PLEXUS CORP. OVERVIEW
Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or "we") participate in the Electronic Manufacturing Services ("EMS") industry. Since 1979, Plexus has been partnering with companies to create the products that build a better world. We are a team of over 19,500 employees, providing global support for all facets of the product realization process - Design and Development,Supply Chain Solutions , New Product Introduction, Manufacturing, and Aftermarket Services - to companies in the Healthcare/Life Sciences, Industrial/Commercial,Aerospace/Defense and Communications market sectors. In fiscal year 2021, Plexus intends to consolidate theIndustrial/Commercial and Communications market sectors to form an Industrial market sector. Plexus is an industry leader that specializes in serving customers with highly complex products used in demanding regulatory environments. Plexus delivers comprehensive end-to-end solutions in theAmericas ("AMER"),Asia-Pacific ("APAC") andEurope ,Middle East , andAfrica ("EMEA") regions. COVID-19 Update We continue to monitor the global outbreak and spread of COVID-19 and take steps to mitigate the potential risks to us posed by its spread and related circumstances and impacts. Workplace Safety The health and safety of our employees is a top priority for us. Our goal is that our facilities should be the safest place our team members can be outside their homes. We have progressively implemented measures to safeguard our employees from the COVID-19 infection and exposure, in alignment with guidelines established by theCenters for Disease Control , theWorld Health Organization , governmental requirements, and our own safety standards. They consist of policies, procedures, protocols, and guidance related to, among other things, COVID-19 symptom awareness, effective hygiene practices, travel restrictions, visitor restrictions, social distancing, face covering expectations, temperature and health screening, work-from-home requirements, employee infection assessments, close contact tracing, enhanced workplace cleaning, and large-scale decontamination. In addition, in all geographies in which we operate, regulatory authorities at some point have imposed restrictions regarding the conduct of business and people movement to safeguard its citizens. We have made significant efforts to mitigate the effects of these measures and impacts on our operations through a combination of adjustments in our shift patterns, flexible work arrangements, productivity improvements, facility enhancements to support social distancing and optimizing employee capability to work from home. These efforts will continue as requirements change, new risks are identified, and infections impact us. While we have been successful in largely mitigating the effects of the pandemic on our productivity and are currently operating at pre-COVID-19 production capacity globally, the continued spread and resurgence of the COVID-19 virus may make our ability to mitigate the impacts more challenging. Supply Chain Our suppliers may face challenges in maintaining an adequate workforce or securing materials from their own suppliers as a result of COVID-19. As such, we may experience an inability to procure certain components and materials on a timely basis as a result of the COVID-19 outbreak. We continue to take steps to validate our suppliers' ability to deliver to us on time, which may also be affected by the impact of COVID-19 on their own financial condition.
Customers
Likewise, we remain in close contact with our customers to understand the impact of COVID-19 on their businesses and the resulting potential impact on our business. COVID-19 has introduced volatility and uncertainty to all of our customers, which has resulted in the need for us to react and respond. While COVID-19 has negatively impacted some of our customers and, therefore, our business with them, we have experienced opportunities with new and existing customers, particularly in our Healthcare/Life Sciences Sector, to manufacture products in high demand to combat the effects of COVID-19.
Liquidity
We believe we are positioned with a strong balance sheet as we face the future challenges presented by COVID-19. As of the end of fiscal year 2020, cash and cash equivalents and restricted cash was$388 million , while debt, finance lease obligations and other financing was$335 million . This included a$138 million unsecured delayed draw term loans ("term loans") facility secured onApril 29, 2020 in response to the uncertainties created by the COVID-19 outbreak, on which we have drawn the full amount. The full amount of our revolving commitment of$350 million remained available for use as ofOctober 3, 2020 . Refer 27 -------------------------------------------------------------------------------- Table of Contents to Note 4, "Debt, Finance Lease Obligations and Other Financing," in Notes to Consolidated Financial Statements and "Management's Discussion and Analysis Liquidity and Capital Resources" in Part II, Item 7 for further information. A discussion regarding our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 is presented below. A discussion regarding our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 can be found under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on the Form 10-K for the fiscal year endedSeptember 28, 2019 , which was filed with theSEC onNovember 15, 2019 , and is available on theSEC's website at www.sec.gov as well as our Inventor Relations website at www.plexus.com. The following information should be read in conjunction with our consolidated financial statements included herein and "Risk Factors" included in Part I, Item 1A herein. RESULTS OF OPERATIONS Consolidated Performance Summary. The following table presents selected consolidated financial data for the indicated fiscal years (dollars in millions, except per share data): 2020 2019 Net sales$ 3,390.4 $ 3,164.4 Cost of sales 3,077.7 2,872.6 Gross profit 312.7 291.8 Gross margin 9.2 % 9.2 % Operating income 153.4 142.1 Operating margin 4.5 % 4.5 % Other expense 18.0 16.1 Income tax expense 17.9 17.3 Net income 117.5 108.6 Diluted earnings per share$ 3.93 $ 3.50 Return on invested capital* 14.0 % 13.1 % Economic return* 5.2 % 4.1 %
