e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the Quarter ended July 1, 2006
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 000-14824
PLEXUS CORP.
(Exact name of registrant as specified in charter)
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Wisconsin
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39-1344447 |
(State of Incorporation)
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(IRS Employer Identification No.) |
55 Jewelers Park Drive
Neenah, Wisconsin 54957-0156
(Address of principal executive offices)(Zip Code)
Telephone Number (920) 722-3451
(Registrant’s telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of August 3, 2006, there were 46,204,890 shares of Common Stock of the Company outstanding.
PLEXUS CORP.
TABLE OF CONTENTS
July 1, 2006
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Unaudited
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Three Months Ended |
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Nine Months Ended |
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July 1, |
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July 2, |
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July 1, |
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July 2, |
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2006 |
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2005 |
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2006 |
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2005 |
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Net sales |
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$ |
397,398 |
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$ |
313,709 |
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$ |
1,063,615 |
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$ |
906,675 |
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Cost of sales |
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351,894 |
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286,572 |
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949,796 |
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831,698 |
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Gross profit |
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45,504 |
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27,137 |
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113,819 |
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74,977 |
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Operating expenses: |
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Selling and administrative expenses |
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21,554 |
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19,298 |
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58,084 |
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56,615 |
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Goodwill impairment costs |
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— |
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26,915 |
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— |
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26,915 |
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Restructuring and asset impairment costs |
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— |
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729 |
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— |
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12,247 |
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21,554 |
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46,942 |
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58,084 |
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95,777 |
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Operating income (loss) |
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23,950 |
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(19,805 |
) |
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55,735 |
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(20,800 |
) |
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Other income (expense): |
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Interest expense |
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(821 |
) |
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(878 |
) |
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(2,652 |
) |
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(2,640 |
) |
Interest income |
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1,654 |
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698 |
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4,226 |
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1,702 |
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Miscellaneous income (expense) |
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637 |
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(491 |
) |
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656 |
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(299 |
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Income (loss) before income taxes |
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25,420 |
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(20,476 |
) |
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57,965 |
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(22,037 |
) |
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Income tax expense |
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328 |
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1,022 |
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579 |
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897 |
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Net income (loss) |
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$ |
25,092 |
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$ |
(21,498 |
) |
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$ |
57,386 |
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$ |
(22,934 |
) |
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Earnings per share: |
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Basic |
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$ |
0.55 |
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$ |
(0.50 |
) |
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$ |
1.28 |
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$ |
(0.53 |
) |
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Diluted |
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$ |
0.53 |
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$ |
(0.50 |
) |
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$ |
1.24 |
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$ |
(0.53 |
) |
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Weighted average shares outstanding: |
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Basic |
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45,848 |
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43,369 |
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44,793 |
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43,291 |
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Diluted |
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47,274 |
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43,369 |
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46,391 |
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43,291 |
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Comprehensive income (loss): |
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Net income (loss) |
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$ |
25,092 |
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$ |
(21,498 |
) |
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$ |
57,386 |
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$ |
(22,934 |
) |
Foreign currency translation adjustments |
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1,053 |
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(6,256 |
) |
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1,796 |
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(4,942 |
) |
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Comprehensive income (loss) |
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$ |
26,145 |
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$ |
(27,754 |
) |
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$ |
59,182 |
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$ |
(27,876 |
) |
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See notes to condensed consolidated financial statements.
3
PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
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July 1, |
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October 1, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
139,750 |
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$ |
98,727 |
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Short-term investments |
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30,000 |
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10,000 |
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Accounts receivable, net of allowance of $1,100 and $3,000,
respectively |
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218,128 |
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|
167,345 |
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Inventories |
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232,824 |
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|
180,098 |
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Deferred income taxes |
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|
58 |
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|
127 |
|
Prepaid expenses and other |
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6,260 |
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|
5,693 |
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Total current assets |
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627,020 |
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|
461,990 |
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Property, plant and equipment, net |
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129,755 |
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|
123,140 |
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Goodwill |
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|
7,312 |
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|
6,995 |
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Other |
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|
9,226 |
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|
8,343 |
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Deferred income taxes |
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|
1,725 |
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|
1,572 |
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Total assets |
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$ |
775,038 |
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$ |
602,040 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt and capital lease obligations |
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$ |
1,245 |
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$ |
770 |
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Accounts payable |
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|
230,303 |
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|
159,068 |
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Customer deposits |
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|
5,923 |
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|
7,707 |
|
Accrued liabilities: |
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Salaries and wages |
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|
32,965 |
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|
24,052 |
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Other |
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|
34,458 |
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31,001 |
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Total current liabilities |
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304,894 |
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|
222,598 |
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Long-term debt and capital lease obligations, net of current portion |
|
|
21,666 |
|
|
|
22,310 |
|
Other liabilities |
|
|
6,770 |
|
|
|
13,499 |
|
Deferred income taxes |
|
|
4,670 |
|
|
|
3,618 |
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Commitments and contingencies |
|
|
— |
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— |
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Shareholders’ equity: |
|
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Preferred stock, $.01 par value, 5,000 shares authorized, none
issued or outstanding |
|
|
— |
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— |
|
Common stock, $.01 par value, 200,000 shares authorized, 46,195
and 43,752 shares issued and outstanding, respectively |
|
|
462 |
|
|
|
438 |
|
Additional paid-in capital |
|
|
311,236 |
|
|
|
273,419 |
|
Retained earnings |
|
|
116,229 |
|
|
|
58,843 |
|
Accumulated other comprehensive income |
|
|
9,111 |
|
|
|
7,315 |
|
|
|
|
|
|
|
|
|
|
|
|
437,038 |
|
|
|
340,015 |
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Total liabilities and shareholders’ equity |
|
$ |
775,038 |
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$ |
602,040 |
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See notes to condensed consolidated financial statements.
4
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
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Nine Months Ended |
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July 1, |
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July 2, |
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2006 |
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2005 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
57,386 |
|
|
$ |
(22,934 |
) |
Adjustments to reconcile net income (loss) to net cash
flows provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
17,189 |
|
|
|
18,478 |
|
Non-cash asset impairments |
|
|
59 |
|
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|
31,217 |
|
Deferred income taxes, net |
|
|
(80 |
) |
|
|
377 |
|
Stock based compensation expense |
|
|
1,714 |
|
|
|
— |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(49,731 |
) |
|
|
(22,612 |
) |
Inventories |
|
|
(51,495 |
) |
|
|
(1,637 |
) |
Prepaid expenses and other |
|
|
(1,433 |
) |
|
|
(4,167 |
) |
Accounts payable |
|
|
73,387 |
|
|
|
37,787 |
|
Customer deposits |
|
|
1,000 |
|
|
|
2,625 |
|
Accrued liabilities and other |
|
|
2,024 |
|
|
|
(635 |
) |
|
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|
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|
|
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|
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Cash flows provided by operating activities |
|
|
50,020 |
|
|
|
38,499 |
|
|
|
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Cash flows from investing activities |
|
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Purchases of short-term investments |
|
|
(30,500 |
) |
|
|
(1,995 |
) |
Sales of short-term investments |
|
|
10,500 |
|
|
|
— |
|
Payments for property, plant and equipment |
|
|
(26,192 |
) |
|
|
(13,158 |
) |
Proceeds from sales of property, plant and equipment |
|
|
309 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
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|
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Cash flows used in investing activities |
|
|
(45,883 |
) |
|
|
(15,153 |
) |
|
|
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|
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|
|
|
|
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|
|
|
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|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from debt |
|
|
1,292 |
|
|
|
15,000 |
|
Payments on debt and capital lease obligations |
|
|
(1,692 |
) |
|
|
(17,261 |
) |
Proceeds from stock options exercised |
|
|
35,625 |
|
|
|
985 |
|
Income tax benefit from stock options exercised |
|
|
363 |
|
|
|
— |
|
Issuances of common stock under Employee Stock Purchase Plan |
|
|
138 |
|
|
|
2,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing activities |
|
|
35,726 |
|
|
|
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash
equivalents |
|
|
1,160 |
|
|
|
(1,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
41,023 |
|
|
|
23,301 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
98,727 |
|
|
|
40,924 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
139,750 |
|
|
$ |
64,225 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JULY 1, 2006
Unaudited
NOTE 1 — BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been prepared by Plexus
Corp. (“Plexus” or the “Company”) without audit and pursuant to the rules and regulations of the
United States Securities and Exchange Commission. In the opinion of the Company, the financial
statements reflect all adjustments, which include normal recurring adjustments necessary to present
fairly the financial position of the Company as of July 1, 2006 and the results of operations for
the three and nine months ended July 1, 2006 and July 2, 2005, and its cash flows for the same nine
month periods.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been condensed or omitted
pursuant to the SEC rules and regulations dealing with interim financial statements. However, the
Company believes that the disclosures made in the condensed consolidated financial statements
included herein are adequate to make the information presented not misleading. It is suggested
that these condensed consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company’s 2005 Annual Report on Form 10-K.
The Company’s fiscal year ends on the Saturday closest to September 30 rather than on
September 30, as was the case prior to fiscal 2005. The Company also has adopted a “4-4-5” weekly
accounting system for the interim periods in each quarter. Each quarter therefore ends on a
Saturday at the end of the 4-4-5 weekly period. The accounting periods for the third quarter of
fiscal 2006 and 2005 each included 91 days. The accounting periods for the nine months ended July
1, 2006 and July 2, 2005, included 273 days and 275 days, respectively.
NOTE 2 — INVENTORIES
The major classes of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
October 1, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
167,144 |
|
|
$ |
116,466 |
|
Work-in-process |
|
|
34,726 |
|
|
|
30,282 |
|
Finished goods |
|
|
30,954 |
|
|
|
33,350 |
|
|
|
|
|
|
|
|
|
|
$ |
232,824 |
|
|
$ |
180,098 |
|
|
|
|
|
|
|
|
NOTE 3 — LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company is a party to a secured revolving credit facility (as amended, the “Secured Credit
Facility”) with a group of banks that allows the Company to borrow up to $150 million and expires
on October 31, 2007. Borrowings under the Secured Credit Facility may be either through revolving
or swing loans or letter of credit obligations. As of July 1, 2006, the Company had no borrowings
outstanding under the Secured Credit Facility. 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. The Secured Credit Facility contains certain
financial covenants, which include certain minimum adjusted EBITDA amounts, maximum outstanding
borrowings (not to exceed 2.5 times the adjusted EBITDA for the trailing four quarters) and a
minimum tangible net worth, all as defined in the amended agreement. Interest on borrowings varies
depending upon the Company’s then-current total leverage ratio 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. Origination fees and expenses totaled
approximately $1.4 million. The origination fees and expenses have been deferred and are being
amortized to interest expense over the term of the Secured Credit Facility. Interest expense
related to the commitment fee and amortization of deferred origination fees totaled approximately
$0.3 million and $0.9 million for the three and nine
6
months ended July 1, 2006, respectively, and $0.3 million
and $0.9 million for the three and nine months ended July 2, 2005, respectively.
