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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 March 31, 2004
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-14824
PLEXUS CORP.
(Exact name of registrant as specified in charter)
Wisconsin 39-1344447
(State of Incorporation) (IRS Employer Identification No.)
55 Jewelers Park Drive
Neenah, Wisconsin 54957-0156
(Address of principal executive offices)(Zip Code)
Telephone Number (920) 722-3451
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 under the Exchange Act).
Yes (X) No ( )
As of May 9, 2004 there were 43,050,800 shares of Common Stock of the
Company outstanding.
1
PLEXUS CORP.
TABLE OF CONTENTS
March 31, 2004
PART I. FINANCIAL INFORMATION.............................................................................. 3
Item 1. Consolidated Financial Statements......................................................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)........... 3
CONDENSED CONSOLIDATED BALANCE SHEETS..................................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS........................................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 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............................................. 19
NEW ACCOUNTING PRONOUNCEMENTS............................................................. 20
RISK FACTORS.............................................................................. 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 28
Item 4. Controls and Procedures................................................................... 28
PART II - OTHER INFORMATION................................................................................. 29
Item 4. Submission of Matters to a Vote of Security Holders....................................... 29
Item 6. Exhibits and Reports on Form 8-K.......................................................... 29
SIGNATURES.................................................................................................. 30
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 Six Months Ended
March 31, March 31,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales $ 254,272 $ 190,773 $ 492,735 $ 396,152
Cost of sales 233,091 181,150 451,927 370,989
--------- --------- --------- ---------
Gross profit 21,181 9,623 40,808 25,163
Operating expenses:
Selling and administrative expenses 16,422 16,815 32,778 33,570
Restructuring and impairment costs - - - 31,840
--------- --------- --------- ---------
16,422 16,815 32,778 65,410
--------- --------- --------- ---------
Operating income (loss) 4,759 (7,192) 8,030 (40,247)
Other income (expense):
Interest expense (730) (712) (1,393) (1,590)
Miscellaneous 310 678 826 1,301
--------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting for goodwill 4,339 (7,226) 7,463 (40,536)
Income tax expense (benefit) 868 (2,182) 1,493 (14,660)
--------- --------- --------- ---------
Income (loss) before cumulative effect of change in
accounting for goodwill 3,471 (5,044) 5,970 (25,876)
Cumulative effect of change in accounting for goodwill,
net of income tax benefit of $4,755 - - - (23,482)
--------- --------- --------- ---------
Net income (loss) $ 3,471 $ (5,044) $ 5,970 $ (49,358)
========= ========= ========= =========
Earnings per share:
Basic
Income (loss) before cumulative effect of change in
accounting for goodwill $ 0.08 $ (0.12) $ 0.14 $ (0.61)
Cumulative effect of change in accounting for goodwill - - - (0.56)
--------- --------- --------- ---------
Net income (loss) $ 0.08 $ (0.12) $ 0.14 $ (1.17)
========= ========= ========= =========
Diluted
Income (loss) before cumulative effect of change in
accounting for goodwill $ 0.08 $ (0.12) $ 0.14 $ (0.61)
Cumulative effect of change in accounting for goodwill - - - (0.56)
--------- --------- --------- ---------
Net income (loss) $ 0.08 $ (0.12) $ 0.14 $ (1.17)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 42,962 42,260 42,806 42,164
========= ========= ========= =========
Diluted 44,157 42,260 43,969 42,164
========= ========= ========= =========
Comprehensive income (loss):
Net income (loss) $ 3,471 $ (5,044) $ 5,970 $ (49,358)
Foreign currency hedges and translation adjustments 1,752 (706) 6,575 517
--------- --------- --------- ---------
Comprehensive income (loss) $ 5,223 $ (5,750) $ 12,545 $ (48,841)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
March 31, September 30,
2004 2003
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,386 $ 58,993
Short-term investments 8,079 19,701
Accounts receivable, net of allowance of $2,600
and $4,100, respectively 137,246 111,125
Inventories 198,010 136,515
Deferred income taxes 16,780 23,723
Prepaid expenses and other 7,625 8,326
-------- --------
Total current assets 419,126 358,383
Property, plant and equipment, net 126,357 131,510
Goodwill 34,543 32,269
Deferred income taxes 23,306 24,921
Other 6,710 5,971
-------- --------
Total assets $610,042 $553,054
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 1,639 $ 958
Accounts payable 111,685 91,445
Customer deposits 15,873 14,779
Accrued liabilities:
Salaries and wages 23,693 17,133
Other 21,033 23,753
-------- --------
Total current liabilities 173,923 148,068
Long-term debt and capital lease obligations, net of current portion 38,542 23,502
Other liabilities 8,938 10,468
Commitments and contingencies (Note 10) - -
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 200,000 shares authorized, 43,039
and 42,607 shares issued and outstanding, respectively 430 426
Additional paid-in capital 266,288 261,214
Retained earnings 108,810 102,840
Accumulated other comprehensive income 13,111 6,536
-------- --------
388,639 371,016
-------- --------
Total liabilities and shareholders' equity $610,042 $553,054
======== ========
See notes to condensed consolidated financial statements.
4
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Six Months Ended
March 31,
-----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 5,970 $(49,358)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization 12,821 14,412
Cumulative effect of change in accounting for goodwill - 28,237
Non-cash goodwill and asset impairments - 16,922
Deferred income taxes, net 8,647 (11,826)
Net repayments under asset securitization facility - (1,614)
Income tax benefit of stock option exercises 1,117 154
Changes in assets and liabilities:
Accounts receivable (24,256) 16,689
Inventories (59,855) (10,841)
Prepaid expenses and other (343) 780
Accounts payable 18,947 (6,276)
Customer deposits 1,067 4,206
Accrued liabilities and other 2,293 10,211
-------- --------
Cash flows provided by (used in) operating activities (33,592) 11,696
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales and maturities of short-term investments 11,622 19,714
Payments for property, plant and equipment (6,338) (16,121)
-------- --------
Cash flows provided by investing activities 5,284 3,593
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 73,752 -
Payments on debt (58,151) -
Payments on capital lease obligations (450) (821)
Proceeds from exercise of stock options 2,987 526
Issuances of common stock 974 1,042
-------- --------
Cash flows provided by financing activities 19,112 747
-------- --------
Effect of foreign currency translation on cash and cash
equivalents 1,589 120
-------- --------
Net increase (decrease) in cash and cash equivalents (7,607) 16,156
Cash and cash equivalents:
Beginning of period 58,993 63,347
-------- --------
End of period $ 51,386 $ 79,503
======== ========
See notes to condensed consolidated financial statements.
