facilities that were abandoned and
subleased, the estimated lease loss was accrued for future remaining lease
payments subsequent to abandonment, less any estimated sublease income. As of
December 31, 2003, the significant facilities which we plan to sublease have not
yet been subleased; and, accordingly, our estimates of expected sublease income
could change based on factors that affect our ability to sublease those
facilities such as general economic conditions and the real estate market, among
others. For equipment, the impairment losses recognized are based on the fair
value estimated using existing market prices for similar assets, less estimated
costs to sell. See Note 11 in the Notes to Condensed Consolidated Financial
Statements.
Subsequent to December 31, 2002, costs associated with a restructuring
activity are recorded in compliance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The timing and related recognition
of severance and benefit costs that are not presumed to 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 Post employment Benefits," which resulted in the
recognition of a liability as the severance and benefit costs arose from an
existing condition or situation and the payment was both probable and reasonably
estimated.
For leased facilities that will be abandoned and subleased, a liability
is recognized and measured at fair value for the future remaining lease payments
subsequent to abandonment, less any estimated sublease income that could be
reasonably obtained for the property. For contract termination costs, including
costs that will continue to be incurred under a contract for its remaining term
without economic benefit to the entity, a liability for future remaining
payments under the contract is recognized and measured at its fair value. See
Note 11 in the Notes to Condensed Consolidated Financial Statements.
The recognition of restructuring costs requires that we make certain
judgments and estimates regarding the nature, timing and amount of costs
associated with the planned exit activity. If our actual results in exiting
these facilities differ from our estimates and assumptions, we may be required
to revise the estimates of future liabilities, requiring the recording of
additional restructuring costs or the reduction of liabilities already recorded.
At the end of each reporting period, we evaluate the remaining accrued balances
to ensure that no excess accruals are retained and the utilization of the
provisions are for their intended purpose in accordance with developed exit
plans.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF Issue 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The consensus addresses not only when and how an
arrangement involving multiple deliverables should be divided into separate
units of accounting but also how the arrangement's consideration should be
allocated among separate units. The pronouncement was
19
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.
On December 17, 2003, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition, which
supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superceded as a result of the issuance
of Emerging Issues Task Force (EITF) 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
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 financial condition
or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51," which provides guidance on the identification of
and reporting for variable interest entities. In December 2003, the FASB issued
a revised Interpretation No. 46, which expands the criteria for consideration in
determining whether a variable interest entity should be consolidated.
Interpretation No. 46 is effective for us in the second quarter of fiscal 2004.
Our adoption of Interpretation No. 46 is not expected to have a significant
impact on our future results of operations or financial condition.
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, Financial Accounting Standards Board Staff
Position ("FSP") No. SFAS 150-3 deferred the effective date of SFAS No. 150
indefinitely for applying the provisions of the Statement for certain
mandatorily redeemable non-controlling interests. However, expanded discussions
are required during the deferral period.
RISK FACTORS
OUR CUSTOMER REQUIREMENTS AND OPERATING RESULTS VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER, WHICH COULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK.
Our quarterly and annual results may vary significantly depending on
various factors, many of which are beyond our control. These factors include:
- the volume of customer orders relative to our capacity,
- the level and timing of customer orders, particularly in light
of the fact that some of our customers release a significant
percentage of their orders during the last few weeks of a
quarter,
- the typical short life cycle of our customers' products,
- market acceptance of and demand for our customers' products,
- customer announcements of operating results and business
conditions,
- changes in our sales mix to our customers,
- the timing of our expenditures in anticipation of future
orders,
- our effectiveness in managing manufacturing processes,
- changes in cost and availability of labor and components,
- local events that may affect our production volume, such as
local holidays,
- credit ratings and stock analyst reports and
- changes in economic conditions and world events.
The EMS industry is impacted by the state of the U.S. and global
economies and world events. A continued 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. Over the previous two years, our
sales were adversely affected 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.
20
These factors substantially influenced our levels of net sales. As a result, the
demand for our services could weaken or decrease, which in turn would impact our
sales, capacity utilization, margins and results.