*Non-GAAP metric; refer to "Return on
Net sales. Fiscal 2020 net sales increased$226.0 million , or 7.1%, as compared to fiscal 2019. Net sales are analyzed by management by geographic segment, which reflects our reportable segments, and by market sector. Management measures operational performance and allocates resources on a geographic segment basis. Our global business development strategy is based on our targeted market sectors. As a percentage of consolidated net sales, net sales attributable to customers representing 10% or more of consolidated net sales as well as the percentage of net sales attributable to our ten largest customers for the indicated fiscal years were as follows: 2020 2019 General Electric Company ("GE") 11.7 % 12.4 % Top 10 customers 55.2 % 54.6 %
A discussion of net sales by reportable segment is presented below for the indicated fiscal years (in millions):
2020 2019
Net sales:
AMER $ 1,327.8 $ 1,429.3
APAC 1,824.8 1,557.2
EMEA 349.1 309.9
Elimination of inter-segment sales (111.3) (132.0)
Total net sales $ 3,390.4 $ 3,164.4
28-------------------------------------------------------------------------------- Table of Contents AMER. Net sales for fiscal 2020 in the AMER segment decreased$101.5 million , or 7.1%, as compared to fiscal 2019. The decrease in net sales was driven by overall net decreased customer end-market demand, primarily in theHealthcare/Life Sciences and Communications sectors. The decrease was also driven by a reduction in net sales of$46.3 million due to manufacturing transfers to our APAC segment and$23.6 million due to disengagements with customers. These decreases were partially offset by a$111.3 million increase in production ramps of new products for existing customers, inclusive of increased demand due to COVID-19, and a$27.8 million increase in production ramps for new customers. APAC. Net sales for fiscal 2020 in the APAC segment increased$267.6 million , or 17.2%, as compared to fiscal 2019. The increase in net sales was driven by a$80.1 million increase in production ramps of new products for existing customers, a$46.3 million increase due to manufacturing transfers from our AMER segment and a$19.8 million increase in production ramps for a new customer. In addition, there was an overall net increased customer end-market demand primarily in the Industrial/Commercial sector, partially offset by decreased demand due to COVID-19 in the Aerospace/Defense sector. The overall increase was partially offset by a$36.0 million decrease for end-of-life products. EMEA. Net sales for fiscal 2020 in the EMEA segment increased$39.2 million , or 12.6%, as compared to fiscal 2019. The increase in net sales was the result of a$17.1 million increase in production ramps for new customers as a result of COVID-19, a$15.5 million increase in production ramps of new products for existing customers and overall net increased customer end-market demand, inclusive of increased demand driven by COVID-19. Our net sales by market sector for the indicated fiscal years were as follows (in millions): 2020 2019 Net sales: Healthcare/Life Sciences$ 1,258.4 $ 1,220.0 Industrial/Commercial 1,254.5 981.2 Aerospace/Defense 611.6 588.6 Communications 265.9 374.6 Total net sales$ 3,390.4 $ 3,164.4 Healthcare/Life Sciences. Net sales for fiscal 2020 in the Healthcare/Life Sciences sector increased$38.4 million , or 3.1%, as compared to fiscal 2019. The increase in net sales was driven by a$65.7 million increase in production ramps of new products for existing customers and a$17.1 million increase in production ramps for new customers, both inclusive of customer ramps for critical care products as a result of COVID-19. The increase was partially offset by overall net decreased customer end-market demand inclusive of decreased demand for products associated with elective procedures as a result of COVID-19 and$5.0 million in end-of-life programs. Industrial/Commercial. Net sales for fiscal 2020 in the Industrial/Commercial sector increased$273.3 million , or 27.9%, as compared to fiscal 2019. The increase was driven by a significant overall net increased customer end-market demand and$81.9 million increase in production ramps of new products for existing customers. The increase was partially offset by a decrease of$19.9 million due to a disengagement with a customer. Aerospace/Defense. Net sales for fiscal 2020 in the Aerospace/Defense sector increased$23.0 million , or 3.9%, as compared to fiscal 2019. The increase was driven by a$27.8 million increase in production ramps for new customers and a$24.5 million increase in production ramps of new products for existing customers. The increase was partially offset by overall net decreased customer end-market demand inclusive of decreased demand driven by COVID-19. Communications. Net sales for fiscal 2020 in the Communications sector decreased$108.7 million , or 29.0%, as compared to fiscal 2019. The decrease was driven by significant overall net decreased customer end-market demand. The decrease was partially offset by an increase of$19.8 million due to production ramps for a new customer. Cost of sales. Cost of sales for fiscal 2020 increased$205.1 million , or 7.1%, as compared to fiscal 2019. Cost of sales is comprised primarily of material and component costs, labor costs and overhead. In fiscal 2020 and 2019, approximately 89% of the total cost of sales was variable in nature and fluctuated with sales volumes. Of these amounts, approximately 87% of these costs in both fiscal 2020 and 2019 were related to material and component costs. As compared to fiscal 2019, the increase in cost of sales in fiscal 2020 was primarily driven by the increase in net sales, fixed costs to support new program ramps, and$9.4 million related to employee compensation and supplies costs associated with COVID-19. 