Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarter ended December 31, 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
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 under the Exchange Act).
Yes No [Not yet applicable]
----- -----
As of February 7, 2003 there were 42,265,703 shares of Common Stock of
the Company outstanding.
1
PLEXUS CORP.
TABLE OF CONTENTS
December 31, 2002
PART I. FINANCIAL INFORMATION....................................................................................3
Item 1. Consolidated Financial Statements...............................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME AND (LOSS).................................................................3
CONDENSED CONSOLIDATED BALANCE SHEETS...........................................................4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS.................................................5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........13
"SAFE HARBOR" CAUTIONARY STATEMENT.............................................................13
OVERVIEW.......................................................................................13
MERGERS AND ACQUISITIONS.......................................................................14
RESULTS OF OPERATIONS..........................................................................14
LIQUIDITY AND CAPITAL RESOURCES................................................................16
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES..................................................17
ADDITIONAL DISCLOSURES CONCERNING LIQUIDITY AND CAPITAL
RESOURCES, INCLUDING "OFF-BALANCE SHEET" ARRANGEMENTS..........................................18
NEW ACCOUNTING PRONOUNCEMENTS..................................................................20
RISK FACTORS...................................................................................22
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................28
Item 4. Controls and Procedures........................................................................29
PART II - OTHER INFORMATION......................................................................................30
Item 6. Exhibits and Reports on Form 8-K..............................................................30
SIGNATURE........................................................................................................30
CERTIFICATIONS...................................................................................................31
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME AND (LOSS)
(in thousands, except per share data)
Unaudited
Three Months Ended
----------------------
December 31,
2002 2001
--------- ---------
Net sales $ 205,379 $ 200,218
Cost of sales 189,839 184,747
--------- ---------
Gross profit 15,540 15,471
Operating expenses:
Selling and administrative expenses 16,755 13,970
Restructuring costs 31,840 2,800
Amortization of goodwill - 1,296
--------- ---------
48,595 18,066
--------- ---------
Operating loss (33,055) (2,595)
Other income (expense):
Interest expense (773) (1,352)
Miscellaneous 518 630
--------- ---------
Loss before income taxes and cumulative effect of change in accounting for goodwill (33,310) (3,317)
Income tax benefit (12,478) (1,294)
--------- ---------
Loss before cumulative effect of change in accounting for goodwill (20,832) (2,023)
Cumulative effect of change in accounting for goodwill, net of income
tax benefit of $4,755 (23,482) -
--------- ---------
Net loss $ (44,314) $ (2,023)
========= =========
Earnings per share:
Basic
Loss before cumulative effect of change in accounting for goodwill $ (0.49) $ (0.05)
Cumulative effect of change in accounting for goodwill (0.56) -
--------- ---------
Net loss $ (1.05) $ (0.05)
========= =========
Diluted
Loss before cumulative effect of change in accounting for goodwill $ (0.49) $ (0.05)
Cumulative effect of change in accounting for goodwill (0.56) -
--------- ---------
Net loss $ (1.05) $ (0.05)
========= =========
Weighted average shares outstanding:
Basic 42,069 41,782
========= =========
Diluted 42,069 41,782
========= =========
Comprehensive income and (loss):
Net loss $ (44,314) $ (2,023)
Foreign currency hedges and translation adjustments 1,223 (354)
--------- ---------
Comprehensive loss $ (43,091) $ (2,377)
========= =========
See notes to condensed consolidated financial statements.
