-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LZvNJB+L8yzwQyhN4HMKaGcwuhrEx4quIBidAATpDuOBISVj7SUdYixRFuf0ISOX Q7nNHGtDQSvzKOsbfeOQJw== 0000950137-04-000975.txt : 20040217 0000950137-04-000975.hdr.sgml : 20040216 20040217061240 ACCESSION NUMBER: 0000950137-04-000975 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLEXUS CORP CENTRAL INDEX KEY: 0000785786 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 391344447 STATE OF INCORPORATION: WI FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14824 FILM NUMBER: 04602149 BUSINESS ADDRESS: STREET 1: 55 JEWELERS PARK DR CITY: NEENAH STATE: WI ZIP: 54957-0156 BUSINESS PHONE: 9207223451 MAIL ADDRESS: STREET 1: PLEXUS CORP STREET 2: 55 JEWELERS PARK DR CITY: NEENAH STATE: WI ZIP: 54957-0156 10-Q 1 c82826e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarter ended December 31, 2003 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 000-14824 PLEXUS CORP. (Exact name of registrant as specified in charter) Wisconsin 39-1344447 (State of Incorporation) (IRS Employer Identification No.) 55 Jewelers Park Drive Neenah, Wisconsin 54957-0156 (Address of principal executive offices)(Zip Code) Telephone Number (920) 722-3451 (Registrant's telephone number, including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 under the Exchange Act). Yes (X) No ( ) As of February 9, 2004 there were 42,966,015 shares of Common Stock of the Company outstanding. 1 PLEXUS CORP. TABLE OF CONTENTS December 31, 2003 PART I. FINANCIAL INFORMATION................................................................................... 3 Item 1. Consolidated Financial Statements.............................................................. 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)................ 3 CONDENSED CONSOLIDATED BALANCE SHEETS.......................................................... 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS................................................ 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 13 "SAFE HARBOR" CAUTIONARY STATEMENT............................................................. 13 OVERVIEW....................................................................................... 13 RESULTS OF OPERATIONS.......................................................................... 14 LIQUIDITY AND CAPITAL RESOURCES................................................................ 17 CONTRACTUAL OBLIGATIONS AND COMMITMENTS........................................................ 18 DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES.................................................. 18 NEW ACCOUNTING PRONOUNCEMENTS.................................................................. 19 RISK FACTORS................................................................................... 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 27 Item 4. Controls and Procedures....................................................................... 27 PART II - OTHER INFORMATION...................................................................................... 28 Item 1. Legal Proceedings.............................................................................. 28 Item 6. Exhibits and Reports on Form 8-K.............................................................. 28 SIGNATURE........................................................................................................ 29
2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS PLEXUS CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share data) Unaudited
Three Months Ended December 31, ----------------------- 2003 2002 ---------- ---------- Net sales $ 238,464 $ 205,379 Cost of sales 218,837 189,839 ---------- ---------- Gross profit 19,627 15,540 Operating expenses: Selling and administrative expenses 16,356 16,755 Restructuring and impairment costs - 31,840 ---------- ---------- 16,356 48,595 ---------- ---------- Operating income (loss) 3,271 (33,055) Other income (expense): Interest expense (663) (773) Miscellaneous 516 518 ---------- ---------- Income (loss) before income taxes and cumulative effect of change in accounting for goodwill 3,124 (33,310) Income tax expense (benefit) 625 (12,478) ---------- ---------- Income (loss) before cumulative effect of change in accounting for goodwill 2,499 (20,832) Cumulative effect of change in accounting for goodwill, net of income tax benefit of $4,755 - (23,482) ---------- ---------- Net income (loss) $ 2,499 $ (44,314) ========== ========== Earnings per share: Basic Income (loss) before cumulative effect of change in accounting for goodwill $ 0.06 $ (0.49) Cumulative effect of change in accounting for goodwill - (0.56) ---------- ---------- Net income (loss) $ 0.06 $ (1.05) ========== ========== Diluted Income (loss) before cumulative effect of change in accounting for goodwill $ 0.06 $ (0.49) Cumulative effect of change in accounting for goodwill - (0.56) ---------- ---------- Net income (loss) $ 0.06 $ (1.05) ========== ========== Weighted average shares outstanding: Basic 42,651 42,069 ========== ========== Diluted 43,738 42,069 ========== ========== Comprehensive income (loss): Net income (loss) $ 2,499 $ (44,314) Foreign currency hedges and translation adjustments 4,823 1,223 ---------- ---------- Comprehensive income (loss) $ 7,322 $ (43,091) ========== ==========
See notes to condensed consolidated financial statements. 3 PLEXUS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) Unaudited
December 31, September 30, 2003 2003 ------------ ------------- ASSETS Current assets: Cash and cash equivalents $ 41,176 $ 58,993 Short-term investments 18,489 19,701 Accounts receivable, net of allowance of $3,300 and $4,100, respectively 117,906 111,125 Inventories 162,889 136,515 Deferred income taxes 24,645 23,723 Prepaid expenses and other 7,750 8,326 ------------ ------------- Total current assets 372,855 358,383 Property, plant and equipment, net 129,655 131,510 Goodwill 33,928 32,269 Deferred income taxes 26,293 24,921 Other 6,695 5,971 ------------ ------------- Total assets $ 569,426 $ 553,054 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations $ 1,038 $ 958 Accounts payable 97,338 91,445 Customer deposits 16,372 14,779 Accrued liabilities: Salaries and wages 17,870 17,133 Other 24,027 23,753 ------------ ------------- Total current liabilities 156,645 148,068 Capital lease obligations, net of current portion 23,625 23,502 Other liabilities 10,010 10,468 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value, 5,000 shares authorized, none issued or outstanding - - Common stock, $.01 par value, 200,000 shares authorized, 42,679 and 42,607 shares issued and outstanding, respectively 427 426 Additional paid-in capital 262,021 261,214 Retained earnings 105,339 102,840 Accumulated other comprehensive income 11,359 6,536 ------------ ------------- 379,146 371,016 ------------ ------------- Total liabilities and shareholders' equity $ 569,426 $ 553,054 ============ =============
See notes to condensed consolidated financial statements. 4 PLEXUS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Unaudited
Three Months Ended December 31, -------------------- 2003 2002 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,499 $(44,314) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization 6,444 7,375 Cumulative effect of change in accounting for goodwill - 28,237 Non-cash goodwill and asset impairments - 16,922 Deferred income taxes (2,294) (17,385) Net repayments under asset securitization facility - (3,614) Income tax benefit of stock option exercises 189 249 Changes in assets and liabilities: Accounts receivable (5,438) 8,812 Inventories (25,238) (9,814) Prepaid expenses and other (467) (359) Accounts payable 4,985 (1,314) Customer deposits 1,581 (318) Accrued liabilities and other 791 12,402 -------- -------- Cash flows used in operating activities (16,948) (3,121) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Sales and maturities of short-term investments 1,212 13,026 Payments for property, plant and equipment (3,612) (10,667) -------- -------- Cash flows provided by (used in) investing activities (2,400) 2,359 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on debt and capital lease obligations (223) (437) Proceeds from exercise of stock options 619 491 -------- -------- Cash flows provided by financing activities 396 54 -------- -------- Effect of foreign currency translation on cash and cash equivalents 1,135 428 -------- -------- Net decrease in cash and cash equivalents (17,817) (280) Cash and cash equivalents: Beginning of period 58,993 63,347 -------- -------- End of period $ 41,176 $ 63,067 ======== ========
See notes to condensed consolidated financial statements. 5 PLEXUS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002 UNAUDITED NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statements included herein have been prepared by Plexus Corp. ("Plexus" or the "Company") without audit and pursuant to the rules and regulations of the United States Securities and Exchange Commission. In the opinion of the Company, the financial statements reflect all adjustments, which include normal recurring adjustments necessary to present fairly the financial position of the Company as of December 31, 2003, and the results of operations for the three months ended December 31, 2003 and 2002, and the cash flows for the same three-month periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations dealing with interim financial statements. However, the Company believes that the disclosures made in the condensed consolidated financial statements included herein are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 2003 Annual Report on Form 10-K. NOTE 2 - INVENTORIES The major classes of inventories are as follows (in thousands):
December 31, September 30, 2003 2003 ------------- ------------- Raw materials $ 110,238 $ 88,562 Work-in-process 40,174 41,514 Finished goods 12,477 6,439 ------------- ------------- $ 162,889 $ 136,515 ============= =============
NOTE 3 - FORMER FINANCING In fiscal 2001, the Company entered into an amended agreement to sell up to $50 million of trade accounts receivable without recourse to Plexus ABS Inc. ("ABS"), a wholly owned limited-purpose subsidiary of the Company. This asset securitization facility expired in September 2003 (the "former asset securitization facility"). ABS was a separate corporate entity that sold participating interests in a pool of the Company's accounts receivable to financial institutions, under a separate agreement. Accounts receivable sold to financial institutions were reflected as a reduction to accounts receivable in the Consolidated Balance Sheets. For the three months ended December 31, 2003, the Company did not incur any financing costs associated with the former asset securitization facility due to its expiration in September 2003. For the three months ended December 31, 2002, the Company incurred financing costs of $0.1 million under the former asset securitization facility. These financing costs are included in interest expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In addition, the net repayments under the agreement during the three months ended December 31, 2002 are included in the cash flows from operating activities in the accompanying Condensed Consolidated Statements of Cash Flows. The Company had a previous credit facility (the "Old Credit Facility"), which it terminated, effective December 26, 2002. No amounts were outstanding during the first quarter of fiscal 2003. Termination of the Old Credit Facility was occasioned by anticipated noncompliance with the minimum interest expense coverage ratio covenant as of December 31, 2002, as a result of restructuring costs in the first quarter of fiscal 2003 (see Note 11). As a result of the termination of the Old Credit Facility, the Company wrote-off unamortized deferred financing costs of approximately $0.5 million in the three months ended December 31, 2002. 