-----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, JETbbYVBLkgaIDN67dj81v+fQpDpCGCx2s76fUGhptO+1mTa1X3s8LrpusCxHwMB dFcl5NvYsCD8JCZ8DPoG+w== 0000950137-04-010867.txt : 20041208 0000950137-04-010867.hdr.sgml : 20041208 20041208171342 ACCESSION NUMBER: 0000950137-04-010867 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041208 DATE AS OF CHANGE: 20041208 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14824 FILM NUMBER: 041191416 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-K 1 c90300e10vk.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 000-14824 PLEXUS CORP. (Exact Name of Registrant as Specified in its Charter) WISCONSIN 39-1344447 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 55 JEWELERS PARK DRIVE NEENAH, WISCONSIN 54957-0156 (920) 722-3451 (Address, including zip code, of principal executive offices and Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Preferred Stock Purchase Rights (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports(s)) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [] Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 under the Exchange Act). Yes [X] No [ ] As of December 1, 2004, there were 43,195,105 shares of common stock outstanding. As of March 31, 2004, 43,038,783 shares of common stock were outstanding, and the aggregate market value of the shares of common stock (based upon the $17.79 closing sale price on that date, as reported on the NASDAQ Stock Market) held by non-affiliates (excludes shares reported as beneficially owned by directors and executive officers - does not constitute an admission as to affiliate status) was approximately $758 million. DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which Document Portions of Document are Incorporated -------- ------------------------------------- Proxy Statement for 2004 Annual Meeting of Shareholders Part III
"SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: The statements contained in the Form 10-K which are not historical facts (such as statements in the future tense and statements including "believe," "expect," "intend," "plan," "anticipate" and similar words and concepts) are forward-looking statements that involve risks and uncertainties, including, but not limited to: - the continued uncertain economic outlook for the electronics and technology industries - the risk of customer delays, changes or cancellations in both ongoing and new programs - our ability to secure new customers and maintain our current customer base - the results of cost reduction efforts - the impact of capacity utilization and our ability to manage fixed and variable costs - the effects of facilities closures and restructurings - material cost fluctuations and the adequate availability of components and related parts for production - the effect of changes in average selling prices - the effect of start-up costs of new programs and facilities - the effect of general economic conditions and world events - the effect of the impact of increased competition and - other risks detailed below, especially in "Risk Factors" and otherwise herein, and in our Securities and Exchange Commission filings. In addition, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7, particularly "Risk Factors" for a further discussion of some of the factors that could affect future results. * * * PART 1 ITEM 1. BUSINESS OVERVIEW Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or "we") is a participant in the Electronics Manufacturing Services ("EMS") industry. We provide product realization services to original equipment manufacturers, or OEMs, and other technology companies in the networking/datacommunications/telecom, medical, industrial/commercial, computer and transportation/other industries. We provide advanced electronics design, manufacturing and testing services to our customers with a focus on complex, high technology and high reliability products. We offer our customers the ability to outsource all stages of product realization, including: development and design, materials procurement and management, prototyping and new product introduction, testing, manufacturing, product configuration, logistics and test/repair. Our customers include both industry-leading original equipment manufacturers and technology companies. Due to our focus on serving manufacturers in advanced electronics technology, our business is influenced by major technological trends such as the level and rate of development of telecommunications infrastructure, the expansion of network and internet use, the federal Food and Drug Administration's approval of new medical devices, and the expansion of outsourcing by OEMs and technology companies. Established in 1979 as a Wisconsin corporation, we have approximately 6,000 full-time employees, including approximately 300 engineers and technologists dedicated to product development and design, operating from 19 active facilities in 15 locations, totaling approximately 1.8 million square feet. Prior to fiscal 2003, we had expanded our capacity and geographic reach through a series of strategic acquisitions. Through these transactions, we have enhanced our access to, and ability to provide services within important technology corridors in Boston, Chicago, and San Jose; established facilities in Europe, Mexico and Asia; significantly increased the size and capabilities of our medical services offerings. See note 13 to our consolidated financial statements, which is incorporated herein by reference, for information as to our foreign sales and assets. We maintain a website at www.plexus.com. We make available through that website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Reports on Form 8-K, and amendments to those reports, as soon as reasonably practical after we electronically file those materials with, or furnish them to, the 1 Securities and Exchange Commission ("SEC"). You may access those reports by following the links under "Investors" at our website. SERVICES Plexus offers a broad range of integrated services that provide customers with a total design, new product introduction and manufacturing solution to take a product from initial design through production to test/repair. Our customers may utilize any or all of the following services and tend to use more of these services as their outsourcing strategies mature: Product development and design. We provide comprehensive conceptual design and value engineering services. These services include project management, initial feasibility studies, product concept definition, specifications for product features and functions, product engineering specifications, microprocessor selection, circuit design, software design, application-specific integrated circuit design, printed circuit board layout, product housing design, development of test specifications and product validation testing. Through our product development and design services, we have the capabilities to provide customers with a completed design for a product that can be manufactured efficiently. Prototyping and new product introduction services. We provide assembly of prototype products within our operating sites. We supplement our prototype assembly services with other value-added services, including printed circuit board design, materials management, manufacturing defects analysis, analysis of the manufacturability and testability of a design, test implementation and pilot production runs leading to volume production. These services link our engineering, our customers' engineering and our volume manufacturing. This link facilitates an efficient transition from engineering to manufacturing. We believe that these services provide significant value to our customers by accelerating their products' time-to-market schedule. Test development and product testing. Enhanced product functionality has led to increasingly complex components and assembly techniques; consequently, there is a need to design and assemble increasingly complex in-circuit and functional test equipment for electronic products and assemblies. Our internal development of this test equipment allows us to rapidly implement test solutions and to efficiently test printed circuit assemblies, subassemblies, system assemblies and finished product. We also develop and utilize specialized equipment that allows us to environmentally stress-test products during functional testing to assure reliability. We believe that the design and production of test equipment is an important factor in our ability to provide technology-driven products of consistently high quality. Manufacturing and assembly. We provide contract manufacturing services on either a "turnkey" basis, which means we procure some or all of the materials required for product assembly, or on a "consignment" basis, which means the customer supplies some, or occasionally all, of the materials necessary for product assembly. Turnkey services include materials procurement and warehousing in addition to manufacturing and involve greater resource investment and potential inventory risk than consignment services. Substantially all of our manufacturing services currently are on a turnkey basis. These services, which we endeavor to provide on an agile and rapid basis, include developing and implementing a materials strategy that meets customers' demand and flexibility requirements, assembling printed circuit boards utilizing a wide range of assembly technologies, building and configuring final product and system boxes and testing assemblies to meet customers' requirements. We have the expertise to assemble very complex electronic products that utilize multiple printed circuit boards and subassemblies. These complex products are typically configured to fulfill unique customer requirements and many are shipped directly to our customers' end users. In addition, we have developed special processes and tools to meet industry-specific requirements. Among these are the tools and processes to assemble finished medical devices that meet U.S. Food and Drug Administration Quality Systems Regulation requirements and similar regulatory requirements of other countries. After-market support. We provide service support for manufactured products. In this context, supported products, which may or may not be under a customer's warranty, may be returned for repairs or upgrades at the customer's discretion. CUSTOMERS AND INDUSTRIES SERVED We provide services to a wide variety of customers, ranging from large multinational companies to smaller emerging technology companies. During fiscal 2004, we provided services to over 150 customers. Because of the variety of services we offer, our flexibility in design and manufacturing and our ability to respond to customer needs in a timely fashion, we believe that we are well positioned to offer our services to customers in most industries. For many 2 customers, we serve both a design and production function, thereby permitting customers to concentrate on concept development, distribution and marketing, while accelerating their time to market, reducing their investment in engineering and manufacturing capacity and optimizing total product cost. Juniper Networks ("Juniper") accounted for 14 percent of our net sales in fiscal 2004, and Siemens Medical Systems, Inc. ("Siemens") accounted for 12 percent of our net sales in fiscal 2003. No other customer accounted for 10 percent or more of our net sales in fiscal 2004 or 2003. No customer represented 10 percent or more of net sales in fiscal 2002. The loss of any of our major customers could have a significant negative impact. Many of our large customers contract independently through multiple divisions, subsidiaries, production facilities or locations. We believe that in most cases our sales to one such subsidiary, division, facility or location are not dependent on sales to others. We provided services to the following industries in the following proportions:
Industry 2004 2003 2002 - -------- ---- ---- ---- Networking/Datacommunications/Telecom 43% 36% 36% Medical 31% 32% 28% Industrial/Commercial 15% 15% 20% Computer 6% 12% 11% Transportation/Other 5% 5% 5%
MATERIALS AND SUPPLIERS We primarily purchase raw materials and electronic components from manufacturers and distribution companies. In addition, we may also purchase components from customers. The key electronic components we purchase include printed circuit boards, specialized components such as application-specific integrated circuits, semiconductors, interconnect products, electronic subassemblies (including memory modules, power supply modules and cable and wire harnesses), inductors, resistors and capacitors. Along with these electronic components, we also purchase components for use in higher-level assembly and manufacturing. These components include injection-molded plastic, pressure-formed plastics, vacuum-formed plastics, sheet metal fabrications, aluminum extrusions, die castings and various other hardware and fastener components. These components range from standard to highly customized, and they vary widely in terms of market volatility and price. From time to time, allocation of components by suppliers becomes an integral part of the electronics industry, and shortages can occur with respect to particular components. In response, we actively manage our business in a way that seeks to minimize our exposure to materials and component shortages. We have developed a corporate procurement organization whose primary purpose is to create strong supplier alliances to ensure, as much as possible, a steady flow of components at competitive prices. Because we design products and can influence what components are used in some new products, manufacturers of components often provide us with priority access to a supply of materials and components, even during shortages. We have also established and continue to expand our strategic relationships with international purchasing offices, and we attempt to leverage our design position with suppliers. Beyond this, we have undertaken a series of initiatives, including the utilization of in-plant stores, point-of-use programs, assured supply programs and other efforts. All of these undertakings seek to improve our overall supply chain flexibility and to accommodate the current marketplace. SALES AND MARKETING We market our services primarily through our sales and marketing organization. During fiscal 2004, we reorganized our sales and marketing efforts around key customer end-markets, or market sectors: namely, networking/ datacommunications, medical and industrial. Each market sector is headed by a vice president who leads dedicated resources, which include sales account executives, strategic customer managers, market sector specialists, technology specialists and advertising and other corporate communications personnel. Our sales and marketing efforts focus on generating new customers and expanding business with existing customers. We use our ability to provide a full range of product realization services as a marketing tool, and our technology specialists participate in marketing through direct customer contact and participation in industry symposia and seminars. 3 COMPETITION The market for the products and services we provide is highly competitive. We compete primarily on the basis of engineering, testing and production capabilities, technological capabilities and the capacity for responsiveness, quality and price. There are many competitors in the electronics design and assembly industry. Larger and more geographically diverse competitors have substantially more resources than we do. Other, smaller competitors compete only in specific sectors within limited geographical areas. We also compete against companies that design or manufacture items in-house rather than by outsourcing. In addition, we compete against foreign, low labor cost manufacturers. This foreign, low labor cost competition tends to focus on commodity and consumer-related products, which is not our primary focus. INTELLECTUAL PROPERTY We own various service marks, including "Plexus," and "Plexus, The Product Realization Company." Although we own certain patents, they are not currently material to our business. We do not have any material copyrights. INFORMATION TECHNOLOGY We began to implement in fiscal 2001 an enterprise resource planning ("ERP") platform. This ERP platform is intended to augment our management information systems and includes software from J.D. Edwards (now part of Peoplesoft) and several other vendors. The ERP platform includes various software systems to enhance and standardize our ability to globally translate information from production facilities into operational and financial information and create a consistent set of core business applications at our worldwide facilities. We believe the related licenses are of a general commercial character on terms customary for these types of agreements. During fiscal 2004, we converted one additional manufacturing facility to the ERP platform. We anticipate converting at least one more facility to the ERP platform in fiscal 2005. The conversion timetable and remaining project scope remain subject to change based upon our evolving needs and sales levels. ENVIRONMENTAL COMPLIANCE We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during our manufacturing process. Although we believe that we are in compliance with all federal, state and local environmental laws, and do not anticipate any significant expenditures in maintaining our compliance, there can be no assurances that violations will not occur which could have a material adverse effect on our results. EMPLOYEES Our employees are one of our primary strengths, and we make considerable efforts to maintain a well-qualified staff. We have been able to offer enhanced career opportunities to many of our employees. Our human resources department identifies career objectives and monitors specific skill development for employees with potential for advancement. We invest at all levels of the organization to ensure that employees are well trained. We have a policy of involvement and consultation with employees in every facility and strive for continuous improvement at all levels. We employ approximately 6,000 full-time employees. Given the quick response times required by our customers, we seek to maintain flexibility to scale our operations as necessary to maximize efficiency. To do so, we use skilled temporary labor in addition to our full-time employees. Our employees in the United States, United Kingdom, China, Malaysia and Mexico are not covered by union agreements. We have no history of labor disputes at any of our facilities. We believe that our employee relationships are good. ITEM 2. PROPERTIES Our facilities comprise an integrated network of technology and manufacturing centers with corporate headquarters located in our engineering facility in Neenah, Wisconsin. We own or lease facilities with approximately 2.4 million square feet of capacity. This includes approximately 1.8 million square feet in the United States, approximately 0.2 million square feet in Mexico, approximately 0.3 million square feet in Asia and approximately 0.1 million square feet in Europe. Approximately 0.6 million square feet of this capacity is either vacant or subleased. Approximately 0.1 million of the U.S. capacity is planned for closure in fiscal 2005. The geographic diversity of our technology and manufacturing centers allows us to offer services from locations near our customers and major 4 electronics markets. We believe that this approach reduces material and transportation costs and simplifies logistics and communications. This enables us to provide customers with a responsive, more complete, cost-effective solution. Our facilities are described in the following table:
LOCATION TYPE SIZE (SQ. FT.) OWNED/LEASED -------- ---- -------------- ------------ Penang, Malaysia (1) Manufacturing/Engineering 282,000 Owned Neenah, Wisconsin (1) Manufacturing 277,000 Leased Nampa, Idaho Manufacturing 216,000 Owned Juarez, Mexico Manufacturing 210,000 Leased Buffalo Grove, Illinois Manufacturing 141,000 Leased Bothell, Washington (2) Manufacturing/Engineering 97,000 Leased Appleton, Wisconsin Manufacturing 67,000 Owned Ayer, Massachusetts Manufacturing 65,000 Leased Xiamen, China Manufacturing 63,000 Leased Kelso, Scotland Manufacturing 60,000 Leased Maldon, England Manufacturing 40,000 Owned Freemont, California Manufacturing 36,000 Leased Neenah, Wisconsin Engineering 105,000 Owned Louisville, Colorado Engineering 16,000 Leased Raleigh, North Carolina Engineering 14,000 Leased Livingston, Scotland Engineering 2,000 Leased Neenah, Wisconsin (1) Office/Warehouse 84,000 Owned El Paso, Texas (3) Office/Warehouse 25,000 Leased Neenah, Wisconsin (1) Office 27,000 Leased San Diego, California (4) Inactive/Other 198,000 Leased Bothell, Washington (1) (5) Inactive/Other 141,000 Leased Neenah, Wisconsin (6) Inactive/Other 93,000 Leased Redmond, Washington (7) Inactive/Other 60,000 Leased San Diego, California (7) Inactive/Other 36,000 Leased Hillsboro, Oregon (8) Inactive/Other 9,000 Leased Nashua, New Hampshire (9) Inactive/Other 5,000 Leased
(1) Includes more than one building. (2) Engineering operations occupy approximately 30,000 square feet with manufacturing operations occupying the remaining square footage. This location is expected to close during fiscal year 2005. We are seeking to sublease this space. (3) During fiscal 2004, we amended our warehouse lease for approximately 12,000 of additional square footage. (4) Approximately 71,000 square feet of lease space was subleased to a third party in December 2002. We ceased operations in the remaining part of the facility in May 2003 and are seeking to sublease that space. (5) Consists of two facilities that were previously used for engineering and manufacturing operations. We have recently subleased a portion one of the unoccupied facilities and are seeking to sublease the other facility. (6) We consolidated our leased warehousing space to an owned facility in Neenah, Wisconsin in May 2003. We are seeking to sublease the leased warehousing space. (7) This building is subleased and no longer used in our business operations. 5 (8) During fiscal 2004, we closed our PCB-design office in Hillsboro, Oregon and consolidated it into another Plexus design office. We are seeking to sublease that space. During fiscal 2004, we also sold a small PCB-design operation in Tel Aviv, Israel eliminating a small lease in that city. (9) Primarily represents a former PCB design facility in Nashua, New Hampshire ("Nashua"). During fiscal 2003, we sold the Nashua PCB design operation and subleased the facility to a group of former employees. ITEM 3. LEGAL PROCEEDINGS As we have previously disclosed, the Company (along with hundreds of other companies) has been sued by the Lemelson Medical, Educational & Research Foundation Limited Partnership ("Lemelson") for alleged possible infringement of certain Lemelson patents. The complaint, which is one of a series of complaints by Lemelson against hundreds of companies, seeks injunctive relief, treble damages (amount unspecified) and attorneys' fees. The Company has obtained a stay of action pending developments in other related litigation. In January 2004, the judge in the other related litigation ruled for the parties challenging the patents, thereby declaring the Lemelson patents unenforceable and invalid. Lemelson has appealed this ruling. If the verdict is upheld on appeal, it would likely result in dismissal of claims against the Company. The Company's lawsuit remains stayed pending the outcome of that appeal. A decision on the appeal is not expected until some time in 2005, at the earliest. Even if the verdict is not upheld, the Company believes the vendors from which patent-related equipment was purchased may be required to contractually indemnify the Company. However, based upon the Company's observation of Lemelson's actions in other parallel cases, it appears that Lemelson's primary objective is to cause defendants to enter into license agreements. Although the patents at issue would theoretically relate to a significant portion of our net sales, even if the verdict in the other case is overturned and a judgment is rendered in our case and/or a license fee required, it is the opinion of management that such judgment or fee would not be material to the Company's financial position, results of operations or cash flows. Lemelson Medical, Educational & Research Foundation Limited Partnership vs. Esco Electronics Corporation et al, US District Court for the District of Arizona, Case Number CIV 000660 PHX JWS (2000). We are party to certain other lawsuits in the ordinary course of business. Management does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth our executive officers, their ages and the positions currently held by each person:
NAME AGE POSITION ---- --- -------- Dean A. Foate 46 President, Chief Executive Officer and Director F. Gordon Bitter 61 Vice President and Chief Financial Officer David A. Clark 44 Vice President and Vice President-Materials, Plexus Electronic Assembly Thomas J. Czajkowski 40 Vice President and Chief Information Officer Paul L. Ehlers 48 Senior Vice President, and President of Plexus Electronic Assembly Joseph D. Kaufman 47 Senior Vice President, Secretary and Chief Legal Officer J. Robert Kronser 45 Executive Vice President and Chief Technology & Strategy Officer Michael J. McGuire 49 Vice President - Worldwide Sales, Marketing and Business Development Simon J. Painter 39 Corporate Controller and Chief Accounting Officer David H. Rust 57 Vice President - Human Resources George W.F. Setton 58 Corporate Treasurer and Chief Treasury Officer Michael T. Verstegen 46 Vice President, and President of Plexus Technology Group
6 Dean A. Foate joined Plexus in 1984 and has served as President and Chief Executive Officer since 2002, and as a director since 2000; previously Chief Operating Officer from 2001 to 2002, Executive Vice President from 1999 to 2001 and President of Plexus Technology Group prior thereto. F. Gordon Bitter joined Plexus out of retirement in October 2002 as Vice President and Chief Financial Officer. Previously, Mr. Bitter was the Senior Vice President-Finance and Administration and Chief Financial Officer for Hadco Corporation, a printed circuit board and electronics contract manufacturer, from 1998 to 2000. Prior to that, Mr. Bitter had held numerous senior financial and operational positions in various industrial companies. David A. Clark joined Plexus in 1995 and has served as Vice President since 2002. In 1999, Mr. Clark assumed the position of Vice President-Materials for Plexus Electronic Assembly, a position he continues to hold. Prior to that, he was Director of Procurement for Plexus Electronic Assembly. Thomas J. Czajkowski joined Plexus in 2001 and has served as Vice President and Chief Information Officer since 2002. Prior to that, Mr. Czajkowski served as Chief Information Officer. Prior to joining Plexus, Mr. Czajkowski was a Senior Manager at Deloitte Consulting from 1993 to 2001. Paul L. Ehlers joined Plexus in 1980 and has served as Senior Vice President since 2002. In 2001, Mr. Ehlers served as Vice President. In addition, Mr. Ehlers has served as President of Plexus Electronic Assembly since 2000. From 1995 to 1999, Mr. Ehlers managed various manufacturing facilities. Joseph D. Kaufman joined Plexus in 1986 and has served as Senior Vice President, Secretary and Chief Legal Officer since 2001, and as Vice President, Secretary and General Counsel of Plexus from 1990 to 2001. J. Robert Kronser joined Plexus in 1981 serving in various engineering roles and has served as an Executive Vice President and Chief Technology and Strategy Officer since 2001. From 1999 to 2001, Mr. Kronser served as Vice President of Sales and Marketing. From 1993 to 1999, Mr. Kronser managed the Advanced Manufacturing Center. Michael J. McGuire joined Plexus in December 2002 as Vice President-Worldwide Sales, Marketing and Business Development. Previously, from 2000 to 2002, Mr. McGuire served as Senior Vice President of Sales for Nu Horizons Electronics Corp. Prior to that, Mr. McGuire served as the Midwest Regional Vice President of Sales for Marshall Industries, Inc. from 1987 to 2000. Simon J. Painter joined Plexus in 2000 as Corporate Controller. In 2003, Mr. Painter was appointed to the position of Chief Accounting Officer. Prior to joining Plexus, Mr. Painter was an auditor with the firm of PricewaterhouseCoopers LLP, from 1991 to 2000, serving most recently as an Audit Manager. David H. Rust joined Plexus in 2001 as Vice President - Human Resources. Previously, Mr. Rust served as Vice President and Chief Human Resources Officer from 1990 to 2001 for Menasha Corporation. George W.F. Setton joined Plexus in 2001 as Corporate Treasurer and Chief Treasury Officer. He was Plexus' Principal Accounting Officer from 2001 to 2003. Previously, from 2000 to 2001, Mr. Setton was a partner in Euram, Inc., a financial consulting firm, and from 1997 to 1999, Mr. Setton served as Group Treasurer for Carr Futures, Inc. Michael T. Verstegen joined Plexus in 1983 and has served as Vice-President since 2002. In addition, Mr. Verstegen served as President of Plexus Technology Group since 2001. Mr. Verstegen has held various management positions within the engineering business unit from 1995 to 2000. 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS For the fiscal years ended September 30, 2004 and 2003, the Company's Common Stock has traded on the NASDAQ Stock Market. The price information below represents high and low sale prices of our common stock for each quarterly period.