3
PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
December 31, September 30,
2002 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 63,067 $ 63,347
Short-term investments 39,999 53,025
Accounts receivable, net of allowance of $4,400
and $4,200, respectively 90,905 95,903
Inventories 104,019 94,032
Deferred income taxes 27,911 21,283
Prepaid expenses and other 14,915 14,221
------------ ------------
Total current assets 340,816 341,811
Property, plant and equipment, net 161,706 170,834
Goodwill 31,513 64,957
Deferred income taxes 11,112 355
Other 5,110 5,988
------------ ------------
Total assets $ 550,257 $ 583,945
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 1,726 $ 1,652
Accounts payable 66,101 67,310
Customer deposits 13,589 13,904
Accrued liabilities:
Salaries and wages 15,217 17,505
Other 28,281 21,586
------------ ------------
Total current liabilities 124,914 121,957
Capital lease obligations, net of current portion 24,960 25,356
Other liabilities 12,045 5,943
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 200,000 shares authorized, 42,128
and 42,030 shares issued and outstanding, respectively 421 420
Additional paid-in capital 257,323 256,584
Retained earnings 126,504 170,818
Accumulated other comprehensive income 4,090 2,867
------------ ------------
388,338 430,689
------------ ------------
Total liabilities and shareholders' equity $ 550,257 $ 583,945
============ ============
See notes to condensed consolidated financial statements.
4
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Three Months Ended
December 31,
----------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (44,314) $ (2,023)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 7,375 8,392
Cumulative effect of change in accounting for goodwill 28,237 -
Non-cash restructuring costs 16,922 647
Deferred income taxes (17,385) (2,066)
Net repayments under asset securitization facility (3,614) (3,765)
Income tax benefit from stock option award plans 249 466
Changes in assets and liabilities:
Accounts receivable 8,812 29,987
Inventories (9,814) 20,917
Prepaid expenses and other (359) (10,270)
Accounts payable (1,314) (4,376)
Customer deposits (318) (1,251)
Accrued liabilities 12,703 3,351
Other (301) (766)
--------- ---------
Cash flows provided by (used in) operating activities (3,121) 39,243
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Sales and maturities of short-term investments 13,026 20,300
Payments for property, plant and equipment (10,667) (6,650)
Other - 64
--------- ---------
Cash flows provided by investing activities 2,359 13,714
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt - 100,188
Payments on debt and capital lease obligations (437) (104,897)
Proceeds from exercise of stock options 491 374
--------- ---------
Cash flows provided by (used in) financing activities 54 (4,335)
--------- ---------
Effect of foreign currency translation on cash and cash
equivalents 428 (53)
--------- ---------
Net increase (decrease) in cash and cash equivalents (280) 48,569
Cash and cash equivalents:
Beginning of period 63,347 84,591
--------- ---------
End of period $ 63,067 $ 133,160
========= =========
See notes to condensed consolidated financial statements.
5
PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
UNAUDITED
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by Plexus Corp. ("Plexus" or the "Company") without audit and
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. In the opinion of the Company, the financial statements
reflect all adjustments, which include normal recurring adjustments necessary to
present fairly the financial position of the Company as of December 31, 2002,
and the results of operations for the three months ended December 31, 2002 and
2001, and the cash flows for the same three-month periods.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the SEC rules and
regulations dealing with interim financial statements. However, the Company
believes that the disclosures made in the condensed consolidated financial
statements included herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's 2002 Annual Report on Form 10-K.
NOTE 2 - INVENTORIES
The major classes of inventories are as follows (in thousands):
December 31, September 30,
2002 2002
------------ -------------
Assembly parts $ 70,776 $ 64,085
Work-in-process 24,262 24,507
Finished goods 8,981 5,440
--------- ---------
$ 104,019 $ 94,032
========= =========
NOTE 3 - ASSET SECURITIZATION FACILITY
In fiscal 2001, the Company entered into and amended an agreement to
sell up to $50 million of trade accounts receivable without recourse to Plexus
ABS Inc. ("ABS"), a wholly owned limited-purpose subsidiary of the Company. As
of December 31, 2002, the total available funding amount under the asset
securitization facility was approximately $13.0 million, all of which was
utilized. As a result, accounts receivable has been reduced by $13.0 million for
the off-balance sheet financing. ABS is a separate corporate entity that sells
participating interests in a pool of the Company's accounts receivable to
financial institutions. 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 September 2003.