5
PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2004
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by Plexus Corp. ("Plexus" or the "Company") without audit and
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. In the opinion of the Company, the financial statements
reflect all adjustments, which include normal recurring adjustments necessary to
present fairly the financial position of the Company as of March 31, 2004, and
the results of operations for the three months and six months ended March 31,
2004 and 2003, and the cash flows for the same six-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):
March 31, September 30,
2004 2003
--------- -------------
Raw materials $127,775 $ 88,562
Work-in-process 51,569 41,514
Finished goods 18,666 6,439
-------- --------
$198,010 $136,515
======== ========
NOTE 3 - CURRENT FINANCING
On October 22, 2003, the Company entered into a secured three-year
revolving credit facility (the "Secured Credit Facility") with a group of banks
that allows the Company to borrow up to $100 million. As of March 31, 2004,
borrowings of $15.0 million were outstanding at a weighted average annual
interest rate of 3.6 percent. Borrowings under the Secured Credit Facility may
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 LIBOR plus 1.5 percent. The Company is
also required to pay an annual commitment fee of 0.5 percent of the unused
credit commitment, 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 $40.0 million minimum balance of domestic cash or marketable
securities, a minimum tangible net worth and a minimum adjusted EBITDA, as
defined in the agreement. Interest expense related to the commitment fee,
amortization of deferred origination fees and borrowings totaled approximately
$0.2 million and $0.3 million for the three and six months ended March 31, 2004.
6
NOTE 4 - FORMER FINANCING
In fiscal 2001, the Company entered into an amended agreement to sell
up to $50 million of trade accounts receivable without recourse to Plexus ABS
Inc. ("ABS"), a wholly owned limited-purpose subsidiary of the Company. This
asset securitization facility expired in September 2003 (the "former asset
securitization facility"). ABS was a separate corporate entity that sold
participating interests in a pool of the Company's accounts receivable to
financial institutions, under a separate agreement. Accounts receivable sold to
financial institutions were reflected as a reduction to accounts receivable in
the Condensed Consolidated Balance Sheets. For the three months and six months
ended March 31, 2004, the Company did not incur any financing costs associated
with the former asset securitization facility due to its expiration in September
2003. For the three months and six months ended March 31, 2003, the Company
incurred financing costs of $0.1 million and $0.2 million, respectively, under
the former asset securitization facility. These financing costs are included in
interest expense in the accompanying Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss). In addition, the net repayments
under the agreement during the six months ended March 31, 2003 are included in
the cash flows from operating activities in the accompanying Condensed
Consolidated Statements of Cash Flows.
NOTE 5 - EARNINGS PER SHARE
The following is a reconciliation of the amounts utilized in the
computation of basic and diluted earnings per share (in thousands, except per
share amounts):
Three Months Ended Six Months Ended
March 31, March 31,
---------------------- ----------------------
2004 2003 2004 2003
-------- --------- -------- ---------
Earnings:
Income (loss) before cumulative effect of change
in accounting for goodwill $ 3,471 $ (5,044) $ 5,970 $(25,876)
Cumulative effect of change in accounting
for goodwill, net of income tax benefit of $4,755 - - - (23,482)
-------- -------- -------- --------
Net income (loss) $ 3,471 $ (5,044) $ 5,970 $(49,358)
======== ======== ======== ========
Basic weighted average common shares outstanding 42,962 42,260 42,806 42,164
Dilutive effect of stock options 1,195 - 1,163 -
-------- -------- -------- --------
Diluted weighted average shares outstanding 44,157 42,260 43,969 42,164
======== ======== ======== ========
Basic and diluted earnings per share:
Income (loss) before cumulative effect of change
in accounting for goodwill $ 0.08 $ (0.12) $ 0.14 $ (0.61)
Cumulative effect of change in accounting
for goodwill, net of income taxes - - - (0.56)
-------- -------- -------- --------
Net income (loss) $ 0.08 $ (0.12) $ 0.14 $ (1.17)
======== ======== ======== ========
For both the three and six months ended March 31, 2004, stock options
to purchase approximately 1.8 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 and therefore their effect would be anti-dilutive.
For the three and six months ended March 31, 2003, stock options to
purchase approximately 3.7 million and 3.8 million shares of common stock,
respectively, were outstanding, but were not included in the computation of
diluted earnings per share because there was a net loss in those periods, and
therefore their effect would be anti-dilutive.
NOTE 6 - STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under the guidelines of
Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense
related to the stock option plans has been recognized in the Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss). The
Company utilizes the Black-Scholes option valuation model to value stock options
for pro forma presentation of income and per share data as if the fair value
based method in Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting
7
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 Six Months Ended
March 31, March 31,
---------------------- ------------------------
2004 2003 2004 2003
--------- -------- ---------- ---------
Net income (loss) as reported $ 3,471 $(5,044) $ 5,970 $(49,358)
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 (975) (2,875) (2,928) (5,112)
--------- ------- ---------- --------
Pro forma net income (loss) $ 2,496 $(7,919) $ 3,042 $(54,470)
========= ======= ========== ========
Earnings per share:
Basic, as reported $ 0.08 $ (0.12) $ 0.14 $ (1.17)
========= ======= ========== ========
Basic, pro forma $ 0.06 $ (0.19) $ 0.07 $ (1.29)
========= ======= ========== ========
Diluted, as reported $ 0.08 $ (0.12) $ 0.14 $ (1.17)
========= ======= ========== ========
Diluted, pro forma $ 0.06 $ (0.19) $ 0.07 $ (1.29)
========= ======= ========== ========
Weighted average shares:
Basic, as reported and pro forma 42,962 42,260 42,806 42,164
========= ======= ========== ========
Diluted, as reported 44,157 42,260 43,969 42,164
========= ======= ========== ========
Diluted, pro forma 43,466 42,260 43,623 42,164
========= ======= ========== ========
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 March 31, 2004, only the Juarez and United Kingdom reporting units have
goodwill remaining.