Fiscal Year Ended September 30, 2004 Fiscal Year Ended September 30, 2003 ------------------------------------ ------------------------------------ High Low High Low ---- --- ---- --- First Quarter $19.63 $ 15.30 First Quarter $15.76 $ 7.38 Second Quarter $24.47 $ 16.15 Second Quarter $10.41 $ 7.94 Third Quarter $19.28 $ 12.35 Third Quarter $13.48 $ 8.83 Fourth Quarter $13.50 $ 9.95 Fourth Quarter $18.45 $ 11.18
As of December 1, 2004, there were approximately 1,004 shareholders of record. We have not paid any cash dividends. We anticipate that all earnings in the foreseeable future will be retained to finance the development of our business. See also Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a discussion of the Company's dividend intentions. ITEM 6. SELECTED FINANCIAL DATA FINANCIAL HIGHLIGHTS (1) (dollars in thousands, except per share amounts)
FOR THE YEARS ENDED SEPTEMBER 30, 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- OPERATING STATEMENT DATA Net sales $1,040,858 $ 807,837 $ 883,603 $1,062,304 $ 751,639 Gross profit 86,778 52,965 81,320 131,790 107,164 Gross margin percentage 8.3% 6.6% 9.2% 12.4% 14.3% Operating income (loss) 9,216(2) (71,531)(3) (3,636)(4) 68,388(5) 69,870(6) Operating margin percentage 0.9% (8.9%) (0.4%) 6.4% 9.3% Net income (loss) (31,580)(2) (67,978)(3) (4,073)(4) 39,150(5) 40,196(6) Earnings (loss) per share (diluted) $ (0.74)(2) $ (1.61)(3) $ (0.10)(4) $ 0.91(5) $ 1.04(6) CASH FLOW STATEMENT DATA Cash flows provided by (used in) operations $ (21,352) $ (19,953) $ 130,455 $ 119,479 $ (51,392) Capital equipment additions 18,086 22,372 30,760 54,560 44,228 BALANCE SHEET DATA Working capital $ 215,360 $ 210,315 $ 219,854 $ 277,055 $ 213,596 Total assets 545,708 553,054 583,945 602,525 515,608 Long-term debt and capital lease obligations 23,160 23,502 25,356 70,016 141,409 Shareholders' equity 351,413 371,016 430,689 426,852 209,362 Return on average assets (5.7%) (12.0%) (0.7%) 7.0% 10.8% Return on average equity (8.7%) (17.0%) (0.9%) 12.3% 22.6% Inventory turnover ratio 6.2x 6.5x 7.0x 5.3x 4.4x
8 (1) Historical results have not been restated for the fiscal 2001 merger with e2E Corporation ("e2E"), as it would not differ materially from reported results. (2) In fiscal 2004, we recorded restructuring and impairment costs of approximately $9.3 million associated with the lease obligations for two previously abandoned facilities near Seattle, Washington (the "Seattle facilities"), the severance costs associated with the closure of the existing Bothell, Washington facility, the impairment of certain abandoned software, and the lease obligation and severance costs related to the consolidation of a satellite PCB-design office in Hillsboro, Oregon into another Plexus design office. In addition, we recorded a $36.8 million valuation allowance related to our deferred income tax assets. (3) In response to the reduction in our sales and reduced capacity utilization, we recorded fiscal 2003 restructuring costs of approximately $59.3 million. These costs totaled approximately $36.8 million after-tax. In addition, we adopted SFAS No. 142 for the accounting of goodwill and other intangible assets. Under the transitional provisions of Statement of Financial Accounting Standards No. 142, we determined that a pre-tax transitional impairment charge of $28.2 million was required, which was recorded as a cumulative effect of a change in accounting for goodwill ($23.5 million after-tax). (4) In January 2002, we completed the acquisition of certain assets of MCMS, Inc. ("MCMS"). The results from operations of the assets acquired from MCMS are reflected in our financial statements from the date of acquisition. No goodwill resulted from the acquisition. We incurred approximately $0.3 million of acquisition costs in fiscal 2002 associated with the acquisition of the MCMS operations. In response to the reduction in our sales and reduced capacity utilization, we also recorded fiscal 2002 restructuring costs of approximately $12.6 million. Together, these costs totaled approximately $8.3 million after-tax. (5) In connection with the May 2001 acquisition of Qtron Inc. ("Qtron") and merger with e2E, we recorded acquisition and merger costs of approximately $1.6 million ($1.4 million after-tax). In connection with an economic slowdown, we recorded restructuring costs of approximately $1.9 million ($1.1 million after-tax). The effects of the acquisition of Qtron are reflected in the financial statements from the date of acquisition. (6) In connection with the merger with Agility and the acquisitions of Keltek (Holdings) Limited ("Keltek"), and the turnkey electronics manufacturing services operations of Elamex, S.A. de C.V. ("Mexico turnkey operations"), Plexus recorded acquisition and merger costs of $1.1 million ($0.9 million after-tax). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a participant in the Electronics Manufacturing Services ("EMS") industry. We provide product realization services to original equipment manufacturers, or OEMs, and other technology companies in the networking/datacommunications/telecom, medical, industrial/commercial, computer and transportation/other industries. We provide advanced electronics design, manufacturing and testing services to our customers with a focus on complex, high technology and high reliability products. We offer our customers the ability to outsource all stages of product realization, including: development and design, materials procurement and management, prototyping and new product introduction, testing, manufacturing, product configuration, logistics and test/repair. The following information should be read in conjunction with our consolidated financial statements included herein and the "Risk Factors" section beginning on page 19. Our customers include both industry-leading original equipment manufacturers and technology companies. Due to our focus on serving manufacturers in advanced electronics technology, our business is influenced by major technological trends such as the level and rate of development of telecommunications infrastructure, the expansion of network and internet use, the federal Food and Drug Administration's approval of new medical devices, and the expansion of outsourcing by OEM's and technology companies. We provide most of our contract manufacturing services on a turnkey basis, which means that we procure some or all of the materials required for product assembly. We provide some services on a consignment basis, which means that the customer supplies materials necessary for product assembly. Turnkey services include material procurement and warehousing, in addition to manufacturing, and involve greater resource investment than consignment 9 services. Other than certain test equipment used for internal manufacturing, we do not design or manufacture our own proprietary products. EXECUTIVE SUMMARY Our primary objective at the outset of fiscal 2004 was to return the company to profitability. The restructuring actions of the preceding years had lowered our cost structure and improved capacity utilization. We also strengthened and reorganized our sales, marketing and business development function to drive sales growth and strengthen our customer portfolio. As a result of this focus and improved industry demand, especially within the networking/datacommunication industry, we achieved fiscal 2004 sales growth of 29 percent, without making acquisitions. We believe this to be the highest organic growth rate within the EMS industry. This growth rate was well above the approximately 18 percent annual growth rate expected by various industry surveys for the broad EMS industry, so we believe we have consequently gained market share. The rapid sales growth in fiscal 2004 placed additional strains on the organization, and consequently, gross margins and overall profitability were adversely affected by higher, new program-related transition and training expenses, as well as the need to gain experience manufacturing new programs. Year-over-year, we added and trained approximately 1,300 new production-related employees at sites located around the world, principally in Asia and Mexico, in order to support our sales growth. In addition, we purchased and substantially outfitted a second manufacturing and engineering facility in Penang, Malaysia ("Penang"). This expansion was driven by additional demand from our customers for more production in this relatively low-cost country. As we look to fiscal 2005, our primary objective is to continue to improve profitability. We expect to achieve this goal with improvements in capacity utilization and operating efficiencies through a combination of moderate sales expansion and lean manufacturing and inventory management initiatives. We also recently announced restructuring plans to close our Bothell, Washington ("Bothell") manufacturing and engineering facility in mid-fiscal 2005, which we expect will improve overall capacity utilization once the facility is closed. Additionally, we will remain intensely focused on working capital utilization and return on capital employed. Based on customer indications of expected demand and management estimates of new program wins, our internal projections currently anticipate full fiscal 2005 sales growth of approximately 15 percent to 18 percent. We currently expect first quarter of fiscal 2005 sales to be in the range of $280 million to $290 million; however, our results will ultimately depend on actual customer order levels. We anticipate that the initial stages of production in the new facility in Penang will impair our overall profitability through at least the first half of fiscal 2005. Additionally, incremental costs associated with transitioning programs from our recently announced closure of our Bothell facility and continued near-term weakness at a couple of our sites will also impair our overall profitability in the first half of fiscal 2005. FACILITY CLOSURES/ACQUISITIONS In fiscal 2004, we closed our PCB design operations in Hillsboro, Oregon ("Hillsboro") and announced plans to close our Bothell facility by the second quarter of fiscal 2005. In addition, we sold a small PCB design operations in Tel Aviv, Israel to a group of former employees; however, this transaction did not have a material impact on our consolidated financial statements. In fiscal 2003, we closed our manufacturing facilities in San Diego, California ("San Diego") and Richmond, Kentucky ("Richmond"), and ceased production in our oldest facility in Neenah, Wisconsin ("Neenah"). In addition, we sold our PCB design operations in Nashua, New Hampshire to a group of former employees; however, this transaction did not have a material impact on our consolidated financial statements. In January 2002, we acquired certain assets of MCMS, Inc. ("MCMS"), an electronics manufacturing services provider, for approximately $42.0 million in cash. The assets purchased from MCMS include manufacturing operations in Penang, Malaysia; Xiamen, China; and Nampa, Idaho. The consideration for this acquisition did not include the assumption of any interest-bearing debt, but included the assumption of total liabilities of approximately $7.2 million. The results from MCMS's operations are reflected in our financial statements from the date of acquisition. No goodwill resulted from this acquisition. We incurred approximately $0.3 million of acquisition costs in the second quarter of fiscal 2002 associated with the acquisition of MCMS. 10 RESULTS OF OPERATIONS Net sales. Net sales for the indicated periods were as follows (dollars in millions):
Fiscal years ended September 30, ---------------------------------- 2004 2003 2002 ---------------------------------- Net Sales $ 1,040.9 $ 807.8 $ 883.6
Net sales for the fiscal year ended September 30, 2004 increased 29 percent from the year ended September 30, 2003. The increase reflects strengthened end-market demand, particularly in the networking/ datacommunications, medical and industrial sectors, as well as new program wins from both new and existing customers. Net sales in the computer industry declined to 6 percent of consolidated net sales in fiscal 2004 from 12 percent of consolidated net sales in fiscal 2003 due primarily to weakened end-market demand from two customers. Net sales for the year ended September 30, 2003 decreased 9 percent from the year ended September 30, 2002. Our reduced sales reflected the continued slowdown in the technology markets served by Plexus, primarily in the network/datacommunications/ telecom, industrial/commercial and computer industries. Net sales in fiscal 2003 compared to net sales in fiscal 2002 were also adversely affected by the loss of the primary customer in our former San Diego facility. The slowdown in the technology markets in fiscal 2003 was offset, in part, by increased sales to the medical industry. The percentages of net sales to customers representing 10 percent or more of sales and net sales to our ten largest customers for the indicated periods were as follows:
Fiscal years ended September 30, ------------------------------- 2004 2003 2002 ------------------------------- Juniper Networks 14% * * Siemens * 12% * Top 10 customers 51% 55% 48%
* Represents less than 10 percent of net sales Sales to all of our largest customers may vary from time to time depending on the size and timing of program commencement, termination, delays, modifications and transitions. We remain dependent on continued sales to our significant customers, and we generally do not obtain firm, long-term purchase commitments from our customers. Customers' forecasts can and do change as a result of their fluctuating end-market demand and other factors. Any material change in orders from these major accounts, or other customers, could materially affect our results of operations. In addition, as our percentage of sales to customers in a specific industry becomes larger relative to other industries (as we are currently experiencing significant increases in the networking/datacommunications/telecom industry), we will become increasingly dependent upon economic and business conditions affecting that industry. Our net sales by industry for the indicated periods were as follows:
Fiscal years ended September 30, -------------------------------- 2004 2003 2002 -------------------------------- Networking/Datacommunications/Telecom 43% 36% 36% Medical 31% 32% 28% Industrial/Commercial 15% 15% 20% Computer 6% 12% 11% Transportation/Other 5% 5% 5%
11 Gross profit. Gross profit and gross margins for the indicated periods were as follows (dollars in millions):
Fiscal years ended September 30, ----------------------------- 2004 2003 2002 ----------------------------- Gross Profit $ 86.8 $ 53.0 $ 81.3 Gross Margin 8.3% 6.6% 9.2%
Gross profit for the fiscal year ended September 30, 2004 increased $33.8 million from the fiscal year ended September 30, 2003, while gross margins increased to 8.3 percent from 6.6 percent over this same period. The improvement in gross profit and gross margin was primarily due to higher net sales and prior year restructuring actions that resulted in enhanced manufacturing capacity utilization and better absorption of fixed manufacturing expenses. The primary prior year restructuring actions benefiting fiscal 2004 gross margins include the San Diego and Richmond facility closures. The gross profit and gross margin improvements were somewhat offset, however, by manufacturing inefficiencies related to the start of new programs, higher compensation and benefits costs, including variable incentive compensation, and increased amortization of capitalized costs associated with an enterprise resource planning ("ERP") platform. Gross profit for the fiscal year ended September 30, 2003 decreased $28.3 million from the fiscal year ended September 30, 2002, while gross margins decreased to 6.6 percent from 9.2 percent over this same period. The decline in gross profit and gross margin in fiscal 2003 from 2002 was due primarily to a slowdown in end-market demand, particularly in the networking/datacommunications/telecom and industrial/commercial industries, which resulted in reduced utilization of manufacturing capacity. Gross margins were also impacted by lower product pricing and higher costs incurred to transfer customer programs to other Plexus operating sites as a result of closing our San Diego and Richmond facilities. Gross margins reflect a number of factors that can vary from period to period, including product and service mix, the level of new facility start-up costs, inefficiencies attendant the transition of new programs, product life cycles, sales volumes, price erosion within the electronics industry, overall capacity utilization, labor costs and efficiencies, the management of inventories, component pricing and shortages, the mix of turnkey and consignment business, fluctuations and timing of customer orders, changing demand for our customers' products and competition within the electronics industry. Additionally, turnkey manufacturing involves the risk of inventory management, and a change in component costs can directly impact average selling prices, gross margins and net sales. Although we focus on expanding gross margins, there can be no assurance that gross margins will not decrease in future periods. Most of the research and development we conduct is paid for by our customers and is therefore included in both sales and cost of sales. We conduct our own research and development, but that research and development is not specifically identified, and we believe such expenses are less than one percent of our sales. Operating expenses. Selling and administrative (S&A) expenses for the indicated periods were as follows (dollars in millions):
Fiscal years ended September 30, ----------------------------- 2004 2003 2002 ----------------------------- Selling and administrative expense $ 68.3 $ 65.2 $ 66.9 Percent of sales 6.6% 8.1% 7.6%
S&A expenses for the fiscal year ended September 30, 2004 increased $3.1 million from the fiscal year ended September 30, 2003 primarily due to variable incentive compensation expense and additional expenses for information technology systems support related to the implementation of the new ERP platform, offset, in part, by $1.7 million of recoveries of accounts receivable that were either written off or reserved for in prior periods. In addition, we are currently undergoing a comprehensive effort to comply with Section 404 of the Sarbanes Oxley Act of 2002 ("Section 404"). During fiscal 2004, we devoted substantial internal resources in accounting, information technology and legal, supplemented by the use of external consultants, to the Section 404 compliance effort. We anticipate that we will continue to address our Section 404 compliance efforts in fiscal 2005 primarily through the use of internal resources. The significant decrease in S&A as a percent of net sales was due primarily to the high level of net sales over the prior year. 12 S&A expenses for the fiscal year ended September 30, 2003 decreased $1.7 million from the fiscal year ended September 30, 2002 primarily due to fiscal 2003 restructuring actions and reductions in corporate spending. These reductions were offset, in part, by approximately $1.2 million of additional expenses for information technology systems support related to the implementation of the new ERP platform. Our ERP platform is intended to augment our management information systems and includes various software systems to enhance and standardize our ability to globally translate information from production facilities into operational and financial information and create a consistent set of core business applications at our worldwide facilities. During fiscal 2004, one additional manufacturing facility was converted to the new ERP platform, which in addition to the two manufacturing facilities converted in 2003, results in approximately 50 percent of our net sales being managed on the new platform. We anticipate converting at least one more facility to the new ERP platform in fiscal 2005. Training and implementation costs are expected to continue over the next few quarters as we make system enhancements and convert an additional facility to the new ERP platform. The conversion timetable and project scope remain subject to change based upon our evolving needs and sales levels. In addition to S&A expenses associated with the new ERP system, we continue to incur capital expenditures for hardware, software and certain other costs for testing and installation. As of September 30, 2004, net property, plant and equipment includes $26.5 million related to the new ERP platform, including $3.9 million capitalized in fiscal 2004. We anticipate incurring at least an additional $6.0 million of capital expenditures for the ERP platform through fiscal 2005. Fiscal 2004 restructuring and impairment actions: During fiscal 2004, we recorded pre-tax restructuring and impairment costs of $9.3 million. The restructuring and impairment costs were primarily associated with recognizing additional lease obligations for two previously abandoned facilities near Seattle, Washington (the "Seattle facilities"), the planned closure of our Bothell engineering and manufacturing facility, the write-down of certain software components of our ERP platform and the consolidation of a satellite PCB-design office in Hillsboro, Oregon into another Plexus design office. The estimated cost for the closure of the Seattle facilities was included in our fiscal 2003 restructuring actions. The lease-related restructuring costs recorded in fiscal 2003 were based on future lease payments subsequent to abandonment, less estimated sublease income. As of September 30, 2004, the Seattle facilities had not been subleased. Based on the remaining term available to lease these facilities and the weaker than expected conditions in the local real estate market, we determined that we would most likely not be able to sublease the Seattle facilities. Accordingly, we recorded additional lease-related restructuring costs of $4.2 million in fiscal 2004. We also recorded $0.1 million of lease-related restructuring costs on a facility in Neenah, which had also been included in restructuring actions in fiscal 2003. As part of our efforts to align our service offering with the evolving preferences of our customers, we are in the process of replicating the capabilities of our Bothell facility at other Plexus design and manufacturing locations that have higher productivity. We currently anticipate transferring key customer programs from the Bothell engineering and manufacturing facility to other Plexus locations primarily in the United States. This restructuring will reduce our manufacturing capacity by 97,000 square feet and affect approximately 160 employees. We currently expect the consolidation efforts will be completed by mid-fiscal 2005, subject to customer timelines. In fiscal 2004, we incurred restructuring and impairment costs related to the Bothell closure of $1.8 million, which consisted of $1.5 million associated with employee terminations and $0.3 million associated with fixed asset impairments. In fiscal 2005, we anticipate the Bothell closure will result in additional restructuring costs of approximately $8.2 million, which will consist of $2.2 million associated with employee terminations and $6.0 million associated with the facility lease. Our fiscal 2004 restructuring actions, combined with other factors, also led to the establishment of a $36.8 million valuation allowance on our deferred income tax assets in fiscal 2004 (see discussion below). We recorded a $1.7 million impairment of certain software components of our ERP platform, which primarily resulted from a change in our deployment strategy for a shop floor data-collection system. Some elements of the shop-floor data-collection system will not be deployed because the originally anticipated business benefits could not be realized. The remaining elements of the shop floor data-collection system are still under evaluation. As of September 30, 2004, the capitalized costs of the remaining elements of the shop floor data system totaled approximately $3.8 million. A change in the scope of this project could result in impairment of the remaining elements of the shop floor data-collection system. Finally, we incurred approximately $1.5 million of other restructuring and impairment costs in fiscal 2004 primarily related to the consolidation of the Hillsboro satellite PCB-design office into another Plexus design office. The Hillsboro related restructuring costs were primarily for employee termination costs and contract termination costs 13 associated with leased facilities and software service providers. In fiscal 2005, we anticipate incurring an additional $0.1 million of restructuring costs related to employee relocations. Approximately 40 employees were affected by this restructuring. Fiscal 2003 restructuring and impairment actions: During fiscal 2003, we recorded pre-tax restructuring and impairment costs of $59.3 million. These costs resulted from actions taken in response to reductions in our end-market demand. These actions included closing San Diego and Richmond, the consolidation of several leased facilities, re-focusing the PCB design group, a write-off of remaining goodwill associated with the acquisition of the San Diego facility, the write-down of underutilized assets to fair value at several locations, and the costs associated with reductions in work force in several manufacturing, engineering and corporate groups. These measures were intended to align our capabilities and resources with lower industry demand. The Richmond facility was phased out of operation and sold in September 2003. Production was shifted to other Plexus operating sites in the United States and Mexico. The closure of Richmond resulted in a write-down of the building, a write-down of underutilized assets to fair value, and costs relating to the elimination of the facility's work force. Building impairment charges related to Richmond totaled $3.7 million. San Diego was closed in May 2003. The closure of San Diego resulted in a write-off of remaining goodwill, the write-down of underutilized assets to fair value, and costs relating to the elimination of the facility's work force. Building impairment charges totaled $6.3 million. During fiscal 2003, goodwill impairment for San Diego totaled approximately $20.4 million, of which $14.8 million was impaired as a result of a transitional impairment evaluation under Statement of Financial Accounting Standards ("SFAS") No. 142 (see discussion below under "Cumulative effect of a change in accounting for goodwill") and $5.6 million was impaired as a result of our decision to close the facility. Other fiscal year 2003 restructuring and impairment actions included the consolidation of several leased facilities, the write-down of underutilized assets to fair value and work force reductions, which primarily affected operating sites in Juarez, Mexico ("Juarez"); Seattle; Neenah; and the United Kingdom ("UK"). Restructuring actions also impacted our engineering and corporate organizations. Employee termination and severance costs for fiscal 2003 related to the termination of approximately 1,000 employees. Fiscal 2002 restructuring and impairment actions: During fiscal 2002, we recorded pre-tax restructuring and impairment costs of $12.6 million. These charges resulted from actions taken in response to reductions in sales levels and capacity utilization and included the reduction of our work force and the write-off of certain underutilized assets to fair value at several locations. The employee termination and severance costs for fiscal 2002 affected approximately 700 employees. The operating site closures included two owned facilities: one located in Neenah (the oldest of our four facilities in Neenah) and the other located in Minneapolis, Minnesota. These facilities were no longer adequate to service the needs of our customers and would have required significant investment to upgrade. The Neenah facility was phased out of operation in February 2003 and is currently used for warehousing and administrative purposes. The Minneapolis facility was phased out of operation in July 2002 and sold in October 2002. There was no building impairment charge associated with the closure of these two facilities. The lease termination costs were primarily related to our facilities in Seattle and San Diego. The following table summarizes our restructuring and impairment costs for fiscal 2004, 2003 and 2002 (dollars in thousands):
Fiscal years ended September 30, ----------------------------------- 2004 2003 2002 ----------------------------------- Non-cash impairment costs: Fixed asset impairment $ 2,107 $ 32,451 $ 4,890 Write-off of goodwill - 5,595 - ------- -------- -------- 2,107 38,046 4,890 ------- -------- -------- Cash restructuring costs: Severance costs 2,493 10,358 3,819 Lease termination costs 4,703 10,940 3,872 ------- -------- -------- 7,196 21,298 7,691 ------- -------- -------- Total restructuring and impairment costs $ 9,303 $ 59,344 $ 12,581 ======= ======== ========
