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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the Quarter ended June 30, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 000-14824
PLEXUS CORP.
(Exact name of registrant as specified in charter)
Wisconsin 39-1344447
(State of Incorporation) (IRS Employer Identification No.)
55 Jewelers Park Drive
Neenah, Wisconsin 54957-0156
(Address of principal executive offices)(Zip Code)
Telephone Number (920) 722-3451
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
-----
As of August 8, 2002 there were 42,024,037 shares of Common Stock of
the Company outstanding.
PLEXUS CORP.
TABLE OF CONTENTS
June 30, 2002
PART I. FINANCIAL INFORMATION....................................................................................3
Item 1. Consolidated Financial Statements...............................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS).................3
CONDENSED CONSOLIDATED BALANCE SHEETS...........................................................4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........10
SAFE HARBOR....................................................................................10
OVERVIEW.......................................................................................11
MERGERS AND ACQUISITIONS.......................................................................11
RESULTS OF OPERATIONS..........................................................................12
LIQUIDITY AND CAPITAL RESOURCES................................................................14
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES..................................................15
ADDITIONAL DISCLOSURES CONCERNING LIQUIDITY AND CAPITAL RESOURCES, INCLUDING
"OFF-BALANCE SHEET" ARRANGEMENTS...............................................................16
NEW ACCOUNTING PRONOUNCEMENTS..................................................................18
RISK FACTORS...................................................................................19
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................26
PART II - OTHER INFORMATION......................................................................................27
Item 5. Other Information..............................................................................27
Item 6. Exhibits and Reports on Form 8-K...............................................................27
SIGNATURE........................................................................................................28
2
PART I. FINANCIAL INFORMATION
ITEM 1...CONSOLIDATED FINANCIAL STATEMENTS
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Unaudited
Three Months Ended Nine Months Ended
June 30, June 30,
-----------------------------------------------------------------------
2002 2001 2002 2001
------------- -------------- ------------- --------------
Net sales $ 234,749 $ 253,172 $ 666,128 $ 805,553
Cost of sales 211,672 223,353 607,110 703,807
--------- --------- --------- ---------
Gross profit 23,077 29,819 59,018 101,746
Operating expenses:
Selling and administrative expenses 17,260 13,612 47,574 39,481
Amortization of goodwill 1,342 1,000 3,927 2,779
Restructuring costs 2,700 1,926 10,187 1,926
Acquisition and merger costs -- 596 251 1,610
--------- --------- --------- ---------
21,302 17,134 61,939 45,796
--------- --------- --------- ---------
Operating income (loss) 1,775 12,685 (2,921) 55,950
Other income (expense):
Interest expense (752) (1,389) (3,069) (4,588)
Miscellaneous 71 975 1,112 2,991
--------- --------- --------- ---------
Income (loss) before income taxes 1,094 12,271 (4,878) 54,353
Income tax expense (benefit) 438 4,909 (1,356) 22,122
--------- --------- --------- ---------
Net income (loss) $ 656 $ 7,362 $ (3,522) $ 32,231
========== ========= ========= =========
Earnings per share:
Basic $ 0.02 $ 0.18 $ (0.08) $ 0.79
========== ========= ========= =========
Diluted $ 0.02 $ 0.17 $ (0.08) $ 0.75
========== ========= ========= =========
Weighted average shares outstanding:
Basic 41,919 41,369 41,856 40,944
========== ========= ========= =========
Diluted 43,134 43,248 41,856 43,169
========== ========= ========= =========
Comprehensive income (loss):
Net income (loss) $ 656 $ 7,362 $ (3,522) $ 32,231
Foreign currency hedges and
translation adjustments 2,923 512 1,578 (721)
--------- --------- --------- ---------
Comprehensive income (loss) $ 3,579 $ 7,874 $ (1,944) $ 31,510
========== ========= ========= =========
See notes to condensed consolidated financial statements.
3
PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
June 30, September 30,
2002 2001
---------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,119 $ 84,591
Short-term investments 52,204 20,775
Accounts receivable, net of allowance of $6,400
and $6,500, respectively 89,788 114,055
Inventories 98,184 135,409
Deferred income taxes 16,866 13,662
Prepaid expenses and other 21,157 10,317
--------- ---------
Total current assets 329,318 378,809
Property, plant and equipment, net 172,987 145,928
Goodwill, net 67,084 70,514
Deferred income taxes 178 3,624
Other 4,477 3,650
--------- ---------
Total assets $ 574,044 $ 602,525
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 1,625 $ 8,175
Accounts payable 61,390 52,307
Customer deposits 13,965 16,051
Accrued liabilities:
Salaries and wages 17,619 15,505
Other 22,481 9,716
--------- ---------
Total current liabilities 117,080 101,754
Long-term debt and capital lease obligations, net of current portion 24,235 70,016
Other liabilities 4,612 3,903
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
none issued or outstanding -- --
Common stock, $.01 par value, 200,000 shares authorized, 41,945
and 41,757 issued and outstanding, respectively 419 418
Additional paid-in capital 255,139 251,932
Retained earnings 171,370 174,891
Accumulated other comprehensive income (loss) 1,189 (389)
--------- ---------
428,117 426,852
--------- ---------
Total liabilities and shareholders' equity $ 574,044 $ 602,525
========= =========
See notes to condensed consolidated financial statements.
4
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Nine Months Ended
June 30,
---------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,522) $ 32,231
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization 27,757 21,937
Non-cash restructuring charges 2,546 1,182
Income tax benefit from stock option award plans 765 4,665
Deferred income taxes 242 (2,963)
Changes in assets and liabilities:
Accounts receivable 43,668 (2,497)
Inventories 46,357 32,104
Prepaid expenses and other (9,628) (5,508)
Accounts payable 1,684 (44,365)
Customer deposits (2,096) 2,540
Accrued liabilities 14,911 (10,305)
Other (5,294) (3,479)
--------- ---------
Cash flows provided by operating activities 117,390 25,542
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (51,729) (36,700)
Sales and maturities of short-term investments 20,300 20,624
Payments for property, plant and equipment (21,563) (45,738)
Payments for business acquisitions, net of cash acquired (41,986) (32,600)
Other 64 --
--------- ---------
Cash flows used in investing activities (94,914) (94,414)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 189,461 144,077
Payments on debt and capital lease obligations (241,837) (243,645)
Proceeds from exercise of stock options 1,209 2,000
Net borrowings (repayments) under asset securitization facility (6,305) 30,000
Issuances of common stock 1,234 164,829
--------- ---------
Cash flows provided by (used in) financing activities (56,238) 97,261
--------- ---------
Effect of foreign currency translation on cash and cash equivalents 290 11
--------- ---------
Net increase (decrease) in cash and cash equivalents (33,472) 28,400
Cash and cash equivalents:
Beginning of period 84,591 5,293
--------- ---------
End of period $ 51,119 $ 33,693
========= =========
See notes to condensed consolidated financial statements.
5
PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2002
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by Plexus Corp. ("Plexus" or the "Company") without audit and
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. In the opinion of the Company, the financial statements
reflect all adjustments, which include normal recurring adjustments necessary to
present fairly the financial position of the Company as of June 30, 2002, and
the results of operations for the three months and nine months ended June 30,
2002 and 2001, and the 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 2001 Annual Report on Form 10-K.
The condensed consolidated balance sheet data as of September 30, 2001
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
NOTE 2 - INVENTORIES
The major classes of inventories are as follows (in thousands):
June 30, September 30,
2002 2001
--------------------------------------------
Assembly parts $ 67,437 $ 98,483
Work-in-process 26,857 31,911
Finished goods 3,890 5,015
--------- ---------
$ 98,184 $ 135,409
========= =========
NOTE 3 - ASSET SECURITIZATION FACILITY
In fiscal 2001, the Company entered into an agreement to sell up to $50
million of trade accounts receivable without recourse (the "asset securitization
facility") to Plexus ABS Inc. ("ABS"), a wholly owned, limited-purpose
subsidiary of the Company. ABS is a separate corporate entity that sells
participation interests in a pool of the Company's accounts receivable to
financial institutions. The financial institutions then receive an ownership and
security interest in the pool of receivables. Accounts receivable sold to
financial institutions, if any, are reflected as a reduction to accounts
receivable in the consolidated balance sheets. The Company has no risk of credit
loss on such receivables as they are sold without recourse. The Company retains
collection and administrative responsibilities on the participation interest
sold as services for ABS and the financial institutions. The agreement expires
in October 2003. As of June 30, 2002, the total available funding amount under
the asset securitization facility was approximately $30 million, of which $16.6
million was utilized. As a result, accounts receivable has been reduced by $16.6
million as of June 30, 2002, while long-term debt and capital lease obligations
does not include this $16.6 million of off-balance-sheet financing. For the
three months ended June 30, 2002 and 2001, the Company incurred financing costs
of $0.1 million and $0.3 million, respectively, under the asset securitization
facility. For the nine months ended June 30, 2002 and 2001, the Company incurred
financing costs of $0.5 million and $1.4 million, respectively under the asset
securitization facility. These financing costs are included in interest expense
in the accompanying Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss).