SFAS No. 142 required the Company to perform a transitional goodwill
impairment evaluation that assessed whether there was an indication of goodwill
impairment as of the date of adoption. The Company completed the evaluation and
concluded that it had goodwill impairments related to the San Diego and Juarez
reporting units, since the estimated fair values based on expected future
discounted cash flows to be generated from each reporting unit were
significantly less than their respective carrying values.
In the first quarter of fiscal 2003, the Company identified $28.2
million of transitional impairment losses ($23.5 million, net of income tax
benefits) related to San Diego and Juarez, which were recognized as a cumulative
effect of a change in accounting for goodwill in the Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss).
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 six months ended
March 31, 2004 and for the fiscal year ended September 30, 2003 are as follows
(amounts in thousands):
Balance as of October 1, 2002 $ 64,957
Cumulative effect of change in accounting for goodwill (28,237)
Impairment charge (5,595)
Foreign currency translation adjustments 1,144
--------
Balance as of September 30, 2003 32,269
Foreign currency translation adjustments 2,274
--------
Balance as of March 31, 2004 $ 34,543
========
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 six months ended March 31, 2004, there
were no additions to identifiable intangible assets. Intangible asset
amortization expense was nominal for the six months ended March 31, 2004 and
2003.
NOTE 8 - BUSINESS SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company operates in one business segment. The Company provides
product realization services to electronic original equipment manufacturers
("OEMs"). The Company has three reportable geographic regions: North America,
Europe and Asia. As of March 31, 2004, 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. 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 Six Months Ended
March 31, March 31,
-------------------------------- -----------------------------
2004 2003 2004 2003
------------- ---------- ------------ -----------
Net sales:
North America $ 202,310 $ 170,021 $ 396,005 $ 353,612
Europe 26,598 11,867 53,751 25,769
Asia 25,364 8,885 42,979 16,771
------------- ---------- ------------ -----------
$ 254,272 $ 190,773 $ 492,735 $ 396,152
============= ========== ============ ===========
9
March 31, September 30,
2004 2003
------------- -------------
Long-lived assets:
North America $ 104,529 $ 110,582
Europe 13,410 12,834
Asia 8,418 8,094
---------- ----------
$ 126,357 $ 131,510
========== ==========
Long-lived assets as of March 31, 2004 and September 30, 2003 exclude
goodwill and other non-operating long-term assets totaling $41.3 million and
$38.2 million, respectively.
Juniper Networks, Inc. accounted for 13 percent of net sales for both
the three months and six months ended March 31, 2004. Siemens Medical Systems,
Inc. ("Siemens") accounted for 15 percent of net sales for the three months
ended March 31, 2003. Siemens and General Electric Company accounted for 13
percent and 10 percent of net sales, respectively, for the six months ended
March 31, 2003. No other customers accounted for 10 percent or more of net sales
in either period.
NOTE 9 - GUARANTEES
The Company offers certain indemnifications under its customer
manufacturing agreements and previously offered indemnification under its former
asset securitization facility.
In the normal course of business, the Company also provides its
customers a limited warranty covering workmanship, and in some cases materials,
on products manufactured by the Company for them. Such warranty generally
provides that products will be free from defects in the Company's workmanship
and meet mutually agreed upon testing criteria for periods generally ranging
from 12 months to 24 months. If a product fails to comply with the Company's
warranty, the Company's obligation is generally limited to correcting, at its
expense, any defect by repairing or replacing such defective product. The
Company's warranty generally excludes defects resulting from faulty
customer-supplied components, design defects or damage caused by any party other
than the Company.
The Company provides for an estimate of costs that may be incurred
under its limited warranty at the time product revenue is recognized. These
costs primarily include labor and materials, as necessary, associated with
repair or replacement. The primary factors that affect the Company's warranty
liability include the number of shipped units and historical and anticipated
rates of warranty claims. As these factors are impacted by actual experience and
future expectations, the Company assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary.
Below is a table summarizing the activity related to the Company's
limited warranty liability for the six months ended March 31, 2004 and 2003 (in
thousands):
Six months ended
March 31,
2004 2003
------- -------
Balance at beginning of period $ 985 $ 1,246
Accruals for warranties issued during the period 55 17
Settlements (in cash or in kind) during the period (174) (166)
------- -------
Balance at end of period $ 866 $ 1,097
======= =======
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
10
increases in the costs of performing their obligations under the funding
arrangements. The Company is unable to estimate the maximum potential amount of
future payments under this indemnification due to the uncertainties inherent in
predicting potential regulatory change. Moreover, although the Company's
indemnification obligation survived the termination of that facility in
September 2003, the Company believes that it is unlikely to have any on-going
indemnification obligations because the Company will not be engaged in further
asset securitization transactions after such date; the Company also has no
reasonable basis to believe that any unasserted indemnification obligations
exist as of the date hereof.
NOTE 10 - CONTINGENCIES
The Company (along with many other companies) has been sued by the
Lemelson Medical, Education & Research Foundation Limited Partnership
("Lemelson") related to alleged possible infringement of certain Lemelson
patents. The complaint, which is one of a series of complaints by Lemelson
against hundreds of companies, seeks injunctive relief, treble damages (amount
unspecified) and attorneys' fees. The Company has obtained a stay of action
pending developments in other related litigation. On January 23, 2004, the judge
in the other related litigation ruled against Lemelson, thereby declaring the
Lemelson patents unenforceable and invalid. Lemelson has stated that it will
appeal this ruling. The lawsuit against the Company remains stayed pending the
outcome of that appeal. The Company believes the vendors from which the alleged
patent-infringing equipment was purchased may be required to contractually
indemnify the Company. However, based upon the Company's observation of
Lemelson's actions in other parallel cases, it appears that the primary
objective of Lemelson is to cause other parties to enter into license
agreements. If a judgment is rendered and/or a license fee required, it is the
opinion of management of the Company that such judgment or fee would not be
material to the Company's financial position, results of operations or cash
flows.