29 -------------------------------------------------------------------------------- Table of Contents Gross profit. Gross profit for fiscal 2020 increased$20.9 million , or 7.2%, as compared to fiscal 2019. Gross margin of 9.2% remained flat compared to fiscal 2019. The primary driver of the increase in gross profit as compared to fiscal 2019 was the increase in net sales, partially offset by increased fixed costs due to the ramp of new programs and increased employee compensation and supplies costs related to COVID-19. Operating income. Operating income for fiscal 2020 increased$11.3 million , or 8.0%, as compared to fiscal 2019 as a result of the increase in gross profit, partially offset by the$9.6 million increase in selling and administrative expenses ("S&A"). The increase in S&A was primarily due to a$7.7 million increase in compensation expense, mostly due to incentive based compensation as a result of improved financial performance. A$4.3 million increase in restructuring and impairment charges due to the closure of our Boulder Design Center also contributed to the S&A increase, which was partially offset by decreased sales expense. Operating margin of 4.5% remained flat compared to fiscal 2019, in line with flat gross margin as a result of the factors previously discussed. A discussion of operating income by reportable segment is presented below (in millions): 2020 2019 Operating income (loss): AMER$ 38.1 $ 57.8 APAC 246.6 208.2 EMEA 1.5 4.5 Corporate and other costs (132.8) (128.4) Total operating income$ 153.4 $ 142.1 AMER. Operating income decreased$19.7 million in fiscal 2020 as compared to fiscal 2019, primarily as a result of the decrease in net sales and increased fixed costs to support new production ramps, as well as employee compensation and supplies costs associated with COVID-19. In addition, there was an increase in S&A primarily due to an increase in bad debt expense, which was partially offset by a positive shift in customer mix. APAC. Operating income increased$38.4 million in fiscal 2020 as compared to fiscal 2019, primarily as a result of the increase in net sales, partially offset by a negative shift in customer mix and employee compensation and supplies costs associated with COVID-19. EMEA. Operating income decreased$3.0 million in fiscal 2020 as compared to fiscal 2019 primarily as a result of the increase in fixed costs to support new production ramps. Other expense. Other expense for fiscal 2020 increased$1.9 million as compared to fiscal 2019. The increase in other expense for fiscal 2020 was primarily due to an increase of$3.3 million in interest expense due to borrowings on the term loans and$0.9 million decrease in foreign currency exchange losses, partially offset by a decrease of$2.5 million in factoring fees. 30
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Table of Contents Income taxes. Income tax expense and effective annual income tax rates for fiscal 2020 and 2019 were as follows (dollars in millions):
2020 2019
Income tax expense, as reported (GAAP) $ 17.9 $ 17.3
Accumulated foreign earnings assertion - 10.5
U.S. Tax Reform - (7.0)
Impact of other special tax items 1.5 0.2
Income tax expense, as adjusted (non-GAAP) (1)
2020 2019
Effective tax rate, as reported (GAAP) 13.2 % 13.8 %
Accumulated foreign earnings assertion - 8.4
U.S. Tax Reform - (5.6)
Impact of other special tax items 0.5 (0.1)
Effective tax rate, as adjusted (non-GAAP) (1) 13.7 % 16.5 %
(1) We believe the non-GAAP presentation of income tax expense and the effective
annual tax rate excluding special tax items, guidance issued by the U.S.
Department of the Treasury and restructuring charges provides additional insight
over the change from the comparative reporting periods by isolating the impact
of these significant, special items. In addition, we believes that our income
tax expense, as adjusted, and effective tax rate, as adjusted, enhance the
ability of investors to analyze our operating performance and supplement, but do
not replace, our income tax expense and effective tax rate calculated in
accordance with U.S. GAAP
Income tax expense for fiscal 2020 was $17.9 million compared to $17.3 million
for fiscal 2019. The increase is primarily due to the geographic distribution of
worldwide earnings.
Our annual effective tax rate varies from the U.S. statutory rate of 21.0%
primarily due to the geographic distribution of worldwide earnings as well as a
tax holiday granted to a subsidiary located in the APAC segment where we derive
a significant portion of our earnings. Our effective tax rate also may be
impacted by disputes with taxing authorities, tax planning activities,
adjustments to uncertain tax positions and changes in valuation allowances.
We have been granted a tax holiday for a foreign subsidiary operating in the
APAC segment. This tax holiday will expire on December 31, 2034 , and is subject
to certain conditions with which we expect to continue to comply. In fiscal 2020
and 2019, the holiday resulted in tax reductions of approximately $28.3 million
net of the impact of the global intangible low-taxed income ("GILTI") provisions
of U.S. Tax Reform ($0.97 per basic share, $0.95 per diluted share) and $23.9
million ($0.79 per basic share, $0.77 per diluted share), respectively.
See also Note 6, "Income Taxes," in Notes to Consolidated Financial Statements
for additional information regarding our tax rate.