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 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 in the first quarter of fiscal 2004
represented 13 percent of our net sales. Sales to our two largest customers in
the first quarter of fiscal 2003 represented 13 percent and 11 percent,
respectively. No other customers represented 10 percent or more of our net sales
in either period. Sales to our ten largest customers have represented a
majority, or near majority, of our net sales in recent periods. Our ten largest
customers accounted for approximately 60 percent and 57 percent for the three
months ended December 31, 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 response to a slowdown in the overall
economy.
In addition, we make significant decisions, including determining the
levels of business that we will seek and accept, production schedules, component
procurement commitments, facility requirements, personnel needs and other
resource requirements, based on our estimates of customer requirements. The
short-term nature of our customers' commitments and the possibility of rapid
changes in demand for their products reduce our ability to accurately estimate
the future requirements of those customers. Because many of our costs and
operating expenses are relatively fixed, a reduction in customer demand can harm
our gross margins and operating results.
On occasion, 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 project.
FAILURE TO MANAGE OUR CONTRACTION, AND OUR FUTURE GROWTH, IF ANY, MAY SERIOUSLY
HARM OUR BUSINESS.
Periods of contraction or reduced sales, such as the periods that
occurred from fiscal 2001 through 2003, create tensions and challenges. We must
determine whether all facilities remain productive, determine whether staffing
levels need to be reduced, and determine how to respond to changing levels of
customer demand. While maintaining multiple facilities or higher levels of
employment increases short-term costs, reductions in employment could impair our
ability to respond to later market improvements or to maintain customer
relationships. Our decisions as to how to reduce costs and capacity, such as the
closure of our San Diego and Richmond facilities and the reduction in the number
of employees, can affect our expenses, and therefore our short-term and
long-term results.
We are involved in a multi-year project to install a common ERP
platform and associated information systems. The project was begun at a time
when anticipated sales growth and profitability were expected to be much higher
than has actually occurred in recent financial performance. We continue to
review a number of alternatives to this project, including curtailment or
slow-down in the rate of implementation. As of September 30, 2003, ERP
implementation costs included in property, plant and equipment totaled $29.6
million and we anticipate incurring at
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least an additional $3.3 million in capital expenditures for the ERP platform;
changes in the scope of this project could result in impairment of these
capitalized costs.
The resumption of sales growth would require us to improve and expand
our financial, operational and management information systems, continue to
develop the management skills of our managers and supervisors, and continue to
train, manage and motivate our employees. We may also experience a need for
additional employees, equipment and/or facilities. Because of changes in
business conditions, we may need to incur costs relating to such items even in
some cases where we have recently incurred costs resulting from contractions in
similar areas. If we are unable to manage 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.
We may in the future expand into other international regions. We have limited
experience in managing geographically dispersed operations in these countries.
We also purchase a significant number of components manufactured in foreign
countries. Because of these international aspects of our operations, we are
subject to the following risks that could materially impact our operating
results:
- economic or political instability
- transportation delays or interruptions and other effects of
less developed infrastructure in many countries
- foreign exchange rate fluctuations
- utilization of different systems and equipment
- difficulties in staffing and managing foreign personnel and
diverse cultures and
- the effects of international political developments.
In addition, changes in policies by the U.S. or foreign governments
could negatively affect our operating results due to changes in duties, tariffs,
taxes or limitations on currency or fund transfers. For example, our Mexico
based operation utilizes the Maquiladora program, which provides reduced tariffs
and eases import regulations, and we could be adversely affected by changes in
that program. Also, the Chinese and Malaysian subsidiaries currently receive
favorable tax treatment from the governments in those countries for
approximately 3 to 10 years, which may or may not be renewed.
WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING
PROCESS EXPERTISE.
The markets for our manufacturing and engineering services are
characterized by rapidly changing technology and evolving process development.
The continued success of our business will depend upon our ability to:
- retain our qualified engineering and technical personnel
- maintain and enhance our technological capabilities
- develop and market manufacturing services which meet changing
customer needs
- successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis.