In addition, the Company is party to other certain lawsuits in the
ordinary course of business. Management does not believe that these proceedings,
individually or in the aggregate, will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
NOTE 11 - RESTRUCTURING COSTS
For the six months ended March 31, 2003, the Company recorded pre-tax
restructuring costs totaling $31.8 million, all of which was recorded in the
first quarter of fiscal 2003. The Company's most significant restructuring in
the first quarter of fiscal 2003 was the announced intention to close its San
Diego facility, which resulted in a write-off of goodwill, the write-down of
underutilized assets to fair value, and, in subsequent periods, the elimination
of the facility's work force. The San Diego facility was phased out of operation
in May 2003. Goodwill impairment for San Diego totaled approximately $20.4
million, of which $14.8 million was impaired as a result of the Company's
transitional impairment evaluation under SFAS No. 142 (see Note 7) and $5.6
million was impaired as a result of the Company's decision to close the
facility. Other restructuring actions in the first quarter of fiscal 2003
included the consolidation of several leased facilities, the write-down of
underutilized assets to fair value and work force reductions, which primarily
affected operating sites in Juarez, Mexico; Seattle, Washington; Neenah,
Wisconsin and the United Kingdom. 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. As of March
31, 2004, the significant facilities which the Company plans to sublease have
not yet been subleased; accordingly, the Company's estimates of expected
sublease income may change based on factors that affect its ability to sublease
those facilities such as general economic conditions and the local real estate
markets, among others. Changes in the Company's estimate of sublease income
could result in additional restructuring costs. For the write-off of
underutilized assets, 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 as of 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
manufacturing locations and other costs associated with refocusing the Company's
PCB design group.
11
The table below summarizes the Company's restructuring obligations as
of March 31, 2004 and for the six month period then ended (in thousands):
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
Amounts utilized (326) (657) (983)
-------- -------- --------
Accrued balance,
March 31, 2004 $ 704 $ 6,690 $ 7,394
======== ======== ========
As of March 31, 2004, most of the remaining severance costs and $3.0
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 a significant impact on the Company's
results of operations or financial position.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51," which provides guidance on the identification of
and reporting for variable interest entities. In December 2003, the FASB issued
a revised Interpretation No. 46, which expands the criteria for consideration in
determining whether a variable interest entity should be consolidated.
Interpretation No. 46 is effective for the Company's second fiscal quarter of
2004. The Company's adoption of Interpretation No. 46 did not have a significant
impact on its results of operations or financial position.
In May 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity," which establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. Financial instruments that are
within the scope of the Statement, which previously were often classified as
equity, must now be classified as liabilities. In November 2003, FASB Staff
Position No. SFAS 150-3 deferred indefinitely the effective date of SFAS No. 150
for applying the provisions of the Statement for certain
12
mandatorily redeemable non-controlling interests. However, expanded disclosures
are required during the deferral period. The Company does not have financial
instruments with mandatorily redeemable non-controlling interests.
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 21.
The rapid revenue growth the EMS industry enjoyed through the late
1990's 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 ("Richmond") sites. These and other
actions, more fully described in our 2003 Form 10-K, reduced our manufacturing
capacity from 1.8 million square feet 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 approximate 3.5 percent across the board salary increase in the
United States at the beginning of fiscal 2004, higher costs for medical
benefits, costs for variable incentive compensation in the current year which
13
were not earned in the prior year because of our reported losses, and
amortization of the capitalized costs associated with our enterprise resource
planning ("ERP") platform.
As we progress through 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 25-30 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 have hired and trained approximately 1,100 new employees at
sites located around the world, principally in Asia. During the remaining six
months of fiscal 2004, we also expect to spend approximately $12 million to
acquire an existing 164,000 square foot manufacturing facility in Penang,
Malaysia and to initially outfit that facility with manufacturing equipment. We
expect to complete the purchase of the facility in the third quarter of fiscal
2004 and commence operations in the facility late in the fourth quarter of
fiscal 2004. The addition of the new Penang facility and related manufacturing
fixed overhead will further increase our fixed expense base on a going-forward
basis. Additional execution risk may also arise as the EMS industry rebounds.
The supply chain that supports the EMS industry may tighten, and obtaining
required parts may become more difficult. Nonetheless, to date, the fiscal year
2004 is progressing 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 Six months ended
March 31, March 31,
------------------ Increase/ --------------------- Increase/
2004 2003 (Decrease) 2004 2003 (Decrease)
------ ------ ------------ ------ ------ -------------
Sales $254.3 $190.8 $63.5 33% $492.7 $396.2 $96.6 24%
Our net sales increase for both the three and six month periods
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. The net sales growth in the medical sector was primarily due to
the strength of a medical program in the United Kingdom, as well as revenue from
new medical customers. Based on customers' orders and indications of expected
demand, we currently expect sales in the third quarter of fiscal 2004 to be in
the range of $255 million to $265 million. However, our results will ultimately
depend on the actual level of orders received. See Risk Factors on page 21.
Our percentages of net sales to customers representing 10 percent or
more of sales and net sales to our ten largest customers for the indicated
periods were as follows:
Three months ended Six months ended
March 31, March 31,
-------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Juniper Networks 13% * 13% *
GE * * * 10%
Siemens * 15% * 13%
Top 10 customers 55% 54% 56% 55%
* Represents less than 10 percent of net sales
14
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. Customers'
forecasts can and do change as a result of changes in 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. In addition,
as our percentage of sales to customers in a specific industry becomes larger
relative to other industries (as we are currently experiencing in the
networking/ datacommunications/telecom industry), we become increasingly
dependent upon economic and business conditions affecting that industry.