14 As of September 30, 2004, we have a remaining restructuring liability of approximately $11.8 million, of which $5.2 million is expected to be paid in fiscal 2005. The remaining $6.6 million of accrued liabilities is expected to be paid through June 2008. We currently expect that our fiscal 2004 restructuring actions will result, when fully implemented, in annualized cost savings of approximately $2 million - $3 million. However, we currently expect that our operating performance will be impacted in our fiscal 2005 first and second quarters as we affect transfers from the Bothell facility to other locations. These savings will primarily benefit cost of sales through lower facilities and employee expenses. Fiscal 2002 merger and acquisition activity: For the year ended September 30, 2002, we also incurred approximately $0.3 million of acquisition costs related to the MCMS acquisition. Cumulative effect of a change in accounting for goodwill. We adopted SFAS No. 142 for the accounting for goodwill and other intangible assets as of October 1, 2002. Under the transitional provisions of SFAS No. 142, we identified locations with goodwill, performed impairment tests on the net goodwill and other intangible assets associated with each location using a valuation date as of October 1, 2002, and determined that a pre-tax transitional impairment charge of $28.2 million was required related to the San Diego and Juarez locations. The impairment charge was recorded as a cumulative effect of a change in accounting for goodwill in our Consolidated Statements of Operations. Income taxes. Income taxes for the indicated periods were as follows:
Fiscal years ended September 30, ----------------------------- 2004 2003 2002 ----------------------------- Income tax expense (benefit) $ 39.2 $(27.2) $ (1.8) Effective annual tax rate 515% 38% 30%
The increase in income tax expense in fiscal 2004 was due primarily to establishing a $36.8 million valuation allowance on all of our U.S. Federal and state deferred income tax assets. SFAS No. 109, "Accounting for Income Taxes," requires that a valuation allowance be provided when it is more likely than not that the related income tax assets will not be utilized. Under SFAS No. 109, unless specific exceptions apply, historical operating results are a strong indicator of a company's ability to generate future taxable income. In both fiscal 2003 and 2002, we had a net loss. In fiscal 2004, although we achieved substantial sales growth and gross profit improvement, our fiscal 2004 restructuring actions resulted in only nominal operating income, a net loss in the U.S. for income tax purposes and anticipated additional restructuring charges that will be recorded in fiscal 2005. Consequently, we established a full valuation allowance on our U.S. deferred income tax assets in fiscal 2004. Although this valuation allowance reduces the carrying value of the net deferred income tax assets on the balance sheet, we may be able to utilize these deferred income tax assets in future profitable periods to reduce future tax obligations. As a result of the continued availability of these deferred income tax assets, together with tax holidays in Asia, and if we are able to achieve our current profitability estimates, our effective tax rate for fiscal 2005 would be approximately 5 percent to 8 percent. The effective income tax rate increased to 515 percent in fiscal 2004 compared to 38 percent in fiscal 2003 primarily due to the valuation allowance. The effective income tax rate increased to 38 percent in fiscal 2003 compared to 30 percent in fiscal 2002. The increase in the effective tax rate was due primarily to the absence in fiscal 2003 of non-deductible goodwill amortization expenses that were present in fiscal 2002. As of September 30, 2004 and 2003, we had recorded net deferred income tax assets of $1.7 million and $48.6 million, respectively. The net deferred income tax assets have arisen from available income tax losses and future income tax deductions. Our ability to use these income tax losses and future income tax deductions is dependent upon our future operations in the tax jurisdictions in which such losses or deductions arose. The decrease in deferred income tax assets in fiscal 2004 is due primarily to our recording of a $36.8 million valuation allowance as described above and the receipt of tax refunds. The deferred income tax assets that remain as of September 30, 2004 represent foreign deferred income tax assets for which realization is considered more likely than not. In October 2004, the Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004 became law in the U.S. This legislation provides for a number of changes in U.S. tax laws. In accordance with SFAS No. 109, effects of this new legislation will be reflected in our financial statements beginning in the period of the law's 15 enactment in October 2004. We are presently reviewing this new legislation to determine the impacts on Plexus and our operations. LIQUIDITY AND CAPITAL RESOURCES Cash flows used in operating activities were ($21.4) million for the year ended September 30, 2004, compared to cash flows used in operating activities of ($20.0) and cash flows provided by operating activities of $130.5 million for the years ended September 30, 2003 and 2002, respectively. During fiscal 2004, cash used in operating activities was primarily driven by increased accounts receivable and inventory in support of higher sales, which were offset in part by higher earnings, after adjusting for the non-cash effect of depreciation and amortization, and the decrease in the deferred income tax assets, which primarily represented the establishment of a valuation allowance, and the receipt of tax refunds. Our actual days sales outstanding in accounts receivable for the fiscal year ended September 30, 2004 increased to 52 days in comparison to 50 days for the prior year, primarily as a result of a higher percentage of fourth quarter net sales being recognized in the final month of fiscal 2004 as compared to the final month of fiscal 2003. During fiscal 2004, the allowance for losses on accounts receivable decreased $2.1 million, primarily as a result of a combination of collections and write-offs of accounts receivable that were reserved for in prior periods. Our inventory turns decreased to 6.2 turns for the year ended September 30, 2004 from 6.5 turns for the year ended September 30, 2003. Inventories increased $37.0 million from September 30, 2003, primarily for the purchase of raw materials to support increased sales and the build up of finished goods to support certain vendor managed inventory programs, all of which had a negative impact on inventory turns. Cash flows used in investing activities totaled ($2.4) million for the year ended September 30, 2004. The primary uses were purchases of property, plant and equipment, offset by sales and maturities of short-term investments. We utilized available cash, a revolving credit facility and operating leases to fund our operating requirements during fiscal 2004. Our capital expenditures for fiscal 2004 were approximately $18.1 million. Our level of capital expenditures for fiscal 2005 will be dependent on anticipated sales levels, but we expect them to be in the range of $25 million to $30 million. Cash flows provided by financing activities, totaling $4.2 million for the year ended September 30, 2004, primarily represent proceeds from stock issuances under our Employee Stock Purchase Plan and the exercise of stock options, offset by payments on capital lease obligations. Our secured revolving credit facility, as amended (the "Amended Secured Credit Facility"), allows us to borrow up to $150 million from a group of banks. Borrowing under the Amended Secured Credit Facility may be either through revolving or swing loans or letters of credit. The Amended Secured Credit Facility is secured by substantially all of our domestic working capital assets and a pledge of 65 percent of the stock of each of our foreign subsidiaries. Interest on borrowings varies with our total leverage ratio, as defined in our credit agreement, and begins at the Prime rate (as defined) or LIBOR plus 1.5 percent. We also are required to pay an annual commitment fee of 0.5 percent of the unused credit commitment. The Amended Secured Credit Facility matures on October 31, 2007 and includes certain financial covenants customary in agreements of this type. These covenants include a minimum adjusted EBITDA, a maximum total leverage ratio (not to exceed 2.5 times adjusted EBITDA) and a minimum tangible net worth, all as defined in the agreement. We believe that our Amended Secured Credit Facility, leasing capabilities and cash and short-term investments should be sufficient to meet our working capital and fixed capital requirements, as noted above, through fiscal 2005. However, the growth anticipated for fiscal 2005 may increase our working capital needs. As those needs increase, we may need to arrange additional debt or equity financing. We therefore evaluate and consider from time to time various financing alternatives to supplement our capital resources. However, we cannot be sure that we will be able to make any such arrangements on acceptable terms. We have not paid cash dividends in the past and do not anticipate paying them in the foreseeable future. We anticipate using any earnings to support our business. 16 CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE SHEET OBLIGATIONS Our disclosures regarding contractual obligations and commercial commitments are located in various parts of our regulatory filings. Information in the following table provides a summary of our contractual obligations and commercial commitments as of September 30, 2004 (in thousands):
Payments Due by Fiscal Period -------------------------------------------------------------- 2010 and Contractual Obligations Total 2005 2006-2007 2008-2009 thereafter ------------------------- -------------------------------------------------------------- Long-Term Debt Obligations $ - $ - $ - $ - $ - Capital Lease Obligations 43,005 2,980 5,997 6,302 27,726 Operating Lease Obligations* 78,073 14,754 23,428 15,290 24,601 Purchase Obligations** 172,755 172,755 - - - Other Long-Term Liabilities on the Balance Sheet*** 16,324 5,187 5,427 1,165 4,545 Other Long-Term Liabilities not on the Balance Sheet**** 1,458 500 958 - - ---------- ---------- ---------- ---------- ---------- Total Contractual Cash Obligations $ 311,615 $ 196,176 $ 35,810 $ 22,757 $ 56,872 ========== ========== ========== ========== ==========
* - As of September 30, 2004, operating lease obligations include future payments totaling $6.6 million related to lease exit costs that are included in other long-term Liabilities on the balance sheet. The lease exit costs were accrued as a restructuring cost. ** - As of September 30, 2004, purchase obligations consist of purchases of inventory and equipment in the ordinary course of business. *** - As of September 30, 2004, other long-term obligations on the balance sheet include: deferred compensation obligations to certain of our former executives, executive officers and other key employees and restructuring obligations for both employee terminations and lease exit costs. **** - As of September 30, 2004, other long-term obligations not on the balance sheet consist of a salary commitment to an officer of the Company under an employment agreement. We did not have, and were not subject to, any lines of credit, standby letters of credit, guarantees, standby repurchase obligations, or other commercial commitments. DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES Our accounting policies are disclosed in Note 1 to the Consolidated Financial Statements. During the year ended September 30, 2004, there were no material changes to these policies. Our more critical accounting policies are as follows: Impairment of Long-Lived Assets - We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property, plant and equipment is measured by comparing its carrying value to the projected cash flows that the property, plant and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the property exceeds its fair market value. The impairment analysis is based on significant assumptions of future results made by management, including sales and cash flow projections. Circumstances that may lead to impairment of property, plant and equipment include reductions in anticipated future performance of the asset, or industry demand, and the restructuring of our operations. Intangible Assets - We adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective October 1, 2002. Under SFAS No. 142, beginning October 1, 2002, we no longer amortize goodwill and intangible assets with indefinite useful lives, but, instead, test those assets for impairment at least annually with any related losses recognized in earnings when incurred. We perform goodwill impairment tests annually during the third quarter of each fiscal year and more frequently if an event or circumstance indicates that an impairment loss has occurred. We measure the recoverability of goodwill under the annual impairment test by comparing a reporting unit's carrying amount, including goodwill, to the estimated fair market value of the reporting unit based on projected 17 discounted future cash flows. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second test is performed to measure the amount of impairment loss, if any. Revenue - Net sales from manufacturing services is generally recognized upon shipment of the manufactured product to our customers, under contractual terms, which are generally FOB shipping point. Upon shipment, title transfers and the customer assumes risks and rewards of ownership of the product. Generally, there are no formal customer acceptance requirements or further obligations related to manufacturing services; if such requirements or obligations exist, then a sale is recognized at the time when such requirements are completed and such obligations fulfilled. Nets sales from engineering design and development services, which are generally performed under contracts of twelve months or less in duration, are recognized as costs are incurred utilizing the percentage-of-completion method; any losses are recognized when anticipated. Net sales from engineering design and development services were less than ten percent of total sales for each of fiscal year 2004, 2003 and 2002. Sales are recorded net of estimated returns of manufactured product based on management's analysis of historical returns, current economic trends and changes in customer demand. Net sales also include amounts billed to customers for shipping and handling. The corresponding shipping and handling costs are included in cost of sales. Restructuring Costs - From fiscal 2002 through fiscal 2004, we recorded restructuring costs in response to reductions in sales and reduced capacity utilization. These restructuring costs included employee severance and benefit costs, and costs related to plant closings, including leased facilities that will be abandoned (and subleased, as applicable). Prior to January 1, 2003, severance and benefit costs were recorded in accordance with Emerging Issues Task Force ("EITF") 94-3 and for leased facilities that were abandoned and subleased, the estimated lease loss was accrued for future remaining lease payments subsequent to abandonment, less any estimated sublease income. As of September 30, 2004, the significant facilities which we plan to sublease had not yet been subleased; and, accordingly, certain of our estimates of expected sublease income were changed to reflect factors that affect our ability to sublease those facilities such as general economic conditions and the local real estate markets. Changes in certain of our estimates of sublease income resulted in additional restructuring costs in fiscal 2004. Further changes in certain other estimates of sublease income could result in additional restructuring costs. Subsequent to December 31, 2002, costs associated with a restructuring activity are recorded in compliance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The timing and related recognition of recording severance and benefit costs that are not presumed to be an ongoing benefit as defined in SFAS No. 146, depends on whether employees are required to render service until they are terminated in order to receive the termination benefits and, if so, whether employees will be retained to render service beyond a minimum retention period. During fiscal 2003, we concluded that we had a substantive severance plan based upon our past severance practices; therefore, we recorded certain severance and benefit costs in accordance with SFAS No. 112, "Employer's Accounting for Postemployment Benefits," which resulted in the recognition of a liability as the severance and benefit costs arose from an existing condition or situation and the payment was both probable and reasonably estimated. For leased facilities being abandoned and subleased, a liability is recognized and measured at fair value for the future remaining lease payments subsequent to abandonment, less any estimated sublease income that could be reasonably obtained for the property. For contract termination costs, including costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity, a liability for future remaining payments under the contract is recognized and measured at its fair value. See Note 10 in the Notes to Consolidated Financial Statements. The recognition of restructuring costs requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. If our actual results in exiting these facilities differ from our estimates and assumptions, we may be required to revise the estimates of future liabilities, requiring the recording of additional restructuring costs or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained, no additional accruals are required and the utilization of the provisions are for their intended purpose in accordance with developed exit plans. Income Taxes - Deferred income taxes are provided for differences between the bases of assets and liabilities for financial and income tax reporting purposes. The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Realization of deferred income tax assets is dependent on our ability to generate sufficient future 18 taxable income. During fiscal 2004, we recorded a $36.8 million valuation allowance against all U.S. deferred income tax assets. See Note 5 in the Notes to Consolidated Financial Statements. NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the EITF reached a consensus regarding EITF Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." The consensus addresses not only when and how an arrangement involving multiple deliverables should be divided into separate units of accounting but also how the arrangement's consideration should be allocated among separate units. The pronouncement was effective for us commencing with our first quarter of fiscal 2004, but did not have a material impact on our consolidated results of operations or financial position. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," which provides guidance on the identification of and reporting for variable interest entities. In December 2003, the FASB issued a revised Interpretation No. 46, which expands the criteria for consideration in determining whether a variable interest entity should be consolidated. Interpretation No. 46 became effective for us in the second quarter of fiscal 2004. Our adoption of Interpretation No. 46 did not have an impact on our consolidated results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial instruments that are within the scope of the Statement, which previously were often classified as equity, must now be classified as liabilities. In November 2003, FASB Staff Position No. SFAS 150-3 deferred indefinitely the effective date of SFAS No. 150 for applying the provisions of the Statement for certain mandatorily redeemable non-controlling interests. However, expanded disclosures are required during the deferral period. The Company does not have financial instruments with mandatorily redeemable non-controlling interests. In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supercedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" document issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. The adoption of this bulletin did not have an impact on our consolidated results of operations or financial position. RISK FACTORS OUR CUSTOMER REQUIREMENTS AND OPERATING RESULTS VARY SIGNIFICANTLY FROM QUARTER TO QUARTER, WHICH COULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK. Our quarterly and annual results and share price may vary significantly depending on various factors, many of which are beyond our control. These factors include: - the volume of customer orders relative to our capacity - the level and timing of customer orders, particularly in light of the fact that some of our customers release a significant percentage of their orders during the last few weeks of a quarter - the typical short life cycle of our customers' products - market acceptance of and demand for our customers' products - customer announcements of operating results and business conditions - changes in our sales mix to our customers - business conditions in our customers' industries - the timing of our expenditures in anticipation of future orders - our effectiveness in managing manufacturing processes - changes in cost and availability of labor and components - local events that may affect our production volume, such as local holidays - credit ratings and securities analysts' reports and - changes in economic conditions and world events. 19 The EMS industry is impacted by the state of the U.S. and global economies and world events. A slowdown or flat performance in the U.S. or global economies, or in particular in the industries served by us, may result in our customers reducing their forecasts. The demand for our services could weaken or decrease, which in turn would impact our sales, capacity utilization, margins and results. Our sales were adversely affected in fiscal 2003 and 2002 by the slowdown in the networking/datacommunications/telecom and industrial/commercial markets, as a result of reduced end-market demand and reduced availability of venture capital to fund existing and emerging technologies. These factors substantially influenced our net sales and margins. The percentage of our sales to customers in the networking/datacommunications/telecom industry has increased significantly in recent quarters both in dollars and as a percentage of our net sales. When an increasing percentage of our net sales is made to customers in a particular industry, we become more dependent upon the performance of that industry and the economic and business conditions that affect it. Our quarterly and annual results are affected by the level and timing of customer orders, fluctuations in material costs and availabilities, and the degree of capacity utilization in the manufacturing process. THE MAJORITY OF OUR SALES COME FROM A RELATIVELY SMALL NUMBER OF CUSTOMERS AND IF WE LOSE ANY OF THESE CUSTOMERS, OUR SALES AND OPERATING RESULTS COULD DECLINE SIGNIFICANTLY. Sales to our largest customer represented 14 percent of our net sales in fiscal 2004. A different customer represented 12 percent of our net sales in fiscal 2003. We had no customers that represented 10 percent or more in fiscal 2002. Sales to our ten largest customers have represented a majority, or near majority, of our net sales in recent periods. Our ten largest customers accounted for approximately 51 percent, 55 percent and 48 percent of our net sales for the years ended September 30, 2004, 2003 and 2002, respectively. Our principal customers have varied from year to year, and our principal customers may not continue to purchase services from us at current levels, if at all. Significant reductions in sales to any of these customers, or the loss of major customers, could seriously harm our business. If we are not able to replace expired, canceled or reduced contracts with new business on a timely basis, our sales will decrease. OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY PRODUCTION. Electronics manufacturing service providers must provide rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers, and we continue to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities or delay production for a number of reasons that are beyond our control. The success of our customers' products in the market and the strength of the markets themselves affect our business. Cancellations, reductions or delays by a significant customer or by a group of customers could seriously harm our operating results. Such cancellations, reductions or delays have occurred and may continue to occur. In addition, we make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, facility requirements, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of our customers' commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers. Because many of our costs and operating expenses are relatively fixed, a reduction in customer demand can harm our gross margins and operating results. Customers may require rapid increases in production, which can stress our resources and reduce operating margins. Although we have had a net increase in our manufacturing capacity over the past few fiscal years, we have significantly reduced our capacity from its peak, and we may not have sufficient capacity at any given time to meet all of our customers' demands or to meet the requirements of a specific program. FAILURE TO MANAGE CONTRACTION AND GROWTH, IF ANY, MAY SERIOUSLY HARM OUR BUSINESS. Periods of contraction or reduced sales, such as the periods that occurred from fiscal 2001 through 2003, create tensions and challenges. We must determine whether all facilities remain productive, determine whether staffing levels need to be reduced, and determine how to respond to changing levels of customer demand. While maintaining multiple facilities or higher levels of employment increases short-term costs, reductions in employment could impair our ability to respond to later market improvements or to maintain customer relationships. Our decisions to reduce costs and capacity, such as the recent announcement to close the Bothell facility in fiscal 2005 and the fiscal year 2003 closures 20 of our San Diego and Richmond facilities and the reduction in the number of employees, can affect our expenses, and therefore our short-term and long-term results. We have announced our intention to close our Bothell, Washington facility in fiscal 2005. The exact timing of that closure will depend upon the arrangements for transitioning customer programs. Although we work to minimize the potential effects of any such transition, there are inherent risks that such a transition can result in the disruption of programs and customer relationships. We are involved in a multi-year project to install a common ERP platform and associated information systems. Our ERP platform is intended to augment our management information systems and includes various software systems to enhance and standardize our ability to globally translate information from production facilities into operational and financial information and create a consistent set of core business applications at our worldwide facilities. As of September 30, 2004, facilities generating approximately 50 percent of our net sales are being managed on the new platform. We anticipate converting at least one more facility to the new ERP platform in fiscal 2005. The conversion timetable and project scope remain subject to change based upon our evolving needs and sales levels. During fiscal 2004, we recorded a $1.7 million impairment of certain components of our ERP platform, which primarily resulted from a change in our deployment strategy for a shop floor data-collection system. Some elements of the shop-floor data-collection system will not be deployed because the originally anticipated business benefits could not be realized. The remaining elements of the shop floor data-collection system are still under evaluation. As of September 30, 2004, the capitalized costs of the remaining elements of the shop floor data system total approximately $3.8 million. A change in the scope of this project could result in impairment of the remaining elements of the shop floor data-collection system, As of September 30, 2004, overall ERP implementation costs included in net property, plant and equipment totaled $26.5 million and we anticipate incurring at least an additional $6.0 million in capital expenditures for the ERP platform through fiscal 2005; changes in the scope of the ERP platform could result in impairment of these capitalized costs. Due to recent