NOTE 4 — EARNINGS PER SHARE
The following is a reconciliation of the amounts utilized in the computation of basic and
diluted earnings per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
July 1, |
|
|
July 2, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic and Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
25,092 |
|
|
$ |
(21,498 |
) |
|
$ |
57,386 |
|
|
$ |
(22,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
45,848 |
|
|
|
43,369 |
|
|
|
44,793 |
|
|
|
43,291 |
|
Dilutive effect of stock options |
|
|
1,426 |
|
|
|
— |
|
|
|
1,598 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
47,274 |
|
|
|
43,369 |
|
|
|
46,391 |
|
|
|
43,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.55 |
|
|
$ |
(0.50 |
) |
|
$ |
1.28 |
|
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.53 |
|
|
$ |
(0.50 |
) |
|
$ |
1.24 |
|
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended July 1, 2006, stock options to purchase approximately 0.4
million and 0.7 million shares of common stock, respectively, were outstanding but not included in
the computation of diluted earnings per share because the options’ exercise prices were greater
than the average market price of the common shares and therefore their effect would be
anti-dilutive.
For both the three and nine months ended July 2, 2005, stock options to purchase approximately
5.2 million shares of common stock were outstanding but not included in the computation of diluted
earnings per share because there was a net loss in each period, and therefore their effect would be
anti-dilutive.
NOTE 5 — STOCK-BASED COMPENSATION
Effective October 2, 2005, the Company adopted Statement of Financial Accounting Standards No.
123 (R), “Share-Based Payment: An Amendment of Financial Accounting Standards Board Statements No.
123 and 95” (“SFAS No. 123(R)”), which revised SFAS No. 123, “Accounting for Stock-Based
Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees.” SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be measured at fair value and expensed in the consolidated
statement of operations over the service period (generally the vesting period) of the grant. Upon
adoption, the Company transitioned to SFAS No. 123(R) using the modified prospective application,
under which compensation expense is only recognized in the consolidated statements of operations
beginning with the first period that SFAS No. 123(R) is effective and continuing to be expensed
thereafter. Prior periods’ stock-based compensation expense is still presented on a pro-forma
basis.
Stock Option Plans: The Company’s shareholders have approved the 2005 Equity Incentive Plan
(the “2005 Plan”). The 2005 Plan is a stock-based incentive plan for the Company and includes
provisions by which the Company’s Compensation Committee of the Board of Directors may grant
stock-based awards to directors, executive officers and other officers and key employees. The
Compensation Committee of the Board of Directors may establish the terms and vesting periods of the
stock options, as well as accelerate the vesting of stock options. Unless otherwise directed by
the Compensation Committee, stock options vest over a three-year period from the date of grant and
have a term of ten years.
The maximum number of shares of Plexus common stock that may be issued pursuant to the 2005
Plan is 2.7 million shares. Under the 2005 Plan, the Company granted options to purchase 1.5
million shares of the Company’s common stock from the approval date of the 2005 Plan through July
1, 2006.
7
As a result of the adoption of SFAS No. 123(R), the Company recognized $0.7 million and $1.7
million of compensation expense associated with stock options for the three and nine months ended
July 1, 2006, respectively. The following presents pro-forma net income and per share data as if a
fair-value-based method had been used to account for stock-based compensation for the three and
nine months ended July 2, 2005 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
July 2, |
|
|
July 2, |
|
|
|
2005 |
|
|
2005 |
|
Net income (loss) as reported |
|
$ |
(21,498 |
) |
|
$ |
(22,934 |
) |
|
|
|
|
|
|
|
|
|
Stock-based employee compensation expense
included in reported net income (loss),
net of related income tax effects |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation expense
determined under fair value based method
excluded in reported net income (loss),
net of related income tax effects |
|
|
(9,487 |
) |
|
|
(12,428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
(30,985 |
) |
|
$ |
(35,362 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
(0.50 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
Basic, pro forma |
|
$ |
(0.71 |
) |
|
$ |
(0.82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted, as reported |
|
$ |
(0.50 |
) |
|
$ |
(0.53 |
) |
|
|
|
|
|
|
|
Diluted, pro forma |
|
$ |
(0.71 |
) |
|
$ |
(0.82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
43,369 |
|
|
|
43,291 |
|
|
|
|
|
|
|
|
Diluted |
|
|
43,369 |
|
|
|
43,291 |
|
|
|
|
|
|
|
|
A summary of the Company’s stock option activity follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise |
|
|
Intrinsic Value |
|
|
|
(in thousands) |
|
|
Price |
|
|
(in thousands) |
|
Options outstanding as of October 1, 2004 |
|
|
4,929 |
|
|
$ |
18.00 |
|
|
|
|
|
|
Granted |
|
|
764 |
|
|
|
13.02 |
|
|
|
|
|
Cancelled |
|
|
(375 |
) |
|
|
21.85 |
|
|
|
|
|
Exercised |
|
|
(364 |
) |
|
|
8.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of October 1, 2005 |
|
|
4,954 |
|
|
$ |
17.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
810 |
|
|
$ |
40.11 |
|
|
|
|
|
Cancelled |
|
|
(28 |
) |
|
|
24.17 |
|
|
|
|
|
Exercised |
|
|
(2,460 |
) |
|
|
14.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of July 1, 2006 |
|
|
3,276 |
|
|
$ |
25.20 |
|
|
$ |
30,262 |
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise |
|
|
Intrinsic Value |
|
|
|
(in thousands) |
|
|
Price |
|
|
(in thousands) |
|
Options exercisable as of: |
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2004 |
|
|
3,365 |
|
|
$ |
19.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2005 |
|
|
4,527 |
|
|
$ |
18.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006 |
|
|
2,508 |
|
|
$ |
20.33 |
|
|
$ |
35,364 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes outstanding stock option information as of July 1, 2006
(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 |
$ 3.38- $ 5.07 |
|
|
3 |
|
|
$ |
3.38 |
|
|
|
0.1 |
|
|
|
3 |
|
|
$ |
3.38 |
|
$ 5.08- $ 7.62 |
|
|
77 |
|
|
$ |
6.16 |
|
|
|
0.7 |
|
|
|
77 |
|
|
$ |
6.16 |
|
$ 7.63- $11.45 |
|
|
303 |
|
|
$ |
9.47 |
|
|
|
5.1 |
|
|
|
303 |
|
|
$ |
9.47 |
|
$11.46- $17.19 |
|
|
1,009 |
|
|
$ |
14.42 |
|
|
|
7.2 |
|
|
|
999 |
|
|
$ |
14.41 |
|
$17.20- $25.80 |
|
|
654 |
|
|
$ |
23.92 |
|
|
|
5.9 |
|
|
|
615 |
|
|
$ |
24.06 |
|
$25.81- $38.72 |
|
|
485 |
|
|
$ |
35.39 |
|
|
|
3.9 |
|
|
|
484 |
|
|
$ |
35.38 |
|
$38.73- $63.88 |
|
|
745 |
|
|
$ |
42.75 |
|
|
|
9.7 |
|
|
|
27 |
|
|
$ |
49.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.38- $63.88 |
|
|
3,276 |
|
|
$ |
25.20 |
|
|
|
6.6 |
|
|
|
2,508 |
|
|
$ |
20.33 |
|
The Company continues to use the Black-Scholes valuation model to value stock options. The
Company used its historical stock prices as the basis for its volatility assumptions. The assumed
risk-free rates were based on U.S. Treasury rates in effect at the time of grant and with a term
consistent with the expected option lives. The expected option lives represent the period of time
that the options granted are expected to be outstanding and were based on historical experience.
The weighted average fair value per share of options granted for the three and nine months
ended July 1, 2006 are $21.32 and $20.10, respectively. The weighted average fair value per share
of options granted for the three and nine months ended July 2, 2005 are $5.43 and $5.68,
respectively. The fair value of each option grant was estimated at the date of grant using the
Black-Scholes option-pricing method based on the assumption ranges below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Expected life (years) |
|
|
3.75 – 5.48 |
|
|
|
3.75 – 9.10 |
|
|
|
3.75 – 5.48 |
|
|
|
3.75 – 9.10 |
|
Risk-free interest rate |
|
|
2.43 – 5.00 |
% |
|
|
2.43 – 4.51 |
% |
|
|
2.43 – 5.00 |
% |
|
|
2.43 – 4.51 |
% |
Weighted average volatility |
|
|
51 – 81 |
% |
|
|
51 – 85 |
% |
|
|
51 – 85 |
% |
|
|
51 – 85 |
% |
Dividend yield |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
For the three and nine months ended July 1, 2006, the total intrinsic value of stock options
exercised was $28.2 million and $50.5 million, respectively.
As of July 1, 2006, there was $15.0 million of unrecognized compensation cost related to
non-vested stock options that is expected to be recognized over a weighted average period of 2.8
years.
9
Employee Stock Purchase Plans: The Company’s shareholders have also approved the 2005
Employee Stock Purchase Plan (the “2005 Purchase Plan”) under which the Company may issue up to 1.2
million shares of its common stock. The terms of the 2005 Purchase Plan allowed 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 2005 Purchase Plan was effective on July 1, 2005 and
terminates on June 30, 2010, unless all shares authorized under the 2005 Purchase Plan have been
issued prior to that date.
The Board of Directors of the Company amended the 2005 Purchase Plan to allow qualified
employees to purchase the Company’s common stock at a price equal to 95 percent of the average high
and low stock price at the end of each semi-annual purchase period. The effect of the amendment
was to reduce the discount available to employees who purchase shares under the 2005 Purchase Plan.
With the amendment, the Company does not expect to record any compensation expense related to the
2005 Purchase Plan under SFAS No. 123(R). The Company has issued 4,226 shares under the 2005
Purchase Plan during the three months and nine months ended July 1, 2006.
NOTE 6 — INCOME TAXES
Income taxes for the three and nine months ended July 1, 2006 were $0.3 million and $0.6
million, respectively. The effective tax rates for the three and nine months ended July 1, 2006
were 1.3 percent and 1.0 percent, respectively. Income taxes for the three and nine months ended
July 2, 2005 were $1.0 million and $0.9 million, respectively. The effective tax rate for the three
and nine months ended July 2, 2005 was (5.0) percent and (4.0) percent, respectively. The reduction
in our effective tax rate for the three and nine months ended July 1, 2006, compared to the three
and nine months ended July 2, 2005, was due to increased profits in Asia, where we currently enjoy
tax holidays, and in the United States where the carry-forward of net operating losses (“NOLs”),
and the establishment in fiscal 2004 of a full-valuation allowance on deferred tax assets, result
in no tax provision on U.S. income. As of July 1, 2006, the Company had a $44.3 million valuation
allowance on U.S. deferred tax assets.
U.S. GAAP requires us to periodically review our historical and projected levels of
profitability in the United States, and we may be required to reduce the valuation allowance by
crediting the tax provision for a portion of the remaining valuation allowance, which would have a
beneficial impact on our effective tax rate. Once the U.S. valuation allowance is reversed, our
effective tax rate is expected to increase.
NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”)
effective October 1, 2002. Under SFAS No. 142, the Company no longer amortizes goodwill and
intangible assets with indefinite useful lives, but instead, the Company tests those assets for
impairment at least annually, and recognizes any related losses when incurred. Recoverability of
goodwill is measured at the reporting unit level. Upon the adoption of SFAS No. 142, the Company’s
goodwill was originally assigned to three reporting units or operations: San Diego, California
(“San Diego”), Juarez, Mexico (“Juarez”) and Kelso, Scotland and Maldon, England (“United
Kingdom”). As of July 1, 2006, the Company had remaining goodwill of $7.3 million, all of which
related to the operations in the United Kingdom.
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, or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. The Company’s fiscal 2006
annual impairment test did not result in any further impairment of the remaining goodwill in the
United Kingdom. The fair value of the Company’s United Kingdom operations was primarily estimated
using the present value of expected future cash flows. No
assurances can be given that future impairment tests of the Company’s remaining goodwill will
not result in additional impairment.