For the three months ended December 31, 2002 and 2001, the Company incurred
financing costs of $0.1 million and $0.2 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 and (Loss). In addition, the net borrowings/(repayments)
under the agreement are included in the cash flows from operating activities in
the accompanying Condensed Consolidated Statements of Cash Flows.
In both December 2002 and January 2003, the Company, along with its
banking partners, amended its receivables purchase agreement to allow it to
revise certain covenants and be in compliance with these covenants.
NOTE 4 -- DEBT
Effective November 9, 2002, the Company reduced its maximum borrowing
capacity under its unsecured revolving credit facility (the "Credit Facility")
to $150 million from $250 million. Effective December 26, 2002, the
6
Company terminated the Credit Facility. No amounts were outstanding during the
first quarter of fiscal 2003. The Company's termination of the Credit Facility
was occasioned by anticipated noncompliance with covenants as of December 31,
2002, as a result of restructuring costs in the first quarter of fiscal 2003
(see Note 11). As a result of the termination of the Credit Facility, the
Company wrote-off unamortized deferred financing costs of approximately $0.5
million.
NOTE 5 - EARNINGS PER SHARE
The following is a reconciliation of the amounts utilized in the
computation of basic and diluted earnings per share (in thousands, except per
share amounts):
Three Months Ended
December 31,
-----------------------
2002 2001
-------- --------
Earnings:
Loss before cumulative effect of change
in accounting for goodwill $(20,832) $ (2,023)
Cumulative effect of change in accounting
for goodwill, net of income tax benefit of $4,755 (23,482) -
-------- --------
Net loss $(44,314) $ (2,023)
======== ========
Basic weighted average common shares outstanding 42,069 41,782
Dilutive effect of stock options - -
-------- --------
Diluted weighted average shares outstanding 42,069 41,782
======== ========
Basic and diluted earnings per share:
Loss before cumulative effect of change
in accounting for goodwill $ (0.49) $ (0.05)
Cumulative effect of change in accounting
for goodwill, net of income taxes (0.56) -
-------- --------
Net loss $ (1.05) $ (0.05)
======== ========
For the three months ended December 31, 2002 and 2001, stock options to
purchase approximately 3.5 million and 2.4 million shares of common stock,
respectively, were outstanding, but were not included in the computation of
diluted earnings per share because their effect would be anti-dilutive.
NOTE 6 - GOODWILL AND PURCHASED INTANGIBLE ASSETS
The Company adopted the Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" effective October 1,
2002. Under SFAS No. 142, the Company no longer amortizes goodwill and
intangible assets with indefinite useful lives, but instead, tests those assets
for impairment at least annually with any related losses recognized in earnings
when incurred.
SFAS No. 142 requires the Company to perform a transitional goodwill
impairment evaluation. Step one of the evaluation requires the Company to
perform an assessment of whether there was an indication that goodwill was
impaired as of the date of adoption. The Company completed step one of the
evaluation and concluded that it had material goodwill impairment at certain of
its North American locations, since the estimated fair values based on expected
future discounted cash flows to be generated from such locations was
significantly less than the carrying values.
In the second step, the Company compared the implied fair value of each
location's goodwill, determined by allocating the fair value to all of its
assets (recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation for an acquired business, to its carrying amount, both
of which would be measured at the date of adoption. In connection with
allocating the fair value of the locations to the various assets and
liabilities, the Company obtained independent valuations of any unrecognized
intangible assets and fixed assets. Upon completion of step two, the Company
identified $28.2 million of transitional impairment losses ($23.5 million, net
of income tax benefits) at certain of its North American locations, which are
recognized as a cumulative effect of a change in
7
accounting for goodwill in the Company's Condensed Consolidated Statements of
Operations and Comprehensive Income and (Loss). See Note 11 for discussion of
additional goodwill impairment resulting from restructuring actions taken in the
first quarter of fiscal 2003.