rapid sales growth in fiscal 2004, we have experienced a significant need for additional employees and facilities. We have added many employees around the world, and we are expanding our operations in Penang, Malaysia. Our response to these changes in business conditions in fiscal 2004, compared to the two previous fiscal years, has resulted in additional costs to support our growth. If we are unable to manage this growth and any future growth effectively, our operating results could be harmed. OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS. We have operations in China, Malaysia, Mexico and the United Kingdom. As noted above, we have expanded our operations in Malaysia, and we may in the future expand in these and/or into other international regions. We have limited experience in managing geographically dispersed operations in these countries. We also purchase a significant number of components manufactured in foreign countries. Because of these international aspects of our operations, we are subject to the following risks that could materially impact our operating results: - economic or political instability - transportation delays or interruptions and other effects of less developed infrastructure in many countries - foreign exchange rate fluctuations - utilization of different systems and equipment - difficulties in staffing and managing foreign personnel and diverse cultures and - the effects of international political developments. In addition, changes in policies by the U.S. or foreign governments could negatively affect our operating results due to changes in duties, tariffs, taxes or limitations on currency or fund transfers. For example, our Mexican-based operation utilizes the Maquiladora program, which provides reduced tariffs and eases import regulations, and we could be adversely affected by changes in that program. Also, the Malaysian and Chinese subsidiaries currently receive favorable tax treatments from these governments for approximately 2 years and 9 years, respectively, which may or may not be renewed. WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING PROCESS EXPERTISE. The markets for our manufacturing and engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business will depend upon our ability to: 21 - retain our qualified engineering and technical personnel - maintain and enhance our technological capabilities - develop and market manufacturing services which meet changing customer needs - successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis. Although we believe that our operations utilize the assembly and testing technologies, equipment and processes that are currently required by our customers, we cannot be certain that we will develop the capabilities required by our customers in the future. The emergence of new technology industry standards or customer requirements may render our equipment, inventory or processes obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing technologies and equipment to remain competitive. The acquisition and implementation of new technologies and equipment may require significant expense or capital investment that could reduce our operating margins and our operating results. Our failure to anticipate and adapt to our customers' changing technological needs and requirements could have an adverse effect on our business. OUR MANUFACTURING SERVICES INVOLVE INVENTORY RISK. Most of our contract manufacturing services are provided on a turnkey basis, where we purchase some or all of the required materials. These services involve greater resource investment and inventory risk than consignment services, where the customer provides these materials. Accordingly, various component price increases and inventory obsolescence could adversely affect our selling price, gross margins and operating results. In our turnkey operations, we need to order parts and supplies based on customer forecasts, which may be for a larger quantity of product than is included in the firm orders ultimately received from those customers. For example, fiscal 2004 saw a significant increase in inventories to support increased sales and expected growth in customer programs. Customers' cancellation or reduction of orders can result in additional expense to us. While most of our customer agreements include provisions that require customers to reimburse us for excess inventory specifically ordered to meet their forecasts, we may not actually be reimbursed or be able to collect on these obligations. In that case, we could have excess inventory and/or cancellation or return charges from our suppliers. In addition, we provide a managed inventory program under which we hold and manage finished goods inventory for some of our key customers. The managed inventory program may result in higher finished goods inventory levels, further reduce our inventory turns and increase our financial risk with such customers, although our customers will have contractual obligations to purchase the inventory from us. WE MAY NOT BE ABLE TO OBTAIN RAW MATERIALS OR COMPONENTS FOR OUR ASSEMBLIES ON A TIMELY BASIS OR AT ALL. We rely on a limited number of suppliers for many components used in the assembly process. We do not have any long-term supply agreements. At various times, there have been shortages of some of the electronic components that we use, and suppliers of some components have lacked sufficient capacity to meet the demand for these components. At times, component shortages have been prevalent in our industry, and in certain areas recur from time to time. In some cases, supply shortages and delays in deliveries of particular components have resulted in curtailed production, or delays in production, of assemblies using that component, which contributed to an increase in our inventory levels. We expect that shortages and delays in deliveries of some components will continue from time to time, especially as demand for those components increases. An increase in economic activity could result in shortages, if manufacturers of components do not adequately anticipate the increased orders and/or have previously excessively cut back their production capability in view of reduced activity in recent years. World events, such as terrorism, armed conflict and epidemics, also could affect supply chains. If we are unable to obtain sufficient components on a timely basis, we may experience manufacturing and shipping delays, which could harm our relationships with customers and reduce our sales. A significant portion of our sales is derived from turnkey manufacturing in which we provide materials procurement. While most of our customer contracts permit quarterly or other periodic adjustments to pricing based on decreases and increases in component prices and other factors, we typically bear the risk of component price increases that occur between any such repricings or, if such repricing is not permitted, during the balance of the term of the particular customer contract. Accordingly, component price increases could adversely affect our operating results. 22 START-UP COSTS AND INEFFICIENCIES RELATED TO NEW OR TRANSFERRED PROGRAMS CAN ADVERSELY AFFECT OUR OPERATING RESULTS. Start-up costs, the management of labor and equipment resources in connection with the establishment of new programs and new customer relationships, and the need to estimate required resources in advance can adversely affect our gross margins and operating results. These factors are particularly evident in the early stages of the life cycle of new products and new programs or program transfers. The effects of these start-up costs and inefficiencies can also occur when we open new facilities, such as our additional facility in Penang, Malaysia, which began production in the first quarter of fiscal 2005. These factors also affect our ability to efficiently use labor and equipment. Due to the improved economy and our increased marketing efforts, we are currently managing a number of new programs. Consequently, our exposure to these factors has increased. In addition, if any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short term. WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS. We are also subject to environmental regulations relating to the use, storage, discharge, recycling and disposal of hazardous chemicals used in our manufacturing process. If we fail to comply with present and future regulations, we could be subject to future liabilities or the suspension of business. These regulations could restrict our ability to expand our facilities or require us to acquire costly equipment or incur significant expense. While we are not currently aware of any material violations, we may have to spend funds to comply with present and future regulations or be required to perform site remediation. In addition, our medical device business, which represented approximately 31 percent of our net sales in fiscal 2004, is subject to substantial government regulation, primarily from the federal FDA and similar regulatory bodies in other countries. We must comply with statutes and regulations covering the design, development, testing, manufacturing and labeling of medical devices and the reporting of certain information regarding their safety. Failure to comply with these rules can result in, among other things, our and our customers being subject to fines, injunctions, civil penalties, criminal prosecution, recall or seizure of devices, or total or partial suspension of production. The FDA also has the authority to require repair or replacement of equipment, or refund of the cost of a device manufactured or distributed by our customers. Violations may lead to penalties or shutdowns of a program or a facility. In addition, failure or noncompliance could have an adverse effect on our reputation. In recent periods, our sales related to the defense industry, including homeland security, have begun to increase. Companies that design and manufacture for this industry face governmental and other requirements that could materially affect their financial condition and results of operations. PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS THAT COULD RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US. We manufacture products to our customers' specifications that are highly complex and may at times contain design or manufacturing defects. Defects have been discovered in products we manufactured in the past and, despite our quality control and quality assurance efforts, defects may occur in the future. Defects in the products we manufacture, whether caused by a design, manufacturing or component defects, may result in delayed shipments to customers or reduced or cancelled customer orders. If these defects occur in large quantities or too frequently, our business reputation may also be tarnished. In addition, these defects may result in liability claims against us. Even if customers are responsible for the defects, they may or may not be able to assume responsibility for any costs or payments. OUR PRODUCTS ARE FOR THE ELECTRONICS INDUSTRY, WHICH PRODUCES TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES. Factors affecting the electronics industry, in particular the short life cycle of products, could seriously harm our customers and, as a result, us. These factors include: - the inability of our customers to adapt to rapidly changing technology and evolving industry standards that result in short product life cycles - the inability of our customers to develop and market their products, some of which are new and untested - the potential that our customers' products may become obsolete or the failure of our customers' products to gain widespread commercial acceptance. 23 OUR BUSINESS IN THE NETWORKING/DATACOMMUNICATION/TELECOM INDUSTRY COULD BE SLOWED BY FURTHER GOVERNMENT REGULATION OF THE COMMUNICATIONS INDUSTRY. The end-markets for most of our customers in the networking/datacommunication/telecom industry are subject to regulation by the Federal Communications Commission, as well as by various state agencies. The policies of these agencies can directly affect both the near-term and long-term profitability of the industry and therefore directly impact the demand for products that we manufacture. INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES. The electronics manufacturing services industry is highly competitive and has become more so as a result of excess capacity in the industry. We compete against numerous U.S. and foreign electronics manufacturing services providers with global operations, as well as those who operate on a local or regional basis. In addition, current and prospective customers continually evaluate the merits of manufacturing products internally. Consolidations and other changes in the electronics manufacturing services industry result in a continually changing competitive landscape. The consolidation trend in the industry also results in larger and more geographically diverse competitors that may have significantly greater resources with which to compete against us. Some of our competitors have substantially greater managerial, manufacturing, engineering, technical, financial, systems, sales and marketing resources than we do. These competitors may: - respond more quickly to new or emerging technologies - have greater name recognition, critical mass and geographic and market presence - be better able to take advantage of acquisition opportunities - adapt more quickly to changes in customer requirements - devote greater resources to the development, promotion and sale of their services - be better positioned to compete on price for their services. We may be operating at a cost disadvantage compared to manufacturers who have greater direct buying power from component suppliers, distributors and raw material suppliers or who have lower cost structures. As a result, competitors may have a competitive advantage and obtain business from our customers. Our manufacturing processes are generally not subject to significant proprietary protection, and companies with greater resources or a greater market presence may enter our market or increase their competition with us. Increased competition could result in price reductions, reduced sales and margins or loss of market share. WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF KEY PERSONNEL MAY HARM OUR BUSINESS. Our success depends in large part on the continued service of our key technical and management personnel, and on our ability to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the development of new products and processes and the manufacture of existing products. The competition for these individuals is significant, and the loss of key employees could harm our business. WE MAY FAIL TO SUCCESSFULLY COMPLETE FUTURE ACQUISITIONS AND MAY NOT SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS. Although we have previously grown through acquisitions, our current focus is on pursuing organic growth opportunities. If we were to pursue future growth through acquisitions, however, this would involve significant risks that could have a material adverse effect on us. These risks include: Operating risks, such as the: - inability to integrate successfully our acquired operations' businesses and personnel - inability to realize anticipated synergies, economies of scale or other value - difficulties in scaling up production and coordinating management of operations at new sites - strain placed on our personnel, systems and resources - possible modification or termination of an acquired business's customer programs, including cancellation of current or anticipated programs and - loss of key employees of acquired businesses. 24 Financial risks, such as the: - use of cash resources, or incurrence of additional debt and related interest expenses - dilutive effect of the issuance of additional equity securities - inability to achieve expected operating margins to offset the increased fixed costs associated with acquisitions, and/or inability to increase margins at acquired entities to Plexus' desired levels - incurrence of large write-offs or write-downs - impairment of goodwill and other intangible assets - unforeseen liabilities of the acquired businesses. EXPANSION OF OUR BUSINESS AND OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS. We have expanded our presence in Malaysia and may further expand our operations by establishing or acquiring other facilities or by expanding capacity in our current facilities. We may expand both in geographical areas in which we currently operate and in new geographical areas within the United States and internationally. We may not be able to find suitable facilities on a timely basis or on terms satisfactory to us. Expansion of our business and operations involves numerous business risks, including: - the inability to successfully integrate additional facilities or capacity and to realize anticipated synergies, economies of scale or other value - additional fixed costs which may not be fully absorbed by the new business - difficulties in the timing of expansions, including delays in the implementation of construction and manufacturing plans - creation of excess capacity, and the need to reduce capacity elsewhere if anticipated sales or opportunities do not materialize - diversion of management's attention from other business areas during the planning and implementation of expansions - strain placed on our operational, financial, management, technical and information systems and resources - disruption in manufacturing operations - incurrence of significant costs and expenses - inability to locate sufficient customers or employees to support the expansion. WE MAY FAIL TO SECURE NECESSARY FINANCING. We maintain an Amended Secured Credit Facility with a group of banks, which allows us to borrow up to $150 million. However, we cannot be sure that the Amended Secured Credit Facility will provide all of the financing capacity that we will need in the future. Our future success may depend on our ability to obtain additional financing and capital to support increased sales and our possible future growth. We may seek to raise capital by: - issuing additional common stock or other equity securities - issuing debt securities - modifying existing credit facilities or obtaining new credit facilities - a combination of these methods. We may not be able to obtain capital when we want or need it, and capital may not be available on satisfactory terms. If we issue additional equity securities or convertible debt to raise capital, it may be dilutive to shareholders' ownership interests. Furthermore, any additional financing may have terms and conditions that adversely affect our business, such as restrictive financial or operating covenants, and our ability to meet any financing covenants will largely depend on our financial performance, which in turn will be subject to general economic conditions and financial, business and other factors. RECENTLY ENACTED CHANGES IN THE SECURITIES LAWS AND REGULATIONS ARE LIKELY TO INCREASE COSTS. The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") that became law in July 2002 has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of the Sarbanes-Oxley Act, the SEC and the NASDAQ Stock Market have promulgated new rules in a 25 variety of subjects. Compliance with these new rules has increased our legal and accounting costs, and we expect these increased costs to continue indefinitely. These developments may also make it more difficult for us to attract and retain qualified members of our board of directors or qualified executive officers. IF WE RECEIVE OTHER THAN AN UNQUALIFIED OPINION ON THE ADEQUACY OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING AS OF SEPTEMBER 30, 2005 AND FUTURE YEAR-ENDS AS REQUIRED BY THE SECTION 404 OF THE SARBANES-OXLEY ACT, INVESTORS COULD LOSE CONFIDENCE IN THE RELIABILITY OF OUR FINANCIAL STATEMENTS, WHICH COULD RESULT IN A DECREASE IN THE VALUE OF THE OUR COMMON STOCK. As required by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring public companies to include a report of management on the company's internal control over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the company's internal control over financial reporting. In addition, the public accounting firm auditing a company's financial statements must attest to and report on both management's assessment as to whether the company maintained effective internal control over financial reporting and on the effectiveness of the company's internal control over financial reporting. We are currently undergoing a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act. If we are unable to complete our assessment in a timely manner or if our independent auditors issue other than an unqualified opinion on the design, operating effectiveness or management's assessment of internal control over financial reporting, this could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our shares to decline. A weakness in Plexus' stock price could mean that investors will not be able to sell their shares at or above the prices that they paid. A weakness in stock price could also impair Plexus' ability in the future to offer common stock or convertible securities as a source of additional capital and/or as consideration in the acquisition of other businesses. THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE. Our stock price has fluctuated significantly in recent periods. The price of our common stock may fluctuate significantly in response to a number of events and factors relating to us, our competitors and the market for our services, many of which are beyond our control. In addition, the stock market in general, and especially the NASDAQ Stock Market, along with share prices for technology companies in particular, have experienced extreme volatility, including weakness, that sometimes has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating results. Our stock price and the stock price of many other technology companies remain below their peaks. Among other things, volatility and weakness in Plexus' stock price could mean that investors will not be able to sell their shares at or above the prices that they paid. Volatility and weakness could also impair Plexus' ability in the future to offer common stock or convertible securities as a source of additional capital and/or as consideration in the acquisition of other businesses. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in foreign exchange and interest rates. To reduce such risks, we selectively use financial instruments. FOREIGN CURRENCY RISK We do not use derivative financial instruments for speculative purposes. Our policy is to selectively hedge our foreign currency denominated transactions in a manner that substantially offsets the effects of changes in foreign currency exchange rates. Presently, we use foreign currency contracts to hedge only those currency exposures associated with certain assets and liabilities denominated in non-functional currencies. Corresponding gains and losses on the underlying transaction generally offset the gains and losses on these foreign currency hedges. Our international operations create potential foreign exchange risk. As of September 30, 2004, we had no foreign currency contracts outstanding. 26 Our percentages of transactions denominated in currencies other than the U.S. dollar for the indicated periods were as follows:
Fiscal year ------------------------------ 2004 2003 2002 ------------------------------ Net Sales 10% 8% 9% Total Costs 14% 11% 11%
INTEREST RATE RISK We have financial instruments, including cash equivalents and short-term investments, which are sensitive to changes in interest rates. We consider the use of interest-rate swaps based on existing market conditions. We currently do not use any interest-rate swaps or other types of derivative financial instruments to hedge interest rate risk. The primary objective of our investment activities is to preserve principal, while maximizing yields without significantly increasing market risk. To achieve this, we maintain our portfolio of cash equivalents and short-term investments in a variety of highly rated securities, money market funds and certificates of deposit and limit the amount of principal exposure to any one issuer. Our only material interest rate risk is associated with our secured credit facility. A 10 percent change in our weighted average interest rate on our average long-term borrowings would have had only a nominal impact on net interest expense in fiscal 2004, 2003 and 2002. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 15 on page 28. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures: The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company's principal executive officer and principal financial officer have reviewed and evaluated, with the participation of the Company's management, the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in the Company's periodic filings under the Exchange Act. Internal Control Over Financial Reporting: As previously disclosed, the Company commenced a phased implementation of a global Enterprise Resource Planning (ERP) platform in fiscal 2001. Through September 30, 2004, four facilities have been converted to the ERP platform, including one facility converted in fiscal 2004. The conversion of the facility in fiscal 2004 and the related changes to the Company's internal control (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) did not have a material effect on, nor is it reasonably likely to materially affect, the Company's internal control over financial reporting. There have been no other changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company is currently undergoing a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Compliance is required for our fiscal year-end September 30, 2005. This effort includes documenting and testing of internal controls. During the course of these activities, the Company has identified certain internal control issues which management believes should be improved. The Company's review continues, but to date the Company has not identified any material weaknesses in its internal control as defined by the Public Company Accounting Oversight Board. The Company is nonetheless making improvements to its internal controls over financial 27 reporting as a result of its review efforts. These planned improvements include additional information technology system controls, further formalization of policies and procedures, improved segregation of duties and additional monitoring controls. The matters noted herein have been discussed with the Company's Audit Committee. The Company believes that it is taking the necessary steps to monitor and maintain appropriate internal control during periods of change. ITEM 9B. OTHER INFORMATION. On September 17, 2004, the Board's Compensation Committee approved the Plexus 2005 Variable Incentive Compensation Plan (the "2005 Plan"). The 2005 Plan provides for incentive bonuses to executive officers based on goals set for corporation and the individual for fiscal 2005. (Another incentive plan covers key salaried employees.) Although different goals are set for fiscal 2005, the 2005 Plan is otherwise substantially similar in operation and concept to the 2004 Incentive Compensation Plan that was in effect for fiscal 2004. The 2005 Plan is filed as an exhibit to this report. On November 18, 2004, the Board of Directors approved a change in directors' compensation. The annual board fee and annual fees for committee chairs were increased. Meeting fees were unchanged. The summary of the changes and new compensation structure was prepared on December 7, 2004; the summary is filed as an exhibit to this report. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information in response to this item is incorporated herein by reference to "Election of Directors" in the Registrant's Proxy Statement for its 2005 Annual Meeting of Shareholders ("2005 Proxy Statement") and from "Security Ownership of Certain Beneficial Owners and Management--Section 16(a) Beneficial Ownership Reporting Compliance" in the 2005 Proxy Statement and "Executive Officers of the Registrant" in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to "Election of Directors - Directors' Compensation" and "Executive Compensation" in the 2005 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to "Security Ownership of Certain Beneficial Owners and Management" and Executive Compensation - Equity Compensation Plan Information" in the 2005 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION Incorporated herein by reference to "Certain Transactions" in the 2005 Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Incorporated herein by reference to the subheading "Fees and Services" under "Auditors" in the 2005 Proxy Statement. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed Financial Statements and Financial Statement Schedules. See following list of Financial Statements and Financial Statement Schedules on page 29. (b) Exhibits. See Exhibit Index included as the last page of this report, which index is incorporated herein by reference 28 PLEXUS CORP. LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES SEPTEMBER 30, 2004