Although we believe that our operations utilize the assembly and
testing technologies, equipment and processes that are currently required by our
customers, we cannot be certain that we will develop the capabilities required
by our customers in the future. The emergence of new technology industry
standards or customer requirements may render our equipment, inventory or
processes obsolete or noncompetitive. In addition, we may have to acquire new
assembly and testing technologies and equipment to remain competitive. The
acquisition and implementation of new technologies and equipment may require
significant expense or capital investment that could reduce our operating
margins and our operating results. Our failure to anticipate and adapt to our
customers' changing technological needs and requirements could have an adverse
effect on our business.
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 materials required for designing,
product assembling and manufacturing. These services involve greater
22
resource investment and inventory risk management than consignment services,
where the customer provides these materials. Accordingly, various component
price increases and inventory obsolescence could adversely affect our selling
price, gross margins and operating results.
In our turnkey operations, we need to order parts and supplies based on
customer forecasts, which may be for a larger quantity of product than is
included in the firm orders ultimately received from those customers. For
example, the first quarter of fiscal 2004 saw a significant increase in
inventories to support increased sales and expected growth in customer programs.
Customers' cancellation or reduction of orders can result in expenses to us.
While most of our customer agreements include provisions which require customers
to reimburse us for excess inventory specifically ordered to meet their
forecasts, we may not actually be reimbursed or be able to collect on these
obligations. In that case, we could have excess inventory and/or cancellation or
return charges from our suppliers.
In addition, we provide a managed inventory program under which we hold
and manage finished goods inventory for two 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. An increase in economic activity could also result in
shortages, if manufacturers of components do not adequately anticipate the
increased orders and/or have previously excessively cut back their production
capability in view of reduced activity in recent years. World events, such as
terrorism, armed conflict and epidemics, also could affect supply chains. If we
are unable to obtain sufficient components on a timely basis, we may experience
manufacturing and shipping delays, which could harm our relationships with
customers and reduce our sales.
A significant portion of our sales is derived from turnkey
manufacturing in which we provide materials procurement. While most of our
customer contracts permit quarterly or other periodic adjustments to pricing
based on decreases and increases in component prices and other factors, we
typically bear the risk of component price increases that occur between any such
repricings or, if such repricing is not permitted, during the balance of the
term of the particular customer contract. Accordingly, component price increases
could adversely affect our operating results.
START-UP COSTS AND INEFFICIENCIES RELATED TO NEW OR TRANSFERRED PROGRAMS CAN
ADVERSELY AFFECT OUR OPERATING RESULTS.
Start-up costs, the management of labor and equipment resources in
connection with the establishment of new programs and new customer
relationships, and the need to estimate required resources in advance can
adversely affect our gross margins and operating results. These factors are
particularly evident in the early stages of the life cycle of new products and
new programs or program transfers. These factors also affect our ability to
efficiently use labor and equipment. If start-up programs increase with an
improved economy, our exposure to these factors could consequently increase. 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 MAY HAVE NEW CUSTOMER RELATIONSHIPS WITH EMERGING COMPANIES, WHICH MAY
PRESENT MORE RISKS THAN WITH ESTABLISHED COMPANIES.
We currently anticipate that less than 5 percent of our fiscal 2004
sales will be to emerging companies, including start-ups, particularly in the
networking/datacommunications market. However, similar to our other customer
relationships, there are no volume purchase commitments under these new
programs, and the revenues we
23
actually achieve from these programs may not meet our expectations. In
anticipation of future activities under these programs, we incur substantial
expenses as we add personnel and manufacturing capacity and procure materials.
Because emerging companies do not have a history of operations, it will be
harder for us to anticipate needs and requirements than with established
customers. Our operating results will be harmed if sales do not develop to the
extent and within the time frame we anticipate.
Customer relationships with emerging companies also present special
risks. For example, because they do not have an extensive product history, there
is less demonstration of market acceptance of their products. Also, due to the
current economic environment, additional funding for such companies may be more
difficult to obtain and these customer relationships may not continue or
materialize to the extent we plan or we previously experienced. This tightening
of financing for start-up customers, together with many start-up customers' lack
of prior earnings and unproven product markets increase our credit risk,
especially in accounts receivable and inventories. Although we adjust our
reserves for accounts receivable and inventories for all customers, including
start-up customers, based on the information available, these reserves may not
be adequate.