Our percentages of sales by industry for the indicated periods were as
follows:
Three months ended Six months ended
March 31, March 31,
-------------------- -------------------
Industry 2004 2003 2004 2003
- -------- ---- ---- ---- ----
Networking/Datacommunications/Telecom 42% 33% 41% 34%
Medical 29% 33% 31% 34%
Industrial/Commercial 15% 16% 14% 15%
Computer 10% 11% 10% 11%
Transportation/Other 4% 7% 4% 6%
Gross profit. Gross profit and gross margins for the indicated periods
were as follows (dollars in millions):
Three months ended Six months ended
March 31, March 31,
------------------ Increase/ --------------------- Increase/
2004 2003 (Decrease) 2004 2003 (Decrease)
------- ------ ------------- ------- ------- --------------
Gross Profit $ 21.2 $ 9.6 $11.6 120% $ 40.8 $ 25.2 $ 15.6 62%
Gross Margin 8.3% 5.0% 8.3% 6.4%
The improvement in gross profit and gross margin for both the three and
six month periods 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, higher compensation and benefits costs,
including health care benefits, and amortization of capitalized costs associated
with our ERP platform.
Our gross margins reflect a number of factors that can vary from period
to period, including product and service mix, the level of 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.
15
Operating expenses. Selling and administrative (S&A) expenses for the
indicated periods were as follows (dollars in millions):
Three months ended Six months ended
March 31, March 31,
-------------------- Increase/ -------------------- Increase/
2004 2003 (Decrease) 2004 2003 (Decrease)
------ ------ -------------- ------- -------- ----------------
Sales and administrative
expense (S&A) $16.4 $16.8 $(0.4) (2.3)% $ 32.8 $ 33.6 $ (0.8) (2.4)%
Percent of sales 6.5% 8.8% 6.7% 8.5%
The dollar reductions in S&A for both the three and six month periods
ended March 31, 2004 were due primarily to $1.1 million of recoveries of
accounts receivable that were either written off or reserved for in prior
periods. These reductions were offset, in part, by higher compensation and
benefits costs and ERP implementation costs. The significant decrease in S&A as
a percent of net sales for both the three and six month periods was due
primarily to the increase in net sales over the comparable prior year periods,
together with the dollar reductions in S&A expenses.
Included in S&A for both periods are expenses for information
technology systems support related to the implementation of a new ERP platform.
This ERP platform is intended to augment our management information systems and
includes various software systems to enhance and standardize our ability to
globally translate information from production facilities into operational and
financial information and create a consistent set of core business applications
at our worldwide facilities.
During the second fiscal quarter of 2004, we converted one additional
facility to the new ERP platform, which results in approximately 50 percent of
our revenues being managed on the new ERP platform. We anticipate converting at
least one more facility to the new ERP platform in fiscal 2005. Training and
implementation costs are expected to continue over the next few quarters as we
make system enhancements and convert 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 March 31, 2004, property, plant and equipment include $28.0
million related to the new ERP platform, including $0.6 million and $2.3 million
of capital expenditures for the three and six months ended March 31, 2004. We
anticipate incurring at least an additional $2.1 million of capital expenditures
for the ERP platform over the rest of fiscal 2004.
For the six months ended March 31, 2003, we recorded pre-tax
restructuring charges totaling $31.8 million, all of which was recorded in the
first quarter of fiscal 2003. 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. 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. 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.
16
Pre-tax restructuring charges for the indicated periods are summarized
as follows (in millions):
Three months ended Six months ended
March 31, March 31,
------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ -------
Fixed asset impairment $ - $ - $ - $11.3
Lease exit costs - - - 9.7
Write-off of goodwill - - - 5.6
Severance - - - 5.2
---- ---- ---- -----
$ - $ - $ - $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 during the six months ended March 31, 2003,
was required at our Juarez, Mexico and San Diego locations. The impairment
charge was recorded as a cumulative effect of a change in accounting for
goodwill in the Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss).
Income taxes. Income taxes for the indicated periods were as follows
(dollars in millions):
Three months ended Six months ended
March 31, March 31,
------------------------ ------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Income tax expense (benefit) $ 0.9 $ (2.2) $ 1.5 $ (14.7)
Effective annual tax rate 20% 30% 20% 36%
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
$(33.6) million for the six months ended March 31, 2004, compared to cash flows
provided by operating activities of $11.7 million for the six months ended March
31, 2003. During the six months ended March 31, 2004, cash used in operating
activities was primarily driven by increased accounts receivable and inventory
in support of higher sales, which were offset, in part, by increased accounts
payable and our net income.
As of March 31, 2004, actual days sales outstanding represented by our
accounts receivable increased to 49 days from 47 days as of September 30, 2003.
This was due to slightly extended average terms. During the six months ended
March 31, 2004, the allowance for losses on accounts receivable decreased $1.5
million, which primarily resulted from a combination of collections and
write-offs of accounts receivable that were reserved for in prior periods.
Annualized inventory turns declined to 5.2 turns for the three months
ended March 31, 2004 from 6.2 turns for the prior year-end. Inventories
increased $61.5 million from September 30, 2003, primarily for the purchase of
raw materials to support new programs and new customers and increased sales. In
addition, we planned other increases in inventory to facilitate certain program
transfers between sites, to ensure continuity of supply for one location during
its ERP implementation and for another location during its ERP upgrade, and to
ensure adequate supplies for certain end of life programs.
Investing Activities. Cash flows provided by investing activities
totaled $5.3 million for the six months ended March 31, 2004, which primarily
represented sales and maturities of short-term investments, reduced by additions
to property, plant and equipment (principally software).
17
We utilized available cash, and more recently debt, to finance our
operating requirements. We currently estimate capital expenditures for fiscal
2004 to be approximately $24 million to $26 million, of which $6.3 million was
made through the six months ended March 31, 2004. The remaining fiscal 2004
capital expenditure estimate includes an estimated $12 million for the
acquisition of an additional facility in Penang, Malaysia and the initial
outfitting of manufacturing equipment for that facility.
Financing Activities. Cash flows provided by financing activities
totaled $19.1 million for the six months ended March 31, 2004, and primarily
represented the proceeds from net borrowings on our secured revolving credit
facility (the "Secured Credit Facility").