CONTENTS PAGES - -------- ----- Report of Independent Registered Public Accounting Firm .................................... 30 Consolidated Financial Statements: Consolidated Statements of Operations for the years ended September 30, 2004, 2003 and 2002 .................................................. 31 Consolidated Balance Sheets as of September 30, 2004 and 2003....................... 32 Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the years ended September 30, 2004, 2003 and 2002............................... 33 Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2003 and 2002................................................... 34 Notes to Consolidated Financial Statements ................................................. 35-55 Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 2004, 2003 and 2002................................................... 56
29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Plexus Corp.: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Plexus Corp. and its subsidiaries at September 30, 2004 and September 30, 2003, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective October 1, 2002. PricewaterhouseCoopers LLP Milwaukee, WI November 17, 2004 30 PLEXUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2004 2003 2002 ---- ---- ---- Net sales $ 1,040,858 $ 807,837 $ 883,603 Cost of sales 954,080 754,872 802,283 ----------- --------- ---------- Gross profit 86,778 52,965 81,320 Operating expenses: Selling and administrative expenses 68,259 65,152 66,921 Amortization of goodwill - - 5,203 Restructuring and impairment costs 9,303 59,344 12,581 Acquisition and merger costs - - 251 ----------- --------- ---------- 77,562 124,496 84,956 ----------- --------- ---------- Operating income (loss) 9,216 (71,531) (3,636) Other income (expense): Interest expense (3,080) (2,817) (3,821) Miscellaneous 1,475 2,624 1,631 ----------- --------- ---------- Income (loss) before income taxes and cumulative effect of change in accounting for goodwill 7,611 (71,724) (5,826) Income tax expense (benefit) 39,191 (27,228) (1,753) ----------- --------- ---------- Loss before cumulative effect of change in accounting for goodwill (31,580) (44,496) (4,073) Cumulative effect of change in accounting for goodwill, net of income tax benefit of $4,755 - (23,482) - ----------- --------- ---------- Net loss $ (31,580) $ (67,978) $ (4,073) =========== ========= ========== Earnings per share: Basic: Loss before cumulative effect of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10) Cumulative effect of change in accounting for goodwill - (0.56) - ----------- --------- ---------- Net loss $ (0.74) $ (1.61) $ (0.10) =========== ========= ========== Diluted: Loss before cumulative effect of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10) Cumulative effect of change in accounting for goodwill - (0.56) - ----------- --------- ---------- Net loss $ (0.74) $ (1.61) $ (0.10) =========== ========= ========== Weighted average shares outstanding: Basic 42,961 42,284 41,895 =========== ========= ========== Diluted 42,961 42,284 41,895 =========== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. 31 PLEXUS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2004 AND 2003 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2004 2003 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 40,924 $ 58,993 Short-term investments 4,005 19,701 Accounts receivable, net of allowances of $2,000 and $4,100, respectively 148,301 111,125 Inventories 173,518 136,515 Deferred income taxes 1,727 23,723 Prepaid expenses and other 5,972 8,326 -------- -------- Total current assets 374,447 358,383 Property, plant and equipment, net 129,586 131,510 Goodwill 34,179 32,269 Deferred income taxes - 24,921 Other 7,496 5,971 -------- -------- Total assets $545,708 $553,054 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations $ 811 $ 958 Accounts payable 100,588 91,445 Customer deposits 11,952 14,779 Accrued liabilities: Salaries and wages 26,050 17,133 Other 19,686 23,753 -------- -------- Total current liabilities 159,087 148,068 Capital lease obligations, net of current portion 23,160 23,502 Other liabilities 12,048 10,468 Commitments and contingencies (Notes 9 and 12) - - Shareholders' equity: Preferred stock, $.01 par value, 5,000 shares authorized, none issued or outstanding - - Common stock, $.01 par value, 200,000 shares authorized, and 43,184 and 42,607 issued and outstanding, respectively 432 426 Additional paid-in capital 267,925 261,214 Retained earnings 71,260 102,840 Accumulated other comprehensive income 11,796 6,536 -------- -------- 351,413 371,016 -------- -------- Total liabilities and shareholders' equity $545,708 $553,054 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 32 PLEXUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002 (IN THOUSANDS)
Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Shares Amount Capital Earnings Income (Loss) Total ------ ------ ---------- -------- --------------- --------- BALANCES, OCTOBER 1, 2001 41,757 $ 418 $251,932 $ 174,891 $ (389) $ 426,852 Comprehensive income (loss): Net loss - - - (4,073) - (4,073) Foreign currency hedges and translation adjustments - - - - 3,277 3,277 Other - - - - (21) (21) --------- Total comprehensive loss (817) Issuance of common stock under Employee Stock Purchase Plan 132 1 2,398 - - 2,399 Exercise of stock options, including tax benefits 141 1 2,254 - - 2,255 -------- -------- -------- --------- --------- --------- BALANCES, SEPTEMBER 30, 2002 42,030 420 256,584 170,818 2,867 430,689 Comprehensive income (loss): Net loss - - - (67,978) - (67,978) Foreign currency hedges and translation adjustments - - - - 3,667 3,667 Other - - - - 2 2 --------- Total comprehensive loss (64,309) Issuance of common stock under Employee Stock Purchase Plan 253 3 1,939 - - 1,942 Exercise of stock options, including tax benefits 324 3 2,691 - - 2,694 -------- -------- -------- --------- --------- --------- BALANCES, SEPTEMBER 30, 2003 42,607 426 261,214 102,840 6,536 371,016 Comprehensive income (loss): Net loss - - - (31,580) - (31,580) Foreign currency translation adjustments - - - - 5,260 5,260 --------- Total comprehensive loss (26,320) Issuance of common stock under Employee Stock Purchase Plan 186 2 1,971 - - 1,973 Exercise of stock options, including tax benefits 391 4 4,740 - - 4,744 -------- -------- -------- --------- --------- --------- BALANCES, SEPTEMBER 30, 2004 43,184 $ 432 $267,925 $ 71,260 $ 11,796 $ 351,413 ======== ======== ======== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 33 PLEXUS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002 (IN THOUSANDS)
2004 2003 2002 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (31,580) $(67,978) $ (4,073) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 25,449 27,135 36,604 Cumulative effect of change in accounting for goodwill - 28,237 - Non-cash goodwill and asset impairments 2,106 38,046 4,890 Net (repurchases) sales under asset securitization facility - (16,612) (6,305) Income tax benefit of stock option exercises 1,508 926 984 Provision for accounts receivable allowances - 438 2,994 Deferred income taxes 46,946 (27,006) (4,352) Changes in assets and liabilities: Accounts receivable (35,492) 1,861 33,444 Inventories (35,700) (41,852) 50,610 Prepaid expenses and other 1,230 6,309 (3,462) Accounts payable 1,526 23,554 7,504 Customer deposits (2,847) 868 (2,152) Accrued liabilities and other 5,502 6,121 13,769 --------- -------- --------- Cash flows provided by (used in) operating activities (21,352) (19,953) 130,455 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments (86,903) (105,236) (52,550) Sales and maturities of short-term investments 102,599 138,560 20,300 Payments for property, plant and equipment (18,086) (22,372) (30,760) Proceeds on sale of property, plant and equipment - 2,665 561 Payments for business acquisitions, net of cash acquired - - (41,985) --------- -------- --------- Cash flows provided by (used in) investing activities (2,390) 13,617 (104,434) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from debt 159,752 - 190,437 Payments on debt and capital lease obligations (160,753) (2,749) (242,797) Proceeds from exercise of stock options 3,236 1,768 1,271 Issuances of common stock under Employee Stock Purchase Plan 1,973 1,942 2,399 --------- -------- --------- Cash flows provided by (used in) financing activities 4,208 961 (48,690) --------- -------- --------- Effect of foreign currency translation on cash 1,465 1,021 1,425 --------- -------- --------- Net decrease in cash and cash equivalents (18,069) (4,354) (21,244) Cash and cash equivalents, beginning of year 58,993 63,347 84,591 --------- -------- --------- Cash and cash equivalents, end of year $ 40,924 $ 58,993 $ 63,347 ========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 34 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Description of Business: Plexus Corp. together with its subsidiaries, (the "Company") provides product realization services to original equipment manufacturers (OEMs) and other technology companies in the networking/ datacommunications/telecom, medical, industrial/commercial, computer, and transportation/other industries. The Company provides advanced electronics design, manufacturing and testing services to its customers with a focus on complex, high technology and high reliability products. The Company offers its customers the ability to outsource all stages of product realization, including: development and design services, materials procurement and management, prototyping, and new product introduction, testing, manufacturing, configuration, logistics and test/repair. We provide most of our contract manufacturing services on a turnkey basis, which means we procure some or all of the materials required for product assembly. We provide some services on a consignment basis, which means that the customer supplies materials necessary for product assembly. Turnkey services include material procurement and warehousing, in addition to manufacturing, and involve greater resource investment than consignment services. Other than certain test equipment used for internal manufacturing, we do not design or manufacture our own proprietary products. Consolidation Principles: The consolidated financial statements include the accounts of Plexus Corp. and its subsidiaries. All significant intercompany transactions have been eliminated. Cash Equivalents and Short-Term Investments: Cash equivalents are highly liquid investments purchased with an original maturity of less than three months. Short-term investments include investment-grade short-term debt instruments with original maturities greater than three months. Short-term investments are generally comprised of securities with contractual maturities greater than one year but with optional or early redemption provisions or rate reset provisions within one year. Investments in debt securities are classified as "available-for-sale." Such investments are recorded at fair value as determined from quoted market prices, and the cost of securities sold is determined on the specific identification method. If material, unrealized gains or losses are reported as a component of comprehensive income or loss, net of the related income tax effect. For fiscal 2004, 2003 and 2002, unrealized or realized gains and losses were not material. As of September 30, 2004 and 2003, cash and cash equivalents included the following securities (in thousands):
2004 2003 ---- ---- Money market funds and other $15,797 $22,757 U.S. corporate and bank debt 16,297 28,877 State and municipal securities - 4,000 ------- ------- $32,094 $55,634 ======= =======
Short-term investments as of September 30, 2004 and 2003 consist primarily of state and municipal securities. Inventories: Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Valuing inventories at the lower of cost or market requires the use of estimates and judgment. Customers may cancel their orders, change production quantities or delay production for a number of reasons that are beyond the Company's control. Any of these, or certain additional actions, could impact the valuation of inventory. Any actions taken by the Company's customers that could impact the value of its inventory are considered when determining the lower of cost or market valuations. Property, Plant and Equipment and Depreciation: These assets are stated at cost. Depreciation, determined on the straight-line method, is based on lives assigned to the major classes of depreciable assets as follows: 35 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Buildings and improvements 15-50 years Machinery and equipment 3-10 years Computer hardware and software 3-10 years
Certain facilities and equipment held under capital leases are classified as property, plant and equipment and amortized using the straight-line method over the lease terms and the related obligations are recorded as liabilities. Lease amortization is included in depreciation expense (see Note 3) and the financing component of the lease payments is classified as interest expense. For the capitalization of software costs, the Company follows Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed for Internal Use." The Company capitalizes significant costs incurred in the acquisition or development of software for internal use, including the costs of the software, consultants and payroll and payroll related costs for employees directly involved in developing internal use computer software once the final selection of the software is made (see Note 3). Costs incurred prior to the final selection of software and costs not qualifying for capitalization are expensed as incurred. Goodwill and Other Intangible Assets: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" effective October 1, 2002. Under SFAS No. 142, beginning October 1, 2002, the Company no longer amortizes goodwill and intangible assets with indefinite useful lives, but instead, tests those assets for impairment at least annually, with any related loss recognized in earnings when incurred. Recoverability of goodwill is measured at the reporting unit level. The Company's goodwill was assigned to three reporting units: San Diego, California ("San Diego"), Juarez, Mexico ("Juarez") and Kelso, Scotland and Maldon, England ("United Kingdom"). As of September 30, 2004, only the Juarez and United Kingdom reporting units had goodwill remaining. SFAS No. 142 required the Company to perform a transitional goodwill impairment evaluation that required the Company to perform an assessment of whether there was an indication of goodwill impairment as of the date of adoption. The Company completed the evaluation and concluded that it had goodwill impairments related to San Diego and Juarez, since the estimated fair value based on expected future discounted cash flows to be generated from each reporting unit was significantly less than their respective carrying value. The Company then compared the respective carrying amounts of San Diego's and Juarez's goodwill to the implied fair value of each reporting unit's respective goodwill. The implied fair value was determined by allocating the fair value to each respective reporting unit's assets and liabilities in a manner similar to a purchase price allocation for an acquired business. Both values were measured at the date of adoption. The Company identified $28.2 million of transitional impairment losses ($23.5 million, net of income tax benefits) related to San Diego and Juarez, which were recognized as a cumulative effect of a change in accounting for goodwill in the Consolidated Statements of Operations. The Company is required to perform goodwill impairment tests at least on an annual basis, for which the Company selected the third quarter of each fiscal year, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. In the first quarter of fiscal 2003, $5.6 million of goodwill was impaired as a result of the Company's decision to close the San Diego facility (see Note 10). The Company's fiscal year 2004 and 2003 annual impairment tests did not result in any further impairment. However, no assurances can be given that future impairment tests of goodwill will not result in an impairment. The following sets forth a reconciliation of net income (loss) and earnings per share information for fiscal 2004, 2003 and 2002, adjusted to exclude goodwill amortization, net of income taxes (in thousands, except per share data): 36 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2004 2003 2002 ---- ---- ---- Reported loss before cumulative effect of change in accounting for goodwill $(31,580) $(44,496) $ (4,073) Add back: goodwill amortization, net of income taxes - - 4,375 -------- -------- ---------- Adjusted loss before cumulative effect of change in accounting for goodwill (31,580) (44,496) 302 Cumulative effect of change in accounting for goodwill, net of income taxes - (23,482) - -------- -------- ---------- Adjusted net income (loss) $(31,580) $(67,978) $ 302 ======== ======== ========== Basic weighted average common shares outstanding 42,961 42,284 41,895 Dilutive effect of stock options - - 1,223 -------- -------- ---------- Diluted weighted average shares outstanding 42,961 42,284 43,118 ======== ======== ========== Basic earnings per share: Reported loss before cumulative effect of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10) Add back: goodwill amortization, net of income taxes - - 0.10 -------- -------- ---------- Adjusted income (loss) before cumulative effect of change in accounting for goodwill (0.74) (1.05) - Cumulative effect of change in accounting for goodwill, net of income taxes - (0.56) - -------- -------- ---------- Adjusted net income (loss) $ (0.74) $ (1.61) $ - ======== ======== ========== Diluted earnings per share: Reported loss before cumulative effect of change in accounting for goodwill $ (0.74) $ (1.05) $ (0.10) Add back: goodwill amortization, net of income taxes - - 0.10 -------- -------- ---------- Adjusted income (loss) before cumulative effect of change in accounting for goodwill (0.74) (1.05) - Cumulative effect of change in accounting for goodwill, net of income taxes - (0.56) - -------- -------- ---------- Adjusted net income (loss) $ (0.74) $ (1.61) $ - ======== ======== ==========
The changes in the carrying amount of goodwill for fiscal years ended September 30, 2004 and 2003 are as follows (in thousands): BALANCE AS OF OCTOBER 1, 2002 $ 64,957 Cumulative effect of change in accounting for goodwill (28,237) Impairment charge (See Note 10) (5,595) Foreign currency translation adjustments 1,144 -------- BALANCE AS OF SEPTEMBER 30, 2003 32,269 Foreign currency translation adjustments 1,910 -------- BALANCE AS OF SEPTEMBER 30, 2004 $ 34,179 ========
37 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The Company has a nominal amount of identifiable intangibles that are subject to amortization. These intangibles relate to patents with useful lives of twelve years. The Company has no intangibles, except goodwill, that are not subject to amortization. During fiscal 2004, there were no additions to intangible assets. Intangible asset amortization expense was nominal for fiscal 2004, 2003 and 2002. Impairment of Long-Lived Assets: The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" effective October 1, 2002. SFAS No. 144 modifies and expands the financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill, which is specifically addressed in SFAS No. 142. SFAS No. 144 maintains the requirement that an impairment loss be recognized for a long-lived asset to be held and used if its carrying value is not recoverable from its undiscounted cash flows, with the recognized impairment being the difference between the carrying amount and fair value of the asset. With respect to long-lived assets to be disposed of other than by sale, SFAS No. 144 requires that the asset be considered held and used until it is actually disposed of, but requires that its depreciable life be revised in accordance with APB Opinion No. 20 "Accounting Changes." Impairment charges recorded in fiscal 2003 against the carrying value of certain of the Company's long-lived assets are discussed in Note 10. The Company reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property, plant and equipment is measured by comparing its carrying value to the projected cash flows the property, plant and equipment are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value of the property exceeds its fair market value. The impairment analysis is based on significant assumptions of future results made by management, including sales and cash flow projections. Circumstances that may lead to impairment of property, plant and equipment include decreases in future performance or industry demand and the restructuring of the Company's operations. Revenue Recognition: Net sales from manufacturing services are generally recognized upon shipment of the manufactured product to the Company's customers, under contractual terms, which are generally FOB shipping point. Upon shipment, title transfers and the customer assumes risks and rewards of ownership of the product. Generally, there are no formal customer acceptance requirements or further obligations related to manufacturing services; if such requirements or obligations exist, then a sale is recognized at the time when such requirements are completed and such obligations are fulfilled. Net sales from engineering design and development services, which are generally performed under contracts of twelve months or less duration, are recognized as costs are incurred utilizing the percentage-of-completion method; any losses are recognized when anticipated. Progress towards completion of product design and development contracts is based on units of work for labor content and costs incurred for component content. Net sales from engineering design and development services were less than ten percent of total sales in fiscal 2004, 2003 and 2002. Sales are recorded net of estimated returns of manufactured product based on management's analysis of historical returns, current economic trends and changes in customer demand. Net sales also include amounts billed to customers for shipping and handling. The corresponding shipping and handling costs are included in cost of sales. Restructuring Costs: From time to time, the Company has recorded restructuring costs in response to the reduction in its sales levels and reduced capacity utilization. These restructuring charges included employee severance and benefit costs, costs related to plant closings, including leased facilities that will be abandoned (and subleased, as applicable), and impairment of equipment. Prior to January 1, 2003, severance and benefit costs were recorded in accordance with Emerging Issues Task Force ("EITF") 94-3. For leased facilities that were abandoned and subleased, the estimated lease loss was accrued for future remaining lease payments subsequent to abandonment, less any estimated sublease income. As of September 30, 2004, the significant facilities which the Company plans to sublease have not yet been subleased and, accordingly, the Company's estimates of expected sublease income could change based on factors that affect its ability to sublease those facilities such as general economic conditions and the real estate market, among others. 38 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Subsequent to December 31, 2002, costs associated with a restructuring activity are recorded in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The timing and related recognition of recording severance and benefit costs that are not presumed to be an ongoing benefit as defined in SFAS No. 146, depends on whether employees are required to render service until they are terminated in order to receive the termination benefits and, if so, whether employees will be retained to render service beyond a minimum retention period. The Company concluded that it had a substantive severance plan based upon past severance practices; therefore, certain severance and benefit costs were recorded in accordance with SFAS No. 112, "Employer's Accounting for Postemployment Benefits," which resulted in the recognition of a liability as the severance and benefit costs arose from an existing condition or situation and the payment was both probable and reasonably estimated. For leased facilities that will be abandoned and subleased, a liability for the future remaining lease payments subsequent to abandonment, less any estimated sublease income that could be reasonably obtained for the property, is recognized and measured at its fair value. For contract termination costs, including costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity, a liability for future remaining payments under the contract is recognized and measured at its fair value. The recognition of restructuring costs requires that the Company make certain judgments and estimates regarding the nature, timing and amount of cost associated with the planned exit activity. If actual results in exiting these facilities differ from the Company's estimates and assumptions, the Company may be required to revise the estimates of future liabilities, requiring the recording of additional restructuring costs or the reduction of liabilities already recorded. At the end of each reporting period, the Company evaluates the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed exit plans. Income Taxes: Deferred income taxes are provided for differences between the bases of assets and liabilities for financial and income tax reporting purposes. The Company records a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized (see Note 5). Realization of deferred income tax assets is dependent on our ability to generate future taxable income. Foreign Currency: For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated at exchange rates in effect at year-end, with net sales, expenses and cash flows translated at the monthly exchange rates. Adjustments resulting from translation of the financial statements are recorded as a component of accumulated other comprehensive income. Exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved and remeasurement adjustments for foreign operations where the U.S. dollar is the functional currency are included in the statement of operations. Exchange gains and losses on foreign currency transactions were not significant for the years ended September 30, 2004, 2003 and 2002, respectively. Derivatives: The Company periodically enters into derivative contracts, primarily foreign currency forward, call and put contracts which are designated as cash-flow hedges. The changes in fair value of these contracts, to the extent the hedges are effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. These amounts were not material during fiscal 2004, 2003 and 2002. Earnings Per Share: The computation of basic earnings per common share is based upon the weighted average number of common shares outstanding and net income (loss). The computation of diluted earnings per common share reflects additional dilution from stock options, unless such shares are antidilutive. Stock-based Compensation: In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of SFAS No. 123" was issued. SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair-value-based method of accounting for stock-based employee compensation and is effective for fiscal years ending after December 15, 2002. In addition, SFAS No. 148 requires prominent disclosures in both annual and interim financial statements about the effects on reported net income of an entity's method of accounting for stock-based employee compensation. The disclosure provisions were effective for the Company in the second 39 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED quarter of fiscal 2003. The Company did not effect a voluntary change in accounting to the fair value method, and, accordingly, the adoption of SFAS No. 148 did not have a significant impact on the Company's results of operations or financial position. The Company accounts for its stock option plans under the guidelines of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense related to the stock option plans has been recognized in the Consolidated Statements of Operations. The Company's stock-based employee compensation plans are more fully described in Note 11. The following sets forth a reconciliation of net loss and earnings per share information for fiscal 2004, 2003 and 2002 had the Company recognized compensation expense based on the fair value at the grant date for awards under the plans, estimated at the date of grant using the Black-Scholes option pricing method (in thousands, except per share amounts).