The annual effective tax rate for fiscal 2021 is expected to be approximately
13.0% to 15.0%.
Net Income. Net income for fiscal 2020 increased $8.9 million , or 8.2%, from
fiscal 2019 to $117.5 million . Net income increased primarily as a result of the
increase in operating income, partially offset by an increase in other expense
as previously discussed.
31
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Diluted earnings per share. Diluted earnings per share for fiscal 2020 and 2019,
as well as information as to the effects of special events that occurred in the
indicated periods, as previously discussed and detailed below, were as follows:
2020 2019
Diluted earnings per share, as reported (GAAP)$ 3.93 $
3.50
Restructuring costs, net of tax 0.18
0.05
U.S. Tax Reform (0.03)
0.23
Accumulated foreign earnings assertion -
(0.35)
Diluted earnings per share, as adjusted (non-GAAP) (1)
(1) We believe the non-GAAP presentation of diluted earnings per share excluding special tax items, consisting of those related to restructuring costs,U.S. Tax Reform and a change in our permanent reinvestment assertions related to undistributed earnings of two foreign subsidiaries provide additional insight over the change from the comparative reporting periods by eliminating the effects of special or unusual items. In addition, we believe that diluted earnings per share, as adjusted, enhances the ability of investors to analyze our operating performance and supplements, but does not replace, its diluted earnings per share calculated in accordance withU.S. GAAP. Diluted earnings per share increased to$3.93 in fiscal 2020 from$3.50 in fiscal 2019 primarily as a result of increased net income due to the factors discussed above and a reduction in diluted shares outstanding due to repurchase activity under our stock repurchase plans. Return onInvested Capital ("ROIC") and economic return. We use a financial model that is aligned with our business strategy and includes a ROIC goal of 500 basis points over our weighted average cost of capital ("WACC"), which we refer to as "economic return." Non-GAAP financial measures, including ROIC and economic return, are used for internal management goals and decision making because such measures provide management and investors additional insight into financial performance. In particular, we provide ROIC and economic return because we believe they offer insight into the metrics that are driving management decisions because we view ROIC and economic return as important measures in evaluating the efficiency and effectiveness of our long-term capital requirements. We also use a derivative measure of ROIC as a performance criteria in determining certain elements of compensation, and certain compensation incentives are based on economic return performance. We define ROIC as tax-effected operating income before restructuring and other special items divided by average invested capital over a rolling five-quarter period for the fiscal year. Invested capital is defined as equity plus debt and operating lease liabilities, less cash and cash equivalents. Other companies may not define or calculate ROIC in the same way. ROIC and other non-GAAP financial measures should be considered in addition to, not as a substitute for, measures of our financial performance prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). We review our internal calculation of WACC annually. Our WACC was 8.8% for fiscal year 2020 and 9.0% for fiscal year 2019. By exercising discipline to generate ROIC in excess of our WACC, our goal is to create value for our shareholders. Fiscal 2020 ROIC of 14.0% reflects an economic return of 5.2%, based on our weighted average cost of capital of 8.8%, and fiscal 2019 ROIC of 13.1% reflects an economic return of 4.1%, based on our weighted average cost of capital of 9.0% for that fiscal year. For a reconciliation of ROIC, economic return and adjusted operating income (tax effected) to our financial statements that were prepared using GAAP, see Exhibit 99.1 to this annual report on Form 10-K, which exhibit is incorporated herein by reference. Refer to the table below, which includes the calculation of ROIC and economic return (dollars in millions) for the indicated periods: 2020 2019 Adjusted operating income (tax effected)$ 137.1 $ 120.7 Average invested capital 978.9 923.1 After-tax ROIC 14.0 % 13.1 % WACC 8.8 % 9.0 % Economic return 5.2 % 4.1 % 32
-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and restricted cash were$387.9 million as ofOctober 3, 2020 , as compared to$226.3 million as ofSeptember 28, 2019 . As ofOctober 3, 2020 , 76% of our cash and cash equivalents balance was held outside of theU.S. by our foreign subsidiaries. With the enactment ofU.S. Tax Reform, we believe that our offshore cash can be accessed in a more tax efficient manner than beforeU.S. Tax Reform. Currently, we believe that our cash balance, together with cash available under our Credit Facility, will be sufficient to meet our liquidity needs and potential share repurchases, if any, for the next twelve months and for the foreseeable future. Our future cash flows from operating activities will be reduced by$59.6 million due to cash payments forU.S. federal taxes on the deemed repatriation of undistributed foreign earnings that are payable over an eight year period that began in fiscal 2019 with the first payment. The table below provides the expected timing of these future cash outflows, in accordance with the following installment schedule for the remaining six years (in millions): 2021$ 5.7 2022 5.7 2023 5.7 2024 10.6 2025 14.2 2026 17.7 Total$ 59.6
Cash Flows. The following table provides a summary of cash flows for fiscal 2020 and 2019 (in millions):
2020 2019
Cash provided by operating activities $ 210.4 $ 115.3
Cash used in investing activities (49.9) (89.4)
Cash used in financing activities (1.5) (97.2)
Effect of exchange rate changes on cash and cash
equivalents 2.6 (0.1)
Net increase (decrease) in cash and cash equivalents
and restricted cash $ 161.6 $ (71.4) Operating Activities. Cash flows provided by operating activities were
•$121.8 million in accounts payables cash flows driven by increased purchasing
activity to support ramp of customer programs and longer lead times for certain
components heightened by the COVID-19 outbreak.