6
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
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
BASIC EARNINGS PER SHARE:
Net income (loss) $ 656 $ 7,362 $ (3,522) $ 32,231
======== ======== ======== ========
Basic weighted average shares outstanding 41,919 41,369 41,856 40,944
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.02 $ 0.18 $ (0.08) $ 0.79
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income (loss) $ 656 $ 7,362 $ (3,522) $ 32,231
======== ======== ======== ========
Weighted average shares outstanding 41,919 41,369 41,856 40,944
Dilutive effect of stock options 1,215 1,879 -- 2,225
-------- -------- -------- --------
Diluted weighted average shares outstanding 43,134 43,248 41,856 43,169
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.02 $ 0.17 $ (0.08) $ 0.75
======== ======== ======== ========
For the nine months ended June 30, 2002, the calculations of earnings
per share on a diluted basis excludes the impact of stock options, since they
would result in an antidilutive effect. For the three months ended June 30, 2002
and the three and nine months ended June 30, 2001, stock options to purchase
approximately 2,156,000, 930,000 and 56,000 shares of common stock,
respectively, were outstanding, but were not included in the computation of
diluted earnings per share because the exercise price of the stock options was
greater than the average market price of the common shares, and therefore their
effect would be anitdilutive.
NOTE 5 - ACQUISITION
On January 8, 2002, the Company completed its acquisition of certain
assets of MCMS, Inc. ("MCMS"), an electronics manufacturing services provider,
for approximately $42 million in cash subject to purchase price adjustments. The
assets purchased from MCMS include manufacturing operations in Penang, Malaysia;
Xiamen, China; and Nampa, Idaho. The Company acquired these assets primarily to
provide electronic manufacturing services in Asia and increase its customer
base. The acquisition did not include any interest-bearing debt, but included
the assumption of certain specific liabilities of approximately $4.4 million.
The Company recorded the acquisition utilizing the accounting principles
promulgated by Statement of Financial Accounting Standards ("SFAS") No.'s 141
and 142. The results from operations of the assets acquired from MCMS are
reflected in the Company's financial statements from the date of acquisition. No
goodwill resulted from this acquisition. The Company incurred approximately $0.3
million of acquisition costs during the second quarter of fiscal 2002 associated
with the acquisition of the MCMS operations.
NOTE 6 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one business segment. The Company provides product
realization services to electronic original equipment manufactures ("OEMs"). The
Company has three reportable geographic regions: North America, Europe and Asia.
As of June 30, 2002, the Company had 26 manufacturing and engineering facilities
in North America, Europe and Asia to serve these OEMs. The Company uses an
internal management reporting system, which provides important financial data,
to evaluate performance and allocate the Company's resources on a geographic
basis. Inter-region transactions are generally recorded at amounts that
approximate arm's length transactions. Certain corporate expenses are allocated
to these regions and are included for performance evaluation. The accounting
policies for the regions are the same as for the Company taken as a whole.
Geographic net sales information reflects the origin of the product shipped.
Asset information is based on the physical location of the asset.
7
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales (in thousands):
North America $207,814 $230,054 $596,217 $737,661
Europe 20,236 23,118 55,940 67,892
Asia 6,699 - 13,971 -
-------- -------- -------- --------
$234,749 $253,172 $666,128 $805,553
======== ======== ======== ========
June 30, September 30,
2002 2001
---- ----
Long-lived assets (in thousands):
North America $204,392 $183,065
Europe 33,935 37,027
Asia 6,221 -
-------- --------
$244,548 $220,092
======== ========
NOTE 7 - CONTINGENCY
The Company (along with numerous other companies) has been sued by the
Lemelson Medical, Education & Research Foundation Limited Partnership
("Lemelson") related to alleged possible infringement of certain Lemelson
patents. The Company had requested a stay of action pending developments in
other related litigation which has been granted. The Company believes the
vendors from whom the patent-related equipment was purchased may contractually
indemnify the Company. If a judgment is rendered and/or a license fee required,
it is currently the opinion of management of the Company that such judgment
would not be material to the consolidated financial position of the Company or
the results of its operations.
NOTE 8 -- RESTRUCTURING COSTS
In response to the reduction in the Company's sales levels and reduced
capacity utilization, the Company reduced its cost structure through the
reduction of its work force, lease obligations and other exit costs and the
write-off of certain under-utilized assets. For the nine months ended June 30,
2002, the Company recorded pre-tax restructuring charges of $10.2 million, which
includes $2.7 million recorded in the third quarter of fiscal 2002. See Note 11.
The Company expects the settlement of the majority of these charges to be made
over the next 12 months, except for certain long-term contractual obligations.
The components of the restructuring charges, amounts utilized and remaining
accrued balance by quarter during fiscal 2002 were as follows (in thousands):
8
Employee Lease Obligations
Termination and and Other Non-cash Asset
Severance Costs Exit Costs Write-downs Total
--------------------------------------------------------------------------------
Accrued balance, September 30, 2001 $ 79 $ -- $ -- $ 79
Restructuring charges 1,179 975 646 2,800
Amounts utilized (929) (310) (646) (1,885)
------------- ----------- ----------- ------------
Accrued balance, December 31, 2001 329 665 -- 994
Restructuring charges 690 2,847 1,150 4,687
Amounts utilized (522) (150) (1,150) (1,822)
------------- ----------- ----------- ------------
Accrued balance, March 31, 2002 497 3,362 -- 3,859
Restructuring charges 1,950 -- 750 2,700
Amounts utilized (434) (84) (750) (1,268)
------------- ----------- ----------- ------------
Accrued balance, June 30, 2002 $ 2,013 $ 3,278 $ -- $ 5,291
============= =========== ----------- ------------
NOTE 9 -- INCOME TAX
The provision for income taxes is determined by applying an estimated
annual effective income tax rate to income before income taxes. The rates are
based on the most recent annualized forecast of pretax income, permanent
book/tax differences and tax credits. The Company's effective tax rates for the
nine months ended June 30, 2002 and 2001 were 28% and 41%, respectively. Non-tax
deductible goodwill and merger expenses lowered the effective income tax rate
for fiscal 2002 as pre-tax book income (loss) is expected to be low or near
break-even for fiscal 2002.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company has provided certain engineering design and development
services for MemoryLink Corp., which develops electronic products. The former
Chairman of the Board of the Company is a shareholder and director of
MemoryLink. During the second quarter of fiscal 2002, the Company received a
payment of $100,000, and has converted the remaining accounts receivable balance
into a $650,000 promissory note and a $750,000 minority equity interest in
MemoryLink, both of which are recorded net of reserves in other assets in the
accompanying Condensed Consolidated Balance Sheets. As of June 30, 2002, the
Company has reserved approximately $1.3 million for the promissory note and
minority equity interest.
NOTE 11 - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets" were issued. These statements eliminate
the pooling-of-interests method of accounting for business combinations and
require that goodwill and certain intangible assets not be amortized. Instead,
these assets will be reviewed for impairment annually with any related losses
recognized in earnings when incurred. SFAS No. 141 was effective for business
combinations completed subsequent to June 30, 2001. SFAS No. 142 will be
effective for the Company's first quarter of fiscal 2003 for existing goodwill
and intangible assets. The impact of SFAS 142 will result in eliminating
approximately $1.3 million of quarterly amortization of goodwill. However,
Plexus will need to perform annual impairment tests to determine goodwill
impairment, if any, which could affect the results in any given period.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations" was issued. SFAS No. 143 sets forth the financial accounting and
reporting to be followed for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred if a reasonable
estimate of
9
fair value can be made. The associated asset retirement costs are to be
capitalized as part of the carrying amount of the long-lived asset.
Subsequently, the recorded liability will be accreted to its present value and
the capitalized costs will be depreciated. SFAS No. 143 will be effective for
the Company's first quarter of fiscal 2003 and is not expected to have a
material effect on its financial position or results of operations.
In October 2001, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" was issued. SFAS No. 144 modifies and expands the
financial accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill, which is specifically addressed by SFAS No. 142.
SFAS No. 144 maintains the requirement that an impairment loss be recognized for
a long-lived asset to be held and used if its carrying value is not recoverable
from its undiscounted cash flows, with the recognized impairment being the
difference between the carrying amount and fair value of the asset. With respect
to long-lived assets to be disposed of other than by sale, SFAS No. 144 requires
that the asset be considered held and used until it is actually disposed of, but
requires that its depreciable life be revised in accordance with APB Opinion No.