On October 22, 2003 we entered into the Secured Credit Facility with a
group of banks that allows us to borrow up to $100 million. Borrowing under the
Secured Credit Facility may 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 LIBOR 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 $40.0 million minimum balance of domestic cash or marketable
securities, a minimum tangible net worth and a minimum adjusted EBITDA, all 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 capital and fixed capital requirements, as noted
above, through fiscal 2004. However, the rapid growth anticipated for fiscal
2004 may increase our working capital needs and strain our available resources.
As those needs increase, we may need to arrange additional debt or equity
financing. We therefore evaluate and consider from time to time various
financing alternatives to supplement our capital resources. However, we cannot
assure that we will be able to make any such arrangements on acceptable terms.
We have not paid cash dividends in the past and do not anticipate
paying them in the foreseeable future. We anticipate using any earnings to
support our business.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Our disclosures regarding contractual obligations and commercial
commitments are located in various parts of our regulatory filings. Information
in the following table provides a summary of our contractual obligations and
commercial commitments as of March 31, 2004 (in thousands):
Payments Due by Fiscal Period
--------------------------------------------------------------------------
Remaining in 2009 and
Contractual Obligations Total 2004 2005-2006 2007-2008 thereafter
- ----------------------- ----------- --------- --------- -------- ----------
Long-Term Debt* $ 15,601 $ 601 $ - $ 15,000 $ -
Capital Lease Obligations 42,981 2,222 5,900 6,090 28,769
Operating Leases 77,493 6,882 23,960 17,173 29,478
Unconditional Purchase Obligations** 5,263 5,263 - - -
Other Long-Term Obligations*** 1,595 404 1,191 - -
----------- --------- --------- -------- ---------
Total Contractual Cash Obligations $ 142,933 $ 15,372 $ 31,051 $ 38,263 $ 58,247
=========== ========= ========= ======== =========
* - As of March 31, 2004, long-term debt consists of borrowings outstanding
under our Secured Credit Facility and the financing of certain insurance
premiums.
** - Unconditional purchase obligations consist of a purchase commitment on a
manufacturing facility in Penang, Malaysia. There are no other unconditional
purchase obligations other than purchases of inventory and equipment in
18
the ordinary course of business. All such unconditional purchase obligations of
inventory and equipment have a term of less than one year.
*** - As of March 31, 2004, other long-term obligations consist of salary
commitments under employment agreements. We did not have, and were not subject
to, any lines of credit, standby letters of credit, guarantees, standby
repurchase obligations, other commercial commitments or off-balance sheet
financing arrangements.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in our 2003 Report on Form 10-K.
During the three and six months ended March 31, 2004, there were no material
changes to these policies. Our more critical accounting policies are as follows:
Impairment of Long-Lived Assets - We review property, plant and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
property, plant and equipment is measured by comparing its carrying value to the
projected cash flows the property, plant and equipment are expected to generate.
If such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying value of the property exceeds its
fair market value. The impairment analysis is based on significant assumptions
of future results made by management, including revenue and cash flow
projections. Circumstances that may lead to impairment of property, plant and
equipment include decreases in future performance or industry demand and the
restructuring of our operations.
Intangible Assets - We do not amortize goodwill and intangible assets
with indefinite useful lives, but, instead, test those assets for impairment at
least annually with any related losses recognized in earnings when incurred. We
will perform goodwill impairment tests annually during the third quarter of each
fiscal year and more frequently if an event or circumstance indicates that an
impairment loss has occurred.
We measure the recoverability of goodwill under the annual impairment
test by comparing a reporting unit's carrying amount, including goodwill, to the
fair market value of the reporting unit based on projected discounted future
cash flows. If the carrying amount of the reporting unit exceeds its fair value,
goodwill is considered impaired and a second test is performed to measure the
amount of impairment loss, if any.
Revenue - Revenue from manufacturing services is generally recognized
upon shipment of the manufactured product to our customers, under contractual
terms, which are generally FOB shipping point. Upon shipment, title transfers
and the customer assumes risks and rewards of ownership of the product.
Generally, there are no formal customer acceptance requirements or further
obligations related to manufacturing services; if such requirements or
obligations exist, then revenue is recognized at the time when such requirements
are completed and such obligations fulfilled.
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
March 31, 2004, 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 local real estate
markets. Changes in our estimate of sublease
19
income could result in additional restructuring costs. For equipment, the
impairment losses recognized were based on the fair value estimated using
existing market prices for similar assets, less estimated costs to sell. See
Note 11 in the Notes to Condensed Consolidated Financial Statements.
Subsequent to December 31, 2002, costs associated with a restructuring
activity are recorded in compliance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The timing and related recognition
of severance and benefit costs that are not presumed to 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, no additional accruals are
required 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 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 results of
operations or financial position.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51," which provides guidance on the identification of
and reporting for variable interest entities. In December 2003, the FASB issued
a revised Interpretation No. 46, which expands the criteria for consideration in
determining whether a variable interest entity should be consolidated.
Interpretation No. 46 is effective for us in the second quarter of fiscal 2004.
Our adoption of Interpretation No. 46 did not have a significant impact on our
results of operations or financial position.
In May 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity," which establishes
20
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. Financial
instruments that are within the scope of the Statement, which previously were
often classified as equity, must now be classified as liabilities. In November
2003, FASB Staff Position No. SFAS 150-3 deferred indefinitely the effective
date of SFAS No. 150 for applying the provisions of the Statement for certain
mandatorily redeemable non-controlling interests. However, expanded disclosures
are required during the deferral period. The Company does not have financial
instruments with mandatorily redeemable non-controlling interests.
RISK FACTORS
OUR CUSTOMER REQUIREMENTS AND OPERATING RESULTS VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER, WHICH COULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK.
Our quarterly and annual results may vary significantly depending on
various factors, many of which are beyond our control. These factors include:
- the volume of customer orders relative to our capacity,
- the level and timing of customer orders, particularly in light
of the fact that some of our customers release a significant
percentage of their orders during the last few weeks of a
quarter,
- the typical short life cycle of our customers' products,
- market acceptance of and demand for our customers' products,
- customer announcements of operating results and business
conditions,
- changes in our sales mix to our customers,
- business conditions in our customers' industries,
- the timing of our expenditures in anticipation of future
orders,
- our effectiveness in managing manufacturing processes,
- changes in cost and availability of labor and components,
- local events that may affect our production volume, such as
local holidays,
- credit ratings and stock analyst reports and
- changes in economic conditions and world events.