•$105.5 million in accounts receivable cash flows, which resulted from the
timing of payments and shipments, as well as mix of customer payment terms.
•$(75.2) million in inventory cash flows driven by increased inventory levels to
support the ramp of customer programs and longer lead times for certain
components heightened by the COVID-19 outbreak.
•$(40.7) million in other current and noncurrent liabilities cash flows driven
by decreases in advance payments from customers, partially offset by an increase
in accrued salaries and wages due to timing of the quarter-end.
•$(30.8) million in customer deposit cash flows driven by significant deposits
received from two customers in the prior year, partially offset by a significant
deposit received from one customer in the current year.
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The following table provides a summary of cash cycle days for the periods
indicated (in days):
Three Months Ended
October 3, September 28,
2020 2019
Days in accounts receivable 48 55
Days in contract assets 11 10
Days in inventory 85 87
Days in accounts payable (57) (55)
Days in cash deposits (18) (17)
Annualized cash cycle 69 80
We calculate days in accounts receivable and contract assets as each balance
sheet item for the respective quarter divided by annualized sales for the
respective quarter by day. We calculate days in inventory, accounts payable, and
cash deposits as each balance sheet line item for the respective quarter divided
by annualized cost of sales for the respective quarter by day. We calculate
annualized cash cycle as the sum of days in accounts receivable, days in
contract assets and days in inventory, less days in accounts payable and days in
cash deposits.
As of October 3, 2020 , annualized cash cycle days decreased eleven days compared
to September 28, 2019 due to the following factors:
Days in accounts receivable for the three months ended October 3, 2020 decreased
seven days compared to the three months ended September 28, 2019 . The decrease
is primarily attributable to the timing of customer shipments and payments and
mix of customer payment terms, partially offset by a decrease in accounts
receivable sold under factoring programs.
Days in contract assets for the three months ended October 3, 2020 increased one
day compared to the three months ended September 28, 2019 . The increase is due
to increased demand from customers with arrangements requiring revenue to be
recognized over time as products are produced.
Days in inventory for the three months ended October 3, 2020 decreased two days
compared to the three months ended September 28, 2019 . The decrease is primarily
attributable to inventory management efforts, partially offset by increasing
inventory levels to support the ramp of customer programs and longer lead times
for certain components due to the COVID-19 outbreak.
Days in accounts payable for the three months ended October 3, 2020 increased
two days compared to the three months ended September 28, 2019 . The increase is
primarily attributable to increased purchasing activity to support the ramp of
customer programs and longer lead times for certain components heightened by the
COVID-19 outbreak.
Days in cash deposits for the three months ended October 3, 2020 increased one
day compared to the three months ended September 28, 2019 . The increase was
primarily attributable to significant deposits received from 2 customers to
cover higher inventory balances.
Free Cash Flow. We define free cash flow ("FCF"), a non-GAAP financial measure,
as cash flow provided by operations less capital expenditures. FCF was $160.3
million for fiscal 2020 compared to $24.7 million for fiscal 2019, an increase
of $135.6 million .
Non-GAAP financial measures, including FCF, are used for internal management
assessments because such measures provide additional insight to investors into
ongoing financial performance. In particular, we provide FCF because we believe
it offers insight into the metrics that are driving management decisions. We
view FCF as an important financial metric as it demonstrates our ability to
generate cash and can allow us to pursue opportunities that enhance shareholder
value. FCF is a non-GAAP financial measure that should be considered in addition
to, not as a substitute for, measures of our financial performance prepared in
accordance with GAAP.