20, "Accounting Changes." SFAS No. 144 also requires that an impairment loss be
recognized at the date a long-lived asset is exchanged for a similar productive
asset. SFAS No. 144 will be effective for the Company's first quarter of fiscal
2003. The Company is currently evaluating the impact of SFAS No. 144.
In May 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was
issued. The Statement rescinds SFAS No. 4 and requires that only unusual or
infrequent gains and losses from extinguishment of debt should be classified as
extraordinary items, consistent with APB Opinion 30. This Statement amends SFAS
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends certain existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 will be
effective for the Company's first quarter of fiscal 2003 and are not expected to
have a material effect on the Company's financial position or results of
operations. The remaining provisions of this statement became effective for the
Company starting May 15, 2002 and did not have a material effect on the
Company's financial position or results of operations.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," was issued. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The Company is currently evaluating the
impact of SFAS No. 146 and whether to adopt its provisions early. Restructuring
charges recorded in the three and nine months ended June 30, 2002, as discussed
in Note 8, were recorded in accordance with Issue 94-3.
NOTE 12 -- Certain amounts in prior years' consolidated financial statements
have been reclassified to conform to the 2002 presentation.
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 this Form 10-Q which are not historical
facts (such as statements in the future tense and statements including
"believe," "expect," "intend," "anticipate" and similar words and concepts, and
statements in "Additional Disclosures Concerning Liquidity and Capital
Resources, Including Off-Balance Sheet Arrangements") are forward-looking
statements that involve risks and uncertainties, including, but not limited to:
10
- our ability to integrate MCMS's and other acquired companies'
operations,
- the continued weak economic performance of the electronics and
technology industries,
- the risk of customer delays, changes, or cancellations in both
on-going and new programs,
- our ability to secure new customers and maintain its, MCMS's and
other acquired operations' current customer base,
- the results of cost reduction efforts,
- the impact of capacity utilization and our ability to manage fixed
costs,
- 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 (such
as the September 11, 2001 attacks),
- the effect of the impact of increased competition, and
- other risks detailed below, especially in "Risk Factors" and
otherwise herein, and in our Securities and Exchange Commission
("SEC") filings.
OVERVIEW
Plexus provides product realization services to original equipment
manufacturers, or OEMs, in the networking/datacommunications, medical,
industrial, computer and transportation industries. We provide advanced
electronics design, manufacturing and testing services to our customers and
focus on complex, high-end products. We offer our customers the ability to
outsource all stages of product realization, including: development and design,
materials procurement and management, prototyping and new product introduction,
testing, manufacturing and after-market support. The following information
should be read in conjunction with our consolidated financial statements
included herein and the "Risk Factors" section beginning on page 19.
We provide contract manufacturing services on either a turnkey basis,
where we procure some or all of the materials required for product assembly, or
on a consignment basis, where the customer supplies some, or occasionally all,
materials necessary for product assembly. Turnkey services include materials
procurement and warehousing in addition to manufacturing and involve greater
resource investment and inventory risk management than consignment services.
Turnkey manufacturing currently represents almost all of our net sales. Turnkey
sales typically generate higher sales and higher gross profit dollars with lower
gross margin percentages than consignment sales due to the inclusion of
component costs, and related markup, in our net sales. However, turnkey
manufacturing involves the risk of inventory management, and a change in
component costs can directly impact average selling prices, gross margins and
our net sales. Due to the nature of turnkey manufacturing, our quarterly and
annual results are affected by the level and timing of customer orders,
fluctuations in materials costs, the degree of automation used in the assembly
process and capacity utilization.
MERGERS AND ACQUISITIONS
On January 8, 2002, Plexus completed its acquisition of certain assets
of MCMS, Inc. ("MCMS"), an electronics manufacturing services ("EMS") provider,
for approximately $42 million in cash subject to purchase price adjustments. The
assets purchased from MCMS, which was in Chapter 11 bankruptcy proceedings,
included facilities located in Penang, Malaysia; Xiamen, China; and Nampa,
Idaho. Plexus transferred operations from MCMS's former Raleigh, North Carolina
and San Jose, California facilities to Plexus's other facilities. MCMS's
Monterrey, Mexico and Colfontaine, Belgium operations were not included in the
transaction. Plexus acquired these assets primarily to provide electronic
manufacturing services in Asia and increase its customer base. The acquisition
did not include any MCMS interest-bearing debt, but included the assumption of
certain specific liabilities of approximately $4.4 million. Plexus recorded the
acquisition utilizing the accounting principles promulgated by Statement of
Financial Accounting Standards ("SFAS") No.'s. 141 and 142. The results from
operations of the assets acquired from MCMS are reflected in our financial
statements from the date of acquisition. No goodwill resulted from this
acquisition.
On May 23, 2001, Plexus acquired Qtron, Inc. ("Qtron"), a privately held EMS
provider located in San Diego, California. Plexus purchased all of the
outstanding shares of Qtron for approximately $29.0 million in cash, paid
outstanding Qtron notes payable of $3.6 million to Qtron shareholders and
thereby assumed liabilities of $47.4 million, including capital lease
obligations of $18.8 million for a new manufacturing facility. The cost exceeded
the
11
fair value of the net assets acquired by approximately $24 million,
which has been recorded as goodwill and is currently being amortized over 15
years (See "New Accounting Pronouncements" related to SFAS No. 142). The
purchase price is subject to certain adjustments. The results of Qtron's
operations have been reflected in our financial statements from the date of
acquisition.
On December 21, 2000, Plexus merged with e2E Corporation ("e2E"), a
privately held PCB design and engineering service provider for electronic OEMs,
including the issuance of 462,625 shares of its common stock. The transaction
was accounted for as a pooling-of-interests. Costs associated with this merger
in the amount of $1.0 million have been expensed as required. Results prior to
October 1, 2000 were not restated, as they would not differ materially from
reported results.
RESULTS OF OPERATIONS
Net sales. Net sales for the three months ended June 30, 2002,
decreased 7 percent to $235 million from $253 million for the three months ended
June 30, 2001. Net sales for the three and nine months ended June 30, 2002
included approximately $24 million and $51 million, respectively, of net sales
related to the acquired MCMS operations. Net sales for the nine months ended
June 30, 2002 decreased 17 percent to $666 million from $806 million for the
nine months ended June 30, 2001. Our reduced sales levels reflect the continued
slowdown in technology markets, primarily in the network/datacommunications and
computer industries, which have been further impacted by reduced end-market
demand and reduced availability to companies in these industries of capital
resources to fund existing and emerging technologies. We were was also affected
by a relatively sharp downturn in orders and forecasts particularly in
engineering subsequent to the September 11, 2001 attacks, as a consequence of
the economic uncertainties resulting from the attacks and their aftermath. These
factors resulted in customers' forecasts and orders becoming more cautious.
Based on our current customers' orders and forecasts, we currently expect fourth
quarter sales to be in the range of $225 million to $235 million. However, our
results will ultimately depend on the actual order levels.
No customers represented greater than ten percent of sales for the
three months ended June 30, 2002, compared to the three months ended June 30,
2001, when Unisphere Networks, Inc., accounted for 11 percent of sales. No
customers represented greater than ten percent of sales for the nine months
ended June 30, 2002 compared to Cisco Systems, Inc., which accounted for
slightly less than 10 percent of sales for the nine months ended June 30, 2001.
There were no other customers who represented ten percent or more of our sales
for each of these periods.
Sales to our ten largest customers accounted for 48 percent of sales
for each of the three months ended June 30, 2002 and 2001. Sales to our 10
largest customers accounted for 48 percent of sales for the nine months ended
June 30, 2002 compared to 51 percent of sales for the nine months ended June 30,
2001. As with sales to most of our customers, sales to our largest customers may
vary from time to time depending on the size and timing of customer program
commencement, termination, delays, modifications and transitions. We remain
dependent on continued sales to our significant customers, and we generally do
not obtain firm, long-term purchase commitments from our customers. Customer
forecasts can and do change as a result of their end-market demand and other
factors. Although any material change in orders from these or other customers
could materially affect our results of operations, we are dedicated to
diversifying our customer base and decreasing our dependence on any particular
customer(s) or concentration in one particular industry.
Our sales for the three months ended June 30, 2002 (and 2001),
respectively, by industry were as follows: networking/datacommunications 36
percent (38 percent), medical 27 percent (23 percent), industrial/commercial 21
percent (22 percent), computer 11 percent (9 percent) and transportation/other 5
percent (8 percent). The relative changes in significance primarily reflect the
industry-wide weaknesses in the networking/datacommunications and computer
industries, offset by sales to former MCMS' customers who are primarily in these
two industries.
Gross profit. Gross profit for the three months ended June 30, 2002,
decreased 23 percent to $23.1 million from $29.8 million for the three months
ended June 30, 2001. Gross profit for the nine months ended June 30, 2002
decreased 42 percent to $59.0 from $101.7 million for the nine months ended June
30, 2001. The gross margin for the three months ended June 30, 2002, was 9.8
percent, compared to 11.8 percent for the three months ended June 30, 2001.