The EMS industry is impacted by the state of the U.S. and global
economies and world events. A slowdown or flat performance in the U.S. or global
economies, or in particular in the industries served by us, may result in our
customers reducing their forecasts. 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. 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.
The percentage of our sales to customers in the
networking/datacommunications/telecom industry has increased significantly in
recent quarters. When an increasing percentage of our net sales are made to
customers in a particular industry, we become more dependent upon the
performance of that industry, and the economic and business conditions that
affect it.
Our quarterly and annual results are affected by the level and timing
of customer orders, fluctuations in material costs and availabilities, and the
degree of capacity utilization in the manufacturing process.
THE MAJORITY OF OUR SALES COME FROM A SMALL NUMBER OF CUSTOMERS AND IF WE LOSE
ANY OF THESE CUSTOMERS, OUR SALES AND OPERATING RESULTS COULD DECLINE
SIGNIFICANTLY.
Sales to our largest customer for the three months ended March 31, 2004
represented 13 percent of our net sales. Sales to our largest customer in the
comparable quarter of fiscal 2003 represented 15 percent of our net sales. 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 55 percent and 54 percent for the three months ended
March 31, 2004 and 2003, respectively. Our principal customers have varied from
year to year, and our principal customers may not continue to purchase from us
at current levels, if at all. Significant reductions in sales to any of these
customers, or the loss of
21
major customers, could seriously harm our business. If we are not able to
replace expired, canceled or reduced contracts with new business on a timely
basis, our sales will decrease.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY
PRODUCTION.
Electronics manufacturing service providers must provide rapid product
turnaround for their customers. We generally do not obtain firm, long-term
purchase commitments from our customers and we continue to experience reduced
lead-times in customer orders. Customers may cancel their orders, change
production quantities or delay production for a number of reasons that are
beyond our control. The success of our customers' products in the market and the
strength of the markets themselves affect our business. Cancellations,
reductions or delays by a significant customer or by a group of customers could
seriously harm our operating results. Such cancellations, reductions or delays
have occurred and may continue to occur in response to a slowdown in the overall
economy.
In addition, we make significant decisions, including determining the
levels of business that we will seek and accept, production schedules, component
procurement commitments, facility requirements, personnel needs and other
resource requirements, based on our estimates of customer requirements. The
short-term nature of our customers' commitments and the possibility of rapid
changes in demand for their products reduce our ability to accurately estimate
the future requirements of those customers. Because many of our costs and
operating expenses are relatively fixed, a reduction in customer demand can harm
our gross margins and operating results.
As we have experienced recently, customers may require rapid increases
in production, which can stress our resources and hinder 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 actually occurred in the past two fiscal years. Although our recent
financial performance has improved, we continue to review a number of
alternatives to this project, including curtailment or slow-down in the rate of
implementation. As of March 31, 2004, ERP implementation costs included in
property, plant and equipment totaled $28.0 million and we anticipate incurring
at least an additional $2.1 million in capital expenditures for the ERP platform
over the rest of fiscal 2004; changes in the scope of this project could result
in impairment of these capitalized costs.
Due to the rapid sales growth, we have experienced a significant need
for additional employees and facilities in fiscal 2004. We have recently added
many employees around the world and our board of directors recently approved
expansion of our operations in Penang, Malaysia, and a 5-year extension of a
lease on one of our manufacturing facilities in Neenah, Wisconsin. Our response
to these changes in business conditions in fiscal 2004 compared to the two
previous fiscal years has resulted in additional costs to support our growth. If
we are unable to manage this growth and any future growth effectively, our
operating results could be harmed.
OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS.
We have operations in China, Malaysia, Mexico and the United Kingdom.
As noted above, we are in the process of expanding our operations in Malaysia,
and we may in the future expand in these and/or into other international
regions. We have limited experience in managing geographically dispersed
operations in these
22
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 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 six months of fiscal 2004 saw a significant increase in
inventories to support increased sales and expected growth in customer programs.
Customers' cancellation or reduction of orders can result in 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
23
inventory levels, further reduce our inventory turns and increase our financial
risk with such customers, although our customers will have contractual
obligations to purchase the inventory from us.
WE MAY NOT BE ABLE TO OBTAIN RAW MATERIALS OR COMPONENTS FOR OUR ASSEMBLIES ON A
TIMELY BASIS OR AT ALL.
We rely on a limited number of suppliers for many components used in
the assembly process. We do not have any long-term supply agreements. At various
times, there have been shortages of some of the electronic components that we
use, and suppliers of some components have lacked sufficient capacity to meet
the demand for these components. At times, component shortages have been
prevalent in our industry, and in certain areas recur from time to time. In some
cases, supply shortages and delays in deliveries of particular components have
resulted in curtailed production, or delays in production, of assemblies using
that component, which contributed to an increase in our inventory levels. We
expect that shortages and delays in deliveries of some components will continue
from time to time, especially as demand for those components increase. An
increase in economic activity could result in shortages, if manufacturers of
components do not adequately anticipate the increased orders and/or have
previously excessively cut back their production capability in view of reduced
activity in recent years. World events, such as terrorism, armed conflict and
epidemics, also could affect supply chains. If we are unable to obtain
sufficient components on a timely basis, we may experience manufacturing and
shipping delays, which could harm our relationships with customers and reduce
our sales.
A significant portion of our sales is derived from turnkey
manufacturing in which we provide materials procurement. While most of our
customer contracts permit quarterly or other periodic adjustments to pricing
based on decreases and increases in component prices and other factors, we
typically bear the risk of component price increases that occur between any such
repricings or, if such repricing is not permitted, during the balance of the
term of the particular customer contract. Accordingly, component price increases
could adversely affect our operating results.