6 NOTE 4 - CURRENT FINANCING On October 22, 2003, the Company entered into a secured three-year revolving credit facility (the "Secured Credit Facility") with a group of banks that allows the Company to borrow up to $100 million. No amounts were outstanding during the first quarter of fiscal 2004. Borrowings under the Secured Credit Facility will be either through revolving or swing loans or letters of credit obligations. The Secured Credit Facility is secured by substantially all of the Company's domestic working capital assets and a pledge of 65 percent of the stock of the Company's foreign subsidiaries. Interest on borrowings varies with usage and begins at the Prime rate, as defined, or the LIBOR rate plus 1.5 percent. The Company is also required to pay an annual commitment fee of 0.5 percent of the unused credit commitment, up to a maximum amount of $0.5 million per year. Origination fees and expenses totaled approximately $0.7 million, which have been deferred and are being amortized to interest expense over the term of the Secured Credit Facility. The Secured Credit Facility matures on October 22, 2006 and contains certain financial covenants. These covenants include a maximum total leverage ratio, a minimum balance of domestic cash or marketable securities, a minimum tangible net worth and a minimum adjusted EBITDA, as defined in the agreement. Interest expense related to the commitment fee and amortization of deferred origination fees totaled approximately $0.1 million for the three months ended December 31, 2003. NOTE 5 - EARNINGS PER SHARE The following is a reconciliation of the amounts utilized in the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended December 31, ------------------- 2003 2002 -------- -------- Earnings: Income (loss) before cumulative effect of change in accounting for goodwill $ 2,499 $(20,832) Cumulative effect of change in accounting for goodwill, net of income tax benefit of $4,755 - (23,482) -------- -------- Net income (loss) $ 2,499 $(44,314) ======== ======== Basic weighted average common shares outstanding 42,651 42,069 Dilutive effect of stock options 1,087 - -------- -------- Diluted weighted average shares outstanding 43,738 42,069 ======== ======== Basic and diluted earnings per share: Income (loss) before cumulative effect of change in accounting for goodwill $ 0.06 $ (0.49) Cumulative effect of change in accounting for goodwill, net of income taxes - (0.56) -------- -------- Net income (loss) $ 0.06 $ (1.05) ======== ========
For the three months ended December 31, 2003, stock options to purchase approximately 2.0 million shares of common stock were outstanding but not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. For the three months ended December 31, 2002, stock options to purchase approximately 3.5 million shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because there was a net loss in this period, and therefore their effect would be anti-dilutive. NOTE 6 - STOCK-BASED COMPENSATION The Company accounts for its stock option plans under the guidelines of Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense related to the stock option plans has been recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company utilizes the 7 Black-Scholes option valuation model to value stock options for pro forma presentation of income and per share data as if the fair value based method in Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123" had been used to account for stock-based compensation. The following presents pro forma net income (loss) and per share data as if a fair value based method had been used to account for stock-based compensation (in thousands, except per share amounts):
Three Months Ended December 31, --------------------------- 2003 2002 ------------ ------------ Net income (loss) as reported $ 2,499 $ (44,314) Add: stock-based employee compensation expense included in reported net loss, net of related income tax effect - - Deduct: total stock-based employee compensation expense determined under fair value based method, net of related tax effects (1,952) (2,237) ------------ ------------ Proforma net income (loss) $ 547 $ (46,551) ============ ============ Earnings per share: Basic, as reported $ 0.06 $ (1.05) ============ ============ Basic, proforma $ 0.01 $ (1.11) ============ ============ Diluted, as reported $ 0.06 $ (1.05) ============ ============ Diluted, proforma $ 0.01 $ (1.11) ============ ============ Weighted average shares: Basic 42,651 42,069 ============ ============ Diluted 44,409 42,069 ============ ============
NOTE 7 - GOODWILL AND PURCHASED INTANGIBLE ASSETS The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective October 1, 2002. Under SFAS No. 142, the Company no longer amortizes goodwill and intangible assets with indefinite useful lives, but instead tests those assets for impairment at least annually with any related loss recognized in earnings when incurred. Recoverability of goodwill is measured at the reporting unit level. The Company's goodwill was originally assigned to three reporting units: San Diego, California ("San Diego"), Juarez, Mexico ("Juarez") and Kelso, Scotland and Maldon, England ("United Kingdom"). As of December 31, 2003, only the Juarez and United Kingdom reporting units have goodwill remaining. SFAS No. 142 required the Company to perform a transitional goodwill impairment evaluation that assessed whether there was an indication of goodwill impairment as of the date of adoption. The Company completed the evaluation and concluded that it had goodwill impairments related to the San Diego and Juarez reporting units, since the estimated fair values based on expected future discounted cash flows to be generated from each reporting unit were significantly less than their respective carrying values. In the first quarter of fiscal 2003, the Company identified $28.2 million of transitional impairment losses ($23.5 million, net of income tax benefits) related to San Diego and Juarez, which were recognized as a cumulative effect of a change in accounting for goodwill in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company is required to perform goodwill impairment tests at least on an annual basis, for which the Company selected the third quarter of each fiscal year, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. In the first quarter of fiscal 2003, an additional $5.6 million of goodwill was impaired as a result of the Company's decision to close the San Diego 8 facility (see Note 11). The Company's fiscal 2003 annual impairment test did not result in any further impairment. However, no assurances can be given that future impairment tests of goodwill will not result in additional goodwill impairment. The changes in the carrying amount of goodwill for the three months ended December 31, 2003 and for the fiscal year ended September 30, 2003 are as follows (amounts in thousands): Balance as of October 1, 2002 $ 64,957 Cumulative effect of change in accounting for goodwill (28,237) Impairment charge (5,595) Foreign currency translation adjustments 1,144 -------- Balance as of September 30, 2003 32,269 Foreign currency translation adjustments 1,659 -------- Balance as of December 31, 2003 $ 33,928 ========
The Company has a nominal amount of identifiable intangibles that are subject to amortization. These intangibles relate to patents with a remaining useful life of 14 years. The Company has no identifiable intangibles that are not subject to amortization. During the three months ended December 31, 2003, there were no additions to identifiable intangible assets. Intangible asset amortization expense was nominal for the three months ended December 31, 2003 and 2002. NOTE 8 - BUSINESS SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION The Company operates in one business segment. The Company provides product realization services to electronic original equipment manufacturers ("OEMs"). The Company has three reportable geographic regions: North America, Europe and Asia. As of December 31, 2003, the Company has 19 active manufacturing and/or engineering facilities in North America, Europe and Asia to serve these OEMs. The Company uses an internal management reporting system, which provides important financial data to evaluate performance and allocate the Company's resources on a geographic basis. Interregion transactions are generally recorded at amounts that approximate arm's length transactions. Certain corporate expenses are allocated to these regions and are included for performance evaluation. The accounting policies for the regions are the same as for the Company taken as a whole. The table below presents geographic net sales information reflecting the origin of the product shipped and asset information based on the physical location of the assets (in thousands):
Three months ended December 31, ------------------- 2003 2002 -------- -------- Net sales: North America $193,696 $183,418 Europe 27,153 14,075 Asia 17,615 7,886 -------- -------- $238,464 $205,379 ======== ========
9
December 31, September 30, 2003 2003 ------------- ------------- Long-lived assets: North America $ 108,023 $ 110,582 Europe 13,516 12,834 Asia 8,116 8,094 ------------- ------------- $ 129,655 $ 131,510 ============= =============
Juniper Networks, Inc. accounted for 13 percent of net sales for the three months ended December 31, 2003. General Electric Corp. and Siemens Medical Systems, Inc. accounted for 13 percent and 11 percent, respectively, of net sales for the three months ended December 31, 2002. No other customers accounted for 10 percent or more of net sales in either period. Long-lived assets as of December 31, 2003 and September 30, 2003 exclude goodwill and other long-term assets totaling $40.6 million and $38.2 million, respectively. NOTE 9 - GUARANTEES The Company offers certain indemnifications under its customer manufacturing agreements and previously offered limited indemnification under the former asset securitization facility, which survives its termination. In the normal course of business, the Company also provides its customers a limited warranty covering workmanship, and in some cases materials, on products manufactured by the Company for them. Such warranty generally provides that products will be free from defects in the Company's workmanship and meet mutually agreed upon testing criteria for periods ranging from 12 months to 24 months. If a product fails to comply with the Company's warranty, the Company's obligation is generally limited to correcting, at its expense, any defect by repairing or replacing such defective product. The Company's warranty generally excludes defects resulting from faulty customer-supplied components, design defects or damage caused by any party other than the Company. The Company provides for an estimate of costs that may be incurred under its limited warranty at the time product revenue is recognized. These costs primarily include labor and materials, as necessary, associated with repair or replacement. The primary factors that affect the Company's warranty liability include the number of shipped units and historical and anticipated rates of warranty claims. As these factors are impacted by actual experience and future expectations, the Company assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Below is a table summarizing the warranty activity for the three months ended December 31, 2003 and for the fiscal year ended September 30, 2003 (in thousands): Limited warranty liability, as of October 1, 2002 $ 1,246 Accruals for warranties issued during the period 150 Accruals related to pre-existing warranties (20) Settlements (in cash or in kind) during the period (391) ------- Limited warranty liability, as of September 30, 2003 985 Accruals for warranties issued during the period 28 Accruals related to pre-existing warranties - Settlements (in cash or in kind) during the period (80) ------- Limited warranty liability, as of December 31, 2003 $ 933 =======