In the third quarter of fiscal 2005, the Company recorded goodwill impairment of $26.9
million, of which $16.1 million represented a partial impairment of goodwill associated with the
Company’s operations in the United Kingdom and $10.8 million represented a complete impairment of
goodwill associated with the Company’s operations in Juarez.
10
In fiscal year 2005, the goodwill impairment of the Company’s United Kingdom operations arose
primarily from a medical customer’s expressed intention to transfer future production from the
Company’s United Kingdom operations to a lower-cost location by the end of fiscal 2006. The
impairment also reflected lowered expectations for the United Kingdom’s electronics manufacturing
services industry in general. Also in fiscal year 2005, the goodwill impairment associated with the
Company’s Juarez operations reflected a lowered forecast of near-term profits and cash flows
associated with recent operational issues and an anticipated transfer of a customer program to
another Plexus manufacturing facility. The fair value of each of the Company’s United Kingdom and
Juarez operations was primarily estimated using the present value of expected future cash flows,
although market valuations were also utilized.
The changes in the carrying amount of goodwill for the fiscal year ended October 1, 2005 and
for the nine months ended July 1, 2006 for the various business segments are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
|
|
Kingdom |
|
|
Mexico |
|
|
Total |
|
Balance as of October 1, 2004 |
|
$ |
23,327 |
|
|
$ |
10,852 |
|
|
$ |
34,179 |
|
Goodwill impairment |
|
|
(16,063 |
) |
|
|
(10,852 |
) |
|
|
(26,915 |
) |
Foreign currency
translation adjustment |
|
|
(269 |
) |
|
|
— |
|
|
|
(269 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2005 |
|
|
6,995 |
|
|
|
— |
|
|
|
6,995 |
|
Foreign currency
translation adjustment |
|
|
317 |
|
|
|
— |
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 1, 2006 |
|
$ |
7,312 |
|
|
$ |
— |
|
|
$ |
7,312 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 — BUSINESS SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS No. 131”) establishes standards for reporting
information about segments in financial statements. Operating segments are defined as components
of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or group, in assessing performance and allocating
resources.
The Company has aggregated its operating locations into four reportable geographical segments:
United States, Asia, Mexico and Europe. As of July 1, 2006, the Company had 18 active
manufacturing and/or engineering facilities in the United States, Asia, Mexico and Europe.
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. Net sales
for segments are attributed to the region in which the product is manufactured or service is
performed. The services provided, manufacturing processes used, class of customers serviced and
order fulfillment processes used are similar and generally interchangeable across the segments. A
segment’s performance is evaluated based upon its operating income (loss). A segment’s operating
income (loss) includes its net sales less cost of sales and selling and administrative expenses,
but excludes corporate and other costs, interest expense, other income (loss), and income tax
expense. Corporate and other costs primarily represent corporate selling and administrative
expenses, and restructuring and impairment costs. These costs are not allocated to the segments, as
management excludes such
costs when assessing the performance of the segments. Inter-segment 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.
11
Information about the Company’s four operating segments for the three and nine months ended
July 1, 2006 and July 2, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
July 1, |
|
|
July 2, |
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
294,567 |
|
|
$ |
230,980 |
|
|
$ |
774,782 |
|
|
$ |
685,448 |
|
Asia |
|
|
89,565 |
|
|
|
44,300 |
|
|
|
212,649 |
|
|
|
111,817 |
|
Mexico |
|
|
16,940 |
|
|
|
32,010 |
|
|
|
67,840 |
|
|
|
94,034 |
|
Europe |
|
|
22,970 |
|
|
|
25,905 |
|
|
|
71,350 |
|
|
|
79,277 |
|
Elimination
of inter-segment sales |
|
|
(26,644 |
) |
|
|
(19,486 |
) |
|
|
(63,006 |
) |
|
|
(63,901 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
397,398 |
|
|
$ |
313,709 |
|
|
$ |
1,063,615 |
|
|
$ |
906,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
2,341 |
|
|
$ |
2,737 |
|
|
$ |
7,318 |
|
|
$ |
8,699 |
|
Asia |
|
|
1,454 |
|
|
|
903 |
|
|
|
3,978 |
|
|
|
2,519 |
|
Mexico |
|
|
311 |
|
|
|
334 |
|
|
|
917 |
|
|
|
1,040 |
|
Europe |
|
|
249 |
|
|
|
478 |
|
|
|
790 |
|
|
|
1,550 |
|
Corporate |
|
|
1,341 |
|
|
|
1,591 |
|
|
|
4,186 |
|
|
|
4,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,696 |
|
|
$ |
6,043 |
|
|
$ |
17,189 |
|
|
$ |
18,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
31,259 |
|
|
$ |
16,383 |
|
|
$ |
74,486 |
|
|
$ |
47,077 |
|
Asia |
|
|
7,952 |
|
|
|
2,729 |
|
|
|
17,763 |
|
|
|
3,491 |
|
Mexico |
|
|
(1,521 |
) |
|
|
46 |
|
|
|
(2,399 |
) |
|
|
(2,543 |
) |
Europe |
|
|
1,679 |
|
|
|
1,829 |
|
|
|
5,275 |
|
|
|
4,784 |
|
Corporate and other costs |
|
|
(15,419 |
) |
|
|
(40,792 |
) |
|
|
(39,390 |
) |
|
|
(73,609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,950 |
|
|
$ |
(19,805 |
) |
|
$ |
55,735 |
|
|
$ |
(20,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,903 |
|
|
$ |
3,452 |
|
|
$ |
9,441 |
|
|
$ |
6,211 |
|
Asia |
|
|
1,916 |
|
|
|
467 |
|
|
|
12,945 |
|
|
|
2,949 |
|
Mexico |
|
|
237 |
|
|
|
79 |
|
|
|
785 |
|
|
|
601 |
|
Europe |
|
|
53 |
|
|
|
139 |
|
|
|
203 |
|
|
|
1,667 |
|
Corporate |
|
|
630 |
|
|
|
420 |
|
|
|
2,818 |
|
|
|
1,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,739 |
|
|
$ |
4,557 |
|
|
$ |
26,192 |
|
|
$ |
13,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
October 1, |
|
|
|
2006 |
|
|
2005 |
|
Total assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
336,029 |
|
|
$ |
264,848 |
|
Asia |
|
|
145,123 |
|
|
|
82,050 |
|
Mexico |
|
|
33,028 |
|
|
|
40,908 |
|
Europe |
|
|
89,522 |
|
|
|
81,549 |
|
Corporate |
|
|
171,336 |
|
|
|
132,685 |
|
|
|
|
|
|
|
|
|
|
$ |
775,038 |
|
|
$ |
602,040 |
|
|
|
|
|
|
|
|
The following enterprise-wide information is provided in accordance with SFAS No. 131. Sales
to unaffiliated customers are based on the Company’s location providing product or services (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
July 1, |
|
|
July 2, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
294,567 |
|
|
$ |
230,980 |
|
|
$ |
774,782 |
|
|
$ |
685,448 |
|
Malaysia |
|
|
75,021 |
|
|
|
34,557 |
|
|
|
173,545 |
|
|
|
88,547 |
|
Mexico |
|
|
16,940 |
|
|
|
32,010 |
|
|
|
67,840 |
|
|
|
94,034 |
|
United Kingdom |
|
|
22,970 |
|
|
|
25,905 |
|
|
|
71,350 |
|
|
|
79,277 |
|
China |
|
|
14,544 |
|
|
|
9,743 |
|
|
|
39,104 |
|
|
|
23,270 |
|
Elimination of inter-segment sales |
|
|
(26,644 |
) |
|
|
(19,486 |
) |
|
|
(63,006 |
) |
|
|
(63,901 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
397,398 |
|
|
$ |
313,709 |
|
|
$ |
1,063,615 |
|
|
$ |
906,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
October 1, |
|
|
|
2006 |
|
|
2005 |
|
Long-lived assets: |
|
|
|
|
|
|
|
|
United States |
|
$ |
31,676 |
|
|
$ |
32,912 |
|
Malaysia |
|
|
32,362 |
|
|
|
22,095 |
|
Mexico |
|
|
3,366 |
|
|
|
3,571 |
|
United Kingdom |
|
|
18,819 |
|
|
|
18,410 |
|
China |
|
|
1,865 |
|
|
|
1,992 |
|
Corporate |
|
|
48,979 |
|
|
|
51,155 |
|
|
|
|
|
|
|
|
|
|
$ |
137,067 |
|
|
$ |
130,135 |
|
|
|
|
|
|
|
|
Long-lived assets as of July 1, 2006 and October 1, 2005 exclude other non-operating long-term
assets totaling $11.0 million and $9.9 million, respectively.
Juniper Networks, Inc. (“Juniper”) accounted for 19 percent and 20 percent of net sales for
the three and nine months ended July 1, 2006, respectively. In addition, General Electric Corp.
(“GE”) accounted for 11 percent and 12 percent of net sales for the three and nine months ended
July 1, 2006, respectively. Also, an unnamed defense customer accounted for 10 percent of net
sales for the three months ended July 1, 2006. Juniper accounted for 20 percent of net sales for
both the three and nine months ended July 2, 2005. In addition, GE accounted for 12 percent and 11
percent of sales for the three and nine months ended July 2, 2005, respectively. No other
customers accounted for 10 percent or more of net sales in either periods for both fiscal 2006 and
2005.
NOTE 9 — GUARANTEES
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’
13
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 does not provide for such indemnities, and seeks indemnification from its
customers for damages or liabilities arising out of the Company’s adherence 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 limited 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 components, design defects or damage caused by any party other than the Company.
The Company provides for an estimate of costs that may be incurred under its limited warranty
at the time product revenue is recognized and establishes reserves for specifically identified
product issues. These costs primarily include labor and materials, as necessary, associated with
repair or replacement. The primary factors that affect the Company’s warranty liability include the
number of shipped units and historical and anticipated rates of warranty claims. As these factors
are impacted by actual experience and future expectations, the Company assesses the adequacy of its
recorded warranty liabilities and adjusts the amounts as necessary. During the nine months ended
July 1, 2006, the Company incurred nominal warranty activity. As of July 1, 2006, the Company had a
$1.0 million accrued warranty liability.
NOTE 10 — CONTINGENCIES
The Company is party to certain lawsuits in the ordinary course of business. Management does
not believe that these proceedings, individually or in the aggregate, will have a material adverse
effect on the Company’s financial position, results of operations or cash flows.
NOTE 11 — RESTRUCTURING AND IMPAIRMENT COSTS
Fiscal 2006 restructuring and asset impairment costs: For the three and nine months ended July
1, 2006, the Company recorded pre-tax restructuring and asset impairment costs of $0.6 million and
$1.0 million, respectively, related to the decision to close its Maldon, England (“Maldon”)
facility and to reduce the workforce in Juarez. For the three and nine months ended July 1, 2006,
these restructuring costs were offset by reductions in lease obligations of $0.6 and $0.8 million,
respectively, as a result of the Company entering into lease termination or sublease agreements for
three of its previously closed facilities in the Bothell and Seattle, Washington area, as well as
favorable adjustments of $0.2 million for the nine months ended July 1, 2006, related to other
restructuring accruals. The details of these fiscal 2006 restructuring actions are listed below:
Maldon Facility Closure: The Company announced its decision to close its Maldon
facility. For the three months ended July 1, 2006, the Company recorded $0.5 million for severance
and asset impairments related to the closure of the Maldon facility. This restructuring affected
77 employees. The Company expects to incur an additional $0.5 million for retention and other
costs when the Maldon facility closes by the end of March 2007.