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 33 percent of our net sales in the first quarter of fiscal 2004,
is subject to substantial government regulation, primarily from the 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.
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.
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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 significant combined resources with which to compete against us.
Some of our competitors have substantially greater managerial,
manufacturing, engineering, technical, financial, systems, sales and marketing
resources than we do. These competitors may:
- respond more quickly to new or emerging technologies
- have greater name recognition, critical mass and
geographic and market presence
- be better able to take advantage of acquisition
opportunities
- adapt more quickly to changes in customer
requirements
- devote greater resources to the development,
promotion and sale of their services
- be better positioned to compete on price for their
services.
We may be operating at a cost disadvantage compared to manufacturers
who have greater direct buying power from component suppliers, distributors and
raw material suppliers or who have lower cost structures. As a result,
competitors may have a competitive advantage and obtain business from our
customers. Our manufacturing processes are generally not subject to significant
proprietary protection, and companies with greater resources or a greater market
presence may enter our market or increase their competition with us. Increased
competition could result in price reductions, reduced sales and margins or loss
of market share.
WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF KEY PERSONNEL MAY HARM OUR
BUSINESS.
Our future success depends in large part on the continued service of
our key technical and management personnel, and on our ability to attract and
retain qualified employees, particularly those highly skilled design, process
and test engineers involved in the development of new products and processes and
the manufacture of existing products. The competition for these individuals is
significant, and the loss of key employees could harm our business.
WE MAY FAIL TO SUCCESSFULLY COMPLETE FUTURE ACQUISITIONS AND MAY NOT
SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
Although we have previously grown through acquisitions, our current
focus is on pursuing organic growth opportunities. If we were to pursue future
growth through acquisitions, however, this would involve significant risks that
could have a material adverse effect on us. These risks include:
Operating risks, such as the:
- inability to integrate successfully our acquired operations' businesses
and personnel
- inability to realize anticipated synergies, economies of scale or other
value
- difficulties in scaling up production and coordinating management of
operations at new sites
- strain placed on our personnel, systems and resources
- possible modification or termination of an acquired business customer
programs, including cancellation of current or anticipated programs
- loss of key employees of acquired businesses.
Financial risks, such as the:
- use of cash resources, or incurrence of additional debt and related
interest costs
25
- dilutive effect of the issuance of additional equity securities
- inability to achieve expected operating margins to offset the increased
fixed costs associated with acquisitions, and/or inability to increase
margins at acquired entities to Plexus' desired levels
- incurrence of large write-offs or write-downs and
- impairment of goodwill and other intangible assets
- unforeseen liabilities of the acquired businesses.
EXPANSION OF OUR BUSINESS AND OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS.
At some future point, we again may expand our operations by
establishing or acquiring new 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 enough customers or employees to support the
expansion.
WE MAY FAIL TO SECURE NECESSARY FINANCING.
On October 22, 2003, we entered into a secured revolving credit
facility (the "Secured Credit Facility") with a group of banks. The Secured
Credit Facility allows us to borrow up to $100 million. However, we cannot
assure that the Secured Credit Facility will provide all of the financing
capacity that we will need in the future.
Our future success may depend on our ability to obtain additional
financing and capital to support increased sales and our possible future growth.
We may seek to raise capital by:
- issuing additional common stock or other equity securities
- issuing debt securities
- obtaining new credit facilities.
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 and
capital may have terms and conditions that adversely affect our business, such
as restrictive financial or operating covenants, and our ability to meet any
financing covenants will largely depend on our financial performance, which in
turn will be subject to general economic conditions and financial, business and
other factors.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our stock price has fluctuated significantly in recent periods. The
price of our common stock may fluctuate significantly in response to a number of
events and factors relating to us, our competitors and the market for our
services, many of which are beyond our control.
26
In addition, the stock market in general, and especially the NASDAQ
Stock Market, along with market 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign exchange and
interest rates. To reduce such risks, we selectively use financial instruments.