Under the Company's former asset securitization facility agreement (see Note 3), which expired in September 2003, the Company was required to provide indemnifications typical of those found in transactions of this sort, such as upon a breach of the Company's representations and warranties in the facility agreement, or upon the Company's failure to perform its obligations under such agreement, or in the event of litigation concerning the agreement. The asset securitization agreement also included an obligation by the Company to indemnify participating financial institutions if regulatory changes result in either reductions in their return on capital or increases in the costs of performing their obligations under the funding arrangements. The Company is unable to estimate the maximum potential amount of future payments under this indemnification due to the uncertainties inherent in predicting potential regulatory change. Moreover, although the Company's indemnification obligation survived the termination of that facility in September 2003, the Company believes that it is unlikely to have any on- 10 going indemnification obligations because the Company will not be engaged in further asset securitization transactions after such date; the Company also has no reasonable basis to believe that any unasserted indemnification obligations exist as of the date hereof. NOTE 10 - CONTINGENCIES The Company (along with many other companies) has been sued by the Lemelson Medical, Education & Research Foundation Limited Partnership ("Lemelson") related to alleged possible infringement of certain Lemelson patents. The complaint, which is one of a series of complaints by Lemelson against hundreds of companies, seeks injunctive relief, treble damages (amount unspecified) and attorney's fees. The Company has obtained a stay of action pending developments in other related litigation. On January 23, 2004, the judge in the other related litigation ruled in favor of the plaintiffs, thereby declaring the Lemelson patents unenforceable and invalid. Lemelson has stated that it will appeal this ruling. The Company's lawsuit remains stayed pending the outcome of that appeal. The Company believes the vendors from which the alleged patent-infringing equipment was purchased may be required to contractually indemnify the Company. However, based upon the Company's observation of the plaintiff's actions in other parallel cases, it appears that the primary objective of the plaintiff is to cause defendants to enter into license agreements. If a judgment is rendered and/or a license fee required, it is the opinion of management of the Company that such judgment or fee would not be material to the Company's financial position, results of operations or cash flows. In addition, the Company is party to other certain lawsuits in the ordinary course of business. Management does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows. NOTE 11 - RESTRUCTURING COSTS In the first quarter of fiscal 2003, the Company recorded pre-tax restructuring costs totaling $31.8 million. The Company's most significant restructuring in the first quarter of fiscal 2003 was the announced intention to close its San Diego facility, which resulted in a write-off of goodwill, the write-down of underutilized assets to fair value, and, in subsequent periods, the elimination of the facility's work force. San Diego was phased out of operation in May 2003. Goodwill impairment for San Diego totaled approximately $20.4 million, of which $14.8 million was impaired as a result of the Company's transitional impairment evaluation under SFAS No. 142 (see Note 7) and $5.6 million was impaired as a result of the Company's decision to close the facility. Other restructuring actions in the first quarter of fiscal 2003 included the consolidation of several leased facilities, the write-down of underutilized assets to fair value and work force reductions, which primarily affected operating sites in Juarez, Mexico; Seattle, Washington; Neenah, Wisconsin and the United Kingdom. For leased facilities that were abandoned and anticipated to be subleased, the restructuring costs were based on future lease payments subsequent to abandonment, less estimated sublease income. For the equipment write-off, the restructuring costs were based on fair value estimated by using market prices for similar assets less estimated selling costs. Employee termination and severance costs in the first quarter fiscal 2003 affected approximately 500 employees. Fiscal year 2003 restructuring activities that occurred subsequent to December 31, 2002 and for which a liability remained at September 30, 2003, included severance costs associated with the closure of the Company's Richmond, Kentucky, facility work force reductions for engineering, corporate and other manufactuzring locations and other costs associated with refocusing the Company's PCB design group. The table below summarizes the Company's payments on its restructuring obligations for the first fiscal quarter of fiscal 2004 (in thousands): 11
EMPLOYEE TERMINATION AND LEASE OBLIGATIONS SEVERANCE COSTS AND OTHER EXIT COSTS TOTAL --------------- -------------------- --------- Accrued balance, September 30, 2003 $ 2,905 $ 7,892 $ 10,797 Amounts utilized (1,875) (545) (2,420) --------------- -------------------- --------- Accrued balance, December 31, 2003 $ 1,030 $ 7,347 $ 8,377 =============== ==================== =========
As of December 31, 2003, most of the remaining severance costs and $2.7 million of the lease obligations are expected to be paid in the next twelve months. The remaining liability for lease payments is expected to be paid through June 2008. NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus regarding EITF Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The consensus addresses not only when and how an arrangement involving multiple deliverables should be divided into separate units of accounting, but also how the arrangement's consideration should be allocated among separate units. The pronouncement was effective for the Company commencing with its first quarter of fiscal 2004 but did not have a material impact on its consolidated results of operations or financial position. On December 17, 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition, which supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issues Task Force (EITF) 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. The adoption of this bulletin did not have an impact on our financial condition or results of operations. In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," which provides guidance on the identification of and reporting for variable interest entities. In December 2003, the FASB issued a revised Interpretation No. 46, which expands the criteria for consideration in determining whether a variable interest entity should be consolidated. Interpretation No. 46 is effective for the Company's second fiscal quarter of 2004. The Company's adoption of Interpretation No. 46 is not expected to have a significant impact on its future results of operations or financial condition. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial instruments that are within the scope of the Statement, which previously were often classified as equity, must now be classified as liabilities. The pronouncement was effective for the Company commencing with its first quarter of fiscal 2004, but did not have a material impact on its consolidated results of operations or financial position. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: The statements contained in the Form 10-Q that are not historical facts (such as statements in the future tense and statements including "believe," "expect," "intend," "anticipate" and similar words and concepts) are forward-looking statements that involve risks and uncertainties, including, but not limited to: - the continued uncertain economic outlook for the electronics and technology industries, - the risk of customer delays, changes or cancellations in both ongoing and new programs, - our ability to secure new customers and maintain our current customer base, - the results of cost reduction efforts, - the impact of capacity utilization and our ability to manage fixed and variable costs, - the effects of facilities closures and restructurings, - material cost fluctuations and the adequate availability of components and related parts for production, - the effect of changes in average selling prices, - the effect of start-up costs of new programs and facilities, - the effect of general economic conditions and world events, - the effect of the impact of increased competition and - other risks detailed below, especially in "Risk Factors" and otherwise herein, and in our Securities and Exchange Commission filings. OVERVIEW Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or "we") is a participant in the Electronic Manufacturing Services ("EMS") industry. We provide product realization services to original equipment manufacturers, or OEMs, in the networking/datacommunications/telecom, medical, industrial/commercial, computer and transportation/other industries. We provide advanced electronics design, manufacturing and testing services to our customers with a focus on complex, high technology and high reliability products. We offer our customers the ability to outsource all stages of product realization, including: development and design, materials procurement and management, prototyping and new product introduction, testing, manufacturing, product configuration, logistics and test/repair. The following information should be read in conjunction with our condensed consolidated financial statements included herein and the "Risk Factors" section beginning on page 20. The rapid revenue growth the EMS industry enjoyed through the late 1990's and into 2001 stalled over the past two years as a result of the bursting of the dot com bubble and generally sluggish economic activity in the United States and elsewhere. As a result of this reduced demand, the industry, as well as Plexus, has faced historically low levels of capacity utilization and consequently lower profitability, and even losses. Excess industry capacity has also led to more competitive pricing environment, which has also lowered profitability. Last year, Plexus responded to these industry conditions by taking a number of actions to reduce manufacturing capacity and lower fixed expenses. The more important of these actions were the closures of the San Diego, California ("San Diego") and the Richmond, Kentucky sites. These and other actions, more fully described in our 2003 Form 10-K, reduced our manufacturing capacity from 1.8 million to 1.4 million square feet (a reduction of 22 percent) and lowered our fixed expense base (both manufacturing and selling and administrative expense) by an estimated $30 million per year. Although the actions taken last year reduced our fixed expense base, other factors will increase the fixed expense base and erode the net expected fixed expense reduction to approximately $15 million per year. These factors include an approximately 3.5 percent across the board salary increase in the United States at the beginning of the fiscal year, higher costs for medical benefits, and costs for variable incentive compensation in the current year which were not earned in the prior year because of our reported losses. 13 As we begin fiscal 2004, based on customer indications, we believe that there is renewed strength in end-market demand, especially from the networking/datacommunications and medical sectors; these are markets in which we have typically generated approximately 60-70 percent of our revenues. In addition, we have focused on improving organic growth opportunities, and our continuing commitment to building a highly effective sales and marketing function has resulted in winning new programs and new customers. Although various surveys suggest that the overall EMS sector will grow 8-11 percent in fiscal 2004, based on customer indications of expected demand and management estimates of new program wins, our internal projections currently anticipate revenue growth for fiscal 2004 in the range of 15-20 percent; however, actual results may be lower and will depend upon future orders and consequent sales. These future orders may be less than we expect due to many factors, including those that we discuss under "Risk Factors" below. The rapid growth anticipated for this fiscal year entails substantial execution risks. We will have to hire and train approximately 1,000 new employees at sites located around the world. Additionally, as the industry rebounds, the supply chain that supports the EMS industry may tighten, and obtaining required parts may become more difficult. Nonetheless, the new fiscal year has begun on a positive note as more fully discussed below. RESULTS OF OPERATIONS Net sales. Net sales for the indicated periods were as follows (dollars in millions):