Years ended September 30, ------------------------- 2004 2003 2002 ---- ---- ---- Net loss as reported $ (31,580) $(67,978) $ (4,073) Add: stock-based employee compensation expense included in reported net loss, net of related income tax effect - - - Deduct: total stock-based employee compensation expense determined under fair value based method, net of related tax effects (9,542) (9,042) (9,947) ---------- -------- --------- Proforma net loss $ (41,122) $(77,020) $ (14,020) ========== ======== ========= Earnings per share: Basic, as reported $ (0.74) $ (1.61) $ (0.10) ========== ======== ========= Basic, proforma $ (0.96) $ (1.82) $ (0.33) ========== ======== ========= Diluted, as reported $ (0.74) $ (1.61) $ (0.10) ========== ======== ========= Diluted, proforma $ (0.96) $ ( 1.82) $ (0.33) ========== ======== ========= Weighted average shares: Basic 42,961 42,284 41,895 ========== ======== ========= Diluted 42,961 42,284 41,895 ========== ======== =========
New Accounting Pronouncements: In November 2002, the EITF reached a consensus regarding EITF Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." The consensus addresses not only when and how an arrangement involving multiple deliverables should be divided into separate units of accounting, but also how the arrangement's consideration should be allocated among separate units. The pronouncement was effective for the Company commencing with its first quarter of fiscal year 2004 but did not have a material impact on its consolidated results of operations or financial position. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51," which provides guidance on the identification of and reporting for variable interest entities. In December 2003, the FASB issued a revised Interpretation No. 46, which expands the criteria for consideration in determining whether a variable interest entity should be consolidated. Interpretation No. 46 became effective for the Company in the second fiscal quarter of 2004. The Company's adoption of Interpretation No. 46 did not have an impact on its consolidated results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial 40 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED instruments that are within the scope of the Statement, which previously were often classified as equity, must now be classified as liabilities. In November 2003, Financial Accounting Standards Board Staff Position ("FSP") No. SFAS 150-3 deferred indefinitely the effective date of SFAS No. 150 for applying the provisions of the Statement for certain mandatorily redeemable non-controlling interests. However expanded disclosures are required during the deferral period. The Company does not have financial instruments with mandatorily redeemable non-controlling interests. In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which supercedes SAB No. 101, "Revenue Recognition in Financial Statements." SAB No. 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issues Task Force (EITF) 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB No. 104 rescinds the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" document issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. The adoption of this bulletin did not have a significant impact on the Company's consolidated results of operations or financial position. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Fair Value of Financial Instruments: Accounts payable and accrued liabilities are reflected in the consolidated financial statements at cost because of the short-term duration of these instruments. Accounts receivables are reflected at net realizable value based on anticipated losses due to potentially uncollectible balances. Anticipated losses are based on management's analysis of historical losses and changes in customer credit status. The fair value of capital lease obligations is approximately $25.4 million and $26.0 million as of September 30, 2004 and 2003, respectively. The Company uses quoted market prices when available or discounted cash flows to calculate these fair values. Business and Credit Concentrations: Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, short-term investments and trade accounts receivable. The Company's cash, cash equivalents and short-term investments are managed by recognized financial institutions that follow the Company's investment policy. Such investment policy limits the amount of credit exposure in any one issue and the maturity date of the investment securities that typically comprise investment grade short-term debt instruments. Concentrations of credit risk in accounts receivable resulting from sales to major customers are discussed in Note 13. The Company, at times, requires advanced cash deposits for services performed. The Company also closely monitors extensions of credit. Related Party Transactions: The Company holds a minority equity interest in MemoryLink Corp. ("MemoryLink"). The minority equity interest represents less than a ten percent ownership interest in MemoryLink and is accounted for under the cost method. The Company had nominal sales to MemoryLink during fiscal 2004 and 2003 and no sales in fiscal 2002. The Company received the minority equity interest in fiscal 2002, as settlement for accounts receivable that had been previously written off. Due to uncertainty regarding MemoryLink's financial viability, the Company recorded the minority equity interest at a zero value. Reclassifications: Certain amounts in prior years' consolidated financial statements have been reclassified to conform to the 2004 presentation. 41 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. INVENTORIES Inventories as of September 30, 2004 and 2003, consist of (in thousands):
2004 2003 ---- ---- Assembly parts $ 115,094 $ 88,562 Work-in-process 46,382 41,514 Finished goods 12,042 6,439 --------- ---------- $ 173,518 $ 136,515 ========= ==========
3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of September 30, 2004 and 2003, consist of (in thousands):
2004 2003 ---- ---- Land, buildings and improvements $ 73,813 $ 66,614 Machinery, and equipment 119,761 119,788 Computer hardware and software 58,512 57,576 Construction in progress 13,812 7,079 --------- --------- 265,898 251,057 Less accumulated depreciation and amortization 136,312 119,547 --------- --------- $ 129,586 $ 131,510 ========= =========
As of September 30, 2004 and 2003, computer hardware and software includes $24.1 million and $21.9 million, respectively, related to a new enterprise resource planning platform ("ERP"). As of September 30, 2004 and 2003, construction in process includes $6.3 million and $6.1 million, respectively, of software implementation costs related to the new ERP platform. The conversion timetable and future project scope remain subject to change based upon our evolving needs and sales levels. Fiscal 2004, 2003 and 2002 amortization of the new ERP platform totaled $2.7, $0.7 million and $0, respectively. Assets held under capital leases and included in property, plant and equipment as of September 30, 2004 and 2003, consist of (in thousands):
2004 2003 ---- ---- Buildings and improvements $ 23,945 $ 23,400 Machinery and equipment 1,775 1,834 -------- -------- 25,720 25,234 Less accumulated amortization 3,914 3,240 -------- -------- $ 21,806 $ 21,994 ======== ========
The above table includes a manufacturing facility in San Diego, which was closed during fiscal 2003 (see Note 10) and is no longer used for operating purposes. The Company subleased a portion of the facility during fiscal 2003 and is attempting to sublease the remaining portion. The portion of the San Diego facility that is subleased is recorded at the net present value of the sublease income. The portion of the facility awaiting sublease is recorded at the net present value of the estimated sublease income. The net book value of the subleased portion of the San Diego facility is reduced on a monthly basis by the amortization of the sublease income. No amortization is recorded on the vacant portion of the San Diego facility. The net book value of the San Diego facility, adjusted for impairment, is approximately $15.4 million as of September 30, 2004. Amortization of assets held under capital leases totaled $0.7, $1.6 million and $2.7 million for fiscal 2004, 2003 and 2002, respectively. There were no capital lease additions in fiscal 2004 or 2003. Capital lease additions of $1.5 million for fiscal 2002 have been treated as non-cash transactions for purposes of the Consolidated Statements of Cash Flows. 42 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED As of September 30, 2004, accounts payable includes approximately $6.5 million related to the purchase of property, plant and equipment and have been treated as non-cash transactions for purposes of the Consolidated Statement of Cash Flow. 4. CAPITAL LEASE OBLIGATIONS AND OTHER FINANCING Capital lease obligations as of September 30, 2004 and 2003, consist of (in thousands):
2004 2003 ---- ---- Capital lease obligations with a weighted average interest rate of 9.2% for both years $ 23,971 $ 24,460 Less current portion 811 958 -------- -------- $ 23,160 $ 23,502 ======== ========
The capital lease obligations are for certain equipment and manufacturing facilities, located in the UK and San Diego, which have been recorded as capital leases and expire on various dates through 2016 subject to renewal options. The aggregate scheduled maturities of the Company's debt and its obligations under capital leases as of September 30, 2004, are as follows (in thousands): 2005 $ 2,980 2006 2,961 2007 3,036 2008 3,112 2009 3,190 Thereafter 27,726 -------- 43,005 Interest portion of capital leases 19,034 -------- Total $ 23,971 ========
On October 22, 2003, the Company entered into a secured three-year revolving credit facility (the "Secured Credit Facility") with a group of banks that allows the Company to borrow up to $100 million. Borrowings under the Secured Credit Facility may be either through revolving or swing loans or letter of credit obligations. The Secured Credit Facility is secured by substantially all of the Company's domestic working capital assets and a pledge of 65 percent of the stock of the Company's foreign subsidiaries. Interest on borrowings varies with usage and begins at the Prime rate, as defined, or LIBOR plus 1.5 percent. The Company is also required to pay an annual commitment fee of 0.5 percent of the unused credit commitment. The Secured Credit Facility contains certain financial covenants, which include a maximum total leverage ratio, a $40.0 million minimum balance of domestic cash or marketable securities, a minimum tangible net worth and a minimum adjusted EBITDA, as defined in the agreement. The Company amended the Secured Credit Facility in October 2003, and in April, July, August and November 2004, to revise certain terms and covenants (the "Amended Secured Credit Facility"). The most significant amendments occurred in July 2004, and included an increase in the maximum borrowing amount to $150 million from $100 million, an approximate one-year extension of the maturity of the Amended Secured Credit Facility to October 31, 2007, elimination of the requirement to maintain a $40 million minimum balance of domestic cash or marketable securities, modification of a minimum adjusted EBITDA and a maximum total leverage ratio (not to exceed 2.5 times adjusted EBITDA), all as defined in the amended agreement. In addition, the interest rate on borrowings will vary depending upon the Company's then-current total leverage ratio; before amendment, the rate varied with usage. Origination fees and expenses totaled approximately $1.2 million, which have been deferred and are being amortized to interest expense over the term of the Amended Secured Credit Facility. Effective December 26, 2002, the Company terminated its prior credit facility ("Old Credit Facility"). No amounts were outstanding during the first quarter of fiscal 2003 prior to the termination of the Old Credit Facility. Termination of the Old Credit Facility was occasioned by anticipated noncompliance with the minimum interest expense coverage ratio covenant as of December 31, 2002, as a result of restructuring costs incurred in the 43 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED first quarter of fiscal 2003 (see Note 10). As a result of the termination of the Old Credit Facility, the Company wrote off unamortized deferred financing costs of approximately $0.5 million. In fiscal 2001, the Company entered into an amended agreement to sell up to $50 million of trade accounts receivable without recourse to a wholly owned limited-purpose subsidiary of the Company. In September 2003, the asset securitization facility expired; therefore, the Company did not incur financing costs under it in fiscal 2004. During fiscal 2003 and 2002, the Company incurred financing costs of $0.4 million and $0.6 million, respectively, under the former asset securitization facility. Net borrowings/(repayments) under the agreement are included in the cash flows from operating activities in the accompanying Consolidated Statements of Cash Flows. Cash paid for interest in fiscal 2004, 2003 and 2002 was $3.1 million, $2.8 million and $4.4 million, respectively. 5. INCOME TAXES The domestic and foreign components of income (loss) before income tax expenses for fiscal 2004, 2003 and 2002 consists of (in thousands):
2004 2003 2002 ---- ---- ---- U.S. income (loss) before $ (69) $ (66,823) $ (5,729) income taxes Foreign income (loss) before income taxes 7,680 (4,901) (97) -------- ---------- ---------- $ 7,611 $ (71,724) $ (5,826) ======== ========= ==========
Income tax expense (benefit) for fiscal 2004, 2003 and 2002 consists of (in thousands):
2004 2003 2002 ---- ---- ---- Currently payable (receivable): Federal $ 563 $ 2,096 $ 1,835 State - - 97 Foreign 839 (69) 1,361 -------- ---------- -------- 1,402 2,027 3,293 -------- ---------- -------- Deferred: Federal expense (benefit) 28,531 (25,094) 322 State expense (benefit) 8,253 (3,800) (3,902) Foreign expense (benefit) 1,005 (361) (1,466) -------- ---------- -------- 37,789 (29,255) (5,046) -------- ---------- -------- $ 39,191 $ (27,228) $ (1,753) ======== ========== ========
44 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Following is a reconciliation of the federal statutory income tax rate to the effective income tax rates reflected in the Consolidated Statements of Operations for fiscal 2004, 2003 and 2002:
2004 2003 2002 ---- ---- ---- Federal statutory income tax rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: State income taxes, net of Federal income tax benefit (1.3) 4.2 26.4 Foreign income and tax rate differences (34.7) 0.3 (13.2) Resolution of prior year tax matters and tax 30.3 (1.9) (0.6) contingencies Non-deductible goodwill and merger costs - 0.2 (21.8) Valuation allowance 483.8 - - Other, net 1.9 0.2 4.3 ----- ---- ---- Effective income tax rate 515.0% 38.0% 30.1% ===== ==== ====
The components of the net deferred income tax asset as of September 30, 2004 and 2003, consist of (in thousands):
2004 2003 ---- ---- Deferred income tax assets: Inventories $ 5,182 $ 6,413 Accrued benefits 4,439 4,303 Allowance for bad debts 705 1,438 Loss carryforwards 22,291 36,084 Other 6,229 5,049 -------- -------- Total gross deferred income tax assets 38,846 53,287 Less valuation allowance (36,818) - -------- -------- Net deferred income tax assets 2,028 53,287 Deferred income tax liabilities: Property, plant and equipment 301 4,643 -------- -------- Net deferred income tax asset $ 1,727 $ 48,644 ======== ========
During the fourth quarter of fiscal 2004, the Company established a valuation allowance on all its U.S. deferred income tax assets. SFAS No. 109, "Accounting for Income Taxes", and relevant interpretations of SFAS No. 109, require that a valuation allowance be provided when it is more likely than not that the related income tax assets will not be utilized. Under SFAS No. 109, unless specific exceptions apply, historical operating results are a strong indicator of a company's ability to generate future taxable income. In both fiscal 2003 and 2002, the Company had a net loss. In fiscal 2004, although the Company achieved substantial sales and gross profit improvement, its fiscal 2004 restructuring and impairment actions (see Note 10) resulted in nominal operating income, a net loss in the U.S. for income tax purposes and anticipated additional restructuring charges that will be recorded in fiscal 2005. Consequently, the Company recorded a full valuation allowance on its net U.S. deferred income tax assets in fiscal 2004. The Company will continue to assess the need for a valuation allowance on these deferred income tax assets in the future. The remaining net deferred income tax assets at September 30, 2004 represent only net foreign deferred income tax assets for which realization is considered more likely than not. The Company has been granted tax holidays for its Malaysian and Chinese subsidiaries. These tax holidays expire in 2006 and 2013, respectively, and are subject to certain conditions with which the Company expects to comply. The Company has applied for an extension of its Malaysian tax holiday. The Company does not provide for taxes which would be payable if undistributed earnings of foreign subsidiaries were remitted because the Company considers these earnings to be invested for an 45 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED indefinite period. The aggregate undistributed earnings of the Company's foreign subsidiaries for which a deferred income tax liability has not been recorded is approximately $15.3 million as of September 30, 2004. In October 2004, the Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004 became law in the U.S. This legislation provides for a number of changes in U.S. tax laws. In accordance with SFAS No. 109, effects of this new legislation will be reflected in the Company's financial statements beginning in the period of the law's enactment in October 2004. Management is presently reviewing this new legislation to determine the impacts on Plexus and its operations. As of September 30, 2004, the Company has approximately $135 million of state net operating loss carryforwards that expire between 2007 and 2024 and $43 million of federal net operating loss carryforwards that expire in varying amounts in 2023 and 2024. Cash paid for income taxes in fiscal 2004, 2003 and 2002 was $1.3 million, $0.3 million and $5.2 million, respectively. 6. SHAREHOLDERS' EQUITY Pursuant to Board of Directors' approval, the Company has a common stock buyback program that permits it to acquire up to 6.0 million shares for an amount not to exceed $25.0 million. To date, no shares have been repurchased. Income tax benefits attributable to stock options exercised are recorded as an increase in additional paid-in capital. 7. EARNINGS PER SHARE The following is a reconciliation of the amounts utilized in the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Years ended September 30, ---------------------------------------- 2004 2003 2002 ---- ---- ---- Earnings: Loss before cumulative effect of change in $ (31,580) $ (44,496) $ (4,073) accounting for goodwill Cumulative effect of change in accounting for goodwill, net of income taxes - (23,482) - ---------- ---------- --------- Net loss $ (31,580) $ (67,978) $ (4,073) ========== ========== ========= Basic weighted average common shares outstanding 42,961 42,284 41,895 Dilutive effect of stock options - - - ---------- ---------- --------- Diluted weighted average shares outstanding 42,961 42,284 41,895 ========== ========== ========= Basic earnings per share: Loss before cumulative effect of change in $ (0.74) $ (1.05) $ (0.10) accounting for goodwill Cumulative effect of change in accounting for goodwill, net of income taxes - (0.56) - ---------- ---------- --------- Net loss $ (0.74) $ (1.61) $ (0.10) ========== ========== ========= Diluted earnings per share: Loss before cumulative effect of change in $ (0.74) $ (1.05) $ (0.10) accounting for goodwill Cumulative effect of change in accounting for goodwill, net of income taxes - (0.56) - ---------- ---------- --------- Net loss $ (0.74) $ (1.61) $ (0.10) ========== ========== =========
46 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED For the years ended September 30, 2004, 2003 and 2002, stock options to purchase approximately 3.0 million, 3.2 million and 3.0 million shares of common stock, respectively, were outstanding, but were not included in the computation of diluted earnings per share because their effect would be antidilutive. 8. ACQUISITIONS AND MERGERS Acquisitions: In January 2002, the Company acquired certain assets of MCMS, Inc. ("MCMS"), an electronics manufacturing services provider, for approximately $42 million in cash. The assets purchased from MCMS include manufacturing operations in Penang, Malaysia; Xiamen, China; and Nampa, Idaho. The Company acquired these assets primarily to provide electronic manufacturing services in Asia and increase its customer base. The Company recorded the acquisition utilizing the accounting principles promulgated by SFAS No.'s 141 and 142. The consideration for this acquisition did not include the assumption of any interest-bearing debt but included the assumption of total liabilities of approximately $7.2 million. The Company allocated the purchase price primarily to accounts receivable, inventory and property, plant and equipment, based on a number of factors, including a third-party valuation. The results from MCMS' operations are reflected in the Company's financial statements from the date of acquisition. No goodwill resulted from this acquisition. The Company incurred approximately $0.3 million of acquisition costs during fiscal 2002 associated with the acquisition of the MCMS operations. Due to unique aspects of this acquisition, pro forma financial information is not meaningful and is therefore not presented. The factors leading to this determination included the selective MCMS assets acquired by the Company, the limited assumption of liabilities and the exclusion of certain customer relationships which were formerly significant to MCMS. 9. OPERATING LEASE COMMITMENTS The Company has a number of operating lease agreements primarily involving manufacturing facilities, manufacturing equipment and computerized design equipment. These leases are non-cancelable and expire on various dates through 2016. Rent expense under all operating leases for fiscal 2004, 2003 and 2002 was approximately $11.2 million, $14.1 million and $14.6 million, respectively. Renewal and purchase options are available on certain of these leases. Rental income from subleases amounted to $1.5 million, $1.3 million and $1.0 million in fiscal 2004, 2003 and 2002, respectively. Future minimum annual payments on operating leases are as follows (in thousands):
2005 $14,754 2006 12,731 2007 10,697 2008 7,972 2009 7,318 Thereafter 24,601 ------- $78,073 =======
For certain leased facilities that were abandoned as result of restructuring actions (see Note 10), the Company accrued estimated losses for future remaining lease payments subsequent to abandonment, less any estimated sublease income. The above table of future minimum annual payments on operating leases includes future payments totaling $9.5 million that are reflected as an obligation for lease exit costs as of September 30, 2004 in the accompanying Consolidated Balance Sheets. 10. RESTRUCTURING AND IMPAIRMENT COSTS Fiscal 2004 Restructuring and Impairment Costs: During fiscal 2004, the Company recorded pre-tax restructuring and impairment costs of $9.3 million. The restructuring costs were primarily associated with additional lease obligations for two previously abandoned facilities near Seattle, Washington (the "Seattle facilities"), the planned closure of the Company's Bothell, Washington ("Bothell") engineering and manufacturing facility, the write-down of certain components of the Company's ERP software and the consolidation of a satellite PCB-design office in Hillsboro, Oregon into another Plexus design office. 47 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The originally estimated cost of the closure of the Seattle facilities was included in the Company's fiscal 2003 restructuring actions. The lease-related restructuring costs recorded in fiscal 2003 were based on future lease payments subsequent to abandonment, less estimated sublease income. As of September 30, 2004, the Seattle facilities had not been subleased. Based on the remaining term available to lease these facilities and the weaker than expected conditions in the local real estate market, the Company determined that it would most likely not be able to sublease the Seattle facilities. Accordingly, the Company recorded additional lease-related restructuring costs of $4.2 million in fiscal 2004. The Company also recorded $0.1 million of lease-related restructuring costs on a facility in Neenah, Wisconsin ("Neenah"), which was also included in restructuring actions in fiscal 2003. EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" is applicable to restructuring activities initiated prior to January 1, 2003, including subsequent restructuring cost adjustments related to such activities. As part of our efforts to align the Company's service offering with the evolving preferences of the Company's customers, the Company is in the process of replicating the focused capabilities of its Bothell facility at other Plexus design and manufacturing locations that have higher productivity. The Company currently anticipates transferring key customer programs from the Bothell engineering and manufacturing facility to other Plexus locations primarily in the United States. This restructuring will reduce the Company's capacity by 97,000 square feet and affect approximately 160 employees. The Company currently expects the consolidation efforts will be completed by mid fiscal 2005, subject to customer timelines. In fiscal 2004, the Company incurred restructuring costs of $1.8 million, which consisted of $1.5 million associated with employee terminations and $0.3 million associated with fixed asset impairments. In fiscal 2005, the Company anticipates the Bothell closure will result in additional restructuring costs of $8.2 million, which will consist of $2.2 million associated with employee terminations and $6.0 million associated with the facility lease. The Company recorded a $1.7 million impairment related to certain ERP software, which primarily resulted from the Company's deployment strategy for a shop floor data-collection system. Some elements of the shop-floor data-collection system will not be deployed because the originally anticipated business benefits could not be realized. The remaining elements of the shop floor data-collection system are still under evaluation. A change in the scope of this project could result in impairment of the remaining elements of the shop floor data-collection system. As of September 30, 2004, the capitalized costs of the remaining elements of the shop floor data system total approximately $3.8 million and are included in Property, Plant and Equipment in the accompanying Consolidated Balance Sheet. Lastly, the Company incurred approximately $1.5 million of other restructuring and impairment costs in fiscal 2004 primarily related to the consolidation of the Hillsboro satellite PCB-design office into another Plexus design office. The Hillsboro related restructuring costs were primarily for employee termination costs and contract termination costs associated with leased facilities and software service providers. In fiscal 2005, the Company anticipates incurring an additional $0.1 million of restructuring costs related to employee relocations. Approximately 40 employees were affected by this restructuring. Fiscal 2003 Restructuring and Impairment Costs: During fiscal 2003, the Company recorded pre-tax restructuring and impairment costs totaling $59.3 million. These costs resulted from the Company's actions taken in response to reductions in its end-market demand. These actions included closing the San Diego and Richmond operating sites, the consolidation of several leased facilities, re-focusing the PCB design group, a write-off of goodwill associated with San Diego, the write-down of underutilized assets to fair value at several locations, and the costs associated with reductions in the work force for manufacturing, engineering and corporate. These measures were intended to align the Company's capabilities and resources with its customer demand. The Richmond facility was phased out of operations and sold in September 2003. Production was shifted to other Plexus operating sites in the United States and Mexico. The closure of Richmond resulted in a write-down of the building, a write-down of underutilized assets to fair value, and costs relating to the elimination of the facility's work force. Building impairment charges totaled $3.7 million related to the Richmond facility. 48 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The San Diego facility was closed in May 2003. The closure of San Diego resulted in a write-off of goodwill, the write-down of underutilized assets to fair value, and costs relating to the elimination of the facility's work force. Building impairment charges totaled $6.3 million related to the San Diego facility. During fiscal 2003, goodwill impairment for San Diego totaled approximately $20.4 million, of which $14.8 million was impaired as a result of a transitional impairment evaluation under SFAS No. 142 (see Note 1) and $5.6 million was impaired as a result of the Company's decision to close the facility. Other fiscal year 2003 restructuring actions included the consolidation of several leased facilities, the write-down of underutilized assets to fair value and work force reductions, which primarily affected operating sites such as Juarez; Seattle, Washington; Neenah and the United Kingdom. It also impacted the Company's engineering and corporate organizations. The employee termination and severance costs for fiscal 2003 affected approximately 1,000 employees. Fiscal 2002 Restructuring and Impairment Costs: During fiscal 2002, the Company recorded restructuring and impairment costs totaling $12.6 million. These charges resulted from the Company's actions taken in response to reductions in its sales levels and capacity utilization and included a reduction in work force and the write-off of certain underutilized assets to fair value at several locations. The employee termination and severance costs for fiscal 2002 affected approximately 700 employees. The operating site closures included two owned facilities: one located in Neenah (the oldest of the Company's four facilities in Neenah) and the other located in Minneapolis, Minnesota ("Minneapolis"). These facilities were no longer adequate to service the needs of the Company's customers and would have required significant investment to upgrade. The Neenah facility was phased out of operations in February 2003 and is currently used for warehousing and administrative purposes. The Minneapolis facility was phased out of operation in July 2002 and sold in October 2002. There was no building impairment charge associated with the closure of these two facilities. Certain lease consolidations also occurred in fiscal 2002, which primarily affected the Company's facilities in Seattle and San Diego.