Gross margin for the nine months ended June 30, 2002 was 8.9 percent, compared
to 12.6 percent for the nine months ended June 30, 2001.
12
Our gross margins reflect a number of factors that can vary from period
to period, including product and service mix, the level of start-up costs and
efficiencies of new programs, product life cycles, sales volumes, price erosion
within the electronics industry, capacity utilization of surface mount and other
equipment, labor costs and efficiencies, the management of inventories,
component pricing and shortages, average sales prices, the mix of turnkey and
consignment business, fluctuations and timing of customer orders, changing
demand for customers' products and competition within the electronics industry.
Overall gross margins continue to be affected by our lower sales levels as a
result of a slowdown in end-market demand, particularly in the
networking/datacommunications industry, and its impact on our capacity
utilization. However, the gross margins of the acquired MCMS operations for the
three and nine months ended June 30, 2002 were somewhat higher than Plexus'
other operations due to the larger portions of consignment sales in these
operations.
In addition, gross margins continue to be negatively affected by other
acquisitions. In particular, gross margins resulting from the Mexico and Qtron
operations are below our historical gross margins as we continue to work to
integrate these acquisitions into our business model and increase their capacity
utilization. These and other factors can cause variations in our operating
results. Although our focus is on maintaining and expanding gross margins, there
can be no assurance that gross margins will not continue to decrease in future
periods. Overall, gross margins have decreased from fiscal 2001 results due to
the impact of our recent acquisitions and our reduced manufacturing capacity
utilization, which was a consequence of reduced sales.
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 other research and development, but that research and development is not
specifically identified and we believe such expenses are less than one percent
of our net sales.
Operating expenses. Selling and administrative (S&A) expenses for the
three months ended June 30, 2002, increased to $17.3 million from $13.6 million
for the three months ended June 30, 2001. S&A expenses for the nine months ended
June 30, 2002 increased to $47.6 from $39.5 million for the nine months ended
June 30, 2001. As a percentage of net sales, S&A expenses were 7.4 percent and
7.1 percent for the three and nine months ended June 30, 2002, respectively,
compared to 5.4 percent and 4.9 percent for the three and nine months ended June
30, 2001, respectively. The increase in dollar terms over the prior year was due
primarily to increases in our sales and marketing efforts, information systems
support related to the roll-out of our new ERP platform, and general staffing
levels resulting from the MCMS acquisition.
Amortization of goodwill increased to $1.3 million for the three months
ended June 30, 2002 from $1.0 million for the three months ended June 30, 2001.
Amortization of goodwill increased to $3.9 million for the nine months ended
June 30, 2002 from $2.8 million for the nine months ended June 30, 2001. This
was a result of the acquisitions of the Mexico, Keltek and Qtron operations over
the last two years which resulted in additional goodwill. See "New Accounting
Pronouncements" below regarding upcoming changes to the rules relating to
accounting for goodwill and amortization thereof. The new accounting rules will
require us to regularly review goodwill and other intangible assets,
particularly goodwill resulting from prior acquisitions, to determine whether it
has become impaired. Once we adopt these new changes, we will no longer amortize
goodwill on a set schedule; however, we will be required to take a charge
against earnings for a write-off of goodwill in any period in which we determine
that such goodwill has become impaired.
In response to the reduction in our sales levels and reduced capacity
utilization, we reduced our cost structure through the reduction of work force,
lease obligations and other exit costs and writing off certain under-utilized
assets. We recorded a pre-tax charge during the three and nine months ended June
30, 2002 of $2.7 million and $10.2 million, respectively, associated with this
restructuring. The third quarter restructuring costs include $1.4 million
related to the closure of two facilities, as discussed below, and $1.3 million
primarily related to workforce reductions and equipment write-downs at several
other locations.
In May 2002, we announced plans to permanently close two of our older
facilities in response to the continued reduction in our sales levels and
reduced capacity utilization. The facilities are located in Neenah, Wisconsin
(the oldest of our three facilities in Neenah) and Minneapolis, Minnesota. These
facilities are no longer sufficient to service our customers' needs and would
have required significant investment to upgrade or replace them. We will attempt
to sell the Neenah and Minneapolis facilities, both of which are owned by us.
The third quarter restructuring costs include $1.4 million related to severance
and equipment write-downs. No write-down of the facilities are anticipated at
this time, although this will ultimately depend upon actual sales proceeds. We
13
currently estimate that we will incur additional costs totaling approximately
$1.0 million to $3.0 million related to the reduction of work force at these
facilities and the write-off of certain under-utilized assets.
Acquisition costs of approximately $0.3 million for the nine months
ended June 30, 2002, were related to the MCMS acquisition. Merger and
acquisition costs of approximately $1.6 million for the nine months ended June
30, 2001, were related to the e2E and Qtron acquisitions.
Income taxes. For the three months ended June 30, 2002, we incurred
income tax expense of $0.4 million compared to income tax expense of $4.9
million for the three months ended June 30, 2001. Our effective income tax rates
for the nine months ended June 30, 2002 and 2001 were approximately 28% and 41%,
respectively. The non-tax-deductible goodwill and merger expenses lowered the
effective income tax rate for fiscal 2002 as the pre-tax book income (loss) is
expected to be low or near break-even.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $117.4 million for the
nine months ended June 30, 2002, compared to cash flows provided by operating
activities of $25.5 million for the nine months ended June 30, 2001. During the
nine months ended June 30, 2002, cash provided by operating activities was
primarily related to decreases in accounts receivable and inventories and
increases in accounts payable and accrued liabilities, which were offset by
increases in prepaid expenses and other. For the three months ended June 30,
2002, actual days sales outstanding represented by our accounts receivable
improved to 41 days from 49 days for the three months ending September 30, 2001.
Included in this calculation is the addback of amounts utilized under the
securitization facility to accounts receivable in the determination of days
sales outstanding (this amount was $16.6 million at June 30, 2002). An
improvement in our annualized inventory turns to 7.6 turns for the three months
ended June 30, 2002 from 5.5 turns for the three months ended September 30, 2001
resulted in a decrease in our inventory levels. This increase in inventory turns
was primarily the result of an improved marketplace for components and improved
inventory management.
Cash flows used in investing activities totaled $94.9 million for the
nine months ended June 30, 2002. Net cash used in investing activities consisted
of our use of existing cash resources to fund the approximately $42 million cash
purchase price of certain assets of MCMS, capital expenditures for property,
plant and equipment, and net purchases of short-term investments.
We utilize available cash, debt and leases to fund our operating
requirements. We utilize operating leases primarily in situations where
technical obsolescence concerns are determined to outweigh the benefits of
financing the equipment purchase. We currently estimate capital expenditures for
fiscal 2002 will be approximately $35 million, of which $21.6 million was spent
through June 30, 2002. This estimate does not include any acquisitions which we
may undertake. The level of capital expenditures for fiscal 2003 will be heavily
dependent on anticipated 2003 sales levels.
Cash flows used in financing activities totaled $56.2 million for the
nine months ended June 30, 2002 and primarily represent net payments on our
credit and asset securitization facilities. The ratio of total liabilities to
equity was 0.34 to 1.0 as of June 30, 2002.
Plexus has an unsecured revolving credit facility (the "Credit
Facility") with a group of banks. The Credit Facility allows us to borrow up to
$250 million, of which no amounts were outstanding as of June 30, 2002.
Borrowing capacity utilized under the Credit Facility will be either through
revolving or other loans or through guarantees of commercial paper. Interest on
borrowings is computed at the applicable eurocurrency rate on the agreed
currency, plus any commitment fees. The Credit Facility matures on October 25,
2003, and requires among other things maintenance of minimum interest expense
coverage and maximum leverage ratios. Plexus, along with our banking partners,
has amended our Credit Facility to allow us to revise certain covenants and be
in compliance with these covenants. The amendment was occasioned by the effect
of our restructuring costs and acquisition and merger costs on compliance with
the prior covenants. As of June 30, 2002, we had total borrowings available of
approximately $128 million under the Credit Facility.
Pursuant to a public offering of shares of common stock in the first
quarter of fiscal 2001, Plexus issued 3.45 million shares of common stock for
$50 per share, with an underwriters' discount of $2.375 per share. We
14
received net proceeds of approximately $164.3 million, after discounts and
commissions to the underwriters of approximately $8.2 million. Additional
expenses were approximately $0.6 million. The net proceeds from the offering
were utilized to refinance, in part, existing debt and to finance capital
expenditures, capacity expansion and the Qtron acquisition. The remaining net
proceeds were used for general corporate purposes and working capital.
Plexus has agreed to sell up to $50 million of trade accounts
receivable without recourse to Plexus ABS Inc. ("ABS"), a wholly owned,
limited-purpose subsidiary of Plexus. ABS is a separate corporate entity that
sells participating interests in a pool of our accounts receivable to financial
institutions. The financial institutions then receive an ownership and security
interest in the pool of receivables. As of June 30, 2002, we had utilized
approximately $16.6 million under this facility. As a result, accounts
receivable has been reduced by $16.6 million as of June 30, 2002, while
long-term debt and capital lease obligations does not include this $16.6 million
of off-balance-sheet financing. See Note 3 in the Notes to Condensed
Consolidated Financial Statements.