Three months ended December 31, ------------------------- 2003 2002 Increase/ (Decrease) ------ ------ -------------------- Sales $238.5 $205.4 $33.1 16%
Our net sales increase of 16 percent reflects the strengthening end-market demand, particularly in the networking/datacommunications and medical sectors, as well as new program wins from both new and existing customers. Growth in the networking/datacommunications sector occurred despite the loss in the comparable prior fiscal year period of programs from the primary customer of our former San Diego facility, which was closed in May 2003. The net sales growth in the medical sector was primarily due to strength of a medical program in the United Kingdom. Based on customers' orders and indications of expected demand, we currently expect second quarter sales to be in the range of $245 million to $255 million. However, our results will ultimately depend on the actual order levels. Our percentages of net sales to customers representing 10 percent or more of sales and net sales to our ten largest customers for indicated periods were as follows:
Three months ended December 31, -------------------- 2003 2002 ---- ---- Juniper Networks 13% * GE * 13% Siemens * 11% Top 10 customers 60% 57%
* Represents less than 10 percent of net sales As with sales to most of our customers, sales to our largest customers may vary from time to time depending on the size and timing of customer program commencement, termination, delays, modifications and transitions. We remain dependent on continued sales to our significant customers, and we generally do not obtain firm, long-term purchase commitments from our customers. Customer forecasts can and do change as a result of their end-market demand and other factors. Any material change in orders from these major accounts, or other customers, could materially affect our results of operations. 14 Our percentages of sales by industry for the indicated periods were as follows:
Three months ended December 31, ------------------ Industry 2003 2002 - -------- ---- ---- Networking/Datacommunications/Telecom 39% 35% Medical 33% 34% Industrial/Commercial 12% 14% Computer 11% 12% Transportation/Other 5% 5%
Gross profit. Gross profit and gross margins for the indicated periods were as follows (dollars in millions):
Three months ended December 31, ------------------ 2003 2002 Increase/ (Decrease) ------ ---- -------------------- Gross Profit $19.6 $15.5 $4.1 26% Gross Margin 8.2% 7.6%
The improvement in gross profit and gross margin was due to a combination of higher net sales, that resulted in enhanced manufacturing capacity utilization, and lower fixed manufacturing costs. The primary reason for the reduction in fixed manufacturing costs was the fiscal 2003 restructuring actions. The gross profit improvements were moderated, however, by lower pricing on certain programs, manufacturing inefficiencies related to the start of new programs, as well as higher compensation and benefits costs. Effective at the beginning of fiscal 2004, Plexus raised employee salaries in the United States by an average of approximately 3.5 percent. This salary increase was to partially compensate for the flat base compensation of employees over the past two years. In addition, the overall costs for employee health care costs will continue to increase, even as we attempt to manage those costs. Our gross margins reflect a number of factors that can vary from period to period, including product and service mix, the level of start-up costs and efficiencies of new programs, product life cycles, sales volumes, price erosion within the electronics industry, overall capacity utilization, labor costs and efficiencies, the management of inventories, component pricing and shortages, average sales prices, the mix of turnkey and consignment business, fluctuations and timing of customer orders, changing demand for customers' products and competition within the electronics industry. Although we focus on maintaining and expanding gross margins, there can be no assurance that gross margins will not decrease in future periods. Most of the research and development we conduct is paid for by our customers and is, therefore, included in both sales and cost of sales. We conduct our own research and development, but that research and development is not specifically identified, and we believe such expenses are less than one percent of our net sales. Operating expenses. Selling and administrative (S&A) expenses for the indicated periods were as follows (dollars in millions):
Three months ended December 31, ------------------ 2003 2002 Increase/(Decrease) ------ ---- ------------------- Selling and administrative expense (S&A) $16.4 $16.8 $ (0.4) (2%) Percent of sales 6.9% 8.2%
The dollar reduction in S&A was due primarily to the fiscal 2003 restructuring initiative offset, in part, by higher compensation and benefits costs in the current quarter. The significant decrease in S&A as a percent of net sales was due primarily to the 16 percent increase in net sales over the comparable prior year period. Included in S&A for both periods are expenses for information technology systems support related to the implementation of a new enterprise resource planning ("ERP") platform. This ERP platform is intended to augment 15 our management information systems and includes various software systems to enhance and standardize our ability to globally translate information from production facilities into operational and financial information and create a consistent set of core business applications at our worldwide facilities. During fiscal 2003, two manufacturing facilities were converted to the new ERP platform, which resulted in additional training and implementation costs. During the balance of fiscal 2004, we will continue to develop enhancements for the new ERP platform. We anticipate converting at least one more facility to the new ERP platform during our second fiscal quarter of fiscal 2004, at which time approximately 50 percent of our revenues will be on the new ERP platform. Training and implementation costs are expected to continue over the next few quarters as we make system enhancements and convert the additional facility to the new ERP platform. The conversion timetable and future project scope remain subject to change based upon our evolving needs and sales levels. In addition to S&A expenses associated with the new ERP system, we continue to incur capital expenditures for hardware, software and other costs for testing and installation. As of December 31, 2003, property, plant and equipment includes $29.6 million related to the new ERP platform, including $1.7 million capitalized in the first quarter of fiscal 2004. Amortization of the capitalized costs associated with the ERP platform commenced in fiscal 2003 and totaled $0.6 million for the three months ended December 31, 2003. We anticipate incurring at least an additional $3.3 million of capital expenditures for the ERP platform over the rest of fiscal 2004. During the first quarter of fiscal 2003, we recorded pre-tax restructuring charges totaling $31.8 million. These charges were taken in response to reductions in end-market demand, including the decision of the largest customer of the San Diego facility to transition most of its programs to non-Plexus facilities. Our primary restructuring actions included the closure of the San Diego facility, which resulted in a write-off of goodwill, the write-down of underutilized assets to fair value, and the elimination of the facility's work force. The San Diego facility was phased out of operations in May 2003. As of September 30, 2002, the San Diego location had unamortized goodwill of approximately $20.4 million, of which $14.8 million was impaired as a result of the transitional impairment evaluation under SFAS No. 142 (see discussion below under "Cumulative effect of change in accounting for goodwill") and $5.6 million was impaired as a result of the decision to close the facility. Other restructuring actions in the first quarter of fiscal 2003 included the consolidation of several leased facilities, the write-down of underutilized assets to fair value and work force reductions, which primarily affected operations in Seattle, Washington; Neenah, Wisconsin and in the United Kingdom. The first quarter fiscal 2003 employee termination costs affected approximately 500 employees. Pre-tax restructuring charges for the indicated periods are summarized as follows (in millions):
Three months ended December 31, ------------------- 2003 2002 -------- -------- Fixed asset impairment $ - $ 11.3 Lease exit costs - 9.7 Write-off of goodwill - 5.6 Severance costs - 5.2 -------- -------- Total restructuring costs $ - $ 31.8 ======== ========
Cumulative effect of a change in accounting for goodwill. We adopted SFAS No. 142 for the accounting of goodwill and other intangible assets on October 1, 2002. Under the transitional provisions of SFAS No. 142, we identified locations with goodwill, performed impairment tests on the net goodwill and other intangible assets associated with each location using a valuation date as of October 1, 2002, and determined that a pre-tax transitional impairment charge of $28.2 million for the three months ended December 31, 2002, was required at our Juarez, Mexico and San Diego locations. The impairment charge was recorded as a cumulative effect of a change in accounting for goodwill in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). 16 Income taxes. Income taxes for the indicated periods were as follows (dollars in millions):
Three months ended December 31, ---------------------- 2003 2002 -------- ---------- Income tax expense (benefit) $ 0.6 $ (12.5) Effective tax rate 20% 37%