Maldon Facility Conversion: In the third quarter of fiscal 2005, the Company
announced a planned workforce reduction at the Maldon facility as the Company decided to convert
this manufacturing facility to a fulfillment, service and repair facility. As a result of this
planned conversion, the Company recorded expenses of $0.1 million and $0.2 million for retention
bonuses for the three and nine months ended July 1, 2006 related to the workforce reduction as part
of the Maldon facility conversion. This restructuring affected 43 employees.
Other Restructuring Costs. For the nine months ended July 1, 2006, the Company
recorded pre-tax restructuring costs of $0.3 million related to severance for its Juarez facility.
The Juarez workforce reductions affected approximately 46 employees.
14
Fiscal 2005 restructuring and asset impairment costs: For the three and nine months ended July
2, 2005, the Company recorded pre-tax restructuring and impairment costs totaling $0.7 million and
$12.3 million, respectively. The details of these fiscal 2005 restructuring actions are listed
below:
Bothell Facility Closure. For the three and nine months ended July 2, 2005, the
Company incurred $0.2 million and $7.5 million, respectively, of restructuring costs associated
with the closure of the Company’s Bothell, Washington engineering and manufacturing facility. For
the three months ended July 2, 2005, these costs consisted of $0.2 million for employee severance
and retention bonuses. For the nine months ended July 2, 2005, these costs consisted of $6.2
million for the facility lease, $1.1 million for employee severance and retention bonuses and $0.2
million for other closure costs.
Shop Floor Data-Collection System Impairment. For the nine months ended July 2, 2005,
the Company recorded a $3.8 million impairment of the remaining elements of a shop floor
data-collection system when it determined that the remaining value of the shop floor
data-collection system was impaired because the anticipated business benefits could not be
realized.
Other Restructuring Costs. For the three and nine months ended July 2, 2005, the
Company recorded $0.5 million and $1.0 million, respectively, of restructuring and asset impairment
costs.
For the three months ended July 2, 2005, the Company incurred other restructuring and asset
impairment costs of $0.5 million, which consisted of the following:
|
• |
|
$0.3 million associated with the elimination of a corporate executive position,
and |
|
|
• |
|
$0.2 million for the planned workforce reduction for the Maldon facility
conversion noted above. |
For the nine months ended July 2, 2005, the Company incurred other restructuring and asset
impairment costs of $1.0 million, which consisted of the following:
|
• |
|
$0.5 million which consisted of $0.4 million associated with a workforce
reduction and $0.1 million in asset impairments in the Juarez facility. The Juarez
workforce reduction affected approximately 50 employees. |
|
|
• |
|
$0.3 million associated with the elimination of a corporate executive position. |
|
|
• |
|
$0.2 million for the planned workforce reduction for the Maldon facility
conversion noted above. |
15
The table below summarizes the Company’s accrued restructuring liabilities as of July 1, 2006
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Lease Obligations |
|
|
|
|
|
|
|
|
|
Termination and |
|
|
and Other Exit |
|
|
Non-cash Asset |
|
|
|
|
|
|
Severance Costs |
|
|
Costs |
|
|
Impairments |
|
|
Total |
|
|
|
|
Accrued
balance, October 1,
2005 |
|
$ |
519 |
|
|
$ |
11,503 |
|
|
$ |
— |
|
|
$ |
12,022 |
|
Restructuring and
asset
impairment/(adjustments to provisions) |
|
|
889 |
|
|
|
(948 |
) |
|
|
59 |
|
|
|
— |
|
Accretion of lease |
|
|
— |
|
|
|
212 |
|
|
|
— |
|
|
|
212 |
|
Amounts utilized |
|
|
(880 |
) |
|
|
(3,584 |
) |
|
|
(59 |
) |
|
|
(4,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued balance,
July 1, 2006 |
|
$ |
528 |
|
|
$ |
7,183 |
|
|
$ |
— |
|
|
$ |
7,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 1, 2006, we expect to pay $0.5 million of the remaining severance liability and
$7.2 million of the lease obligation liability in the next twelve months.
NOTE 12 — NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position
(“FSP”) FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004” (the “Act”). The Act became law in the
U.S. in October 2004. This legislation provides for a number of changes in U.S. tax laws. FSP SFAS
No. 109-2 requires recognition of a deferred tax liability for the tax effect of the excess of book
over tax basis of an investment in a foreign corporate venture that is permanent in duration,
unless a company firmly asserts that such amounts are indefinitely reinvested outside the company’s
home jurisdiction. However, due to the lack of clarification of certain provisions within the Act,
FSP SFAS No. 109-2 provides companies additional time beyond the financial reporting period of
enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign
earnings for purposes of applying SFAS No. 109. We are presently reviewing this legislation, in
conjunction with income tax legislation enacted in July 2005 in the United Kingdom, to determine
the impacts on our consolidated results of operations and financial position.
In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations” (“FIN 47”), which clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the fair value can be
reasonably estimated even though uncertainty exists about the timing and/or method of settlement.
We will adopt FIN 47 in the fourth quarter of fiscal 2006. We estimate the impact of the adoption
of FIN 47 to be approximately $0.9 million, or $0.02 per share, on our consolidated results of
operations and financial position.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS
No. 154 replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting
Changes in Interim Financial Statements,” and changes the requirements for the accounting for and
reporting of a change in accounting principle. We are required to adopt SFAS No. 154 for
accounting changes and error corrections in fiscal 2007. Our results of operations and financial
condition will only be impacted by SFAS No. 154 if we implement changes in accounting principles
that are addressed by the standard or have corrections of accounting errors.
In June 2005, the FASB issued FSP No. FAS 143-1, “Accounting for Electronic Equipment Waste
Obligations,” that provides guidance on how commercial users and producers of electronic equipment
should recognize and measure asset retirement obligations associated with the European Directive
2002/96/EC on Waste Electrical and Electronic Equipment (“WEEE”). WEEE primarily impacts our
operations in the United Kingdom.
FSP No 143-1 is effective on the date that the United Kingdom adopts WEEE into law, which
occurred on July 1, 2006. The adoption of FSP No. 143-1 did not have a material impact on the
Company’s consolidated results of operations, financial position and cash flows for the three and
nine months ended July 1, 2006.
16
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement 109,” (FIN 48) that provides guidance on how a company
should recognize, measure, present and disclose uncertain tax positions which a company has taken
or expects to take. The effective date for FIN 48 is as of the beginning of fiscal years that
start subsequent to December 15, 2006. The Company is currently assessing the impact of FIN 48 on
its consolidated results of operations, financial position and cash flows.
NOTE 13 — RECLASSIFICATIONS
Certain amounts in previously filed consolidated financial statements have been reclassified
to conform to the 2006 presentation.
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
“SAFE HARBOR” CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
The statements contained in the Form 10-Q that are not historical facts (such as statements in
the future tense and statements including “believe,” “expect,” “intend,” “plan,” “anticipate,”
“goal,” “target” and similar words and concepts, including all discussions of periods which are not
yet completed) 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 expanding, closing and restructuring facilities |
|
|
• |
|
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 |
|
|
• |
|
other risks detailed below, especially in “Risk Factors”, otherwise in this report,
and in our other Securities and Exchange Commission filings. |
OVERVIEW
Plexus Corp. and its subsidiaries (together “Plexus,” the “Company,” or “we”) participate in
the Electronic Manufacturing Services (“EMS”) industry. As a contract manufacturer, we provide
product realization services to original equipment manufacturers, (“OEMs”), and other technology
companies in a number of industry sectors that are described in our Form 10-K. We provide advanced
electronics design, manufacturing and testing services to our customers with a focus on complex and
global fulfillment solutions, high technology manufacturing and test services, and high reliability
products. We offer our customers the ability to outsource all stages of product realization,
including development and design, materials sourcing, procurement and management, prototyping and
new product introduction, testing, manufacturing, product configuration, logistics and test/repair.
We are increasingly providing fulfillment and logistic services to many of our customers. Direct
Order Fulfillment (“DOF”) entails receiving orders from our customers that provide the final
specifications required by the end customer. We then build to order and configure to order and
deliver the product directly to the end customer. The DOF process relies on Enterprise Resource
Planning (“ERP”) systems integrated with those of our customers to manage the overall supply chain
from parts procurement through manufacturing and logistics. The following information should be
read in conjunction with our consolidated financial statements included herein and the “Risk
Factors” section beginning on page 29.
Our customers include both industry-leading original equipment manufacturers and technology
companies that have never manufactured products internally. As a result of our focus on serving
industries that rely on advanced electronics technology, our business is influenced by
technological trends such as the level and rate of development of telecommunications infrastructure
and the expansion of networks and use of the Internet. In addition, the federal Food and Drug
Administration’s approval of new medical devices and other governmental approval and regulatory
processes can affect our business. Our business has also benefited from the trend to increased
outsourcing by OEM’s.
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 the necessary materials, and we provide the labor and
other services required for product assembly. Turnkey services require material procurement and
warehousing, in addition to manufacturing,
18
and involve greater resource investments than
consignment services. Other than certain test equipment used for internal manufacturing, we do not
design or manufacture our own proprietary products.
EXECUTIVE SUMMARY
Net sales for the three months ended July 1, 2006 increased by $83.7 million, or 26.7 percent,
over the comparable prior-year period to $397.4 million. Net sales in each of our end-markets, or
sectors, were higher in the current-year period except for wireless infrastructure. Net sales in
the defense/security/aerospace sector, which benefited in the current-year period from production
of a new program, exhibited the highest growth in both dollars and as a percentage.
Net income for the three months ended July 1, 2006 was a record $25.1 million, and diluted
earnings per share were $0.53, which compared favorably to a net loss of $(21.5) million, or
$(0.50) per diluted share, in the prior-year period. The prior-year period included $27.6 million
($27.5 million after-tax) of primarily goodwill impairment ($26.9 million) and other restructuring
charges which together were the equivalent of $0.66 per diluted share.
Net sales for the nine months ended July 1, 2006 increased by $156.9 million, or 17.3 percent
over the comparable prior-year period to $1.1 billion. Net sales for the nine months were higher
than the prior-year period for all sectors except wireless infrastructure.
Net income for the nine months ended July 1, 2006 was $57.4 million and diluted earnings per
share were $1.24, which compared favorably to a net loss of $(22.9) million, or $(0.53) per diluted
share, in the comparable prior-year period. The prior-year period included $39.2 million of,
primarily, goodwill impairment costs ($26.9 million) and other restructuring charges.
In addition to the positive effects of increased sales, earnings in both the three and nine
months ended July 1, 2006 benefited not only from the absence of impairments of goodwill and other
restructuring and asset impairment charges in the current periods, but also higher interest income
earned on higher investment balances in a higher interest-rate environment and lower taxes than in
the prior-year periods. Operationally, we expanded both gross and operating margins as more fully
discussed below.
Gross margins were 11.5 percent for the three months ended July 1, 2006, which compared
favorably to 8.7 percent in the prior-year period. Gross margins were 10.7 percent for the nine
months ended July 1, 2006 as compared to 8.3 percent in the prior-year period. Gross margins in
both current-year periods benefited from the operating leverage gained on incremental revenues
attained on a relatively fixed manufacturing cost structure, favorable changes in the customer and
sector mix of revenues, and the continued application of “lean” manufacturing practices to enhance
operational effectiveness. In addition, our second manufacturing facility in Penang, Malaysia
(“Penang”), had commenced operations early in the prior fiscal year and operated at a loss for the
nine months ended July 2, 2005. This second facility in Penang has been consistently profitable in
both the three and nine months ended July 1, 2006 which has contributed to the year-over-year
improvements for these current-year periods.