The following sets forth a reconciliation of net loss and earnings per
share information for the three months ended December 31, 2002 and 2001 adjusted
to exclude goodwill amortization, net of income tax (in thousands, except per
share data):
Three Months Ended
December 31,
-----------------------
2002 2001
-------- --------
Reported loss before cumulative effect of change
in accounting for goodwill $(20,832) $ (2,023)
Add back: goodwill amortization, net of income taxes - 1,090
-------- --------
Adjusted loss before cumulative effect of change in
accounting for goodwill (20,832) (933)
Cumulative effect of change in accounting
for goodwill, net of income taxes (23,482) -
-------- --------
Adjusted net loss $(44,314) $ (933)
======== ========
Basic weighted average common shares outstanding 42,069 41,782
Dilutive effect of stock options - -
-------- --------
Diluted weighted average shares outstanding 42,069 41,782
======== ========
Basic and diluted earnings per share:
Reported loss before cumulative effect of change
in accounting for goodwill $ (0.49) $ (0.05)
Add back: goodwill amortization, net of income taxes - 0.03
-------- --------
Adjusted loss before cumulative effect of change in
accounting for goodwill (0.49) (0.02)
Cumulative effect of change in accounting
for goodwill, net of income taxes (0.56) -
-------- --------
Adjusted net loss $ (1.05) $ (0.02)
======== ========
The changes in the carrying amount of goodwill for the three months
ended December 31, 2002 and the fiscal year ended September 30, 2002 are as
follows (amounts in thousands):
BALANCE AS OF OCTOBER 1, 2001 $ 70,514
Amortization (5,203)
Finalization of purchase accounting (1,684)
Foreign currency translation adjustments 1,330
----------
BALANCE AS OF SEPTEMBER 30, 2002 64,957
Cumulative effect of change in accounting for goodwill (28,237)
Impairment charge (See Note 11) (5,595)
Foreign currency translation adjustments 388
----------
BALANCE AS OF DECEMBER 31, 2002 $ 31,513
==========
The Company has a nominal amount of identifiable intangibles that are
subject to amortization. These intangibles relate to customer lists and patents
with useful lives from 1 to 15 years. The Company has no identifiable
intangibles that are not subject to amortization. During the three months ended
December 31, 2002, there were no additions to identifiable intangible assets.
Intangible asset amortization expense was nominal for the three months ended
December 31, 2002, and $0 for the three months ended December 31, 2001.
8
NOTE 7 -- ACQUISITION
In January 2002, the Company acquired certain assets of MCMS, Inc.
("MCMS"), an electronics manufacturing services provider, for approximately
$42.0 million in cash. The assets purchased from MCMS include manufacturing
operations in Penang, Malaysia; Xiamen, China; and Nampa, Idaho. The results
from MCMS' operations are reflected in the Company's financial statements from
the date of acquisition. No goodwill resulted from this acquisition. The Company
incurred approximately $0.3 million of acquisition costs in the second quarter
of fiscal 2002 associated with this acquisition. Due to unique aspects of this
acquisition, pro forma financial information is not meaningful and is therefore
not presented. The factors leading to this determination included the selective
MCMS assets acquired by the Company, the limited assumption of liabilities and
the exclusion of certain customer relationships which were formerly significant
to MCMS.
NOTE 8 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one business segment. The Company provides
product realization services to electronic original equipment manufacturers
("OEMs"). The Company has three reportable geographic regions: North America,
Europe and Asia. As of December 31, 2002, the Company had 24 manufacturing
and/or engineering facilities in North America, Europe and Asia to serve these
OEMs. The Company uses an internal management reporting system, which provides
important financial data to evaluate performance and allocate the Company's
resources on a geographic basis. Interregion transactions are generally recorded
at amounts that approximate arm's length transactions. Certain corporate
expenses are allocated to these regions and are included for performance
evaluation. The accounting policies for the regions are the same as for the
Company taken as a whole. The table below presents geographic net sales
information reflecting the origin of the product shipped and asset information
based on the physical location of the asset (in thousands):
Three months ended
December 31,
----------------------
2002 2001
-------- --------
Net sales:
North America $183,418 $182,894
Europe 14,075 17,324
Asia 7,886 -
-------- --------
$205,379 $200,218
======== ========
December 31, September 30,
2002 2002
------------ -------------
Long-lived assets:
North America $157,041 $199,478
Europe 35,252 35,796
Asia 6,036 6,505
-------- --------
$198,329 $241,779
======== ========
NOTE 9 - GUARANTEES
In November 2002, Financial Accounting Standards Board Interpretation
No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" was issued.