The decrease in the effective tax rate is due primarily to our expanding operations in Asia where we benefit from tax holidays. LIQUIDITY AND CAPITAL RESOURCES Operating Activities. Cash flows used in operating activities were $16.9 million for the three months ended December 31, 2003, compared to cash flows used in operating activities of $3.1 million for the three months ended December 31, 2002. During the three months ended December 31, 2003, cash used in operating activities was primarily driven by increased inventory, which was offset, in part, by increased accounts payable and accrued liabilities. As of December 31, 2003, actual days sales outstanding represented by our accounts receivable decreased to 45 days from 47 days as of September 30, 2003. Annualized inventory turns declined to 5.8 turns for the three months ended December 31, 2003 from 6.2 turns for the prior year-end. Inventories increased $26.4 million from September 30, 2003, primarily for the purchase of raw materials to support new programs and new customers, and increased sales. Investing Activities. Cash flows used in investing activities totaled $2.4 million for the three months ended December 31, 2003. The primary uses were for additions to property, plant and equipment (principally software), offset, in part, by sales and maturities of short-term investments. We generally utilize available cash and operating leases to finance our operating requirements. We utilize operating leases primarily in situations where concerns about technical obsolescence outweigh the benefits of direct ownership. We currently estimate capital expenditures for fiscal 2004 to be approximately $20 million to $25 million, of which $3.6 million was made during the first quarter of fiscal 2004. Financing Activities. Cash flows provided by financing activities totaled $0.4 million for the three months ended December 31, 2003, and primarily represented the proceeds from the exercise of stock options offset, in part, by payments on capital lease obligations. On October 22, 2003, we entered into a secured revolving credit facility (the "Secured Credit Facility") with a group of banks that allows us to borrow up to $100 million. Borrowing under the Secured Credit Facility will be either through revolving or swing loans or letters of credit. The Secured Credit Facility is secured by substantially all of our domestic working capital assets and a pledge of 65 percent of the stock of each of our foreign subsidiaries. Interest on borrowings varies with usage and begins at the Prime rate (as defined) or the LIBOR rate plus 1.5 percent. We also are required to pay an annual commitment fee of 0.5 percent of the unused credit commitment, a maximum of $0.5 million per year. The Secured Credit Facility matures on October 22, 2006 and includes certain financial covenants customary in agreements of this type. These covenants include a maximum total leverage ratio, a minimum balance of domestic cash or marketable securities, a minimum tangible net worth and a minimum adjusted EBITDA, as defined in the agreement. We believe that our Secured Credit Facility, leasing capabilities, cash and short-term investments and projected cash from operations should be sufficient to meet our working and fixed capital requirements through fiscal 2004. However, a continuing increase in our sales would increase our working capital needs, particularly as we acquire additional inventory to support those sales and our accounts receivable increase. As those needs increase, we may need to arrange additional debt or equity financing. However, we cannot assure that we will be able to make any such arrangements on acceptable terms. 17 We have not paid cash dividends in the past and do not anticipate paying them in the foreseeable future. We anticipate using any earnings to support our business. CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our disclosures regarding contractual obligations and commercial commitments are located in various parts of our regulatory filings. Information in the following table provides a summary of our contractual obligations and commercial commitments as of December 31, 2003 (in thousands):
Payments Due by Fiscal Period ------------------------------------------------------------------------ Remaining in 2009 and Total 2004 2005-2006 2007-2008 thereafter ------------ ------------ ------------ ------------ ------------ Contractual Obligations Capital Lease Obligations $ 43,910 $ 3,411 $ 5,847 $ 6,042 $ 28,610 Operating Leases 77,782 10,286 23,060 15,865 28,571 Unconditional Purchase Obligations* - - - - - Other Long-Term Obligations** 1,797 606 1,191 - - ------------ ------------ ------------ ------------ ------------ Total Contractual Cash Obligations $ 123,489 $ 14,303 $ 30,098 $ 21,907 $ 57,181 ============ ============ ============ ============ ============
* - There are no unconditional purchase obligations other than purchases of inventory and equipment in the ordinary course of business. All such unconditional purchase obligations of inventory and equipment have a term of less than one year. ** - As of December 31, 2003, other long-term obligations consist of salary commitments under employment agreements. We did not have, and were not subject to, any lines of credit, standby letters of credit, guarantees, standby repurchase obligations, or other commercial commitments. DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES Our accounting policies are disclosed in our 2003 Report on Form 10-K. During the first quarter of fiscal 2004, there were no material changes to these policies. Our more critical accounting policies are as follows: Impairment of Long-Lived Assets - We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property, plant and equipment is measured by comparing its carrying value to the projected cash flows the property, plant and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the property exceeds its fair market value. The impairment analysis is based on significant assumptions of future results made by management, including revenue and cash flow projections. Circumstances that may lead to impairment of property, plant and equipment include decreases in future performance or industry demand and the restructuring of our operations. Intangible Assets - We do not amortize goodwill and intangible assets with indefinite useful lives, but, instead, test those assets for impairment at least annually with any related losses recognized in earnings when incurred. We will perform goodwill impairment tests annually during the third quarter of each fiscal year and more frequently if an event or circumstance indicates that an impairment loss has occurred. We measure the recoverability of goodwill under the annual impairment test by comparing a reporting unit's carrying amount, including goodwill, to the fair market value of the reporting unit based on projected discounted future cash flows. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second test is performed to measure the amount of impairment loss, if any. Revenue - Revenue from manufacturing services is generally recognized upon shipment of the manufactured product to our customers, under contractual terms, which are generally FOB shipping point. Upon shipment, title transfers and the customer assumes risks and rewards of ownership of the product. Generally, there are no formal customer acceptance requirements or further obligations related to manufacturing services; if such 18 requirements or obligations exist, then revenue is recognized at the time when such requirements are completed and such obligations fulfilled. Revenue from engineering design and development services, which are generally performed under contracts of twelve months or less duration, is recognized as costs are incurred utilizing the percentage-of-completion method; any losses are recognized when anticipated. Revenue from engineering design and development services is less than ten percent of total revenue. Revenue is recorded net of estimated returns of manufactured product based on management's analysis of historical returns, current economic trends and changes in customer demand. Revenue also includes amounts billed to customers for shipping and handling. The corresponding shipping and handling costs are included in cost of sales. Restructuring Costs - From fiscal 2001 through fiscal 2003, we recorded restructuring costs in response to reductions in sales and reduced capacity utilization. These restructuring costs included employee severance and benefit costs, and costs related to plant closings, including leased facilities that will be abandoned (and subleased, as applicable). Prior to January 1, 2003, severance and benefit costs were recorded in accordance with Emerging Issues Task Force ("EITF") 94-3 and for leased facilities that were abandoned and subleased, the estimated lease loss was accrued for future remaining lease payments subsequent to abandonment, less any estimated sublease income. As of December 31, 2003, the significant facilities which we plan to sublease have not yet been subleased; and, accordingly, our estimates of expected sublease income could change based on factors that affect our ability to sublease those facilities such as general economic conditions and the real estate market, among others. For equipment, the impairment losses recognized are based on the fair value estimated using existing market prices for similar assets, less estimated costs to sell. See Note 11 in the Notes to Condensed Consolidated Financial Statements. Subsequent to December 31, 2002, costs associated with a restructuring activity are recorded in compliance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The timing and related recognition of severance and benefit costs that are not presumed to be an ongoing benefit as defined in SFAS No. 146, depends on whether employees are required to render service until they are terminated in order to receive the termination benefits and, if so, whether employees will be retained to render service beyond a minimum retention period. During fiscal 2003, we concluded that we had a substantive severance plan based upon our past severance practices; therefore, we recorded certain severance and benefit costs in accordance with SFAS No. 112, "Employer's Accounting for Post employment Benefits," which resulted in the recognition of a liability as the severance and benefit costs arose from an existing condition or situation and the payment was both probable and reasonably estimated. For leased facilities that will be abandoned and subleased, a liability is recognized and measured at fair value for the future remaining lease payments subsequent to abandonment, less any estimated sublease income that could be reasonably obtained for the property. For contract termination costs, including costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity, a liability for future remaining payments under the contract is recognized and measured at its fair value. See Note 11 in the Notes to Condensed Consolidated Financial Statements. The recognition of restructuring costs requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. If our actual results in exiting these facilities differ from our estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring the recording of additional restructuring costs or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed exit plans. NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus regarding EITF Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The consensus addresses not only when and how an arrangement involving multiple deliverables should be divided into separate units of accounting but also how the arrangement's consideration should be allocated among separate units. The pronouncement was 19 effective for us commencing with our first quarter of fiscal 2004, but did not have a material impact on our consolidated results of operations or financial position. On December 17, 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition, which supercedes SAB 101, Revenue Recognition in Financial Statements. SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issues Task Force (EITF) 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. The adoption of this bulletin did not have an impact on our financial condition or results of operations. In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," which provides guidance on the identification of and reporting for variable interest entities. In December 2003, the FASB issued a revised Interpretation No. 46, which expands the criteria for consideration in determining whether a variable interest entity should be consolidated. Interpretation No. 46 is effective for us in the second quarter of fiscal 2004. Our adoption of Interpretation No. 46 is not expected to have a significant impact on our future results of operations or financial condition. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial instruments that are within the scope of the Statement, which previously were often classified as equity, must now be classified as liabilities. In November 2003, Financial Accounting Standards Board Staff Position ("FSP") No. SFAS 150-3 deferred the effective date of SFAS No. 150 indefinitely for applying the provisions of the Statement for certain mandatorily redeemable non-controlling interests. However, expanded discussions are required during the deferral period. RISK FACTORS OUR CUSTOMER REQUIREMENTS AND OPERATING RESULTS VARY SIGNIFICANTLY FROM QUARTER TO QUARTER, WHICH COULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK. Our quarterly and annual results may vary significantly depending on various factors, many of which are beyond our control. These factors include: - the volume of customer orders relative to our capacity, - the level and timing of customer orders, particularly in light of the fact that some of our customers release a significant percentage of their orders during the last few weeks of a quarter, - the typical short life cycle of our customers' products, - market acceptance of and demand for our customers' products, - customer announcements of operating results and business conditions, - changes in our sales mix to our customers, - the timing of our expenditures in anticipation of future orders, - our effectiveness in managing manufacturing processes, - changes in cost and availability of labor and components, - local events that may affect our production volume, such as local holidays, - credit ratings and stock analyst reports and - changes in economic conditions and world events. The EMS industry is impacted by the state of the U.S. and global economies and world events. A continued slowdown or flat performance in the U.S. or global economies, or in particular in the industries served by us, may result in our customers reducing their forecasts. Over the previous two years, our sales were adversely affected by the slowdown in the networking/datacommunications/telecom and industrial/commercial markets, as a result of reduced end-market demand and reduced availability of venture capital to fund existing and emerging technologies. 20 These factors substantially influenced our levels of net sales. As a result, the demand for our services could weaken or decrease, which in turn would impact our sales, capacity utilization, margins and results. Our quarterly and annual results are affected by the level and timing of customer orders, fluctuations in material costs and availabilities, and the degree of capacity utilization in the manufacturing process. THE MAJORITY OF OUR SALES COME FROM A SMALL NUMBER OF CUSTOMERS AND IF WE LOSE ANY OF THESE CUSTOMERS, OUR SALES AND OPERATING RESULTS COULD DECLINE SIGNIFICANTLY. Sales to our largest customer in the first quarter of fiscal 2004 represented 13 percent of our net sales. Sales to our two largest customers in the first quarter of fiscal 2003 represented 13 percent and 11 percent, respectively. No other customers represented 10 percent or more of our net sales in either period. Sales to our ten largest customers have represented a majority, or near majority, of our net sales in recent periods. Our ten largest customers accounted for approximately 60 percent and 57 percent for the three months ended December 31, 2003 and 2002, respectively. Our principal customers have varied from year to year, and our principal customers may not continue to purchase services from us at current levels, if at all. Significant reductions in sales to any of these customers, or the loss of major customers, could seriously harm our business. If we are not able to replace expired, canceled or reduced contracts with new business on a timely basis, our sales will decrease. OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY PRODUCTION. Electronics manufacturing service providers must provide rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers and we continue to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities or delay production for a number of reasons that are beyond our control. The success of our customers' products in the market and the strength of the markets themselves affect our business. Cancellations, reductions or delays by a significant customer or by a group of customers could seriously harm our operating results. Such cancellations, reductions or delays have occurred and may continue to occur in response to a slowdown in the overall economy. In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, facility requirements, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of our customers' commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross margins and operating results. On occasion, customers may require rapid increases in production, which can stress our resources and reduce operating margins. Although we have had a net increase in our manufacturing capacity over the past few fiscal years, we have significantly reduced our capacity from its peak, and we may not have sufficient capacity at any given time to meet all of our customers' demands or to meet the requirements of a specific project. FAILURE TO MANAGE OUR CONTRACTION, AND OUR FUTURE GROWTH, IF ANY, MAY SERIOUSLY HARM OUR BUSINESS. Periods of contraction or reduced sales, such as the periods that occurred from fiscal 2001 through 2003, create tensions and challenges. We must determine whether all facilities remain productive, determine whether staffing levels need to be reduced, and determine how to respond to changing levels of customer demand. While maintaining multiple facilities or higher levels of employment increases short-term costs, reductions in employment could impair our ability to respond to later market improvements or to maintain customer relationships. Our decisions as to how to reduce costs and capacity, such as the closure of our San Diego and Richmond facilities and the reduction in the number of employees, can affect our expenses, and therefore our short-term and long-term results. We are involved in a multi-year project to install a common ERP platform and associated information systems. The project was begun at a time when anticipated sales growth and profitability were expected to be much higher than has actually occurred in recent financial performance. We continue to review a number of alternatives to this project, including curtailment or slow-down in the rate of implementation. As of September 30, 2003, ERP implementation costs included in property, plant and equipment totaled $29.6 million and we anticipate incurring at 21 least an additional $3.3 million in capital expenditures for the ERP platform; changes in the scope of this project could result in impairment of these capitalized costs. The resumption of sales growth would require us to improve and expand our financial, operational and management information systems, continue to develop the management skills of our managers and supervisors, and continue to train, manage and motivate our employees. We may also experience a need for additional employees, equipment and/or facilities. Because of changes in business conditions, we may need to incur costs relating to such items even in some cases where we have recently incurred costs resulting from contractions in similar areas. If we are unable to manage future growth effectively, our operating results could be harmed. OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS. We have operations in China, Malaysia, Mexico and the United Kingdom. We may in the future expand into other international regions. We have limited experience in managing geographically dispersed operations in these countries. We also purchase a significant number of components manufactured in foreign countries. Because of these international aspects of our operations, we are subject to the following risks that could materially impact our operating results: - economic or political instability - transportation delays or interruptions and other effects of less developed infrastructure in many countries - foreign exchange rate fluctuations - utilization of different systems and equipment - difficulties in staffing and managing foreign personnel and diverse cultures and - the effects of international political developments. In addition, changes in policies by the U.S. or foreign governments could negatively affect our operating results due to changes in duties, tariffs, taxes or limitations on currency or fund transfers. For example, our Mexico based operation utilizes the Maquiladora program, which provides reduced tariffs and eases import regulations, and we could be adversely affected by changes in that program. Also, the Chinese and Malaysian subsidiaries currently receive favorable tax treatment from the governments in those countries for approximately 3 to 10 years, which may or may not be renewed. WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING PROCESS EXPERTISE. The markets for our manufacturing and engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business will depend upon our ability to: - retain our qualified engineering and technical personnel - maintain and enhance our technological capabilities - develop and market manufacturing services which meet changing customer needs - successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. Although we believe that our operations utilize the assembly and testing technologies, equipment and processes that are currently required by our customers, we cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technology industry standards or customer requirements may render our equipment, inventory or processes obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing technologies and equipment to remain competitive. The acquisition and implementation of new technologies and equipment may require significant expense or capital investment that could reduce our operating margins and our operating results. Our failure to anticipate and adapt to our customers' changing technological needs and requirements could have an adverse effect on our business. OUR MANUFACTURING SERVICES INVOLVE INVENTORY RISK. Most of our contract manufacturing services are provided on a turnkey basis, where we purchase some or all of the materials required for designing, product assembling and manufacturing. These services involve greater 22 resource investment and inventory risk management than consignment services, where the customer provides these materials. Accordingly, various component price increases and inventory obsolescence could adversely affect our selling price, gross margins and operating results. In our turnkey operations, we need to order parts and supplies based on customer forecasts, which may be for a larger quantity of product than is included in the firm orders ultimately received from those customers. For example, the first quarter of fiscal 2004 saw a significant increase in inventories to support increased sales and expected growth in customer programs. Customers' cancellation or reduction of orders can result in expenses to us. While most of our customer agreements include provisions which require customers to reimburse us for excess inventory specifically ordered to meet their forecasts, we may not actually be reimbursed or be able to collect on these obligations. In that case, we could have excess inventory and/or cancellation or return charges from our suppliers. In addition, we provide a managed inventory program under which we hold and manage finished goods inventory for two of our key customers. The managed inventory program may result in higher finished goods inventory levels, further reduce our inventory turns and increase our financial risk with such customers, although our customers will have contractual obligations to purchase the inventory from us. WE MAY NOT BE ABLE TO OBTAIN RAW MATERIALS OR COMPONENTS FOR OUR ASSEMBLIES ON A TIMELY BASIS OR AT ALL. We rely on a limited number of suppliers for many components used in the assembly process. We do not have any long-term supply agreements. At various times, there have been shortages of some of the electronic components that we use, and suppliers of some components have lacked sufficient capacity to meet the demand for these components. At times, component shortages have been prevalent in our industry, and in certain areas recur from time to time. In some cases, supply shortages and delays in deliveries of particular components have resulted in curtailed production, or delays in production, of assemblies using that component, which contributed to an increase in our inventory levels. We expect that shortages and delays in deliveries of some components will continue from time to time. An increase in economic activity could also result in shortages, if manufacturers of components do not adequately anticipate the increased orders and/or have previously excessively cut back their production capability in view of reduced activity in recent years. World events, such as terrorism, armed conflict and epidemics, also could affect supply chains. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing and shipping delays, which could harm our relationships with customers and reduce our sales. A significant portion of our sales is derived from turnkey manufacturing in which we provide materials procurement. While most of our customer contracts permit quarterly or other periodic adjustments to pricing based on decreases and increases in component prices and other factors, we typically bear the risk of component price increases that occur between any such repricings or, if such repricing is not permitted, during the balance of the term of the particular customer contract. Accordingly, component price increases could adversely affect our operating results. START-UP COSTS AND INEFFICIENCIES RELATED TO NEW OR TRANSFERRED PROGRAMS CAN ADVERSELY AFFECT OUR OPERATING RESULTS. Start-up costs, the management of labor and equipment resources in connection with the establishment of new programs and new customer relationships, and the need to estimate required resources in advance can adversely affect our gross margins and operating results. These factors are particularly evident in the early stages of the life cycle of new products and new programs or program transfers. These factors also affect our ability to efficiently use labor and equipment. If start-up programs increase with an improved economy, our exposure to these factors could consequently increase. In addition, if any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short term. WE MAY HAVE NEW CUSTOMER RELATIONSHIPS WITH EMERGING COMPANIES, WHICH MAY PRESENT MORE RISKS THAN WITH ESTABLISHED COMPANIES. We currently anticipate that less than 5 percent of our fiscal 2004 sales will be to emerging companies, including start-ups, particularly in the networking/datacommunications market. However, similar to our other customer relationships, there are no volume purchase commitments under these new programs, and the revenues we 23 actually achieve from these programs may not meet our expectations. In anticipation of future activities under these programs, we incur substantial expenses as we add personnel and manufacturing capacity and procure materials. Because emerging companies do not have a history of operations, it will be harder for us to anticipate needs and requirements than with established customers. Our operating results will be harmed if sales do not develop to the extent and within the time frame we anticipate. Customer relationships with emerging companies also present special risks. For example, because they do not have an extensive product history, there is less demonstration of market acceptance of their products. Also, due to the current economic environment, additional funding for such companies may be more difficult to obtain and these customer relationships may not continue or materialize to the extent we plan or we previously experienced. This tightening of financing for start-up customers, together with many start-up customers' lack of prior earnings and unproven product markets increase our credit risk, especially in accounts receivable and inventories. Although we adjust our reserves for accounts receivable and inventories for all customers, including start-up customers, based on the information available, these reserves may not be adequate. WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS. We are also subject to environmental regulations relating to the use, storage, discharge, recycling and disposal of hazardous chemicals used in our manufacturing process. If we fail to comply with present and future regulations, we could be subject to future liabilities or the suspension of business. These regulations could restrict our ability to expand our facilities or require us to acquire costly equipment or incur significant expense. While we are not currently aware of any material violations, we may have to spend funds to comply with present and future regulations or be required to perform site remediation. In addition, our medical device business, which represented approximately 33 percent of our net sales in the first quarter of fiscal 2004, is subject to substantial government regulation, primarily from the FDA and similar regulatory bodies in other countries. We must comply with statutes and regulations covering the design, development, testing, manufacturing and labeling of medical devices and the reporting of certain information regarding their safety. Failure to comply with these rules can result in, among other things, our and our customers being subject to fines, injunctions, civil penalties, criminal prosecution, recall or seizure of devices, or total or partial suspension of production. The FDA also has the authority to require repair or replacement of equipment, or refund of the cost of a device manufactured or distributed by our customers. Violations may lead to penalties or shutdowns of a program or a facility. In addition, failure or noncompliance could have an adverse effect on our reputation. PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS THAT COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US. We manufacture products to our customers' specifications that are highly complex and may at times contain design or manufacturing defects. Defects have been discovered in products we manufactured in the past and, despite our quality control and quality assurance efforts, defects may occur in the future. Defects in the products we manufacture, whether caused by a design, manufacturing or component defects, may result in delayed shipments to customers or reduced or cancelled customer orders. If these defects occur in large quantities or too frequently, our business reputation may also be tarnished. In addition, these defects may result in liability claims against us. Even if customers are responsible for the defects, they may or may not be able to assume responsibility for any costs or payments. OUR PRODUCTS ARE FOR THE ELECTRONICS INDUSTRY, WHICH PRODUCES TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES. Factors affecting the electronics industry, in particular the short life cycle of products, could seriously harm our customers and, as a result, us. These factors include: - the inability of our customers to adapt to rapidly changing technology and evolving industry standards that result in short product life cycles - the inability of our customers to develop and market their products, some of which are new and untested - the potential that our customers' products may become obsolete or the failure of our customers' products to gain widespread commercial acceptance. 24 INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES. The electronics manufacturing services industry is highly competitive and has become more so as a result of excess capacity in the industry. We compete against numerous U.S. and foreign electronics manufacturing services providers with global operations, as well as those who operate on a local or regional basis. In addition, current and prospective customers continually evaluate the merits of manufacturing products internally. Consolidations and other changes in the electronics manufacturing services industry result in a continually changing competitive landscape. The consolidation trend in the industry also results in larger and more geographically diverse competitors that may have significant combined resources with which to compete against us. Some of our competitors have substantially greater managerial, manufacturing, engineering, technical, financial, systems, sales and marketing resources than we do. These competitors may: - respond more quickly to new or emerging technologies - have greater name recognition, critical mass and geographic and market presence - be better able to take advantage of acquisition opportunities - adapt more quickly to changes in customer requirements - devote greater resources to the development, promotion and sale of their services - be better positioned to compete on price for their services. We may be operating at a cost disadvantage compared to manufacturers who have greater direct buying power from component suppliers, distributors and raw material suppliers or who have lower cost structures. As a result, competitors may have a competitive advantage and obtain business from our customers. Our manufacturing processes are generally not subject to significant proprietary protection, and companies with greater resources or a greater market presence may enter our market or increase their competition with us. Increased competition could result in price reductions, reduced sales and margins or loss of market share. WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF KEY PERSONNEL MAY HARM OUR BUSINESS. Our future success depends in large part on the continued service of our key technical and management personnel, and on our ability to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the development of new products and processes and the manufacture of existing products. The competition for these individuals is significant, and the loss of key employees could harm our business. WE MAY FAIL TO SUCCESSFULLY COMPLETE FUTURE ACQUISITIONS AND MAY NOT SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS. Although we have previously grown through acquisitions, our current focus is on pursuing organic growth opportunities. If we were to pursue future growth through acquisitions, however, this would involve significant risks that could have a material adverse effect on us. These risks include: Operating risks, such as the: - inability to integrate successfully our acquired operations' businesses and personnel - inability to realize anticipated synergies, economies of scale or other value - difficulties in scaling up production and coordinating management of operations at new sites - strain placed on our personnel, systems and resources - possible modification or termination of an acquired business customer programs, including cancellation of current or anticipated programs - loss of key employees of acquired businesses. Financial risks, such