Selling and administrative expenses were $21.6 million for the three months ended July 1,
2006, an increase of $2.3 million, or 11.7% over the prior-year period’s $19.3 million. The
current-year period had increased salaries and benefits, reflecting wage increases and additional
staffing, as well as higher accruals for variable incentive compensation and stock-based
compensation. There was no stock-based compensation expense in the prior-year period.
For the nine months ended July 1, 2006, selling and administrative expenses increased $1.5
million or 2.6% to $58.1 million. The current-year period had increased salaries and benefits,
reflecting wage increases and additional staffing, as well as higher accruals for variable
incentive compensation and stock-based compensation. There was no stock-based compensation
expense in the prior-year period. The overall growth in selling and
administrative expenses for the nine month period were moderated by lower bad debt expenses
and lower outside professional fees associated with Section 404 of the Sarbanes Oxley Act.
19
A further discussion of the fiscal third quarter’s financial performance by operating segment
is presented below:
|
• |
|
United States: Net sales for the three months ended July 1, 2006 increased
$63.6 million, or 27.5 percent, over the comparable prior-year period to $294.6 million.
This growth reflected primarily increased net sales to several customers including Juniper
Networks Inc. (“Juniper”), General Electric Corp. (“GE”) and a new customer within the
defense sector. Operating income improved $14.9 million for the three months ended July 1,
2006, as compared to the prior-year period, primarily as a result of increased net sales on
a relatively fixed manufacturing cost structure, favorable changes in customer mix and
continued operational improvements achieved through “lean” manufacturing practices. |
|
|
• |
|
Asia: Net sales for the three months ended July 1, 2006 increased $45.3
million, or 102.2 percent, over the prior-year period to $89.6 million as our facilities in
this low-cost region became an increasingly important source for Printed Circuit Board
Assemblies (PCBA’s). Operating income improved $5.2 million to $8.0 million for the three
months ended July 1, 2006 as compared to the prior-year period. Earnings benefited from
the incremental net sales and the turnaround from a loss to a profit at our second facility
in Penang, which began production in the first quarter of fiscal 2005. |
|
|
• |
|
Mexico: Net sales declined by $15.1 million, or 47.1 percent, to $16.9 million
for the three months ended July 1, 2006, as compared to the prior-year period. The decline
in revenues was principally related to the decision of a medical customer to transfer
production back to a Plexus facility located in the United States as well as lower demand
from other customers. The decrease in net sales resulted in an operating loss of $1.5
million for the three months ended July 1, 2006. In the comparable prior-year period,
operating income was essentially break-even. |
|
|
• |
|
Europe: Net sales declined by $2.9 million, or nearly 11.3 percent, to $23.0
million for the three months ended July 1, 2006, as compared to the prior-year period. The
revenue decline was attributable to reduced demand from a medical customer in the
current-year period. Lower operating income was primarily related to lower revenues. |
For our significant customers, we generally manufacture product in more than one location.
For example, manufacturing for Juniper, our largest customer, occurs in the United States and Asia.
Manufacturing for GE, a significant customer, takes place in the United States, Asia, and Mexico.
See Note 8 in Notes to Condensed Consolidated Financial Statements for certain financial
information regarding our operating segments, including a detail of net sales by operating segment.
The effective income tax rates for the three and nine months ended July 1, 2006 were 1.3
percent and 1.0 percent, respectively, which compared favorably to the effective tax rates of (5.0)
percent and (4.0) percent for the three and nine months ended July 2, 2005. The low current rate
reflects increased income in tax jurisdictions where we currently do not pay tax: Asia and the
United States. We enjoy tax holidays in both Malaysia and China, which extend through 2019 and
2013, respectively. In the United States, we have the benefit of the carryforward of net operating
losses (NOLs) incurred in prior years to offset current taxable income. The deferred tax asset for
these NOL carryforwards is offset by a full valuation allowance. The timing of the reversal of the
valuation allowance will be determined by, among other things, the amount of taxable U.S. income
and the amount of U.S. tax deductions generated by the exercises of nonqualified stock options or
disqualifying dispositions of stock received under incentive stock options, which result in tax
deductions, but not expense for financial statement purposes.
We currently expect the annual effective tax rate for fiscal year 2006 to be approximately 1.0
percent. We estimate that our normalized world-wide effective tax rate for fiscal 2006 without this
valuation allowance on our U.S. deferred tax assets would be approximately 25 percent.
Our financial goals for the current fiscal year are to build on the prior year’s achievements
and to focus on attaining industry-leading organic net sales growth and further improvements in
operating income. We recently
announced a revised growth target for net sales for full fiscal year 2006 of approximately
18.3 percent to 19.5 percent over fiscal 2005. Based on customer indications of expected demand
and management estimates of new program wins, including the new program in our
defense/security/aerospace sector, we currently expect net sales for
20
the fourth fiscal quarter 2006
to be in the range of $390 million to $405 million; however, results will ultimately depend upon
the actual level of customer orders. Assuming that net sales are in that range, we would currently
expect to earn, before any restructuring and impairment costs, between $0.46 to $0.50 per diluted
share.
Our primary financial metric for measuring financial performance is after-tax return on
capital employed (ROCE), which we anticipate will exceed in fiscal 2006 our estimated 15 percent
weighted average cost of capital. We expect to achieve this improved metric through further
expansion of operating margins and continued focus on improving working capital management to
increase capital employed turnover. We define after-tax ROCE as tax-effected operating income,
excluding unusual charges, divided by average capital employed, which is equity plus debt, less
cash. Annualized after-tax ROCE for the fiscal third quarter was 34.0 percent, a substantial
improvement over the 26.9 percent achieved in the fiscal second quarter.
RESULTS OF OPERATIONS
Net sales. Net sales for the indicated periods were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
Three months ended |
|
Variance |
|
Nine months ended |
|
Variance |
|
|
July 1, |
|
July 2, |
|
Increase/ |
|
July 1, |
|
July 2, |
|
Increase/ |
|
|
2006 |
|
2005 |
|
(Decrease) |
|
2006 |
|
2005 |
|
(Decrease) |
Net sales |
|
$ |
397.4 |
|
|
$ |
313.7 |
|
|
$ |
83.7 |
|
|
|
27 |
% |
|
$ |
1,063.6 |
|
|
$ |
906.7 |
|
|
$ |
156.9 |
|
|
|
17 |
% |
The dollar increase in net sales for both the three and nine months ended July 1, 2006,
reflects increased demand in all sectors except wireless infrastructure (see industry sector table
below). The net sales growth was due to increased demand from several of our customers, including
our largest customer, Juniper, and GE. In addition, the net sales growth in the
defense/security/aerospace sector was driven by the addition of a new customer. This new customer
represents a significant opportunity; the degree to which this customer relationship, as with all
new customers, matures into a long-term relationship is not yet certain. Net sales in the wireless
infrastructure sector were reduced due to lower end-customer demand for several accounts in this
sector.
Our net sales by industry sector for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
Industry Sector |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Wireline/Networking |
|
|
38 |
% |
|
|
37 |
% |
|
|
38 |
% |
|
|
38 |
% |
Wireless Infrastructure |
|
|
6 |
% |
|
|
11 |
% |
|
|
9 |
% |
|
|
11 |
% |
Medical |
|
|
25 |
% |
|
|
28 |
% |
|
|
26 |
% |
|
|
29 |
% |
Industrial/Commercial |
|
|
17 |
% |
|
|
19 |
% |
|
|
18 |
% |
|
|
18 |
% |
Defense/Security/Aerospace |
|
|
14 |
% |
|
|
5 |
% |
|
|
9 |
% |
|
|
4 |
% |
The percentages of net sales to customers representing 10 percent or more of net sales and net
sales to our ten largest customers for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Juniper |
|
|
19 |
% |
|
|
20 |
% |
|
|
20 |
% |
|
|
20 |
% |
GE |
|
|
11 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
11 |
% |
Defense customer |
|
|
10 |
% |
|
|
* |
|
|
|
* |
|
|
|
* |
|
Top 10 customers |
|
|
63 |
% |
|
|
60 |
% |
|
|
61 |
% |
|
|
58 |
% |
|
|
|
* |
|
Represents less than 10 percent of net sales |
21
Juniper recently announced the addition of another EMS provider. Although the Company expects
to transfer certain programs currently manufactured at Plexus to this
other EMS company, we also
expect to win programs from Juniper that we currently do not manufacture. Accordingly, we expect
that our revenues will be unaffected by Juniper’s decision to add a third EMS provider.
Sales to the unnamed defense customer became significant to us in the third quarter of fiscal
2006. As a result of the nature of the project for that customer, Plexus expects that related
orders and sales (if any) will vary significantly from period to period and are unlikely to result
in predictable recurring revenue or revenue patterns across periods.
Sales to our customers may vary from time to time depending on the size and timing of customer
program commencement, termination, delays, modifications and transitions. We remain dependent on
continued sales to our significant customers. We generally do not obtain firm, long-term purchase
commitments from our customers. Customers’ forecasts can and do change as a result of changes in
their end-market demand and other factors. Any material change in orders from these major
accounts, or other customers, could materially affect our results of operations. In addition, as
our percentage of sales to customers in a specific sector becomes larger relative to other sectors,
we become increasingly dependent upon economic and business conditions affecting that sector.
Gross profit. Gross profit and gross margins for the indicated periods were as follows
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
|
|
Three months ended |
|
Variance |
|
Nine months ended |
|
Variance |
|
|
July 1, |
|
July 2, |
|
Increase/ |
|
July 1, |
|
July 2, |
|
Increase/ |
|
|
2006 |
|
2005 |
|
(Decrease) |
|
2006 |
|
2005 |
|
(Decrease) |
Gross Profit |
|
$ |
45.5 |
|
|
$ |
27.1 |
|
|
$ |
18.4 |
|
|
|
67.7 |
% |
|
$ |
113.8 |
|
|
$ |
75.0 |
|
|
$ |
38.8 |
|
|
|
51.8 |
% |
Gross Margin |
|
|
11.5 |
% |
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
10.7 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
For the three months ended July 1, 2006, gross profit and gross margin improvements were
primarily due to increased net sales, favorable changes in the customer mix and improved operating
efficiencies at several manufacturing locations. For the three months ended July 2, 2005, gross
profit and gross margins were moderated by lower net sales and manufacturing inefficiencies at
certain of our sites, particularly a break-even gross profit at our second facility in Penang which
commenced manufacturing activities in the first quarter of fiscal 2005.
For the nine months ended July 1, 2006, improved gross profit and gross margin were primarily
due to increased net sales, favorable changes in the customer mix and improved operating
performances at several manufacturing locations. For the nine months ended July 2, 2005, the gross
profit and gross margin were unfavorably impacted by manufacturing inefficiencies at certain of our
sites including: $0.9 million of net inventory adjustments at our Juarez, Mexico (“Juarez”)
facility due to the loss of inventory from theft and other causes; $0.8 million of start-up costs
at a new facility in Penang; and only a nominal profit at our Bothell site due to transition
expenses and manufacturing inefficiencies related to the phase-out of that facility.
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 net sales.