Employee Termination and Lease Obligations Non-cash Asset Severance Costs and Other Exit Costs Write-downs Total --------------- -------------------- ----------- ----- ACCRUED BALANCE, OCTOBER 1, 2001 $ 79 $ - $ - $ 79 Restructuring costs 3,819 3,872 4,890 12,581 Adjustment to provisions - - - - Amounts utilized (3,358) (915) (4,890) (9,163) ---------- ---------- ---------- ----------- ACCRUED BALANCE, SEPTEMBER 30, 2002 540 2,957 - 3,497 Restructuring costs 10,358 10,940 38,696 59,994 Adjustment to provisions - - (650) (650) Amount utilized (7,993) (6,005) (38,046) (52,044) ---------- ---------- ---------- ----------- ACCRUED BALANCE, SEPTEMBER 30, 2003 2,905 7,892 - 10,797 Restructuring costs 2,493 393 2,107 4,993 Adjustment to provisions - 4,310 - 4,310 Amount utilized (3,379) (2,835) (2,107) (8,321) ---------- ---------- ---------- ----------- ACCRUED BALANCE SEPTEMBER 30, 2004 $ 2,019 $ 9,760 $ - $ 11,779 ========== ========== ========== ===========
49 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED As of September 30, 2004, all of the remaining employee termination and severance costs are expected to be paid by the end of fiscal 2005, while approximately $3.2 million of the lease obligations and other exit costs are expected to be paid in the next twelve months. The remaining liability for lease payments is expected to be paid through June 2008. 11. BENEFIT PLANS Employee Stock Purchase Plan: On March 1, 2000, the Company established a qualified Employee Stock Purchase Plan (the "2000 Purchase Plan"), the terms of which allow for qualified employees to participate in the purchase of the Company's common stock at a price equal to the lower of 85 percent of the average high and low stock price at the beginning or end of each semi-annual stock purchase period. The Company may issue up to 2.0 million shares of its common stock under the ESPP. During fiscal 2004, 2003 and 2002, the Company issued approximately 186,000, 253,000 and 132,000 shares of common stock, respectively, under the 2000 Purchase Plan, which were issued for $2.0 million, $1.9 million, and $2.4 million, respectively. The 2000 Purchase Plan expires on June 30, 2005. In July 2004, the Board of Directors approved the 2005 Employee Stock Purchase Plan (the "2005 Purchase Plan"), subject to shareholder approval at the Company's annual meeting. If approved, the Company may issue up to 1.5 million shares of its common stock under the 2005 Purchase Plan. The terms of the 2005 Purchase Plan are substantially similar to the 2000 Purchase Plan. Upon shareholder approval, the 2005 Purchase Plan would be effective July 1, 2005 and terminate on June 30, 2010, unless all shares authorized under the 2005 Purchase Plan have been issued prior to that date. 401(k) Savings Plans: The Company's 401(k) savings plans cover all eligible employees. The Company matches employee contributions, after one year of service, up to 2.5 percent of eligible earnings. The Company's contributions for fiscal 2004, 2003 and 2002 totaled $2.2 million, $2.3 million and $2.2 million, respectively. Stock Option Plans: Under the Company's 1998 Option Plan (the "1998 Plan"), the Company has reserved 12.0 million shares of common stock for grant to officers and key employees under an employee stock option plan, of which 11.5 million shares, net of cancellations, have been granted. The exercise price of each option granted must not be less than the fair market value on the date of grant. Options vest over a three-year period from date of grant and have a term of ten years. The plan also authorizes the Company to grant 600,000 stock appreciation rights (in lieu of options for 600,000 shares), none of which have been granted. Under the Company's 1995 Directors Plan (the "1995 Plan"), each outside director of the Company is granted 3,000 stock options each December 1, with the option pricing similar to the employee plan. Commencing in fiscal 2004, to reflect an adjustment for a prior stock split, each outside director of the Company will be granted 6,000 stock options each December 1. These options vest immediately and can be exercised after a minimum six-month holding period. The 400,000 shares of common stock authorized under this plan may come from any combination of authorized but unissued shares, treasury stock or the open market. As of September 30, 2004, options for approximately 182,000 shares have been granted and options for approximately 218,000 shares are available for grant under this plan. The 1995 Plan expires on December 31, 2004. In July 2004, the Board of Directors adopted the 2005 Equity Incentive Plan (the "2005 Plan"), subject to shareholder approval at the Company's annual meeting. The 2005 Plan is intended to constitute a stock-based incentive plan for the Company and includes provisions by which the Company may grant stock-based awards to directors, executive officers and other officers and key employees. If approved, the maximum number of shares of Plexus common stock that may be issued pursuant to the 2005 Plan is 2.7 million shares, all of which may be issued pursuant to stock options, although up to 600,000 shares may be issued pursuant to stock appreciation rights and no more than 400,000 shares may be issued pursuant to restricted stock awards. No stock-based awards have been issued under the 2005 Plan and none will be granted prior to shareholder approval of the 2005 Plan. If the 2005 Plan is approved, no further awards will be made under the 1998 Option Plan. 50 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED A summary of the Company's stock option activity follows:
SHARES WEIGHTED AVERAGE (IN THOUSANDS) EXERCISE PRICE -------------- -------------- Options outstanding as of October 1, 2001 3,871 $ 18.04 Granted 915 25.23 Cancelled (163) 29.43 Exercised (141) 9.01 ------- Options outstanding as of September 30, 2002 4,482 $ 19.40 Granted 1,145 10.87 Cancelled (391) 23.74 Exercised (324) 5.46 ------- Options outstanding as of September 30, 2003 4,912 $ 17.99 Granted 749 15.94 Cancelled (341) 24.26 Exercised (391) 8.37 ------- Options outstanding as of September 30, 2004 4,929 $ 18.00 Options exercisable as of: September 30, 2002 2,954 $ 15.55 ======= ======= September 30, 2003 3,131 $ 18.97 ======= ======= September 30, 2004 3,365 $ 19.34 ======= =======
The following table summarizes outstanding stock option information as of September 30, 2004 (shares in thousands):
Number of Number of Weighted Range of shares Weighted Average Weighted Average shares Average Exercise Prices Outstanding Exercise Price Remaining Life Exercisable Exercise Price - --------------- ----------- -------------- -------------- ----------- -------------- $ 0.63- $ 7.86 558 $ 5.19 2.2 558 $ 5.19 $ 7.87- $15.71 1,868 $12.11 6.4 1,210 $12.72 $15.72- $23.57 1,181 $18.76 8.2 485 $22.89 $23.58- $31.43 662 $25.54 7.4 452 $25.58 $31.44- $47.14 639 $35.76 5.2 639 $35.76 $47.15- $70.71 21 $60.32 5.6 21 $60.32 $ 0.63- $70.71 4,929 $18.00 6.4 3,365 $19.34
The weighted average fair value of options granted per share during fiscal 2004, 2003 and 2002 is $9.56, $7.46 and $15.55, respectively. The fair value of each option grant is estimated at the date of grant using the Black-Scholes option-pricing method with the following assumption ranges: 66 percent to 67 percent volatility, risk-free interest rates ranging from 2.8 percent to 4.6 percent, expected option life of 5.3 to 9.1 years, and no expected dividends. 51 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Deferred Compensation Plan: In September 1996, the Company entered into agreements with certain of its former executive officers under a nonqualified deferred compensation plan. Under the plan, the Company agreed to pay to these former executives, or their designated beneficiaries upon such executives' death, certain amounts annually for the first 15 years subsequent to their retirement. Life insurance contracts owned by the Company will fund this plan. Expense for this plan totaled approximately $0.4 million, $0.4 million and $1.8 million in fiscal 2004, 2003, and 2002, respectively. In fiscal 2000, the Company established an additional deferred compensation plan for its executive officers and other key employees (the "Executive Deferred Compensation Plan"). Under the Executive Deferred Compensation Plan, a covered executive may elect to defer some or all of his or her compensation into the plan, and the Company may credit the participant's account with a discretionary employer contribution. Participants are entitled to payment of deferred amounts and any earnings, which may be credited thereon upon termination or retirement from Plexus. From fiscal 2000 through fiscal 2002, key employee salary deferrals in and discretionary contributions of the Company to the Executive Deferred Compensation Plan were effected through a split-dollar life insurance program, whereby Plexus entered into split-dollar life insurance agreements with various executive officers and key employees. Under these agreements, Plexus paid a minimum annual premium of $13,500 per policy, and such additional premiums as it determined. Upon the death of the covered employee, Plexus had an interest in the proceeds of the policy equal to the premiums paid. Premium payments made by the Company totaled approximately $0.1 million in fiscal 2002. In fiscal 2003, due to changes in law, Plexus terminated the split-dollar life insurance program and replaced it with a rabbi trust arrangement (the "Trust"). The Trust allows investment of deferred compensation, held on behalf of the participants, into individual accounts and, within these accounts, into one or more designated investments. Investment choices do not include Plexus stock. During fiscal 2003, the cash value proceeds that were received upon the surrender of the split-dollar life insurance policies attributable to each plan participant totaled approximately $0.4 million and were placed into the Trust. In each of fiscal 2004 and 2003, the Company made a contribution to the participants' accounts in the amount of $13,500 per participant, or approximately $0.1 million in total in each period. The Trust assets are subject to the claims of the Company's creditors. As of September 30, 2004 and 2003, the Trust assets totaled $1.1 million and $0.7 million, respectively and the related liability to the participants totaled approximately $1.2 million and $0.7 million, respectively. The Trust assets and the related liability to the participants are included in Other assets and Other liabilities, respectively, in the accompanying Consolidated Balance Sheets. Other: The Company is not obligated to provide any post-retirement medical or life insurance benefits to employees. 12. CONTINGENCIES The Company (along with many other companies) has been sued by the Lemelson Medical, Education & Research Foundation Limited Partnership ("Lemelson") related to alleged possible infringement of certain Lemelson patents. The complaint, which is one of a series of complaints by Lemelson against hundreds of companies, seeks injunctive relief, treble damages (amount unspecified) and attorney's fees. The Company has obtained a stay of action pending developments in other related litigation. On January 23, 2004, the judge in the other related litigation ruled against Lemelson, thereby declaring the Lemelson patents unenforceable and invalid. Lemelson has appealed this ruling. The lawsuit against the Company remains stayed pending the outcome of that appeal. The Company believes the vendors from whom the patent equipment was purchased may be required to contractually indemnify the Company. However, based upon the Company's observation of Lemelson's actions in other parallel cases, it appears that the primary objective of Lemelson is to cause other parties to enter into license agreements. If a judgment is rendered and/or a license fee required, it is the opinion of management of the Company that such judgment, or fee, would not be material to the Company's financial position, results of operations or cash flows. In addition, the Company is party to other certain lawsuits in the ordinary course of business. Management does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the Company's financial position, results of operations or cash flows. 52 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. BUSINESS SEGMENT, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS The Company operates in one business segment. The Company provides product realization services to electronic OEMs. The Company has three reportable geographic regions: North America, Europe and Asia. The Company has 19 active manufacturing and engineering facilities in North America, Europe and Asia to serve these OEMs. The Company uses an internal management reporting system, which provides important financial data, to evaluate performance and allocate the Company's resources on a geographic basis. Interregional transactions are generally recorded at amounts that approximate arm's length transactions. The accounting policies for the regions are the same as for the Company taken as a whole. The table below presents geographic net sales information reflecting the origin of the product shipped and asset information based on the physical location of the assets (in thousands):
Years ended September 30, ---------------------------------------- 2004 2003 2002 ---- ---- ---- Net sales: North America $ 828,354 $ 704,057 $ 783,660 Europe 107,802 62,522 78,826 Asia 104,702 41,258 21,117 ----------- --------- --------- $ 1,040,858 $ 807,837 $ 883,603 =========== ========= =========
As of September 30, ------------------------------- 2004 2003 ---- ---- Long-lived assets: North America $ 108,697 $ 121,434 Europe 35,837 34,251 Asia 19,231 8,094 ----------- --------- $ 163,765 $ 163,779 =========== =========
Long-lived assets as of September 30, 2004 and 2003 exclude other non-operating long-term assets totaling $7.5 million and $30.9 million, respectively. Juniper Networks, Inc. ("Juniper") accounted for 14 percent of our net sales in fiscal 2004 and Siemens Medical Systems, Inc. accounted for 12 percent of our net sales in fiscal 2003. No other customer accounted for 10 percent or more of our net sales in fiscal 2004 or 2003. No customer accounted for 10 percent or more of net sales in fiscal 2002. Accounts receivable related to Juniper represented approximately 15 percent and 12 percent, respectively, of the Company's total accounts receivable balance as of September 30, 2004 and 2003. No other customer represented ten percent or more of the Company's total trade receivable balance as of September 30, 2004 or 2003. 14. GUARANTEES In November 2002, Financial Accounting Standards Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" was issued. FIN No. 45 requires a Company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and to elaborate on existing disclosure requirements. The initial recognition requirements of FIN No. 45 are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 were effective in the Company's first quarter of fiscal 2003. Adoption of the initial recognition provisions of FIN No. 45 did not have a material impact on these Consolidated Financial Statements. The Company offers certain indemnifications under its customer manufacturing agreements. In the normal course of business, the Company may from time to time be obligated to indemnify its customers or its customers' customers against damages or liabilities arising out of the Company's negligence, breach of contract, or infringement of third party intellectual property rights relating to its manufacturing processes. Certain of the manufacturing agreements have extended broader indemnification and while most agreements have contractual limits, some do not. However, the Company generally excludes from such indemnities, and seeks indemnification from its customers for, damages or liabilities arising out of the Company's adherence 53 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED to customers' specifications or designs or use of materials furnished, or directed to be used, by its customers. The Company does not believe its obligations under such indemnities are material. In the normal course of business, the Company also provides its customers a limited warranty covering workmanship, and in some cases materials, on products manufactured by the Company for them. Such warranty generally provides that products will be free from defects in the Company's workmanship and meet mutually agreed upon testing criteria for periods generally ranging from 12 months to 24 months. If a product fails to comply with the Company's warranty, the Company's obligation is generally limited to correcting, at its expense, any defect by repairing or replacing such defective product. The Company's warranty generally excludes defects resulting from faulty customer-supplied components, design defects or damage caused by any party other than the Company. The Company provides for an estimate of costs that may be incurred under its limited warranty at the time product sales are recognized. These costs primarily include labor and materials, as necessary, associated with repair or replacement. The primary factors that affect the Company's warranty liability include the number of shipped units and historical and anticipated rates of warranty claims. As these factors are impacted by actual experience and future expectations, the Company assesses the adequacy of its accrued warranty liabilities and adjusts the amounts as necessary. Below is a table summarizing the activity related to the Company's limited warranty liability for fiscal 2004 and 2003 (in thousands): Limited warranty liability, as of October 1, 2002 $ 1,246 Accruals for warranties issued during the period 150 Accruals related to pre-existing warranties (20) Settlements (in cash or in kind) during the period (391) --------- Limited warranty liability, as of September 30, 2003 985 Accruals for warranties issued during the period 148 Settlements (in cash or in kind) during the period (200) --------- Limited warranty liability, as of September 30, 2004 $ 933 =========
15. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for fiscal 2004 and 2003 consists of (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH 2004 QUARTER QUARTER QUARTER QUARTER TOTAL ---- ------- ------- ------- ------- ----- Net sales $ 238,464 $ 254,272 $ 274,817 $ 273,305 $ 1,040,858 Gross profit 19,627 21,181 22,979 22,991 86,778 Net loss 2,499 3,471 (768) (36,782) (31,580) Earnings per share: Basic $ 0.06 $ 0.08 $ (0.02) $ (0.85) $ (0.74) Diluted $ 0.06 $ 0.08 $ (0.02) $ (0.85) $ (0.74)
54 PLEXUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FIRST SECOND THIRD FOURTH 2003 QUARTER QUARTER QUARTER QUARTER TOTAL ---- ------- ------- ------- ------- ----- Net sales $ 205,379 $ 190,773 $ 195,609 $ 216,076 $ 807,837 Gross profit 15,540 9,623 11,829 15,973 52,965 Loss before cumulative effect of change in accounting for goodwill (20,832) (5,044) (14,747) (3,873) (44,496) Cumulative effect of change in accounting for goodwill, net of tax (23,482) - - - (23,482) Net loss (44,314) (5,044) (14,747) (3,873) (67,978) Earnings per share: Basic and Diluted: Loss before cumulative effect of change in accounting for goodwill $ (0.49) $ (0.12) $ (0.35) $ (0.09) $ (1.05) Cumulative effect of change in accounting for goodwill, net of tax (0.56) - - - (0.56) Net loss $ (1.05) $ (0.12) $ (0.35) $ (0.09) $ (1.61)
Earnings per share is computed independently for each quarter. The annual total amounts may not equal the sum of the quarterly amounts due to rounding. In the third and fourth quarters of fiscal 2004, the Company recorded pre-tax restructuring and impairment costs of $5.5 million and $3.8 million, respectively. These costs were primarily associated with lease obligations for two previously abandoned facilities near Seattle, Washington, the planned closure of the Bothell engineering and manufacturing facility, the write-down of certain ERP software and the consolidation of a satellite PCB-design office in Hillsboro, Oregon into another Plexus design office. In the fourth quarter of fiscal 2004, the Company also recorded a full valuation allowance on all of its U.S. deferred income tax assets. In the first, third and fourth quarters of fiscal 2003, the Company recorded pre-tax restructuring and impairment costs of $31.8 million, $19.6 million and $7.9 million, respectively. These costs resulted from our actions taken in response to reductions in our end-market demand. These actions included closing our San Diego and Richmond operating sites, the consolidation of several leased facilities, re-focusing our PCB design group, a write-off of goodwill associated with the San Diego operating site, the write-down of underutilized assets to fair value at several locations, and the costs associated with a reduction in work force in several operating sites, engineering and corporate groups. These measures were intended to align the Company's capabilities and resources with its lower demand. In addition, the Company adopted SFAS No. 142 for the accounting of goodwill and other intangible assets on October 1, 2002. Under the transitional provisions of SFAS No. 142, the Company identified reporting units with goodwill, performed impairment tests on the net goodwill and other indefinite-lived intangible assets associated with each reporting unit using a valuation date as of October 1, 2002, and determined that a pre-tax transitional impairment charge of $28.2 million was required at the San Diego and Juarez operating sites. The impairment charge was recorded in the first quarter of fiscal 2003 as a cumulative effect of a change in accounting for goodwill. * * * * * 55 PLEXUS CORP. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended September 30, 2004, 2003 and 2002 (in thousands)
ADDITIONS BALANCE AT ADDITIONS FROM CHARGED TO BEGINNING OF MERGERS/ COSTS AND BALANCE AT END DESCRIPTIONS PERIOD ACQUISITIONS EXPENSES DEDUCTIONS OF PERIOD ------------ ------------ ------------ -------- ---------- --------- Fiscal Year 2004: Allowance for losses on accounts receivable (deducted from the asset to which it relates) $ 4,100 $ - $ - $ 2,100 $ 2,000 Valuation allowance on deferred income tax assets (deducted from the asset to which it relates) $ - $ - $ 36,818 $ - $ 36,818 Fiscal Year 2003: Allowance for losses on accounts receivable (deducted from the asset to which it relates) $ 4,200 $ - $ 438 $ 538 $ 4,100 Valuation allowance on deferred income tax assets (deducted from the asset to which it relates) $ - $ - - $ - $ - Fiscal Year 2002: Allowance for losses on accounts receivable (deducted from the asset to which it relates) $ 6,500 $ 51 $ 2,994 $ 5,345 $ 4,200 Valuation allowance on deferred income tax assets (deducted from the asset to which it relates) $ - $ - - $ - $ -