A reconciliation of FCF to our financial statements that were prepared using
GAAP follows (in millions):
2020 2019
Cash flows provided by operating activities $ 210.4 $ 115.3
Payments for property, plant and equipment (50.1) (90.6)
Free cash flow $ 160.3 $ 24.7
34-------------------------------------------------------------------------------- Table of Contents Investing Activities. Cash flows used in investing activities were$49.9 million for fiscal 2020 compared to$89.4 million for fiscal 2019. The decrease in cash used in investing activities was due to a$40.5 million decrease in capital expenditures, primarily due to the construction of a second manufacturing facility inGuadalajara, Mexico which was completed in the first quarter of fiscal 2020. We utilized available cash and operating cash flows as the sources for funding our operating requirements during fiscal 2020. We currently estimate capital expenditures for fiscal 2021 will be approximately$70.0 million to$90.0 million . Financing Activities. Cash flows used in financing activities were$1.5 million for fiscal 2020 compared to$97.2 million for fiscal 2019. The decrease was primarily attributable to a$140.7 million decrease in cash used to repurchase our common stock, drawing$138.0 million on the unsecured term loans, and a$10.2 million increase in proceeds from the exercise of stock options. This change was partially offset by a$190.0 million decrease in borrowing and increase in repayments on our revolving commitment. OnJune 6, 2016 , the Board of Directors authorized a multi-year stock repurchase program under which we were authorized to repurchase up to$150.0 million of our common stock beginning in fiscal 2017 (the "2016 Program"). During fiscal 2018, we completed the 2016 Program by repurchasing 1,914,596 shares for$115.9 million , at an average price of$60.52 per share. OnFebruary 14, 2018 , the Board of Directors approved a share repurchase plan under which we were authorized to repurchase$200.0 million of our common stock (the "2018 Program"). During fiscal 2020 and 2019, we completed the 2018 Program by repurchasing 3,129,059 and 343,642 shares under this program for$178.8 million and$21.2 million , at an average price of$57.15 and$61.61 per share, respectively. OnAugust 20, 2019 , the Board of Directors approved a share repurchase plan under which we were authorized to repurchase$50.0 million of our common stock (the "2019 Program"). The 2019 Program commenced upon completion of the 2018 Program, as defined below. During fiscal 2020 and 2019, we repurchased 609,935 and 54,965 shares under this program for$41.4 million and$3.3 million at an average price of$67.86 and 59.66 per share, respectively. As ofOctober 3, 2020 ,$5.3 million of authority remained under the 2019 Program. OnAugust 13, 2020 , the Board of Directors approved a new share repurchase program that authorizes us to repurchase up to$50.0 million of our common stock (the "2021 Program"). The 2021 Program commenced onOctober 19, 2020 , upon completion of the 2019 Program. The 2021 Program has no expiration. OnNovember 18, 2020 , the Board of Directors approved an additional$50.0 million in share repurchase authority under the existing 2021 Program such that there now exists a total of$100.0 million in share repurchase authority under the program. All shares repurchased under the aforementioned programs were recorded as treasury stock. OnJune 15, 2018 , we entered into a Note Purchase Agreement (the "2018 NPA") pursuant to which it issued an aggregate of$150.0 million in principal amount of unsecured senior notes, consisting of$100.0 million in principal amount of 4.05% Series A Senior Notes, due onJune 15, 2025 , and$50.0 million in principal amount of 4.22% Series B Senior Notes, due onJune 15, 2028 (collectively, the "2018 Notes"), in a private placement. The 2018 NPA includes customary operational and financial covenants with which we are required to comply, including, among others, maintenance of certain financial ratios such as a total leverage ratio and a minimum interest coverage ratio. The 2018 Notes may be prepaid in whole or in part at any time, subject to payment of a make-whole amount; interest on the 2018 Notes is payable semiannually. As ofOctober 3, 2020 , we were in compliance with the covenants under the 2018 NPA. OnMay 15, 2019 , we refinanced our then-existing senior unsecured revolving credit facility by entering into a new five-year senior unsecured revolving credit facility (referred to as the "Credit Facility"), which expanded the maximum commitment from$300.0 million to$350.0 million and extended the maturity fromJuly 5, 2021 toMay 15, 2024 . The maximum commitment under the Credit Facility may be further increased to$600.0 million , generally by mutual agreement of the lenders and us, subject to certain customary conditions. The increase of the maximum facility is not able to be exercised until after the maturity date of the 364 day delayed draw term loans ("term loans") onApril 28, 2021 , as outlined in Amendment No. 1 to the Credit Agreement (the "Amendment") subsequently discussed. During fiscal 2020, the highest daily borrowing was$164.5 million ; the average daily borrowings were$78.5 million . We borrowed$538.7 million and repaid$633.7 million of revolving borrowings under the Credit Facility during fiscal 2020. As ofOctober 3, 2020 , we were in compliance with all financial covenants relating to the Credit Agreement, which are generally consistent with those in the 2018 NPA discussed above. We are required to pay a commitment fee on the daily unused revolver credit commitment based on our leverage ratio; the fee was 0.125% as ofOctober 3, 2020 . 