FIN No. 45 requires a Company, at the time it issues a guarantee, to recognize
an initial liability for the fair value of obligations assumed under the
guarantee and to elaborate on existing disclosure requirements. The initial
recognition requirements of FIN No. 45 are effective for guarantees issued or
modified after December 31, 2002, however, the Company was required to adopt the
disclosure requirements of FIN No. 45 in both annual and interim financial
statements effective for its first fiscal quarter of 2003.
As of December 31, 2002, the Company offers certain indemnifications
under its asset securitization facility, leases and customer manufacturing
agreements. The Company does not, nor is it required to, estimate a liability
for the fair value of its indemnification obligations existing at December 31,
2002. However, for all
9
indemnifications or guarantees meeting the FIN No. 45 requirements of an
obligation and issued by the Company subsequent to December 31, 2002, the
Company will be required to recognize a liability for the fair value of such
obligations.
Under the Company's asset securitization facility agreement with ABS
(see Note 3), the Company is obligated to indemnify the participating financial
institutions if regulatory changes result in either reductions in their return
on capital or increases in the costs of performing their obligations under the
funding arrangement. The indemnification expires with the expiration of the
agreement in September 2003. The Company is unable to estimate the maximum
potential amount of future payments under its indemnification due to the
uncertainties inherent in predicting potential regulatory changes.
Under certain of the Company's leases, the Company is obligated to
indemnify for loss of capital allowances or reductions in after-tax returns as a
result of any changes in tax laws or regulations occurring subsequent to lease
commencement. The indemnification provisions expire with the respective lease
agreements during fiscal 2004. The Company is unable to estimate the maximum
potential amount of future payments under its indemnifications due to the
uncertainties inherent in predicting potential regulatory changes.
In the normal course of business, the Company may from time to time be
obligated to indemnify its customers or its customers' customers against damages
or liabilities arising out of the Company's negligence, breach of contract, or
infringement of third party intellectual property rights relating to its
manufacturing processes. Certain of our manufacturing agreements have extended
broader indemnification. However, the Company generally excludes from such
indemnities, and seeks indemnification from its customers for, damages or
liabilities arising out of the Company's adherence to customers' specifications
or designs or use of materials furnished, or directed to be used, by its
customers.
In the normal course of business, the Company also provides its
customers a limited warranty covering workmanship, and in some cases materials,
on products manufactured by the Company for them. Such warranty generally
provides that products will be free from defects in the Company's workmanship
and meet mutually agreed upon testing criteria for periods ranging from 12
months to 24 months. If a product fails to comply with the Company's warranty,
the Company is obligated, at its expense, to correct any defect by repairing or
replacing such defective product. The Company's warranty excludes defects
resulting from faulty customer-supplied components, design defects or damage
caused by any party other than the Company.
The Company provides for an estimate of costs that may be incurred
under its limited warranty at the time product revenue is recognized. These
costs primarily include labor and materials, as necessary, associated with
repair or replacement. The primary factors that affect the Company's warranty
liability include the number of shipped units and historical and anticipated
rates of warranty claims. As these factors are impacted by actual experience and
future expectations, the Company assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary.
Below is a table summarizing the warranty activity for the first
quarter of fiscal 2003 (in thousands):
Limited warranty liability, as of October 1, 2002 $1,246
Accruals for warranties issued during the period 44
Accruals related to pre-existing warranties 23
Settlements (in cash or in kind) during the period (49)
------
Limited warranty liability, as of December 31, 2002 $1,264
======
NOTE 10 - CONTINGENCIES
The Company (along with many other companies) has been sued by the
Lemelson Medical, Education & Research Foundation Limited Partnership
("Lemelson") related to alleged possible infringement of certain Lemelson
patents. The Company had requested a stay of action pending developments in
other related litigation, which has been granted. The Company believes the
vendors from which the patent-related equipment was purchased may contractually
indemnify the Company. If a judgment is rendered and/or a license fee required,
it is the opinion of
10
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.