Selling and administrative expenses. Selling and administrative (S&A) expenses for the
indicated periods were as follows (dollars in millions):
22
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|
|
Three months ended |
|
Variance |
|
Nine months ended |
|
Variance |
|
|
July 1, |
|
July 2, |
|
Increase/ |
|
July 1, |
|
July 2, |
|
Increase/ |
|
|
2006 |
|
2005 |
|
(Decrease) |
|
2006 |
|
2005 |
|
(Decrease) |
Sales and
administrative
expense (S&A) |
|
$ |
21.6 |
|
|
$ |
19.3 |
|
|
$ |
2.3 |
|
|
|
11.7 |
% |
|
$ |
58.1 |
|
|
$ |
56.6 |
|
|
$ |
1.5 |
|
|
|
2.6 |
% |
Percent of net sales |
|
|
5.4 |
% |
|
|
6.2 |
% |
|
|
|
|
|
|
|
|
|
|
5.5 |
% |
|
|
6.2 |
% |
|
|
|
|
|
|
|
|
The dollar increase in S&A for the three months ended July 1, 2006 was due to increased
salaries and benefits, reflecting wage increases and additional staffing, as well as higher
accruals for variable incentive compensation and stock-based compensation required to be recognized
under SFAS No. 123(R) in fiscal 2006. Variable incentive compensation increased $2.1 million for
the three months ended July 1, 2006 compared with the three months ended July 2, 2005. Stock-based
compensation included in selling and administrative expenses was $0.5 million for the three months
ended July 1, 2006. There was no stock-based compensation expense for the three months ended July
2, 2005. The increases were moderated by decreases to various other elements of expenses. The
reduction in S&A as a percentage of net sales was attributable to the increase in net sales.
The dollar increase in S&A for the nine months ended July 1, 2006 was also due to increased
salaries and benefits, reflecting wage increases and additional staffing, as well as higher
accruals for variable incentive compensation and stock-based compensation. Variable incentive
compensation increased $3.5 million for the nine months ended July 1, 2006 as compared to the nine
months ended July 2, 2005. Stock-based compensation included in selling and administrative
expenses was $1.3 million for the nine months ended July 1, 2006. There was no stock-based
compensation expense for the nine months ended July 2, 2005. The growth in selling and
administrative expenses for the nine months ended July 1, 2006 was moderated by lower bad debt
expense of $1.9 million and lower outside professional fees of $1.4 million associated with Section
404 of the Sarbanes Oxley Act of 2002 as compared to the nine months ended July 2, 2005. The
reduction in S&A as a percentage of net sales was attributable to the increase in net sales.
The Compensation Committee of the Plexus’ Board of Directors awarded approximately 0.7 million
stock options at its meeting in May; this action increased the total expense for share-based
compensation in the third quarter of fiscal 2006 to $0.7 million. We currently estimate our total
share-based compensation expense to increase to $1.4 million or $0.03 per diluted share for the
three months ended September 30, 2006.
Restructuring and Impairment Actions: In the three and nine months ended July 1, 2006, we did
not incur any additional net-restructuring charges. We did, however, incur pre-tax restructuring
costs of $0.6 million and $1.0 million, respectively, related to our decisions initially to convert
and ultimately to close our Maldon, England (“Maldon”) facility and to reduce our workforce in
Juarez. The Maldon conversion and closure affects 120 employees. The Juarez workforce reduction
affected 46 employees.
For the three and nine months ended July 1, 2006, these restructuring costs noted above were
offset by favorable adjustments of $0.6 million and $1.0 million, respectively, for reductions in
lease obligations at three of our closed facilities near Bothell and Seattle, Washington
(“Seattle”) and prior other restructuring accruals.
For the three months and nine months ended July 2, 2005, we recorded $0.7 million and $12.3
million, respectively, of restructuring and asset impairment costs. For the three months ended
July 2, 2005, these costs consisted of $0.3 million for the elimination of a corporate executive
position, $0.2 million for additional severance
and retention bonuses for one of the previously closed Seattle facilities and $0.2 million for
a planned workforce reduction at Maldon related to the conversion of the facility from
manufacturing to fulfillment, service and repair.
For the nine months ended July 2, 2005, these costs consisted of $7.5 million of restructuring
and impairment costs for the closure of the Seattle facility, $3.8 million for impairment of a shop
floor data-collection system and $1.0 million of other restructuring and asset impairment costs at
our corporate location, Juarez and Maldon.
23
In addition to the restructuring and asset impairment costs noted above, for both the three
and nine months ended July 2, 2005, we recorded goodwill impairment costs of $26.9 million, of
which $16.1 million represented a partial impairment of goodwill associated with our United Kingdom
operations and $10.8 million represented a complete impairment of goodwill associated with our
Juarez operations.
Pre-tax
restructuring and impairment charges for the indicated periods are summarized as follows (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
July 1, |
|
|
July 2, |
|
|
July 1, |
|
|
July 2, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Goodwill impairment |
|
$ |
— |
|
|
$ |
26.9 |
|
|
$ |
— |
|
|
$ |
26.9 |
|
Severance costs |
|
|
0.5 |
|
|
|
0.6 |
|
|
|
0.9 |
|
|
|
2.2 |
|
Lease exit costs and other |
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
|
|
6.5 |
|
Asset impairments |
|
|
0.1 |
|
|
|
— |
|
|
|
0.1 |
|
|
|
3.9 |
|
Adjustments to lease exit costs |
|
|
(0.6 |
) |
|
|
— |
|
|
|
(1.0 |
) |
|
|
(0.7 |
) |
Adjustment to asset impairment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
$ |
27.6 |
|
|
$ |
— |
|
|
$ |
39.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 1, 2006, we have a remaining restructuring liability of approximately $7.7 million,
all of which is expected to be paid in the next twelve months. See Note 7 and Note 11 in Notes to
the Condensed Consolidated Financial Statements for further information on goodwill impairment and
restructuring and asset impairment costs.
Income taxes. Income taxes for the indicated periods were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Income tax expense |
|
$ |
0.3 |
|
|
$ |
1.0 |
|
|
$ |
0.6 |
|
|
$ |
0.9 |
|
Effective annual tax rate |
|
|
1.3 |
% |
|
|
(5.0 |
)% |
|
|
1.0 |
% |
|
|
(4.0 |
)% |
The reduction in our effective tax rate for the three and nine months ended July 1, 2006,
compared to the three and nine months ended July 2, 2005, was due to increased profits in Asia,
where we currently enjoy tax holidays, and in the United States where the carry-forward of NOLs and
the establishment in fiscal 2004 of a full-valuation allowance on deferred tax assets, result in no
tax provision on U.S. income. As of July 1, 2006, we had a $44.3 million valuation allowance on
U.S. deferred tax assets.
In addition, U.S. GAAP requires us to periodically review our historical and projected levels
of profitability in the United States, and we may be required to reduce the valuation allowance by
crediting the tax provision for a portion of the remaining valuation allowance, which would have a
beneficial impact on our effective tax rate. If the U.S. valuation allowance is reversed, our
effective tax rate is expected to increase. We estimate that our normalized world-wide effective
tax rate for fiscal 2006 without this valuation allowance would be approximately 25 percent.
In July 2005, the Finance Act (the “Finance Act”) was enacted in the United Kingdom. The
Finance Act limits the deduction of interest expense incurred in the United Kingdom when the
corresponding interest income earned by the other party is not taxable to such party. We currently
extend loans from a U.S. subsidiary to a subsidiary in the United Kingdom, which is affected by the
Finance Act. The Finance Act affects interest expense incurred by the United Kingdom subsidiary on
these loans arising or accrued after March 16, 2005. For the three and nine months ended July 1,
2006, we revised the estimated effect of the Finance Act on our United Kingdom interest deductions
to approximately half of the interest expense recorded. This revision was based on continued
discussions with the tax authorities in the United Kingdom. In fiscal 2005, we had provided income
tax expense for the anticipated full effect of the Finance Act on the non-deductibility of this
interest expense.
24
The American Jobs Creation Act (the “Jobs Act”), enacted in the United States in 2004,
includes a deduction of 85 percent of certain foreign earnings that are repatriated, as defined in
the Jobs Act. We may elect to apply this provision to qualifying earnings repatriations made in
fiscal 2006. During the three and nine months ended July 1, 2006 and July 2, 2005, we did not
repatriate any qualified earnings pursuant to the Jobs Act. We have determined that $15 million
to $30 million of existing foreign earnings meet the requirements of the Jobs Act. We are
currently evaluating the repatriation of earnings in the amounts ranging from $0 to $15 million and
currently estimate that a repatriation of earnings in this range would result in income tax of up
to approximately $0.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Cash flows provided by operating activities were $50.0 million for the
nine months ended July 1, 2006, compared to cash flows provided by operating activities of 38.5
million for the nine months ended July 2, 2005. During the nine months ended July 1, 2006, cash
provided by operating activities was primarily due to higher earnings (after adjusting for the
non-cash effects of depreciation, amortization and stock-based compensation expense) and increased
accounts payable, as a result of negotiating improved vendor terms. These sources of operating cash
flows were partially offset by increased inventory and increased accounts receivable to support
increased net sales.
As of July 1, 2006, annualized days sales outstanding in accounts receivable remained at 50
days sales outstanding as compared to 50 days sales outstanding as of October 1, 2005. Annualized
inventory turns remained at 6.4 turns for the three months ended July 1, 2006 as compared to 6.4
turns for fiscal 2005.
Investing Activities. Cash flows used in investing activities totaled $45.9 million for the
nine months ended July 1, 2006, which represented additions to property, plant and equipment of
approximately $26.2 million as well as net purchases of short-term investments of $20 million. The
additions to property, plant and equipment were primarily for our Asian operations as we continued
to expand in that region. See Note 8 in Notes to the Condensed Consolidated Financial Statements
for further information regarding our capital expenditures by operating segment.
We utilize available cash as the primary means of financing our operating requirements. We
currently estimate capital expenditures for fiscal 2006 to be approximately $30 million to $35
million, of which $26.2 million were made through the nine months ended July 1, 2006. This fiscal
2006 estimate excludes the capital expenditures to expand our current facility in Xiamen, China and
to add a third facility in Penang, Malaysia which are expected to be incurred in fiscal 2007.
Financing Activities. Cash flows provided by financing activities totaled $35.7 million for
the nine months ended July 1, 2006, which primarily represented proceeds from the exercises of
stock options.