as the: - use of cash resources, or incurrence of additional debt and related interest costs 25 - dilutive effect of the issuance of additional equity securities - inability to achieve expected operating margins to offset the increased fixed costs associated with acquisitions, and/or inability to increase margins at acquired entities to Plexus' desired levels - incurrence of large write-offs or write-downs and - impairment of goodwill and other intangible assets - unforeseen liabilities of the acquired businesses. EXPANSION OF OUR BUSINESS AND OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS. At some future point, we again may expand our operations by establishing or acquiring new facilities or by expanding capacity in our current facilities. We may expand both in geographical areas in which we currently operate and in new geographical areas within the United States and internationally. We may not be able to find suitable facilities on a timely basis or on terms satisfactory to us. Expansion of our business and operations involves numerous business risks, including: - the inability to successfully integrate additional facilities or capacity and to realize anticipated synergies, economies of scale or other value - additional fixed costs which may not be fully absorbed by the new business - difficulties in the timing of expansions, including delays in the implementation of construction and manufacturing plans - creation of excess capacity, and the need to reduce capacity elsewhere if anticipated sales or opportunities do not materialize - diversion of management's attention from other business areas during the planning and implementation of expansions - strain placed on our operational, financial, management, technical and information systems and resources - disruption in manufacturing operations - incurrence of significant costs and expenses - inability to locate enough customers or employees to support the expansion. WE MAY FAIL TO SECURE NECESSARY FINANCING. On October 22, 2003, we entered into a secured revolving credit facility (the "Secured Credit Facility") with a group of banks. The Secured Credit Facility allows us to borrow up to $100 million. However, we cannot assure that the Secured Credit Facility will provide all of the financing capacity that we will need in the future. Our future success may depend on our ability to obtain additional financing and capital to support increased sales and our possible future growth. We may seek to raise capital by: - issuing additional common stock or other equity securities - issuing debt securities - obtaining new credit facilities. We may not be able to obtain capital when we want or need it, and capital may not be available on satisfactory terms. If we issue additional equity securities or convertible debt to raise capital, it may be dilutive to shareholders' ownership interests. Furthermore, any additional financing and capital may have terms and conditions that adversely affect our business, such as restrictive financial or operating covenants, and our ability to meet any financing covenants will largely depend on our financial performance, which in turn will be subject to general economic conditions and financial, business and other factors. THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE. Our stock price has fluctuated significantly in recent periods. The price of our common stock may fluctuate significantly in response to a number of events and factors relating to us, our competitors and the market for our services, many of which are beyond our control. 26 In addition, the stock market in general, and especially the NASDAQ Stock Market, along with market prices for technology companies in particular, have experienced extreme volatility, including weakness, that sometimes has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating results. Our stock price and the stock price of many other technology companies remain below their peaks. Among other things, volatility and weakness in Plexus' stock price could mean that investors will not be able to sell their shares at or above the prices that they paid. Volatility and weakness could also impair Plexus' ability in the future to offer common stock or convertible securities as a source of additional capital and/or as consideration in the acquisition of other businesses. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in foreign exchange and interest rates. To reduce such risks, we selectively use financial instruments. FOREIGN CURRENCY RISK We do not use derivative financial instruments for speculative purposes. Our policy is to selectively hedge our foreign currency denominated transactions in a manner that substantially offsets the effects of changes in foreign currency exchange rates. Presently, we use foreign currency contracts to hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. Corresponding gains and losses on the underlying transaction generally offset the gains and losses on these foreign currency hedges. Our presence in international markets increases the complexity and size of our foreign exchange risk. As December 31, 2003, we had no foreign currency contracts outstanding. In the first quarter of fiscal 2004 and 2003, we had net sales of approximately 11 percent and 7 percent, respectively, denominated in currencies other than the U.S. dollar. In the first quarter of fiscal 2004 and 2003, we had total costs of approximately 14 percent and 10 percent, respectively, denominated in currencies other than the U.S. dollar. INTEREST RATE RISK We have financial instruments, including cash equivalents and short-term investments, which are sensitive to changes in interest rates. We consider the use of interest-rate swaps based on existing market conditions. We currently do not use any interest-rate swaps or other types of derivative financial instruments to hedge interest rate risk. The primary objective of our investment activities is to preserve principal, while maximizing yields without significantly increasing market risk. To achieve this, we maintain our portfolio of cash equivalents and short-term investments in a variety of highly rated securities, money market funds and certificates of deposit and limit the amount of principal exposure to any one issuer. Our only material interest rate risk is associated with our secured credit facility. A 10 percent change in our weighted average interest rate on average long-term borrowings would have had a nominal impact on net interest expense for the three months ended December 31, 2003 and 2002. ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures: The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company's principal executive officer and principal financial officer have reviewed and evaluated, with the participation of the Company's management, the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the 27 Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in the Company's periodic filings under the Exchange Act. Internal Control Over Financial Reporting: There have not been any changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As we have previously disclosed, the Company (along with hundreds of other companies) has been sued by the Lemelson Medical, Educational & Research Foundation Limited Partnership ("Lemelson") for alleged possible infringement of certain Lemelson patents. The complaint, which is one of a series of complaints by Lemelson against hundreds of companies, seeks injunctive relief, treble damages (amount unspecified) and attorneys' fees. The Company has obtained a stay of action pending developments in other related litigation. Based on information received from a party to that other litigation, on January 23, 2004, the judge in the other related litigation ruled for the plaintiffs (the parties challenging the patents), thereby declaring the Lemelson patents unenforceable and invalid. Lemelson has stated that it will appeal that ruling. If that verdict is upheld on an expected appeal, it would likely result in dismissal of claims against the Company. The Company's lawsuit remains stayed pending the outcome of that appeal. Even if the verdict is not upheld, the Company believes the vendors from which patent-related equipment was purchased may be required to contractually indemnify the Company. However, based upon the Company's observation of the plaintiff's actions in other parallel cases, it appears that the primary objective of the plaintiff is to cause defendants to enter into license agreements. Even though the patents at issue would theoretically relate to a significant portion of our net sales, even if the verdict in the other case is overturned and a judgment is rendered in our case and/or a license fee required, it is the opinion of management that such judgment or fee would not be material to the Company's financial position, results of operations or cash flows. Lemelson Medical, Educational & Research Foundation Limited Partnership vs. Esco Electronics Corporation et al, US District Court for the District of Arizona, Case Number CIV 000660 PHX JWS (2000). We are party to certain other lawsuits in the ordinary course of business. We do not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to section 203(a) of the Sarbanes Oxley Act of 2002. 32.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 28 (b) Reports on Form 8-K during this period. No reports were filed during the quarter ended December 31, 2003. However, Plexus submitted reports (which are not to be deemed incorporated by reference into other filings) dated October 23, 2003 and January 21, 3004, which furnished certain earnings information. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 2/17/04 /s/ Dean A. Foate - ------- -------------------- Date Dean A. Foate President and Chief Executive Officer 2/17/04 /s/ F. Gordon Bitter - ------- ----------------------- Date F. Gordon Bitter Vice President and Chief Financial Officer 29 EX-31.1 3 c82826exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Dean A. Foate, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarter ended December 31, 2003 of Plexus Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 17, 2004 /s/ Dean A. Foate ------------------------------------- Dean A. Foate President and Chief Executive Officer 30 EX-31.2 4 c82826exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, F. Gordon Bitter, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarter ended December 31, 2003 of Plexus Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 17, 2004 /s/ F. Gordon Bitter ----------------------------- F. Gordon Bitter, Chief Financial Officer 31 EX-32.1 5 c82826exv32w1.txt 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Plexus Corp. (the "Company") on Form 10-Q for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dean A. Foate, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Dean A. Foate - ----------------------------- Dean A. Foate Chief Executive Officer February 17, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Plexus Corp. and will be retained by Plexus Corp. and furnished to the Securities and Exchange Commission or its staff upon request. 32 EX-32.2 6 c82826exv32w2.txt 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Plexus Corp. (the "Company") on Form 10-Q for the period ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, F. Gordon Bitter, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the bEst of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ F. Gordon Bitter - ------------------------------ F. Gordon Bitter Chief Financial Officer February 17, 2004 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Plexus Corp. and will be retained by Plexus Corp. and furnished to the Securities and Exchange Commission or its staff upon request. 33 -----END PRIVACY-ENHANCED MESSAGE-----