START-UP COSTS AND INEFFICIENCIES RELATED TO NEW OR TRANSFERRED PROGRAMS CAN
ADVERSELY AFFECT OUR OPERATING RESULTS.
Start-up costs, the management of labor and equipment resources in
connection with the establishment of new programs and new customer
relationships, and the need to estimate required resources in advance can
adversely affect our gross margins and operating results. These factors are
particularly evident in the early stages of the life cycle of new products and
new programs or program transfers. The effects of these start-up costs and
inefficiencies can also occur when we open new facilities, such as our
additional planned facility in Penang, Malaysia. These factors also affect our
ability to efficiently use labor and equipment. Due to the improved economy and
our increased marketing efforts, we are currently managing a number of new
programs. Consequently, our exposure to these factors has increased. In
addition, if any of these new programs or new customer relationships were
terminated, our operating results could be harmed, particularly in the short
term.
WE 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. However, as with other customer
relationships, there are no purchase commitments with emerging companies, and
the revenues we actually achieve may not meet our expectations. 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 could be harmed if sales do not develop to the extent and within the
timeframe 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 increases our credit risk and
exposure to inventory write-offs. Although we adjust reserves for accounts
receivable and inventories for all customers, including start-up customers,
based on the information available, these reserves may not be adequate.
24
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 29 percent of our net sales in the second 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.
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:
25
- 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
- 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.
We are expanding our presence in Malaysia and may further expand our
operations by establishing or acquiring other facilities or by expanding
capacity in our current facilities. We may expand both in geographical areas in
which we currently operate and in new geographical areas within the United
States and internationally. We may not be able to find suitable facilities on a
timely basis or on terms satisfactory to us. Expansion of our business and
operations involves numerous business risks, including:
26
- 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 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
- modifying existing credit facilities or obtaining new credit facilities
- a combination of these methods.
We may not be able to obtain capital when we want or need it, and
capital may not be available on satisfactory terms. If we issue additional
equity securities or convertible debt to raise capital, it may be dilutive to
shareholders' ownership interests. Furthermore, any additional financing 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.
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.
27
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 March 31, 2004, we had
no foreign currency contracts outstanding.
Our percentages of transactions denominated in currencies other than
the U.S. dollar for the indicated periods were as follows:
Three months ended Six months ended
March 31, March 31,
--------------------- --------------------
2004 2003 2004 2003
------ ------ ------ ------
Net Sales 10% 6% 11% 6%
Total Costs 14% 9% 14% 10%
INTEREST RATE RISK
We have financial instruments, including cash equivalents and
short-term investments, which are sensitive to changes in interest rates. We
consider the use of interest-rate swaps based on existing market conditions. We
currently do not use any interest-rate swaps or other types of derivative
financial instruments to hedge interest rate risk.
The primary objective of our investment activities is to preserve
principal, while maximizing yields without significantly increasing market risk.
To achieve this, we maintain our portfolio of cash equivalents and short-term
investments in a variety of highly rated securities, money market funds and
certificates of deposit and limit the amount of principal exposure to any one
issuer.
Our only material interest rate risk is associated with our secured
credit facility. A 10 percent change in our weighted average interest rate on
average long-term borrowings would have had a nominal impact on net interest
expense for both the three months and six months ended March 31, 2004 and 2003.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: The Company maintains disclosure
controls and procedures designed to ensure that the information the Company must
disclose in its filings with the Securities and Exchange Commission is recorded,
processed, summarized and reported on a timely basis. The Company's principal
executive officer and principal financial officer have reviewed and evaluated,
with the participation of the Company's management, the Company's disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end
of the period covered by this report (the "Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in bringing to their
attention on a timely basis material information relating to the Company
required to be included in the Company's periodic filings under the Exchange
Act.
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
28
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.
The Company is currently undergoing a comprehensive effort to comply
with Section 404 of the Sarbanes-Oxley Act of 2002. Compliance is required for
our fiscal year end September 30, 2005. This effort includes documenting and
testing of internal controls. During the course of these activities, the Company
has identified certain internal control issues which management believes should
be improved. These control issues are, in large part, the result of operating on
multiple ERP platforms. The Company's review continues, but to date the Company
has not identified any material weaknesses in its internal control as defined by
the Public Company Accounting Oversight Board. The Company is nonetheless making
improvements to its internal controls over financial reporting as a result of
its review efforts. These planned improvements include additional systematic
controls, further formalization of policies and procedures, improved segregation
of duties and additional monitoring controls.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Plexus Corp. annual meeting of shareholders on February
11, 2004, the seven management nominees for re-election to the board were
re-elected by the shareholders. The nominees/directors were re-elected with the
following votes:
Authority
Nominee's/ Granted to Authority
Director's Name Vote "For" Withheld
- --------------------- ---------- ---------
Stephen P. Cortinovis 36,596,864 239,550
David J. Drury 36,480,798 355,616
Dean A. Foate 36,480,324 356,090
John L. Nussbaum 36,470,178 366,236
Thomas J. Prosser 36,304,972 531,442
Charles M. Strother 36,620,564 215,850
Jan K. VerHagen 36,596,864 239,550
In addition, shareholders ratified the selection of
PricewaterhouseCoopers LLP as the independent auditors for fiscal 2004. The vote
on the proposal was as follows:
For: 36,395,822 Against: 400,631 Abstain: 39,961
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(i) Restated Articles of Incorporation of Plexus Corp., as
amended through March 13, 2001
31.1 Certification of Chief Executive Officer pursuant to Section
302(a) of the Sarbanes Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to section
302(a) of the Sarbanes Oxley Act of 2002.
32.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
29
(b) Reports on Form 8-K during this period.
No reports were filed during the three months ended March 31, 2004.
However, Plexus furnished reports (which are not to be deemed incorporated by
reference into other filings) dated January 21, 2004 and April 21, 2004, which
furnished certain earnings information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
5/14/04 /s/ Dean A. Foate
- ------- ------------------------------------------
Date Dean A. Foate
President and Chief Executive Officer
5/14/04 /s/ F. Gordon Bitter
- ------- ------------------------------------------
Date F. Gordon Bitter
Vice President and
Chief Financial Officer
30