We believe that our projected cash flows from operations, available cash and short-term
investments, the Secured Credit Facility, and leasing capabilities should be sufficient to meet our
working capital and fixed capital requirements, as noted above, through fiscal 2006 and at least
the early part of 2007. We currently do not anticipate having to use the Secured Credit Facility
to finance this growth. As our financing 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 certain 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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
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, commercial commitments and off-balance sheet arrangements as of July
1, 2006 (dollars in millions):
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Period |
|
|
|
|
|
|
|
Remaining in |
|
|
|
|
|
|
|
|
|
|
2011 and |
|
|
|
Total |
|
|
2006 |
|
|
2007-2008 |
|
|
2009-2010 |
|
|
thereafter |
|
|
|
|
Current Portion of Long-Term Debt
Obligations |
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Capital Lease Obligations |
|
|
36.3 |
|
|
|
0.8 |
|
|
|
6.2 |
|
|
|
6.5 |
|
|
|
22.8 |
|
Operating Lease Obligations (1) |
|
|
61.7 |
|
|
|
7.4 |
|
|
|
19.3 |
|
|
|
11.8 |
|
|
|
23.2 |
|
Purchase Obligations (2) |
|
|
231.4 |
|
|
|
164.5 |
|
|
|
66.9 |
|
|
|
— |
|
|
|
— |
|
Other Long-Term Liabilities on the
Balance Sheet (3) |
|
|
5.8 |
|
|
|
— |
|
|
|
1.5 |
|
|
|
1.2 |
|
|
|
3.1 |
|
Other Long-Term Liabilities not on
the Balance Sheet (4) |
|
|
1.8 |
|
|
|
0.5 |
|
|
|
1.3 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations |
|
$ |
337.3 |
|
|
$ |
173.5 |
|
|
$ |
95.2 |
|
|
$ |
19.5 |
|
|
$ |
49.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
– |
As of July 1, 2006, operating lease obligations include future payments related to accrued
lease costs attendant various restructurings. The remaining fiscal 2006 and fiscal 2007 payments
include $5.1 million and $2.1 million, respectively, which are included in accrued other
liabilities on the balance sheet. |
|
(2) |
– |
As of July 1, 2006, purchase obligations consist of purchases of inventory and equipment in
the ordinary course of business. |
|
(3) |
– |
As of July 1, 2006, other long-term obligations on the balance sheet include: deferred
compensation obligations to certain of our former and current executive officers and other key
employees. |
|
(4) |
– |
As of July 1, 2006, other long-term obligations not on the balance sheet consist of a salary
commitment to an executive 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 that would not already be included on the
balance sheet. |
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in our 2005 Report on Form 10-K. During the three and
nine months ended July 1, 2006, there were no material changes to these policies other than
stock-based compensation as noted below. Our more critical accounting policies are as follows:
Stock-Based Compensation — Effective October 2, 2005, we adopted Statement of Financial
Accounting Standards No. 123 (R), “Share-Based Payment: An Amendment of Financial Accounting
Standards Board Statements No. 123 and 95” (“SFAS No. 123(R)”), which revised SFAS No. 123,
“Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees”. SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be measured at fair value and expensed in the consolidated
statement of operations over the service period (generally the vesting period) of the grant. Upon
adoption, we transitioned to SFAS No. 123(R) using the modified prospective application, under
which compensation expense is only recognized in the consolidated statements of operations
beginning with the first period that SFAS No. 123(R) is effective and continuing to be expensed
thereafter. Prior
periods’ stock-based compensation expense is still presented on a pro-forma basis. We
continue to use the Black-Scholes valuation model to value stock options. See Note 5 in Notes to
Condensed Consolidated Financial Statements for further information.
Impairment of Long-Lived Assets — We review property, plant and equipment for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of property, plant and equipment is measured by comparing its
carrying value to the projected cash flows the property, plant and equipment are expected to
generate. If such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying value of the property exceeds its fair market value.
The impairment analysis is based on significant assumptions made by management of future results,
26
including revenue and cash flow projections. Circumstances that may lead to impairment of
property, plant and equipment include reductions in future performance or industry demand and the
restructuring of our operations.
Intangible Assets — Under Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets,” 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 has occurred.
We measure the recoverability of goodwill under the annual impairment test by comparing a
reporting unit’s carrying amount, including goodwill, to a reporting unit’s estimated fair market
value, which is primarily estimated using the present value of expected future cash flows, although
market valuations may also be used. 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, if any. Circumstances that may lead to impairment of goodwill include, but are not
limited to, the loss of a significant customer or customers and unforeseen reductions in customer
demand, future operating performance or industry demand.
Revenue — Net sales from manufacturing services are 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.
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.
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, if applicable. The
corresponding shipping and handling costs are included in cost of sales.
Restructuring Costs — From fiscal 2002 through fiscal 2006, we have recorded restructuring
costs in response to reductions in sales and/or 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. The estimated lease loss was accrued for future remaining lease payments subsequent to
abandonment, less any estimated sublease income.
Subsequent to December 31, 2002, costs associated with a restructuring activity are recorded
in compliance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities.” The timing and related recognition of severance and benefit costs, that are not
presumed to be an ongoing benefit as defined in SFAS No. 146, depend 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 abandoned and expected to be 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 reasonably be 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.
27
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, which would require the recognition 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 is for their
intended purposes 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. We record 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 taxable income.
Although we recorded a $36.8 million valuation allowance against all U.S. deferred income tax
assets in fiscal 2004, we may be able to utilize these deferred income tax assets to offset future
taxable income in the U.S. as was the case for the nine months of fiscal 2006.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 12 in Notes to Condensed Consolidated Financial Statements for further information
regarding new accounting pronouncements.
28
RISK FACTORS
Our net sales and operating results may vary significantly from quarter to quarter, which could
negatively impact the price of our common stock.
Our quarterly and annual results may vary significantly depending on various factors, many of
which are beyond our control. These factors include:
|
• |
|
the volume of customer orders relative to our capacity |
|
|
• |
|
the level and timing of customer orders, particularly in light of the fact that some
of our customers determine whether or not to 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 and demand for our customers’ products |
|
|
• |
|
customers’ announcements of operating results and business conditions |
|
|
• |
|
changes in the 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 and regional events, such as holidays, that may affect our production levels |
|
|
• |
|
credit ratings and securities analysts’ reports and |
|
|
• |
|
changes in economic conditions and world events. |
The EMS industry is impacted by the state of the U.S. and global economies and world events.
A slowdown in the U.S. or global economy, or in particular in the industries served by us, may
result in our customers reducing their forecasts. The demand for our services could weaken, which
in turn would impact our sales, capacity utilization, margins and financial results. Historically,
we have seen periods, such as in fiscal 2003 and 2002, when our sales were adversely affected by a
slowdown in the wireline/networking and wireless infrastructure sectors, as a result of reduced
end-market demand and reduced availability of venture capital to fund existing and emerging
technologies. These factors substantially influence our net sales and margins.
Net sales to customers in the wireline/networking sector have increased significantly in
absolute dollars, making us more dependent upon the performance of that industry and the economic
and business conditions that affect it. In addition, net sales in the defense/security/aerospace
sector have become increasingly important; net sales in this sector are particularly susceptible to
significant period to period variations.
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 net 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 ten largest customers have represented a majority of our net sales in recent
periods. Our ten largest customers accounted for approximately 63 percent and 60 percent of our net
sales for the three months ended July 1, 2006 and July 2, 2005, respectively. For the three months
ended July 1, 2006, there were three customers each of which
represented 10 percent or more of our net
sales. Our principal customers have varied from period to period, 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 other major customers, could seriously harm our
business.
Our customers may cancel their orders, change production quantities or delay production.
29
EMS companies must provide rapid product turnaround for their customers. We generally do not
obtain firm, long-term purchase commitments from our customers. 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. 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 growth and contraction, if any, may seriously harm our business.
Due to continued sales growth in fiscal 2006, we needed additional employees and production
equipment to meet incremental demand. In fiscal 2004, we expanded of our operations in Penang,
Malaysia and added many employees, principally in Asia. These actions resulted in additional costs
to support our growth. We are currently evaluating further expansion alternatives in Asia,
including a recently announced intention to double capacity in our existing Xiamen, China facility
as well as adding a third facility in Penang, Malaysia. If we are unable to effectively manage the
growth currently anticipated, our operating results could be adversely affected.
Periods of contraction or reduced sales, such as the periods that occurred from fiscal 2001
through 2003, create challenges. We must determine whether 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 market
improvements or to maintain customer relationships. Our decisions to reduce costs and capacity,
such as the fiscal 2005 closure of our Bothell facility and the recently announced closure of our
Maldon, England facility and the related reduction in the number of employees, can affect our
expenses and, therefore, our short-term and long-term results.
In addition, to meet our customers’ needs, or to achieve increased efficiencies, we sometimes
require additional capacity in one location while reducing capacity in another. Since customers’
needs and market conditions can vary and change rapidly, we may find ourselves in a situation where
we simultaneously experience the effects of contraction in one location while incurring the costs
of expansion in another location, such as those noted above.
Expansion of our business and operations may negatively impact our business.
We have announced our intentions to add a third facility in Malaysia as well as expand our
existing facility in Xiamen, China. We may expand in geographical areas in which we currently
operate or in new geographical areas within the United States or internationally. We may not be
able to find suitable facilities on a timely basis or on terms satisfactory to us. Expansion of
our operations involves numerous business risks, including:
|
• |
|
the inability to successfully integrate additional facilities or incremental
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 |
30
|
• |
|
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. |
Operating in foreign countries exposes us to increased risks, including foreign currency risks.
We have operations in China, Malaysia, Mexico and the United Kingdom. As noted above, we are
considering a new manufacturing facility in Penang, Malaysia and have announced an expansion in
China, and we may in the future expand further in these or into other international locations. We
have limited experience in managing geographically dispersed operations. We also purchase a
significant number of components manufactured in foreign countries. These international aspects of
our operations subject us to the following risks that could materially impact our operating
results:
|
• |
|
economic or political instability |
|
|
• |
|
transportation delays or interruptions and other effects of the less-developed
infrastructure in many countries |
|
|
• |
|
foreign exchange rate fluctuations |
|
|
• |
|
utilization of different systems and equipment |
|
|
• |
|
difficulties in staffing and managing foreign personnel in diverse cultures and |
|
|
• |
|
the effects of international political developments. |
In fiscal 2005, the Chinese and Malaysian governments revalued their currencies against the
U.S. dollar. Both currencies had been relatively fixed to the U.S. dollar for the last several
years, but both governments now appear to have adopted policies described as “managed floats” (that
is, allowing their currencies to move in a tight range up or down from the previous day’s close).
We do not currently “hedge” foreign currencies. As our Asian operations expand, our failure to
adequately hedge foreign currency transactions and/or currency exposures associated with assets and
liabilities denominated in non-functional currencies could adversely affect our financial
condition, results of operations and cash flows.
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 facility in Mexico operates under the Mexican Maquiladora program,
which provides for reduced tariffs and eased import regulations; we could be adversely affected by
changes in that program. Also, the Malaysian and Chinese subsidiaries currently receive favorable
tax treatments from these governments which extend for approximately 13 years and 7 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 continued ability to:
|
• |
|
retain our qualified engineering and technical personnel |
|
|
• |
|
maintain and enhance our technological capabilities |
|
|
• |
|
develop and market manufacturing services which meet changing customer needs |
|
|
• |
|
successfully anticipate or respond to technological changes in manufacturing
processes on a cost-effective and timely basis. |
Although we believe that our operations utilize the assembly and testing technologies,
equipment and processes that are currently required by our customers, we cannot be certain that we
will develop the capabilities required by our customers in the future. The emergence of new
technology, industry standards or customer requirements may render our equipment, inventory or
processes obsolete or noncompetitive. In addition, we may have to acquire new assembly and testing
technologies and equipment to remain competitive. The acquisition and
31
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.
We invest in technology to support our operations; developments may impair those assets.
We are involved in a multi-year project to install a common ERP platform and associated
information systems at most of our manufacturing sites. 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 July 1, 2006, facilities representing a significant majority of our net sales are
currently managed on the common ERP platform. We plan to extend the common ERP platform to our
remaining sites over the next two years; however, the conversion timetable and project scope for
our remaining sites are subject to change based upon our evolving needs.
Our manufacturing services involve inventory risk.
Most of our contract manufacturing services are provided on a turnkey basis, under which we
purchase some, or all, of the required materials. Accordingly, 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. 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 managed inventory programs for some of our key customers under which
we hold and manage finished goods inventories. These managed inventory programs may result in
higher finished goods inventory levels, further reduce our inventory turns and increase our
financial exposure with such customers. Even though our customers generally have contractual
obligations to purchase such inventories from us, we may remain subject to the risk of enforcing
those obligations.