In addition, the Company is party to other certain lawsuits in the
ordinary course of business. Management does not believe that these proceedings,
individually or in the aggregate, will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
NOTE 11 - RESTRUCTURING COSTS
During the first quarter of fiscal 2003 and 2002, the Company recorded
restructuring charges totaling $31.8 million and $2.8 million, respectively.
These charges were taken in response to reductions in the Company's sales and
rates of capacity utilization.
In the first quarter of fiscal 2003, the Company's most significant
restructuring actions included the planned closure of its San Diego, California
manufacturing facility, which resulted in a write-off of goodwill, the
write-down of underutilized assets to fair value, and the elimination of the
facility's work force. The San Diego facility will be phased out of operation by
approximately June 2003. As of September 30, 2002, the San Diego location had
unamortized goodwill of approximately $20.4 million, of which $14.8 million was
impaired as a result of the Company's transitional impairment evaluation under
SFAS No. 142 (see Note 6) and $5.6 million was impaired as a result of the
Company's intent to close the facility. Other restructuring actions in the first
quarter of fiscal 2003 included the consolidation of several leased facilities,
the write-down of underutilized assets to fair value and work force reductions,
which primarily affected operations in Seattle, Washington; Neenah, Wisconsin
and the United Kingdom ("UK"). For leased facilities that will be abandoned and
subleased, the restructuring charge was based on future lease payments
subsequent to abandonment, less estimated sublease income. For the equipment
write-off, the restructuring charge was based on fair value estimated by using
existing market prices for similar assets less costs to sell. The first quarter
fiscal 2003 employee termination costs include severance associated with the
Company's December 2002 announcement that will affect approximately 400
employees and severance associated with previous announcements that affected
approximately 100 employees.
In the first quarter of fiscal 2002, the Company's restructuring costs
included $1.2 million for employee termination and severance, $1.0 million for
lease obligation and other exit activities and $0.6 million for non-cash asset
write-downs. The employee terminations resulted in the elimination of
approximately 90 employees. As of September 30, 2002, recorded liabilities
related to these restructuring activities were not significant.
Below is a table summarizing the restructuring activity for the first
fiscal quarter of fiscal 2003:
EMPLOYEE
TERMINATION AND LEASE OBLIGATIONS NON-CASH ASSET
SEVERANCE COSTS AND OTHER EXIT COSTS WRITE-DOWNS TOTAL
---------------------------------------------------------------------------
Accrued balance, $ 540 $ 2,957 $ - $ 3,497
September 30, 2002
Restructuring charges 5,252 9,666 16,922 31,840
Amounts utilized (1,496) (1,540) (16,922) (19,958)
-------- -------- -------- --------
Accrued balance,
December 31, 2002 $ 4,296 $ 11,083 $ - $ 15,379
======== ======== ======== ========
Non-cash asset write-downs in the above table includes $5.6 million of
goodwill impairment.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
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. The
Company adopted SFAS No. 143 effective
11
October 1, 2002. The adoption of this standard did not have a material effect on
the Company's 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. The Company adopted SFAS No. 144 effective October 1, 2002. The Adoption
of this standard 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. The Company anticipates that the adoption of SFAS No. 146, effective
January 1, 2003, may impact the timing of the recognition of the costs and
liabilities resulting from any future restructuring activities, but will not
have a material impact on its financial position or results of operations.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123"
was issued. SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the effects on reported net income
of an entity's method of accounting for stock-based employee compensation. SFAS
No. 148 is effective for the Company in its second fiscal quarter of 2003. The
Company does not intend to effect a voluntary change in accounting to the fair
value method, and, accordingly, does not anticipate the adoption of SFAS No. 148
to have a significant impact on the Company's future results of operations or
financial position.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF Issue 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The consensus addresses not only when and how an
arrangement involving multiple deliverables should be divided into separate
units of accounting but also how the arrangement's consideration should be
allocated among separate units. The pronouncement is effective for the Company
commencing with its fiscal year 2004 and is not expected to have a material
impact on its consolidated results of operations or financial position.