Effective in the first quarter of fiscal 2002, the Plexus board of
directors adopted a stock repurchase program, authorizing the repurchase of up
to 1.0 million shares of common stock not to exceed $25 million. Through August
14, 2002, we had not yet repurchased any shares.
Our credit facilities, leasing capabilities, cash and short-term
investments and projected cash from operations should be sufficient to meet our
working capital and capital requirements through fiscal 2003. However, we may
need further capital or credit facilities to support increased operations in the
event of an improvement in sales and/or a significant acquisition. We have not
paid cash dividends in the past, and do not anticipate paying them in the
foreseeable future. We anticipate using earnings to support our business.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
On December 12, 2001, the SEC issued FR-60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies." FR-60 is an
intermediate step to alert companies to the need for greater investor awareness
of the sensitivity of financial statements to the methods, assumptions, and
estimates underlying their preparation including the judgments and uncertainties
affecting the application of those policies, and the likelihood that materially
different amounts would be reported under different conditions or using
different assumptions.
Our accounting policies are disclosed in Note 1 to the Consolidated
Financial Statements in our Fiscal 2001 Report on Form 10-K. There have been no
changes material to these policies during the first nine months of fiscal 2002.
The more critical of these policies are as follows:
Revenue Recognition -- We continued to recognize revenues primarily
when products are shipped. Revenue and profit relating to product design and
development contracts are generally recognized utilizing the
percentage-of-completion method. The use of percentage-of-completion accounting
does involve the use of estimates, but accounts for less than 10% of our total
revenues. We used the same methods to recognize revenues under
percentage-of-completion accounting for this quarter as we have in the past. Our
revenue recognition policies are in accordance with Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements."
Inventories -- We value inventories primarily 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. As discussed later under "Risk Factors," our customers may cancel
their orders, change production quantities or delay production for a number of
reasons, which are beyond our control. Any of these, or certain additional
actions, could impact the valuation of our inventory. We continued to use the
same techniques to value our inventory as we have in the past. 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.
Accounts Receivable -- We value accounts receivable net of an allowance
for uncollectible accounts. This allowance is based on our estimate of the
portion of the receivables that will not be collected in the future. We
continued to apply the same techniques to compute this allowance at June 30,
2002 as we have in the past. However, the ultimate collectibility of a
receivable is dependent upon the financial condition of an individual customer,
which could change rapidly and without advance warning. During the nine months
ended June 30, 2002, we reclassified a total of approximately $2.4 million in
allowance for doubtful accounts to other assets, upon Plexus reaching settlement
on certain aged accounts receivable from two customers. Approximately $1.1
million was reclassified
15
from allowance for doubtful account when we accepted stock warrants from a
customer in exchange for approximately $1.1 million in accounts receivable. In
addition, approximately $1.3 million was reclassified from allowance for
doubtful accounts when we converted a related party accounts receivable to a
promissory note and minority equity interest. See Note 10 in the Notes to
Consolidated Financial Statements.
Restructuring Costs -- From time to time, we have recorded
restructuring costs in response to the reduction in our sales levels and reduced
capacity utilization. These restructuring charges included employee severance
and benefit costs, costs related to plant closings, including leased facilities
that will be abandoned (and subleased, as applicable), and impairment of
equipment. Severance and benefit costs are recorded when incurred. For leased
facilities that will be abandoned and subleased, the estimated lease loss is
accrued for future lease payments subsequent to abandonment, less estimated
sublease income. For equipment, the impairment losses recognized are based on
the fair value estimated using existing market prices for similar assets less
costs to sell. See Notes 8 and 11 in the Notes to Condensed Consolidated
Financial Statements.
ADDITIONAL DISCLOSURES CONCERNING LIQUIDITY AND CAPITAL RESOURCES, INCLUDING
"OFF-BALANCE SHEET" ARRANGEMENTS
On January 22, 2002, the SEC issued FR-61, "Commission Statement about
Management's Discussion and Analysis of Financial Condition and Results of
Operations." While the SEC intends to consider rulemaking regarding the topics
addressed in this statement and other topics covered by MD&A, the purpose of
this statement is to suggest steps that issuers should consider in meeting their
current disclosure obligations with respect to the topics described.
1. Liquidity Disclosures
Plexus includes a discussion of liquidity and capital resources in
Management's Discussion and Analysis. More specifically, FR-61 requires
management to consider the following to identify trends, demands, commitments,
events and uncertainties that require disclosure:
a. Provisions in financial guarantees or commitments, debt or lease
agreements or other arrangements that could trigger a requirement for an
early payment, additional collateral support, changes in terms,
acceleration of maturity, or the creation of an additional financial
obligation, such as adverse changes in the registrant's credit rating,
financial ratios, earnings, cash flows, or stock price, or changes in
the value of underlying, linked or indexed assets.
As disclosed in our 2001 Report on Form 10-K, Plexus issued a note
payable on demand for approximately $6.9 million to the prior owners of
Keltek. On April 11, 2002, Plexus repaid these notes for $6.7 million.
The difference in the amount paid from the amount recorded as of
September 30, 2001 was due to changes in foreign exchange rates.
In addition, as disclosed in the 2001 Report on Form 10-K, our Credit
Facility requires us to maintain certain financial ratios to comply with
the terms of the agreement. No amounts are outstanding under the Credit
Facility at June 30, 2002 and we do not anticipate the need to borrow on
the Credit Facility in the near term. Plexus, along with our banking
partners, have amended our Credit Facility to allow us to revise certain
covenants and be in compliance with these covenants. The amendment was
occasioned by the effect of our restructuring costs and acquisition and
merger costs on compliance with the prior covenants.
b. Circumstances that could impair our ability to continue to engage in
transactions that have been integral to historical operations or are
financially or operationally essential, or that could render that
activity commercially impracticable, such as the inability to maintain a
specified investment grade credit rating, level of earnings, earnings
per share, financial ratios, or collateral. Our material risk factors
are disclosed in this Report on Form 10-Q.
We are not aware of anything that could reasonably be expected to impair
our ability to continue to engage in our historical operations at this
time.
16
c. Factors specific to Plexus and our markets that we expect to be given
significant weight in the determination of our credit rating or will
otherwise affect the registrant's ability to raise short-term and
long-term financing. Our material risk factors are disclosed in this
Report on Form 10-Q.
We are not aware of any specific factor or factors that could reasonably
be given significant weight in the determination of our credit rating or
will otherwise affect our ability to raise short-term and long-term
financing.
d. Guarantees of debt or other commitments to third parties. Plexus does
not have any significant guarantees of debt or other commitments to
third parties.
e. Written options on non-financial assets (for example, real estate puts).
Plexus does not have any written options on non-financial assets.
2. Off-Balance Sheet Arrangements
FR-61 indicates that registrants should consider the need to provide
disclosures concerning transactions, arrangements and other relationships with
unconsolidated entities or other persons that are reasonably likely to affect
materially liquidity or the availability of or requirements for capital
resources. We disclosed in Note 4 to the Consolidated Financial Statements in
our 2001 Report on Form 10-K and Note 3 to our Condensed Consolidated Financial
Statements for each of the three months ended December 31, 2001, March 31, 2002
and in this Report on Form 10-Q, a securitization that Plexus entered into in
fiscal 2001. Plexus's wholly owned, limited-purpose subsidiary, Plexus ABS Inc.,
has agreed to purchase up to $50 million of receivables from Plexus and sell
participating interests to financial institutions. As of June 30, 2002, Plexus
has utilized approximately $16.6 million under this facility. Any interests sold
to the financial institutions are removed from the balance sheet as we have no
risk of loss on such receivables as they are sold without recourse.
Plexus also leases various assets under both capital and operating
leases. The aggregate payments under the capital leases and operating leases are
disclosed in Notes 4 and 9, respectively, to our Consolidated Financial
Statements in our 2001 Report on Form 10-K. There were no significant changes to
these lease arrangements during the nine months of 2002, with the exception of
certain operating leases assumed by Plexus associated with its January 8, 2002
acquisition of certain assets of MCMS. These leases primarily relate to
production facilities and equipment in Malaysia and China.
3. Disclosures about Contractual Obligations and Commercial Commitments
In FR-61, the SEC notes that current accounting standards require
disclosure concerning a registrant's obligations and commitments to make future
payments under contracts, such as debt and lease agreements, and under
contingent commitments, such as debt guarantees. They also indicate that the
disclosures responsive to these requirements usually are located in various
parts of a registrant's filings. The SEC believes that investors would find it
beneficial if aggregated information about contractual obligations and
commercial commitments were provided in a single location so that a total
picture of obligations would be readily available. They further suggested that
one useful aid to presenting the total picture of a registrant's liquidity and
capital resources and the integral role of on- and off-balance sheet
arrangements may be schedules of contractual obligations and commercial
commitments as of the latest balance sheet date.