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 of the 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 such shortages may be expected to recur from time to time.
In some cases, supply shortages and delays in deliveries of particular components have resulted in
curtailed or delayed production of assemblies, which contributed to an increase in our inventory
levels. 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, could also 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 relationships with our customers and reduce our sales.
While most of our customer contracts permit quarterly or other periodic adjustments to pricing
based on changes 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.
32
Start-up costs and inefficiencies related to new or transferred programs can adversely affect our
operating results.
The management of labor and production capacity in connection with the establishment of new
programs and new customer relationships, and the need to estimate required resources in advance of
production can adversely affect our gross margins and operating margins. 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, or when we transfer programs between locations. Customer needs, capacity
utilization rates and/or increased demand may require that we expand certain facilities, or seek
larger facilities in fiscal 2006, or future years. 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 worsen,
particularly in the short term.
Although we try to minimize the potential losses arising from transitioning customer programs
between Plexus facilities, there are inherent risks that such transitions can result in the
disruption of programs and customer relationships.
We and our customers are subject to extensive government regulations.
We are 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.
Medical - Our medical device business, which represented approximately 25 percent of our net
sales for the third quarter of fiscal 2006, is subject to substantial government regulation,
primarily from the federal Food and Drug Administration (“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 regulations can result in, among other
things, 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. Failure or
noncompliance could have an adverse effect on our reputation.
In addition, our customers’ failure to comply with applicable regulations or legal
requirements, or even allegations of such failures, could affect our sales to those customers.
Defense - In recent periods, our net sales to the defense/security/aerospace sector have
significantly increased. Companies that design and manufacture for this sector face governmental,
security and other requirements that could materially affect their financial condition and results
of operations. In addition, defense contracting can be subject to extensive procurement processes
and other factors that can affect the timing and duration of contracts and orders. While those
arrangements may result in a significant amount of net sales in a short period of time as they did
in the third quarter of fiscal 2006, they may or may not result in continuing long-term
relationships. Even in the case of continuing long-term relationships, orders in the defense
sector can be episodic and vary significantly from period to period.
Wireline/Wireless — The end-markets for most of our customers in the wireline/networking and
wireless infrastructure sectors are subject to regulation by the Federal Communications Commission,
as well as by various state and foreign government agencies. The policies of these agencies can
directly affect both the near-term and long-term consumer and provider demand and profitability of
the sector and therefore directly impact the demand for products that we manufacture.
European Union - There are two European Union (“EU”) directives which could affect our
business and results. The first of these is the Restriction of the use of Certain Hazardous
Substances (“RoHS”). RoHS became
33
effective on July 1, 2006, and restricted within the EU the
distribution of products containing certain substances, lead being the restricted substance most
relevant to us. Although most of the EU member countries have not yet turned the mandates into
legislation, it appears that we will be required to manufacture RoHS compliant products for
customers intending to sell into the EU after the effective date. In addition, industry analysts
anticipate that similar legislation in the U.S. and Asia will eventually follow.
The second EU directive is the Waste Electrical and Electronic Equipment directive which
requires a manufacturer or importer, at its own cost, to take back and recycle all of the products
it either manufactured in or imported into the EU.
Since both of these directives affect the worldwide electronics supply-chain, we expect to
make collaborative efforts with our suppliers and customers to develop compliant processes and
products. The cost of such efforts, the degree to which we will be expected to absorb such costs,
the impact that the directive may have on product shipments, and our liability for non-compliant
product was nominal.
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 defect, 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 such costs or required payments to us, and we occasionally incur
costs defending claims.
Our products are for the electronics industry, which produces technologically advanced products
with relatively short life cycles.
Factors affecting the electronics industry, in particular the short life cycle of products,
could seriously harm our customers and, as a result, us. These factors include:
|
• |
|
the inability of our customers to adapt to rapidly changing technology and evolving
industry standards that result in short product life cycles |
|
|
• |
|
the inability of our customers to develop and market their products, some of which
are new and untested |
|
|
• |
|
the potential that our customers’ products may become obsolete or the failure of our
customers’ products to gain widespread commercial acceptance. |
Increased competition may result in decreased demand or reduced 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 which operate
on only 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 |
34
|
• |
|
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 which have greater direct
buying power from component suppliers, distributors and raw material suppliers or which 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 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.
Energy price increases may reduce our profits.
We use some components made with petroleum-based materials. In addition, we use various energy
sources transporting, producing and distributing products. Energy prices have increased
significantly and are subject to further volatility caused by market fluctuations, supply and
demand, currency fluctuation, production and transportation disruption, world events, and changes
in governmental programs.
Energy price increases raise both our material and operating costs. We may not be able to
increase our prices enough to offset these increased costs. Increasing our prices also may reduce
sales volume and profitability.
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:
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• |
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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 |
|
|
• |
|
loss of key employees of acquired businesses. |
|
|
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 our desired levels |
|
|
• |
|
incurrence of large write-offs or write-downs |
|
|
• |
|
impairment of goodwill and other intangible assets |
|
|
• |
|
unforeseen liabilities of the acquired businesses. |
We may fail to secure or maintain necessary financing.
35
We maintain a Secured Credit Facility with a group of banks, which allows us to borrow up to
$150 million depending upon compliance with related covenants and conditions. However, we cannot
be certain that the Secured Credit Facility will provide all of the financing capacity that we will
need in the future or that we will be able to amend the Secured Credit Facility or revise
covenants, if necessary or appropriate in the future, to accommodate changes or developments in our
business and operations.
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 have increased our costs.
The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) 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 rules
on a variety of subjects. These developments may make it more difficult for us to attract and
retain qualified members of our board of directors or qualified executive officers. Compliance with
these new rules has increased our legal and accounting costs, most significantly in fiscal 2005,
which was our first year of compliance. We expect our compliance costs to continue; however, absent
significant changes in related rules (which we cannot assure), we anticipate these costs to be
lower in fiscal 2006 and beyond as we become more efficient in our compliance processes.
If we reach other than an affirmative conclusion on the adequacy of our internal control over
financial reporting 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 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 report must contain an assessment by
management of the effectiveness of our internal control over financial reporting. In addition, the
independent registered 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.
In fiscal 2006, we are continuing our comprehensive efforts to comply with Section 404 of the
Sarbanes-Oxley Act. If we are unable to complete our assessment in a timely manner or if we and/or
our independent registered public accounting firm determines that there are material weaknesses
regarding the design or operating effectiveness of our 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.
Our operations could be negatively affected by an epidemic.
We have a production facility in Xiamen, China, which is one of the countries that have been
most at risk in the recent outbreak of avian flu. We also operate in Malaysia, which is in the
area in which avian flu has spread. To
36
the best of our knowledge, concerns about the spread of
avian flu have not affected our employees or operations in China or Malaysia, nor have we
experienced any disruption in our supply chain as a result of these concerns. However, our
production in Asia and elsewhere could be severely impacted by an epidemic spread of avian flu or a
similar widespread disease or epidemic. Our facilities could be closed by government authorities,
some or all of our workforce could be unavailable due to quarantine, fear of contagion or other
factors, and transportation or other elements of the infrastructure could be affected, leading to
delays or loss of production.
Concerns relating to avian flu are currently focused on Asia; however, avian flu or other
outbreaks of disease or epidemics could similarly affect our other facilities. These
health-related factors could also affect our suppliers and lead to a shortage of components. They
could also lead to a reduction in end-customer demand.
The price of our common stock has been and may continue to be volatile.
Our stock price has fluctuated in recent periods. The price of our common stock may fluctuate
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 markets, 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 our stock price could mean that investors may
not be able to sell their shares at or above the prices that they paid. Volatility and weakness
could also impair our ability in the future to offer common stock or convertible securities as a
source of additional capital and/or as consideration in the acquisition of other businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign exchange and interest rates. We
selectively use financial instruments to reduce such risks.
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. Historically, we have used
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 July 1, 2006, we had no
foreign currency contracts outstanding.
Our percentages of transactions denominated in currencies other than the U.S. dollar for the
indicated periods were as follows:
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Three months ended |
|
Nine months ended |
|
|
July 1, |
|
July 2, |
|
July 1, |
|
July 2, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net Sales |
|
|
6 |
% |
|
|
8 |
% |
|
|
7 |
% |
|
|
9 |
% |
Total Costs |
|
|
10 |
% |
|
|
13 |
% |
|
|
12 |
% |
|
|
13 |
% |
37
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 for both the three months and nine months ended
July 1, 2006 and July 2, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: The Company maintains disclosure controls and procedures
designed to ensure that the information the Company must disclose in its filings with the
Securities and Exchange Commission is recorded, processed, summarized and reported on a timely
basis. The Company’s principal executive officer and principal financial officer have reviewed and
evaluated, with the participation of the Company’s management, the Company’s disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”) as of the end of the period covered by this report (the
“Evaluation Date”). Based on such evaluation, the chief executive officer and chief financial
officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports the Company files or submits
under the Exchange Act.
Internal Control Over Financial Reporting: During the third quarter of fiscal 2006, there
have been no changes to the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 13d-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
38
PART II — OTHER INFORMATION
ITEM 1A. Risk Factors
The Company does not become subject to this item until after filing its Annual Report on Form
10-K for fiscal 2006. However, see “Risk Factors” in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Part I, Item 2, beginning on page 29, which is
incorporated by reference.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides the specified information about the repurchases of shares by the
Company during the three months ended July 1, 2006.
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number |
|
|
Maximum number of |
|
|
|
|
|
|
|
|
|
|
|
of shares purchased |
|
|
shares that may yet |
|
|
|
Total number |
|
|
Average |
|
|
as part of publicly |
|
|
be purchased under |
|
|
|
of shares |
|
|
price paid |
|
|
announced plans or |
|
|
the plans or |
|
Period |
|
purchased |
|
|
per share |
|
|
programs |
|
|
programs* |
|
April 2 to
April 29, 2006 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30 to
May 27, 2006 |
|
|
4,116 |
|
|
|
46.55 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 28 to
July 1, 2006 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,116 |
|
|
$ |
46.55 |
|
|
|
— |
|
|
|
6,000,000 |
|
|
|
|
|
|
|
|
|
|
* |
|
At period end. Plexus has a common stock buyback program that permits it to acquire up to $25.0
million of its common stock. To date, no shares have been repurchased. |
The shares repurchased above, were existing employee-owned shares of the Company used by
option holders in payment of the purchase price and/or tax withholding obligations in connection
with their exercise of stock options under the Company’s stock option plans. The “price” used for
these purposes is the market value of those shares.
39
ITEM 6. EXHIBITS
|
31.1 |
|
Certification of Chief Executive Officer
pursuant to Section 302(a) of the Sarbanes Oxley Act of 2002. |
|
|
31.2 |
|
Certification of Chief Financial Officer
pursuant to section 302(a) of the Sarbanes Oxley Act of 2002. |
|
|
32.1 |
|
Certification of the CEO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
32.2 |
|
Certification of the CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
8/9/06
|
|
/s/ Dean A. Foate |
|
|
Date
|
|
Dean A. Foate
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
8/9/06
|
|
/s/ F. Gordon Bitter |
|
|
Date
|
|
F. Gordon Bitter
|
|
|
|
|
Senior Vice President and |
|
|
|
|
Chief Financial Officer |
|
|
41