NOTE 13 -- RECLASSIFICATIONS
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the fiscal 2003 presentation.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995:
The statements contained in the Form 10-Q which are not historical
facts (such as statements in the future tense and statements including
"believe," "expect," "intend," "anticipate" and similar 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:
- the continued weak economic performance of the electronics and
technology industries,
- the risk of customer delays, changes or cancellations in both
ongoing and new programs,
- our ability to integrate MCMS' and other acquired companies'
operations,
- our ability to secure new customers and maintain our current
customer base,
- the results of cost reduction efforts,
- the impact of capacity utilization and our ability to manage fixed
costs,
- the effects of facilities closures and restructurings,
- material cost fluctuations and the adequate availability of
components and related parts for production,
- the effect of changes in average selling prices,
- the effect of start-up costs of new programs,
- the effect of general economic conditions and world events,
- the effect of the impact of increased competition and
- other risks detailed below, especially in "Risk Factors" and
otherwise herein, and in our Securities and Exchange Commission
filings.
OVERVIEW
Plexus Corp. and its subsidiaries (together "Plexus," the "Company," or
"we") provide product realization services to original equipment manufacturers,
or OEMs, in the networking/datacommunications/telecom, medical,
industrial/commercial, computer and transportation industries. We provide
advanced electronics design, manufacturing and testing services to our customers
with a 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 configuration, logistics and test/repair.
The following information should be read in conjunction with our condensed
consolidated financial statements included herein and the "Risk Factors" section
beginning on page 22.
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 over 90 percent 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 and the degree of automation used in the
assembly process.
13
MERGERS AND ACQUISITIONS
In January 2002, we acquired certain assets of MCMS, Inc. ("MCMS"), an
electronics manufacturing services provider, for approximately $42.0 million in
cash. The assets purchased from MCMS include manufacturing operations in Penang,
Malaysia; Xiamen, China; and Nampa, Idaho. The results from MCMS' operations are
reflected in our financial statements from the date of acquisition. No goodwill
resulted from this acquisition. We incurred approximately $0.3 million of
acquisition costs in the second quarter of fiscal 2002 associated with the
acquisition of MCMS.
RESULTS OF OPERATIONS
Net sales. Net sales for the three months ended December 31, 2002,
increased 3 percent to $205 million from $200 million for the three months ended
December 31, 2001. Net sales for the first quarter of fiscal 2003 included
approximately $18 million, or 9 percent of sales, related to the acquired MCMS
operations. Our sales levels reflect the continued slowdown in technology
markets, primarily in the network/datacommunications/telecom and
industrial/commercial industries, which have been further impacted by reduced
end-market demand and reduced capital resources of companies in these
industries. The slowdown in the technology markets was offset, in part, by
increased sales levels to the medical industry. The factors affecting the
technology markets will continue to affect our second quarter sales. Based on
customer indications to date, we currently expect second quarter sales to be in
the range of $190 million to $200 million. However, our results will ultimately
depend on the actual order levels.
Our largest customers for the three months ended December 31, 2002,
were General Electric Company (GE) and Siemens Medical Systems, Inc., which
accounted for 13 percent and 11 percent of sales, respectively. In the
comparable three months ended December 31, 2001, GE accounted for 12 percent of
sales and was the only customer representing 10 percent or more of sales. Sales
to our ten largest customers accounted for 57 percent of sales for the three
months ended December 31, 2002 compared to 51 percent for the three months ended
December 31, 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. Any material change in orders from these
major accounts, or other customers, could materially affect our results of
operations.