We are no different than most other registrants in that our disclosures
are located in various parts of our regulatory filings including, Notes 1, 4, 6,
9, 10 and 13 to our Consolidated Financial Statements in our 2001 Report on Form
10-K and Notes 1, 3, 5 and 8 to our Condensed Consolidated Financial Statements
for the three months ended December 31, 2001 on Form 10-Q, for the three and six
months ended March 31, 2002 on Form 10-Q and for the three and nine months ended
June 30, 2002 in this Report on Form 10-Q. In addition, we prepared schedules as
of June 30, 2002 suggested by the SEC in FR -61. Information in the following
table is in thousands as of June 30, 2002:
17
PAYMENTS DUE BY PERIOD
REMAINING 2007 AND
CONTRACTUAL OBLIGATIONS TOTAL IN 2002 2003-2004 2005-2006 THEREAFTER
CAPITAL LEASE OBLIGATIONS $ 25,860 $ 376 $ 3,334 $ 2,299 $ 19,851
OPERATING LEASES 116,846 4,058 30,208 24,028 58,552
UNCONDITIONAL PURCHASE OBLIGATIONS*
-- -- -- -- --
-------- -------- -------- -------- --------
TOTAL CONTRACTUAL CASH OBLIGATIONS $142,706 $ 4,434 $ 33,542 $ 26,327 $ 78,403
======== ======== ======== ======== ========
* - There are no unconditional purchase obligations other than inventory and
property, plant and equipment purchases in the ordinary course of business.
As of June 30, 2002, other than our asset securitization ($16.6 million as of
June 30, 2002), we did not have, and were not subject to, any other lines of
credit, standby letters of credit, guarantees, standby repurchase obligations,
or other commercial commitments.
DISCLOSURES ABOUT CERTAIN TRADING ACTIVITIES THAT INCLUDE NON-EXCHANGE TRADED
CONTRACTS ACCOUNTED FOR AT FAIR VALUE
We do not have any trading activities that include non-exchange traded
contracts accounted for at fair value.
DISCLOSURES ABOUT EFFECTS OF TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES
We have disclosed the effects of transactions with a related party in
Note 1 to our Consolidated Financial Statements in our 2001 Report on Form 10-K.
An update of these transactions was included in Footnote 10 to our financial
statements for the three and nine months ended June 30, 2002 and in this report.
There were no other significant transactions with related and certain other
parties.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets" were issued. The statements eliminate the
pooling-of-interests method of accounting for business combinations and require
that goodwill and certain intangible assets not be amortized. Instead, these
assets will be reviewed for impairment annually with any related losses
recognized in earnings when incurred. SFAS No. 141 was effective for Plexus
business combinations completed subsequent to June 30, 2001. SFAS No. 142 will
be effective for our first quarter of fiscal 2003 for existing goodwill and
intangible assets. The impact of SFAS 142 will result in eliminating
approximately $1.3 million of quarterly amortization of goodwill. However,
Plexus will be required to perform annual impairment tests to determine goodwill
impairment, if any, which could affect the results in any given period.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations" was issued. SFAS No. 143 sets forth the financial accounting and
reporting to be followed for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No.
143 requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are to
be capitalized as part of the carrying amount of the long-lived asset.
Subsequently, the recorded liability will be accreted to its present value and
the capitalized costs will be depreciated. SFAS No. 143 will be effective for
our first quarter of fiscal 2003 and is not expected to have a material effect
on its financial position or results of operations.
In October 2001, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" was issued. SFAS No. 144 modifies and expands the
financial accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill, which is specifically addressed by SFAS No. 142.
SFAS No. 144 maintains the requirement that an impairment loss be recognized for
a long-lived asset to be held and used if its carrying value
18
is not recoverable from its undiscounted cash flows, with the recognized
impairment being the difference between the carrying amount and fair value of
the asset. With respect to long-lived assets to be disposed of other than by
sale, SFAS No. 144 requires that the asset be considered held and used until it
is actually disposed of, but requires that its depreciable life be revised in
accordance with APB Opinion No. 20, "Accounting Changes." SFAS No. 144 also
requires that an impairment loss be recognized at the date a long-lived asset is
exchanged for a similar productive asset. SFAS No. 144 will be effective for our
first quarter of fiscal 2003. We are currently evaluating the impact of SFAS No.
144.
In May 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" was
issued. The Statement rescinds SFAS No. 4 and requires that only unusual or
infrequent gains and losses from extinguishment of debt should be classified as
extraordinary items, consistent with APB Opinion 30. This Statement amends SFAS
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends certain existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 will be
effective for our first quarter of fiscal 2003 and are not expected to have a
material effect on our financial position or results of operations. The
remaining provisions of this statement became effective for us starting May 15,
2002 and did not have a material effect on our financial position or results of
operations.
In June 2002, SFAS No. 146, " Accounting for Costs Associated with
Exit or Disposal Activities," was issued. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and replaces Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. We are currently evaluating the impact
of SFAS No. 146 and whether to adopt its provisions early.
RISK FACTORS
OUR CUSTOMER REQUIREMENTS AND OPERATING RESULTS VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER, WHICH COULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK; RECENT
DEMAND HAS CONTINUED TO BE WEAK.
Our quarterly and annual results may vary significantly depending on
various factors, many of which are beyond our control. These factors include:
- the volume of customer orders relative to our capacity
- the level and timing of customer orders, particularly in light of the
fact that some of our customers release a significant percentage of
their orders during the last few weeks of a quarter
- the typical short life cycle of our customers' products
- market acceptance of and demand for our customers' products
- changes in our sales mix to our customers
- the timing of our expenditures in anticipation of future orders
- our effectiveness in managing manufacturing processes - changes in cost
and availability of labor and components
- changes in economic conditions
- local events that may affect our production volume, such as local
holidays.
The EMS industry is impacted by the condition of the U.S. and global economies
and world events (such as the September 11, 2001 attacks). Any slowdown in the
U.S. or global economies, or in particular in the industries served by us, may
result in our customers reducing their forecasts. Our sales have been, and are
expected to continue to be, impacted by the slowdown in the
networking/datacommunications and computer markets, which more recently have
been further impacted by reduced end-market demand and reduced availability of
capital resources to fund existing and emerging technologies. These factors
contributed substantially to the decline in our net sales in the first
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nine months of fiscal 2002. As a result, the demand for our services could
continue to be weak or decrease, which in turn would impact our sales, capacity
utilization, margins and results.
Due to the nature of turnkey manufacturing services, our quarterly and
annual results are affected by the level and timing of customer orders,
fluctuations in material costs and availability, and the degree of capacity
utilization in the manufacturing process.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY
PRODUCTION.
Electronics manufacturing service providers must provide increasingly
rapid product turnaround for their customers. We generally do not obtain firm,
long-term purchase commitments from our customers and we continue to experience
short lead times in customer orders. Customers may cancel their orders, change
production quantities or delay production for a number of reasons, which are
beyond our control. The success of our customers' products in the market and the
strength of the markets themselves affect our business. Cancellations,
reductions or delays by a significant customer or by a group of customers could
seriously harm our operating results. Such cancellations, reductions or delays
have occurred and may continue to occur in response to the slowdown in the
networking/datacommunications, computer and other industries as a result of the
overall weakness of the economy.
In addition, we make significant decisions, including determining the
levels of business that we will seek and accept, production schedules,
facilities and expansion/contraction decisions, component procurement
commitments, 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
reduces our ability to estimate accurately the future requirements of those
customers.
On occasion, customers may require rapid increases in production, which
can stress our resources and reduce operating margins. Although we have had a
net increase in our manufacturing capacity over the past few fiscal years, we
may not have sufficient capacity at any given time to meet all of our customers'
demands or to meet the requirements of a specific project. In addition, because
many of our costs and operating expenses are relatively fixed, a reduction in
customer demand can harm our gross margins and operating results.
WE MAY NOT BE ABLE TO OBTAIN RAW MATERIALS OR COMPONENTS FOR OUR ASSEMBLIES ON A
TIMELY BASIS OR AT ALL.
We rely on a limited number of suppliers for many components used in
the assembly process. We do not have any long-term supply agreements. At various
times, there have been shortages of some of the electronic components that we
use, and suppliers of some components have lacked sufficient capacity to meet
the demand for these components. During the majority of fiscal 2000 and early
fiscal 2001, component shortages were prevalent in our industry, and in certain
areas have continued to occur. In some cases, supply shortages and delays in
deliveries of particular components have resulted in curtailed production in the
past, or delays in production of assemblies using that component, which
contributed to an increase in our inventory levels. We expect that shortages and
delays in deliveries of some components will continue. An increase in economic
activity could also result in shortages, if manufacturers of components do not
adequately anticipate the increased orders. If we are unable to obtain
sufficient components on a timely basis, we may experience manufacturing and
shipping delays, which could harm our relationships with customers and reduce
our sales.