35 -------------------------------------------------------------------------------- Table of Contents To further ensure our ability to meet our working capital and fixed capital requirements, onApril 29, 2020 , we entered into the Amendment in response to the COVID-19 outbreak, which amends the Credit Agreement, dated as ofMay 15, 2019 . The Amendment amends certain provisions of the Credit Facility to, among other things, provide for a$138.0 million unsecured delayed draw term loans facility. Term loans borrowed under the new facility were funded in a single draw onMay 4, 2020 and will mature onApril 28, 2021 . Outstanding term loans will bear interest, at our option, at a eurocurrency rate (subject to a floor of 1.0%) plus a margin of 1.75% per annum or at a base rate (subject to a floor of 2.0%) plus a margin of 0.75% per annum. The proceeds of the term loans were used to prepay outstanding revolving and swing line loans under the Credit Facility and for the general corporate purposes of ourselves and our subsidiaries. The$138.0 million of outstanding term loans as ofOctober 3, 2020 was subject to a 2.75% per annum interest rate. The Credit Agreement and the 2018 NPA allow for the future payment of cash dividends or the repurchase of shares provided that no event of default (including any failure to comply with a financial covenant) exists at the time of, or would be caused by, the dividend payment or the share repurchases. We have not paid cash dividends in the past. However, we evaluate from time to time potential uses of excess cash, which in the future may include share repurchases above those already authorized, a special dividend or recurring dividends. We have Master Accounts Receivable Purchase Agreements withMUFG Bank ,New York Branch (formerly known asThe Bank of Tokyo-Mitsubishi UFJ, Ltd. ) (the "MUFG RPA"), andHSBC Bank (China) Company Limited ,Xiamen branch (the "HSBC RPA"), under which we may elect to sell receivables, at a discount, on an ongoing basis. These facilities are uncommitted facilities. The maximum facility amount under the MUFG RPA as ofOctober 3, 2020 is$340.0 million . OnSeptember 17, 2020 , we entered into Amendment 11 under the MUFG RPA to change the allocation of factoring for certain customers and add LIBOR replacement language. The maximum facility amount under the HSBC RPA as ofOctober 3, 2020 is$60.0 million . The MUFG RPA will be automatically extended each year unless any party gives no less than 10 days prior notice that the agreement should not be extended. The terms of the HSBC RPA are generally consistent with the terms of the MUFG RPA discussed above. We sold$834.4 million and$919.3 million of trade accounts receivable under these programs during fiscal years 2020 and 2019, respectively, in exchange for cash proceeds of$831.2 million and$913.6 million , respectively. In all cases, the sale discount was recorded within "Miscellaneous, net" in the Consolidated Statements of Comprehensive Income in the period of the sale. For further information regarding the receivable sale programs, see Note 14, "Trade Accounts Receivable Sale Programs," in Notes to Consolidated Financial Statements. Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents, potential borrowings under the Credit Facility and our leasing capabilities should be sufficient to meet our working capital and fixed capital requirements for the next twelve months. We believe we are positioned with a strong balance sheet as we face the future challenges presented by COVID-19. As of the end of the fourth quarter of fiscal 2020, cash and cash equivalents and restricted cash were$388 million , while debt, finance lease obligations and other financing were$335 million . In addition to our strong balance sheet, we have significant funding availability through our Credit Facility, should future needs arise. In addition, to further ensure our ability to meet our working capital and fixed capital requirements, we drew the full amount of the unsecured delayed draw term loans facility previously discussed in response to the COVID-19 outbreak. If our future financing needs increase, then we may need to arrange additional debt or equity financing. Accordingly, we evaluate and consider from time to time various financing alternatives to supplement our financial resources. However, we cannot be assured that we will be able to make any such arrangements on acceptable terms. 36
-------------------------------------------------------------------------------- Table of Contents CONTRACTUAL OBLIGATIONS, COMMITMENTS AND OFF-BALANCE SHEET OBLIGATIONS Our disclosures regarding contractual obligations and commercial commitments are located in various parts of our regulatory filings. Information in the following table provides a summary of our contractual obligations and commercial commitments as ofOctober 3, 2020 (dollars in millions):
Payments Due by Fiscal Year
2026 and
Contractual Obligations Total 2021 2022-2023 2024-2025 thereafter
Debt Obligations (1) $ 327.8 $ 146.9 $ 12.3 $ 112.3 $ 56.3
Finance Lease Obligations 123.8 7.2 12.9 10.1 93.6
Operating Lease Obligations 51.5 9.0 15.8 10.5 16.2
Purchase Obligations (2) 624.5 610.4 13.9 0.2 -
Repatriation Tax on Undistributed
Foreign Earnings (3) 59.6 5.7 11.4 24.8 17.7
Other Liabilities on the Balance Sheet
(4) 19.3 4.3 5.1 1.7 8.2
Other Liabilities not on the Balance
Sheet (5) 9.1 3.8 2.0 - 3.3
Total Contractual Cash Obligations $ 1,215.6 $ 787.3 1)As ofOctober 3, 2020 , debt obligations includes$150.0 million in principal amount of 2018 Notes and$138.0 million in term loans borrowed under the credit facility, as well as interest. 2)As ofOctober 3, 2020 , purchase obligations consist primarily of purchases of inventory and equipment in the ordinary course of business. 3)As ofOctober 3, 2020 , repatriation tax on undistributed foreign earnings consists ofU.S. federal income taxes on the deemed repatriation of undistributed foreign earnings due toU.S. Tax Reform. Refer to "Liquidity and Capital Resources" above for further detail. 4)As ofOctober 3, 2020 , other obligations on the balance sheet included deferred compensation obligations to certain of our former and current executive officers, as well as other key employees, other financing obligations arising from information technology maintenance agreements, and asset retirement obligations related to our buildings. We have excluded from the above table the impact of approximately$2.1 million , as ofOctober 3, 2020 , related to unrecognized income tax benefits. We cannot make reliable estimates of the future cash flows by period related to these obligations. 5)As ofOctober 3, 2020 , other obligations not on the balance sheet consist of guarantees and a commitment for salary continuation and certain benefits in the event employment of one executive officer is terminated without cause. Excluded from the amounts disclosed are certain bonus and incentive compensation amounts, which would be paid on a prorated basis in the year of termination. 