FOREIGN CURRENCY RISK
We do not use derivative financial instruments for speculative
purposes. Our policy is to selectively hedge our foreign currency denominated
transactions in a manner that substantially offsets the effects of changes in
foreign currency exchange rates. Presently, we use foreign currency contracts to
hedge only those currency exposures associated with certain assets and
liabilities denominated in non-functional currencies. Corresponding gains and
losses on the underlying transaction generally offset the gains and losses on
these foreign currency hedges. Our presence in international markets increases
the complexity and size of our foreign exchange risk. As December 31, 2003, we
had no foreign currency contracts outstanding.
In the first quarter of fiscal 2004 and 2003, we had net sales of
approximately 11 percent and 7 percent, respectively, denominated in currencies
other than the U.S. dollar. In the first quarter of fiscal 2004 and 2003, we had
total costs of approximately 14 percent and 10 percent, respectively,
denominated in currencies other than the U.S. dollar.
INTEREST RATE RISK
We have financial instruments, including cash equivalents and
short-term investments, which are sensitive to changes in interest rates. We
consider the use of interest-rate swaps based on existing market conditions. We
currently do not use any interest-rate swaps or other types of derivative
financial instruments to hedge interest rate risk.
The primary objective of our investment activities is to preserve
principal, while maximizing yields without significantly increasing market risk.
To achieve this, we maintain our portfolio of cash equivalents and short-term
investments in a variety of highly rated securities, money market funds and
certificates of deposit and limit the amount of principal exposure to any one
issuer.
Our only material interest rate risk is associated with our secured
credit facility. A 10 percent change in our weighted average interest rate on
average long-term borrowings would have had a nominal impact on net interest
expense for the three months ended December 31, 2003 and 2002.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: The Company maintains disclosure
controls and procedures designed to ensure that the information the Company must
disclose in its filings with the Securities and Exchange Commission is recorded,
processed, summarized and reported on a timely basis. The Company's principal
executive officer and principal financial officer have reviewed and evaluated,
with the participation of the Company's management, the Company's disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end
of the period covered by this report (the "Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, the
27
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: There have not been any
changes in the Company's internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the
Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As we have previously disclosed, the Company (along with hundreds of
other companies) has been sued by the Lemelson Medical, Educational & Research
Foundation Limited Partnership ("Lemelson") for alleged possible infringement of
certain Lemelson patents. The complaint, which is one of a series of complaints
by Lemelson against hundreds of companies, seeks injunctive relief, treble
damages (amount unspecified) and attorneys' fees. The Company has obtained a
stay of action pending developments in other related litigation.
Based on information received from a party to that other litigation, on
January 23, 2004, the judge in the other related litigation ruled for the
plaintiffs (the parties challenging the patents), thereby declaring the Lemelson
patents unenforceable and invalid. Lemelson has stated that it will appeal that
ruling. If that verdict is upheld on an expected appeal, it would likely result
in dismissal of claims against the Company. The Company's lawsuit remains stayed
pending the outcome of that appeal.
Even if the verdict is not upheld, the Company believes the vendors
from which patent-related equipment was purchased may be required to
contractually indemnify the Company. However, based upon the Company's
observation of the plaintiff's actions in other parallel cases, it appears that
the primary objective of the plaintiff is to cause defendants to enter into
license agreements. Even though 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. We do not believe that these proceedings, individually or in the
aggregate, will have a material adverse effect on our financial position,
results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer
pursuant to Section 302(a) of the Sarbanes
Oxley Act of 2002.
31.2 Certification of Chief Financial Officer
pursuant to section 203(a) of the Sarbanes
Oxley Act of 2002.
32.1 Certification of the CEO pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of the CFO pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
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(b) Reports on Form 8-K during this period.
No reports were filed during the quarter ended December 31, 2003. However,
Plexus submitted reports (which are not to be deemed incorporated by reference
into other filings) dated October 23, 2003 and January 21, 3004, which furnished
certain earnings information.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
2/17/04 /s/ Dean A. Foate
- ------- --------------------
Date Dean A. Foate
President and Chief Executive Officer
2/17/04 /s/ F. Gordon Bitter
- ------- -----------------------
Date F. Gordon Bitter
Vice President and
Chief Financial Officer
29