A significant portion of our sales is derived from turnkey
manufacturing in which we provide materials procurement. While most of our
customer contracts permit quarterly or other periodic adjustments to pricing
based on decreases and increases in component prices and other factors, we
typically bear the risk of component price increases that occur between any such
repricings or, if such repricing is not permitted, during the balance of the
term of the particular customer contract. Accordingly, component price increases
could adversely affect our operating results.
A LARGE PORTION OF OUR SALES COMES FROM A SMALL NUMBER OF CUSTOMERS AND IF WE
LOSE ANY OF THESE CUSTOMERS, OUR SALES AND OPERATING RESULTS COULD DECLINE
SIGNIFICANTLY.
Sales to our ten largest customers have represented a large portion of
our sales in recent periods. Our ten largest customers accounted for
approximately 48 percent of our net sales for each of the three months ended
June 30, 2002 and 2001, respectively. Our principal customers have varied from
year to year, and our principal customers
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may not continue to purchase services from us at current levels, if at all.
Significant reductions in sales to any of these customers, or the loss of major
customers, could seriously harm our business. If we are not able to timely
replace expired, canceled or reduced contracts with new business, our sales will
decrease.
WE MAY HAVE SIGNIFICANT CUSTOMER RELATIONSHIPS WITH EMERGING COMPANIES, WHICH
MAY PRESENT MORE RISKS THAN WITH ESTABLISHED COMPANIES.
We currently anticipate that a significant percentage of our sales will
be to emerging companies, including start-ups, particularly in the
networking/datacommunications market. However, similar to our other customer
relationships, there are no volume purchase commitments under these new
programs, and the revenues we actually achieve may not meet our expectations. In
anticipation of future activities under these programs, we incur substantial
expenses as we add personnel and manufacturing capacity and procure materials.
Because emerging companies do not have a history of operations, it will be
harder for us to anticipate needs and requirements than with established
customers. Our operating results will be harmed if sales do not develop to the
extent and within the time frame we anticipate.
Customer relationships with emerging companies also present special
risks. For example, because they do not have an extensive product history, there
is less demonstration of market acceptance of their products. Also, due to the
current economic environment, additional funding for such companies may be more
difficult to obtain and these customer relationships may not continue or
materialize to the extent we previously experienced or we plan. This tightening
of financing for start-up customers, together with many start-up customers' lack
of prior earnings and unproven product markets could further increase our credit
risk, especially in accounts receivable and inventories. Although we adjust our
reserves for accounts receivable and inventories for all customers, including
start-up customers, based on the information available, these reserves may not
be adequate.
FAILURE TO MANAGE OUR GROWTH AND OUR CONTRACTION MAY SERIOUSLY HARM OUR
BUSINESS.
We have experienced rapid growth, both internally and through
acquisitions, even though recent periods have seen reductions in sales levels.
This growth has placed, and will continue to place, significant strain on our
operations. To manage our growth effectively, we must continue to improve and
expand our financial, operational and management information systems; continue
to develop the management skills of our managers and supervisors; and continue
to train, manage and motivate our employees. If we are unable to manage our
growth effectively, our operating results could be harmed.
Periods of contraction or reduced sales also create tensions and
challenges. We must determine whether all facilities remain productive and
determine how to respond to customer demand. Our decisions as to how to reduce
costs and capacity can affect our results in both the short-term and long-term.
We have entered into a licensing arrangement for new ERP software and
related information systems. Conversions to new software and systems are
complicated processes, and can cause management and operational disruptions
which may affect us. Information flow and production could also be affected if
the new software and systems do not perform as we expect.
WE MAY FAIL TO COMPLETE SUCCESSFULLY FUTURE ACQUISITIONS AND MAY NOT INTEGRATE
SUCCESSFULLY ACQUIRED BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
We have pursued a strategy that has included growth through
acquisitions. We cannot assure you that we will be able to successfully complete
future acquisitions, due primarily to competition for the acquisition of
electronics manufacturing service operations. If we are unable to acquire
additional businesses, our growth could be inhibited. Similarly, we cannot
assure you that we will be able to successfully integrate the operations and
management of our recent acquisitions such as Qtron, MCMS or future
acquisitions. Acquisitions involve significant risks that could have a material
adverse effect on us. These risks include:
OPERATING RISKS, SUCH AS THE:
- inability to successfully integrate our acquired operations' businesses
and personnel
- inability to realize anticipated synergies, economies of scale or other
value
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- difficulties in scaling up production and coordinating management of
operations at new sites
- strain placed on our personnel, systems and resources
- possible modification or termination of an acquired business customer
and/or customer program, including cancellation of current or
anticipated programs
- loss of key employees of acquired businesses.
FINANCIAL RISKS, SUCH AS THE:
- dilutive effect of the issuance of additional equity securities o
incurrence of additional debt and related interest costs
- inability to achieve expected operating margins to offset the increased
fixed costs associated with acquisitions, and/or inability to increase
margins at acquired entities to Plexus' desired levels
- incurrence of large write-offs or write-downs
- amortization and/or impairment of goodwill or other intangible assets
- unforeseen liabilities of the acquired businesses.
EXPANSION OF OUR BUSINESS AND OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS.
We may expand our operations by establishing or acquiring new
facilities or by expanding capacity in our current facilities. We may expand
both in geographical areas in which we currently operate and in new geographical
areas within the United States and internationally. We may not be able to find
suitable facilities on a timely basis or on terms satisfactory to us. Expansion
of our business and operations involves numerous business risks, including the:
- inability to successfully integrate additional facilities or capacity
and to realize anticipated synergies, economies of scale or other value
- additional fixed costs which may not be fully absorbed by the new
business
- difficulties in the timing of expansions, including delays in the
implementation of construction and manufacturing plans
- creation of excess capacity, and the need to reduce capacity elsewhere
if anticipated sales or opportunities do not materialize
- diversion of management's attention from other business areas during
the planning and implementation of expansions
- strain placed on our operational, financial, management, technical and
information systems and resources
- disruption in manufacturing operations
- incurrence of significant costs and expenses
- inability to locate enough customers or employees to support the
expansion.
OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS.
As part of the MCMS acquisition on January 8, 2002, we acquired
operations located in China and Malaysia. In addition, we acquired operations in
Mexico and the United Kingdom in fiscal 2000. We may in the future expand into
other international regions. We have limited experience in managing
geographically dispersed operations and in operating in Mexico and the United
Kingdom, and had no prior experience in China and Malaysia. We also purchase a
significant number of components manufactured in foreign countries. Because of
these international aspects of our operations, we are subject to the following
risks that could materially impact our operating results:
- economic or political instability
- transportation delays or interruptions and other effects of less
developed infrastructure in many countries
- foreign exchange rate fluctuations
- utilization of different systems and equipment
- difficulties in staffing and managing foreign personnel and diverse
cultures
- the effects of international political developments.
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In addition, changes in policies by the U.S. or foreign governments
could negatively affect our operating results due to changes in duties, tariffs,
taxes or limitations on currency or fund transfers. For example, our Mexico
based operation utilizes the Maquiladora program, which provides reduced tariffs
and eases import regulations, and we could be adversely affected by changes in
that program. Also, the newly-acquired Chinese and Malaysian subsidiaries
currently receive favorable tax treatment from the governments in those
countries for approximately 3 to 5 years, which may or may not be renewed.
WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING
PROCESS EXPERTISE.
The markets for our manufacturing and engineering services are
characterized by rapidly changing technology and evolving process development.
The success of our business depends upon our ability to:
- hire, retain and expand our qualified engineering and technical
personnel
- maintain and enhance our technological capabilities
- develop and market manufacturing services which meet changing customer
needs
- successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis.
Although we believe that our operations utilize the assembly and
testing technologies, equipment and processes that are currently required by our
customers, we cannot be certain that we will develop the capabilities required
by our customers in the future. The emergence of new technology industry
standards or customer requirements may render our equipment, inventory or
processes obsolete or noncompetitive. In addition, we may have to acquire new
assembly and testing technologies and equipment to remain competitive. The
acquisition and implementation of new technologies and equipment may require
significant expense or capital investment which could reduce our operating
margins and our operating results. Our failure to anticipate and adapt to our
customers' changing technological needs and requirements could have an adverse
effect on our business.
OUR TURNKEY MANUFACTURING SERVICES INVOLVE INVENTORY RISK.
Most of our contract manufacturing services are provided on a turnkey
basis, where we purchase some or all of the materials required for designing,
product assembling and manufacturing. These services involve greater resource
investment and inventory risk management than consignment services, where the
customer provides these materials. Accordingly, various component price
increases and inventory obsolescence could adversely affect our selling price,
gross margins and operating results.