37 -------------------------------------------------------------------------------- Table of Contents DISCLOSURE ABOUT CRITICAL ACCOUNTING ESTIMATES Our accounting policies are disclosed in Note 1 "Description of Business and Significant Accounting Policies" of Notes to Consolidated Financial Statements. During fiscal 2020 there were no material changes to these policies. Our more critical accounting estimates are described below: Revenue Recognition: Revenue is recognized over time for arrangements with customers for which: (i) our performance does not create an asset with an alternative use to us, and (ii) we have an enforceable right to payment, including reasonable profit margin, for performance completed to date. Revenue recognized over time is estimated based on costs incurred to date plus a reasonable profit margin. If either of the two conditions noted above are not met to recognize revenue over time, revenue is recognized following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying arrangement. We recognize revenue when a contract exists and when, or as, it satisfies a performance obligation by transferring control of a product or service to a customer. Contracts are accounted for when they have approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. We generally enter into a master services arrangement that establishes the framework under which business will be conducted. These arrangements represent the master terms and conditions of our services that apply to individual orders, but they do not commit the customer to work with, or to continue to work with, us nor do they obligate the customer to any specific volume or pricing of purchases. Moreover, these terms can be amended in appropriate situations. Customer purchase orders are received for specific quantities with predominantly fixed pricing and delivery requirements. Thus, for the majority of our contracts, there is no guarantee of any revenue to us until a customer submits a purchase order. As a result, we generally consider our arrangement with a customer to be the combination of the master services arrangement and the purchase order. Most of our arrangements with customers create a single performance obligation as the promise to transfer the individual manufactured product or service is capable of being distinct. Our performance obligations are satisfied over time as work progresses or at a point in time. A performance obligation is satisfied over time if we have an enforceable right to payment, including a reasonable profit margin. Determining if an enforceable right to payment includes a reasonable profit margin requires judgment and is assessed on a contract by contract basis. If an enforceable right to payment for work-in-process does not exist, revenue is recognized following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contract. For contracts requiring over time revenue recognition, the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We use a cost-based input measurement of progress because it best depicts the transfer of assets to the customer, which occurs as costs are incurred during the manufacturing process or as services are rendered. Under the cost-based measure of progress, the extent of progress towards completion is measured based on the costs incurred to date. Generally, there are no subjective customer acceptance requirements or further obligations related to goods or services provided; if such requirements or obligations exist, then a sale is recognized at the time when such requirements are completed and such obligations are fulfilled. We do not allow for a general right of return. Net sales include amounts billed to customers for shipping and handling and out-of-pocket expenses. The corresponding shipping and handling costs and out-of-pocket expenses are included in cost of sales. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from net sales. Net sales from engineering design and development services, which are generally performed under contracts with a duration of twelve months or less, are typically recognized as program costs are incurred by utilizing the proportional performance model. The completed performance model is used if certain customer acceptance criteria exist. Any losses are recognized when anticipated. Income Taxes: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We maintain valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In determining 38 -------------------------------------------------------------------------------- Table of Contents whether a valuation allowance is required, we take into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. Share-Based Compensation: Generally accepted accounting principles require all grants of share-based compensation to employees to be measured at fair value and expensed in the Consolidated Statements of Comprehensive Income over the service period (generally the vesting period) of the grant. We use the Black-Scholes valuation model to value stock options, theMonte Carlo valuation model to value performance stock units with market conditions and the share price on the date of grant for performance stock units that vest based on other non-market-based performance conditions. Inventories: Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method. Valuing inventories at the lower of cost or market requires the use of estimates and judgment. Customers may cancel their orders, change production quantities or delay production for a number of reasons that are beyond our control. Any of these, or certain additional actions, could impact the valuation of inventory. Any actions taken by our customers that could impact the value of our inventory are considered when determining the lower of cost or market valuations. Impairment of Long-Lived Assets: Long-lived assets, including property, plant and equipment, operating lease right-of-use assets and intangible assets with finite lives are reviewed for impairment and written down to fair value when facts and circumstances indicate that the carrying value of long-lived assets or asset groups may not be recoverable through estimated future undiscounted cash flows. If an impairment has occurred, a write-down to estimated fair value is made and the impairment loss is recognized as a charge against current operations. The impairment analysis is based on management's assumptions, including future revenue and cash flow projections. Circumstances that may lead to impairment of property, plant and equipment, operating lease right-of-use assets and intangible assets with finite lives include reduced expectations for future performance or industry demand and possible further restructurings, among others. NEW ACCOUNTING PRONOUNCEMENTS See Note 1, "Description of Business and Significant Accounting Policies," in Notes to Consolidated Financial Statements regarding recent accounting pronouncements. 39
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