56 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: PLEXUS CORP. (Registrant) /s/ Dean A. Foate ------------------------------------ Dean A. Foate, President and Chief Executive Officer December 8, 2004 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dean A. Foate, F. Gordon Bitter and Joseph D. Kaufman, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and any other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirement of the Security Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.* SIGNATURE AND TITLE /s/ Dean A. Foate /s/ Steven P. Cortinovis - ------------------------------------------------------------ -------------------------------------------------- Dean A. Foate, President, Chief Executive Officer, and Steven P. Cortinovis, Director Director (Principal Executive Officer) /s/ F. Gordon Bitter /s/ David J. Drury - ------------------------------------------------------------ -------------------------------------------------- F. Gordon Bitter, Vice President and Chief Financial David J. Drury, Director Officer (Principal Financial Officer) /s/ Simon J. Painter /s/ Thomas J. Prosser - ------------------------------------------------------------ -------------------------------------------------- Simon J. Painter, Corporate Controller (Principal Thomas J. Prosser, Director Accounting Officer) /s/ John L. Nussbaum /s/ Dr. Charles M. Strother - ------------------------------------------------------------ -------------------------------------------------- John L. Nussbaum, Chairman and Director Dr. Charles M. Strother, Director /s/ Ralf R. Boer /s/ Jan K. Ver Hagen - ------------------------------------------------------------ -------------------------------------------------- Ralf R. Boer, Director Jan K. Ver Hagen, Director
* Each of the above signatures is affixed as of December 8, 2004. 57 EXHIBIT INDEX PLEXUS CORP. 10-K FOR YEAR ENDED SEPTEMBER 30, 2004
INCORPORATED BY FILED EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH ----------- ------- --------------- -------- 3(i) Restated Articles of Incorporation of Exhibit 3(i) to Plexus' Report on Form 10-Q Plexus Corp., as amended through March for the quarter ended March 31, 2004 13, 2001 ("3/31/01") 3(ii) Bylaws of Plexus Corp., as amended Exhibit 3(ii) to Plexus' Report on Form 10-Q through March 7, 2001 for the quarter ended March 31, 2001 4.1 Restated Articles of Incorporation of Exhibit 3(i) above Plexus Corp. 4.2 (a) Amended and Restated Shareholder Exhibit 1 to Plexus' Rights Agreement, dated as of Form 8-A/A filed August 13, 1998, (as amended through on December 6, 2000 November 14, 2000) between Plexus and Firstar Bank, N.A. (n/k/a US Bank, N.A.) as Rights Agent, including form of Rights Certificates (b) Agreement of Substitution and First Exhibit 4.2 (b) to Plexus' Annual Report on Amendment to the Amended and Restated Form 10-K for the fiscal year ended September Shareholder Rights Agreement dated as 30, 2002 of December 5, 2002 10.1 (a) Supplemental Executive Retirement Exhibit 10.1 (b) to Plexus' Report on Form Agreements with John Nussbaum dated as 10-K for the fiscal year ended September 30, of September 19, 1996**: 1996 (b) First Amendment Agreement to Exhibit 10.1 to Plexus' Quarterly Report on Supplemental Retirement Agreement Form 10-Q for the quarter ended December 31, between Plexus and John Nussbaum, dated 2000 as of September 1, 1999 10.2 Forms of Change of Control Agreements Exhibit 10.2(a) to Plexus Annual Report on dated October 1, 2003 with ** Form 10-K for the fiscal year ended September 30, 2003 ("2003 10-K") (a) Dean A. Foate F. Gordon Bitter David A. Clark Thomas J. Czajkowski Paul L. Ehlers Joseph D. Kaufman Michael J. McGuire J. Robert Kronser David H. Rust Michael T. Verstegen
INCORPORATED BY FILED EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH ----------- ------- --------------- -------- Exhibit 10.2(b) to 2003 10-K (b) George W.F. Setton Simon J. Painter 10.3 Plexus Corp. 1998 Option Plan** Exhibit A to Plexus' definitive proxy statement for its 1998 Annual Meeting of Shareholders 10.4 (a) Plexus Corp. 1995 Directors' Stock Exhibit 10.10 to 1994 10-K Option Plan** 10.4 (b) Summary of Directors' Compensation X (12/04)** 10.5 Plexus Corp. 2005 Equity Incentive Plan Exhibit A to Plexus' definitive proxy (subject to shareholder approval) statement for its 2005 Annual Meeting of Shareholders 10.6 (a) Credit Agreement dated as of Exhibit 10.6 to 2003 10-K October 22, 2003 among Plexus, certain Plexus subsidiaries and various lending institutions whose Administrative Agent is Harris Trust and Savings Bank (b) First Amendment and Waiver to Exhibit 10.6(b) to 2003 10-K Credit Agreement; dated as of October 31, 2003 (c) Second Amendment to Credit Exhibit 10.1 to Plexus' Report on Form 10-Q Agreement, dated as of April 29, 2004 for the quarter ended June 30, 2004 ("6/30/04 10-Q") (d) Third Amendment to Credit Exhibit 10.2 to 6/30/04 10-Q Agreement, dated as of July 13, 2004 (e) Fourth Amendment to Credit Exhibit 10.3 to 6/30/04 10-Q Agreement, dated as of August 5, 2004 (f) Fifth Amendment to Credit Exhibit 10.1 to Plexus' Current Report on Agreement, dated as of November 8, 2004 Form 8-K dated November 8, 2004 10.7 (a) Lease Agreement between Neenah (WI) Exhibit 10.8(a) to Plexus' Report on Form QRS 11-31, Inc. ("QRS: 11-31") and 10-K for the year ended September 30, 1994 Electronic Assembly Corp. (n/k/a Plexus ("1994 10-K") Services Corp.), dated August 11, 1994 (b) Guaranty and Suretyship Agreement Exhibit 10.8(c) to 1994 10-K between Plexus Corp. and QRS: 11-31 dated August 11, 1994, together with related Guarantor's Certificate 10.8 (a) Plexus Corp. 2004 Incentive Exhibit 10.8(b) to 2003 10-K Compensation Plan- Executive Leadership Team **
INCORPORATED BY FILED EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH ----------- ------- --------------- -------- 10.8 (b) Plexus Corp. 2005 Variable Incentive X Compensation Plan - Executive Leadership Team ** 10.9 Plexus Corp. Executive Deferred Exhibit 10.17 to 2000 10-K Compensation Plan** 10.10 Form of Split Dollar Life Insurance Exhibit 10.18 to 2000 10-K Agreements between Plexus and each of [superceded]: ** Dean A. Foate J. Robert Kronser Joseph D. Kaufman Paul L. Ehlers Michael T. Verstegen David A. Clark 10.11 Plexus Corp Executive Deferred Exhibit 10.14 to 2003 10-K Compensation Plan Trust dated April 1, 2003 between Plexus Corp. and Bankers Trust Company** 10.12 (a) Employment Agreement dated as of Exhibit 10.3 to 6/30/02 10-Q July 1, 2002, between Plexus Corp. and Dean A. Foate** [superceded] (b) Amended and Restated Employment Exhibit 10.14 to 2003 10-K Agreement dated as of September 1, 2003 between Plexus Corp and Dean A. Foate * * 10.13 (a) Amended and Restated Receivables Exhibit 10.1 to Plexus' Quarterly Report on Sale Agreement, dated July 1, 2001, Form 10-Q for the quarter ended June 30, between Plexus Services Corp. and 2001 ("6/30/01 10-Q") Plexus ABS, Inc. Exhibit 10.1 to Plexus' Quarterly Report on (b) First Amendment to amended and Form 10-Q for the quarter ended June 30, Restated Receivables Sale Agreement, 2002 ("6/30/02 10-Q") dated June 28, 2002, between Plexus Services Corp. and Plexus ABS, Inc. 10.14 (a) Receivables Purchase Agreement Exhibit 10.10(a) to 2000 10-K dated as of October 6, 2000, among Plexus, Preferred Receivables Funding Corporation and Bank One, NA (b) First Amendment to Receivables Exhibit 10.2 to 6/30/01 10-Q Purchase Agreement, dated July 1, 2001 (c) Second Amendment to Receivables Purchase Agreement, dated October 3, Exhibit 10.2(a) to 6/30/02 10-Q 2001 (d) Limited Waiver and Third Amendment to Receivables Purchase Agreement, Exhibit 10.2(b) to 6/30/02 dated April 25, 2002 10-Q (e) Fourth Amendment to Receivables Exhibit 10.2(c) to 6/30/02
INCORPORATED BY FILED EXHIBIT NO. EXHIBIT REFERENCE TO HEREWITH ----------- ------- --------------- -------- Purchase Agreement, dated June 28, 2002 10-Q (f) Fifth Amendment to Receivables Exhibit 10.2(f) to 2002 10-K Purchase Agreement, dated September 30, 2002 (g) Limited Waiver and Sixth Amendment Exhibit 10.2(g) to 2002 10-K to Receivables Purchase Agreement, dated December 4, 2002 (h) Limited Waiver and Seventh Exhibit 10.2 to 12/31/02 10-Q. Amendment to Receivables Purchase Agreement, dated January 28, 2003 (i) Limited Waiver and Seventh Exhibit 10.4 to Plexus' Quarterly Report on Amendment to Receivables Purchase Form 10-Q for the quarter ended December 31, Agreement, dated January 28, 2003 2002 Note: All agreements included in Exhibit 10.13 and 10.14 were terminated in September 2003 21 List of Subsidiaries X 23 Consent of PricewaterhouseCoopers LLP X 24 Power of Attorney (Signature Page Hereto) 31.1 Certification of Chief Executive Officer X pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer X pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the CEO pursuant to 18 X U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the CFO pursuant to 18 X U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------------- **Designates management compensatory plans or agreements. EX-10.4(B) 2 c90300exv10w4xby.txt SUMMARY OF DIRECTORS' COMPENSATION . . . EXHIBIT 10.4(b) 2004 10-K PLEXUS CORP. SUMMARY OF BOARD COMPENSATION -- 12/04 (OUTSIDE DIRECTORS)
FY2005 (Effective 11/04) FY2004 ----------------- --------------- CASH COMPENSATION BOARD MEETINGS Annual Retainer Fee $25,000 $20,000 Meeting Fee - in person / not in person $2,000 / $1,000 $2,000 / $1,000 COMMITTEE COMPENSATION AUDIT Chairman Retainer $7,500 $4,000 Committee Meeting Fee (including Chairman's participation in $1,000 / $500 $1,000 / $500 periodic conference calls with auditors to review financial disclosures) - in person / not in person COMPENSATION Chairman Retainer $5,000 $2,000 Committee Meeting Fee - in person / not in person $1,000 / $500 $1,000 / $500 NOMINATING & CORP GOVERNANCE Chairman Retainer $5,000 $2,000 Committee Meeting Fee - in person / not in person $1,000 / $500 $1,000 / $500 Directors are also reimbursed for their travel expenses for attending meetings. No compensation for board service is paid to directors who are full-time executive officers or employees of the Company. Directors who are not officers or employees are also eligible for stock option awards under the 1995 Directors' Stock Option Plan; no further options may be granted thereunder after December 31, 2004. Directors will be eligible to participate in awards under the 2005 Equity Incentive Plan, if that plan is approved by Plexus shareholders. The following information summarized directors' option grants in fiscal 2004 and 2005: EQUITY COMPENSATION Annual # of Options Granted (on 12/1, in the case of grants under the 1995 Plan) 6,000 6,000 Stock Price at Grant $14.055 $18.125
EX-10.8(B) 3 c90300exv10w8xby.txt 2005 VARIABLE INCENTIVE COMPENSATION PLAN EXHIBIT 10.8(b) 2004 10-K PLEXUS CORP. 2005 VARIABLE INCENTIVE COMPENSATION PLAN EXECUTIVE LEADERSHIP TEAM PLAN OBJECTIVES The primary objectives of the 2005 Variable Incentive Compensation Plan (Plan) are to reward results delivered by plan participants that enhance shareholder value and to assist Plexus Corp. (Plexus) to attract, retain and motivate highly qualified and talented executives. The Plan provides annual variable incentive compensation opportunities to participants for the achievement of specified financial performance and other significant results that contribute to the overall success of Plexus. Increasing revenues, improving financial returns on capital employed, and achieving specific personal objectives are the three performance elements of this Plan. PLAN YEAR The Plan Year is effective October 1, 2004 and continues through October 1, 2005. ELIGIBILITY FOR PLAN PARTICIPATION Participation in this Plan is limited to the members of the Plexus Executive Leadership Team. INCENTIVE PLAN COMPENSATION Plan awards are to be calculated based upon the Plan Year base salary (salary excluding bonuses, paid commissions, reimbursed relocation expenses, or any other special pay, but including amounts deferred) of each participant adjusted for pro-rations as applicable (See Award Payment Timing and Eligibility, below). Incentive awards are calculated for each position (job) a participant holds through the plan year and are pro-rated accordingly based on calendar weeks in each position (FY 2005 = 52 weeks). INCENTIVE PLAN PERFORMANCE MEASURES The incentive performance measures, each of which stands independently of the others with regard to award opportunities, are: - REVENUES: Total Fiscal Year 2005 Net Sales of Plexus Corp. - RETURN ON AVERAGE CAPITAL EMPLOYED (ROCE): Annual Operating Income for Fiscal Year 2005 divided by Average Capital Employed. Where, - OPERATING INCOME: As reported in the company's audited income statement for Fiscal Year 2005 adjusted, if necessary, to eliminate non-recurring or unusual charges. - AVERAGE CAPITAL EMPLOYED: The 5 point average of the year-end Fiscal Year 2004 and the quarterly Fiscal Year 2005 Capital Employed balances. - CAPITAL EMPLOYED: Total Assets (minus Cash) less non-interest bearing Current and Non-current Liabilities. - OBJECTIVES: Individual participant objectives that relate to measurable personal or site/location/department goals for the plan year; typically the number of goals should be limited to 3 to 5, which have been developed with, reviewed by and approved by the participant's supervisor. Page 1 of 3 INCENTIVE PLAN PERFORMANCE AND REWARD OPPORTUNITIES Incentive compensation is paid based on the following achievement levels:
COMPONENT THRESHOLD PAYOUT TARGET PAYOUT MAXIMUM PAYOUT - ---------------------------------------- -------------- -------- --------------- ---------- --------------- --------- REVENUE $ * 0% $ * 40% $ * 40% ROCE *% 0% *% 40% *% 140% PERSONAL OBJECTIVES 0% 20% 20% TOTAL INCENTIVE = 0% 100% 200% REVENUES + ROCE + PERSONAL OBJECTIVES
* Specific threshold, target and maximum amounts, and percentages allocated to each component, are the same for each participant and determined with the approval of the Compensation and Leadership Development Committee; that information shall be communicated to eligible participants. If it is decided to continue the Plan beyond fiscal 2005, all year references herein will be deemed to refer to the appropriate future year and numbers in this matrix will be re-set for such years.] - THRESHOLD: At or below Revenue and/or ROCE Thresholds, only personal objectives awards can be earned. Revenue and ROCE measures begin producing incentive awards for above Threshold achievement. - TARGET: Targets for the Revenue and ROCE measures relate to the FY 2005 financial plan. Personal objectives relate to individual participant performance and may reflect personal, location, site, department, or other measurable objectives. Awards will be pro-rated on a straight-line basis for performance that falls between Threshold and Target achievement. - MAXIMUM: The maximum performance levels reflect the maximum award for each component. Awards will be pro-rated on a straight-line basis for performance that falls between Target and Maximum achievement. Note: No award will be paid for any component if the company incurs a net loss for the fiscal year (excluding non-recurring or unusual charges). AWARD PAYMENT TIMING AND ELIGIBILITY Eligible participants will receive earned incentive awards no later than December 15, 2005 (payment date). Adjustments occur under the following circumstances: - PARTICIPANT TRANSFER: Awards will be pro-rated for participants who transfer between company organizations (sites, locations, departments, SBU's, etc.) based upon time spent in each job. - PARTICIPANT STATUS CHANGE: Participants changing status (to/from eligible/ineligible position) are to be pro-rated by eligible weeks on the company payroll divided by the number of weeks of the plan year (FY 2005 = 52 weeks). - EMPLOYMENT/RE-EMPLOYMENT: New or rehired employees who enter the Plan after the start of the Plan Year will receive a pro-rated award based on the time actually in the Plan. Page 2 of 3 - EMPLOYMENT TERMINATION: Plan participants who leave the employ of Plexus (whether voluntarily or involuntarily) prior to the payout date (December 15, 2005), except in the case of retirement, disability, death or approval by the CEO, forfeit all rights to incentive awards accrued during the Plan Year. - RETIREMENT, DISABILITY, OR DEATH: "Retirement" means eligible for retirement under Plexus Corp.'s retirement guidelines. Disability means eligible for disability benefits and unable to continue in the employ of the company due to such disability. In the event of death, any payable award will be paid to the participant's beneficiary(ies), or to the estate in the event that no beneficiary is named, following the end of the Plan Year. Awards for participants who leave due to retirement, disability or death will be pro-rated by eligible weeks on the company payroll divided by the number of weeks of the plan year (FY 2005 = 52 weeks). - NON-PERFORMING EMPLOYEES: If at any time during the plan year an individual's performance is not satisfactory and the participant is on a formal written performance improvement plan, such participant may be removed from this Plan, and either no award or a reduced award will be paid to the individual. Approval of such action will be made by the CEO subject to the final approval of the Compensation and Leadership Development Committee of the Board. - LEAVES OF ABSENCE: Awards for participants who are on an unpaid Leave of Absence will be pro-rated for the ROCE and Revenue components based upon eligible calendar weeks on the company payroll divided by the number of weeks of the plan year. (FY 2005 = 52 weeks) COMMUNICATION Each participant will receive a copy of this plan document and a Participant Award Opportunity Summary. To ensure understanding of the status of plan awards, Management will communicate periodic performance trends and results to participants. ADMINISTRATION Overall policy direction shall be provided by the Board of Directors. Plan administration shall be the responsibility of the CEO with support and guidance from the Compensation and Leadership Development Committee of the Board of Directors. EXCEPTIONS AND REVISIONS It is conceivable that there may be particular situations which are not properly accommodated by the regular criteria and boundaries of the prevailing incentive program, (e.g. the effect that an acquisition, a secondary stock offering, or the like may have on Plexus' financial performance). Should such situation(s) occur, the CEO will recommend appropriate adjustments to the Compensation and Leadership Development Committee of the Board of Directors. If adjustments are made, the reason for such adjustments will be set forth in the Committee's Minutes and communicated to Plan participants. Nothing in this plan document or associated communications in any way promises or guarantees the compensation or employment of any participant with Plexus Corp. or any successor or related company(ies). Page 3 of 3 EX-21 4 c90300exv21.txt LIST OF SUBSIDIARIES Exhibit 21 Plexus 2004 10-K 1. Plexus Services Corp. ("PSC"), a Nevada corporation (f/k/a "Plexus Electronic Assembly Corp.) a. Plexus Intl. Sales & Logistics, LLC ("PISL"), a Delaware LLC and subsidiary of PEAC b. Plexus QS, LLC, ("PQS"), a Delaware LLC and subsidiary of PEAC c. Plexus Electronica S.de R.L. de C.V., a Mexico entity and subsidiary of PSS and PQS d. Plexus Servicios, S.de R.L. de C.V., a Mexico entity and subsidiary of PSS and PQS 2. Plexus International Services, Inc. ("PISI"), a Nevada corporation and subsidiary of Plexus Corp. a. Plexus Corp. Limited ("PCL"), a United Kingdom corporation and subsidiary of PISI (i) Plexus Corp. (UK) Limited ("PCUKL"), a United Kingdom corporation and subsidiary of PCL (ii) Plexus Corp. (Kelso) Limited, a United Kingdom corporation and subsidiary of PCUKL (inactive) (iii) Plexus Corp. (Maldon) Limited, a United Kingdom corporation and subsidiary of PCUKL (inactive) b. Plexus Asia, Ltd. ("PAL"), a British Virgin Islands corporation (i) Plexus (Xiamen) Co., Ltd., a Peoples' Republic of China corporation and subsidiary of PAL (ii) Plexus Manufacturing Sdn. Bhd., a Malaysia corporation and subsidiary of PAL c. Plexus Technology Group, Limited, a United Kingdom corporation and subsidiary of PISI (inactive) 3. PTL Information Technology Services Corp., a Nevada corporation and subsidiary of Plexus Corp. 4. Plexus Management Services Corporation, a Nevada corporation and subsidiary of Plexus Corp. EX-23.1 5 c90300exv23w1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-45116), Form S-4 (No. 333-48700) and Form S-8 (No.'s 33-28309, 33-56932, 33-89862, 33-89864, 333-76245, 333-84583, 333-37154, 333-62774 and 333-76728) of our report dated November 17, 2004 relating to the financial statements and financial statement schedules, which appears in Plexus Corp.'s Annual Report on Form 10-K for the year ended September 30, 2004. PricewaterhouseCoopers LLP Milwaukee, Wisconsin December 6, 2004 EX-31.1 6 c90300exv31w1.txt 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Dean A. Foate, certify that: 1. I have reviewed this annual report on Form 10-K 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: December 8, 2004 /s/ Dean A. Foate ------------------------------------- Dean A. Foate President and Chief Executive Officer 1 EX-31.2 7 c90300exv31w2.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, F. Gordon Bitter, certify that: 1. I have reviewed this annual report on Form 10-K 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: December 8, 2004 /s/ F. Gordon Bitter ------------------------------------------ F. Gordon Bitter, Vice President and Chief Financial Officer 2 EX-32.1 8 c90300exv32w1.txt 906 CERTIFICATION OF CEO 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 Annual Report of Plexus Corp. (the "Company") on Form 10-K for the fiscal year ended September 30, 2004 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 President and Chief Executive Officer December 8, 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. 3 EX-32.2 9 c90300exv32w2.txt 906 CERTIFICATION OF CFO 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 Annual Report of Plexus Corp. (the "Company") on Form 10-K for the fiscal year ended September 30, 2004 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 Vice President and Chief Financial Officer December 8, 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. 4 -----END PRIVACY-ENHANCED MESSAGE-----