In our turnkey operations, we need to order parts and supplies based on
customer forecasts, which may be for a larger quantity of product than is
included in the firm orders ultimately received from those customers. Customers'
cancellation or reduction of orders can result in expense to us. While many of
our customer agreements include provisions, which require customers to reimburse
us for excess inventory specifically ordered to meet their forecasts, we may not
actually be reimbursed or be able to collect on these obligations. In that case,
we could have excess inventory and/or cancellation or return charges from our
suppliers.
START-UP COSTS AND INEFFICIENCIES RELATED TO NEW PROGRAMS CAN ADVERSELY AFFECT
OUR OPERATING RESULTS.
Start-up costs, the management of labor and equipment resources in
connection with the establishment of new programs and new customer
relationships, and the need to estimate required resources in advance can
adversely affect our gross margins and operating results. These factors are
particularly evident in the early stages of the life cycle of new products and
new programs. These factors also affect our ability to efficiently use labor and
equipment. In addition, if any of these new programs or new customer
relationships were terminated, our operating results could be harmed,
particularly in the short-term.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS.
We are also subject to environmental regulations relating to the use,
storage, discharge, recycling and disposal of hazardous chemicals used in our
manufacturing process. If we fail to comply with present and future regulations,
we could be subject to future liabilities or the suspension of business. These
regulations could restrict our ability to expand our facilities or require us to
acquire costly equipment or incur significant expense. While we
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are not currently aware of any material violations, we may have to spend funds
to comply with present and future regulations or be required to perform site
remediation.
In addition, our medical device business, which represented
approximately 27 percent of our sales for the three months ended June 30, 2002,
is subject to substantial government regulation, primarily from the FDA and
similar regulatory bodies in other countries. We must comply with statutes and
regulations covering the design, development, testing, manufacturing and
labeling of medical devices and the reporting of certain information regarding
their safety. Failure to comply with these rules can result in, among other
things, us and our customers being subject to fines, injunctions, civil
penalties, criminal prosecution, recall or seizure of devices, total or partial
suspension of production, failure of the government to grant pre-market
clearance or record approvals for projections or the withdrawal of marketing
approvals. 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. In addition, the failure or noncompliance could have an adverse
effect on our reputation.
OUR PRODUCTS ARE FOR THE ELECTRONICS INDUSTRY, WHICH PRODUCES TECHNOLOGICALLY
ADVANCED PRODUCTS WITH SHORT LIFE CYCLES.
Factors affecting the electronics industry, in particular the short
life cycle of products, could seriously harm our customers and, as a result, us.
These factors include:
- the inability of our customers to adapt to rapidly changing technology
and evolving industry standards, which result in short product life
cycles
- the inability of our customers to develop and market their products,
some of which are new and untested
- the potential that our customers' products may become obsolete or the
failure of our customers' products to gain widespread commercial
acceptance.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES.
The electronics manufacturing services industry is highly competitive.
We compete against numerous U.S. and foreign electronics manufacturing services
providers with global operations, as well as those who operate on a local or
regional basis. In addition, current and prospective customers continually
evaluate the merits of manufacturing products internally. Consolidation in the
electronics manufacturing services industry results in a continually changing
competitive landscape. The consolidation trend in the industry also results in
larger and more geographically diverse competitors who have significant combined
resources with which to compete against us.
Some of our competitors have substantially greater managerial,
manufacturing, engineering, technical, financial, systems, sales and marketing
resources than we do. These competitors may:
- respond more quickly to new or emerging technologies
- have greater name recognition, critical mass and geographic and market
presence o be better able to take advantage of acquisition
opportunities
- adapt more quickly to changes in customer requirements
- devote greater resources to the development, promotion and sale of
their services
- be better positioned to compete on price for their services.
We may be operating at a cost disadvantage compared to manufacturers
who have greater direct buying power from component suppliers, distributors and
raw material suppliers or who have lower cost structures. As a result,
competitors may procure 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.
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WE MAY FAIL TO SECURE NECESSARY ADDITIONAL FINANCING.
We have made and intend to continue to make substantial capital
expenditures to expand our operations, acquire businesses and remain competitive
in the rapidly changing electronics manufacturing services industry. Our future
success may depend on our ability to obtain additional financing and capital to
support our continued growth and operations, including our working capital
needs. If and when the economy and our sales improve, we may also need to obtain
additional financing to support operations. We may seek to raise capital by:
- issuing additional common stock or other equity securities
- issuing debt securities
- increasing available borrowings under our existing credit facility or
obtaining new credit facilities
- obtaining further off-balance-sheet financing.
We may not be able to obtain additional 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 your ownership interest. Furthermore, any additional financing and
capital may have terms and conditions that adversely affect our business, such
as restrictive financial or operating covenants.
WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF KEY PERSONNEL MAY HARM OUR
BUSINESS.
Our future success depends in large part on the continued service of
our key technical and management personnel, and on our ability to continue to
attract and retain qualified employees, particularly those highly skilled
design, process and test engineers involved in the development of new products
and processes and the manufacture of existing products. The competition for
these individuals is intense, and the loss of key employees, generally few of
whom are subject to an employment agreement for a specified term or a
post-employment non-competition agreement, could harm our business. We believe
that we have a relatively small management group whose resources could be
strained as a result of expansion or contraction of our business.
PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS WHICH COULD
RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US.
We manufacture products to our customers' specifications which are
highly complex and may at times contain design or manufacturing errors or
failures. 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 failure or error, 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
impaired. In addition, these defects may result in liability claims against us.
Even if customers are responsible for the defects, they may not, or may not be
able to, assume responsibility for any costs or payments. The FDA investigates
and checks, occasionally on a random basis, compliance with statutory and
regulatory requirements. Violations may lead to penalties or shutdowns of a
program or a facility.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our stock price has fluctuated significantly and experienced declines
in recent periods. The price of our common stock may fluctuate significantly in
response to a number of events and factors relating to our company, 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
National Market along with market prices for technology companies, in
particular, have experienced extreme volatility and weakness that has often 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.
Among other things, volatility in Plexus' stock price could mean that
investors will not be able to sell their shares at or above the prices which
they pay. The volatility and weakness also could impair Plexus' ability in the
future to offer common stock or convertible securities as a source of additional
capital and/or as consideration in the acquisition of other businesses.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign exchange and
interest rates. To reduce such risks, we selectively use financial instruments.
FOREIGN CURRENCY RISK
We do not use derivative financial instruments for speculative
purposes. Our policy is to selectively hedge certain foreign currency
denominated transactions in a manner that substantially offsets the effects of
changes in foreign currency exchange rates. Presently, we use foreign currency
forward 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. Expansion into additional international
markets (Malaysia and China) may increase the complexity and size of our foreign
currency exchange risk. As of June 30, 2002, our foreign currency forward
contracts were scheduled to mature in less than three months and were not
material.
INTEREST RATE RISK
We have financial instruments, including cash equivalents, short-term
investments, long-term debt and our asset securitization facility, 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.
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 securities such as 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 credit
facilities and asset securitization facility. Interest on borrowings is computed
at the applicable Eurocurrency rate on the agreed currency. A 10 percent change
in our weighted average interest rate on average borrowings would have impacted
net interest expense by approximately $0.1 million for each of the three months
ended June 30, 2002 and 2001, respectively. A 10 percent change in our weighted
average interest rate on average borrowings would have impacted interest expense
by approximately $0.3 million and $0.5 million for each of the nine months ended
June 30, 2002 and 2001, respectively.
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PART II -OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The officer certifications required by Section 906 of the
Sarbanes-Oxley Act of 2002 have been submitted to the Securities and
Exchange Commissions accompanying this Report on Form 10-Q. See
Exhibits 99.1 and 99.2 hereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits are filed with this Report on Form 10-Q.
(a) Exhibit No.
10.1 First Amendment to Amended and Restated Receivables
Sale Agreement, dated June 28, 2002, between Plexus
Services Corp. and Plexus ABS, Inc.
10.2(a) Second Amendment to Receivables Purchase Agreement,
dated October 3, 2001, among Plexus, Plexus ABS,
Inc., Preferred Receivables Funding Corporation and
Bank One, N.A. (as agent for various Purchasers)
10.2(b) Limited Waiver and Third Amendment to Receivables
Purchase Agreement, dated April 25, 2002
10.2(c) Fourth Amendment to Receivables Purchase Agreement,
dated June 28, 2002
10.3 Employment Agreement, dated as of July 1, 2002, by
and between Plexus Corp. and Dean A. Foate
10.4 Employment Agreement, dated as of July 1, 2002, by
and between Plexus Corp. and Thomas B. Sabol
99.1 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.
99.2 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.
(b) Reports on Form 8-K during this period.
None.
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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.
08/14/02 /s/ Dean A. Foate
-----------------
Date Dean A. Foate
President and Chief Executive Officer
08/14/02 /s/ Thomas B. Sabol
-------------------
Date Thomas B. Sabol
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
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