Our sales by industry for the three months ended December 31, 2002 and
2001, respectively, by industry were as follows:
INDUSTRY 2002 2001
-------- ---- ----
Networking/Datacommunications/Teleco 35% 36%
Medical 34% 29%
Industrial/Commercial 14% 20%
Computer 12% 8%
Transportation/Other 5% 7%
Gross profit. Gross profit for both of the three months ended December
31, 2002 and 2001 were $15.5 million. The gross margin for the three months
ended December 31, 2002, was 7.6 percent as compared to 7.7 percent for the
three months ended December 31, 2001. The decline in gross margin was due
primarily to reduced manufacturing capacity utilization.
Overall gross margins continue to be affected by relatively low sales
levels as a result of a slowdown in end-market demand, particularly in the
networking/datacommunications/telecom and industrial/commercial industries, and
more specifically, the impact of reduced demand on our capacity utilization. Our
gross margins reflect a number of factors that can vary from period to period,
including product and service mix, the level of start-up costs and efficiencies
of new programs, product life cycles, sales volumes, price erosion within the
electronics industry, overall capacity utilization, labor costs and
efficiencies, the management of inventories, component pricing and shortages,
average sales prices, the mix of turnkey and consignment business, fluctuations
and timing of customer orders, changing demand for customers' products and
competition within the electronics industry. Although our focus is on
14
maintaining and expanding gross margins, there can be no assurance that gross
margins will not decrease in future periods.
Most of the research and development we conduct is paid for by our
customers and is, therefore, included in both sales and cost of sales. We
conduct our own research and development, but that research and development is
not specifically identified, and we believe such expenses are less than one
percent of our net sales.
Operating expenses. Selling and administrative (S&A) expenses for the
three months ended December 31, 2002, increased to $16.8 million from $14.0
million for the three months ended December 31, 2001. As a percentage of net
sales, S&A expenses were 8.2 percent for the three months ended December 31,
2002, as compared to 7.0 percent for the three months ended December 31, 2001.
The increase in dollar terms and percentage of net sales was due primarily to
additional investment for information technology systems support related to the
roll-out of our new enterprise resource planning ("ERP") platform. During the
first quarter of fiscal 2003, we converted one manufacturing facility to the new
platform, which together with two conversions in late fiscal 2002 has resulted
in additional training and implementation costs. Training and implementation
cost are expected to continue over the next two years as we convert our
remaining facilities to the new ERP platform. In addition, S&A expenses in the
first quarter of fiscal 2003 are higher than the first quarter of fiscal 2002 as
a result of the acquisition of the MCMS operations.
Effective the first quarter of fiscal 2003, in accordance with SFAS No.
142 "Goodwill and Other Intangible Assets," we no longer amortize goodwill.
However, we will be required to perform annual impairment tests to determine
goodwill impairment, if any, which could materially affect the results in any
given period. See discussion below under "Cumulative effect of change in
accounting for goodwill."
During the first quarter of fiscal 2003, we recorded pre-tax
restructuring charges totaling $31.8 million. These charges were taken in
response to reductions in our end-market demand, including the decision of the
largest customer of our San Diego facility to transition two new programs to
non-Plexus facilities, and to improve our capacity utilization.
Our primary restructuring actions included the planned closure of our
San Diego, California manufacturing facility, which resulted in a write-off of
goodwill, the write-down of underutilized assets to fair value, and the
elimination of the facility's work force. The San Diego facility will be phased
out of operations by approximately June 2003. As of September 30, 2002, our San
Diego location had unamortized goodwill of approximately $20.4 million, of which
$14.8 million was impaired as a result of our transitional impairment evaluation
under SFAS No. 142 (see discussion below under "Cumulative effect of change in
accounting for goodwill") and $5.6 million was impaired as a result of our
decision to close the facility. Other restructuring actions in the first quarter
of fiscal 2003 included the consolidation of several leased facilities, the
write-down of underutilized assets to fair value and work force reductions,
which primarily affected operations in Seattle, Washington; Neenah, Wisconsin
and the United Kingdom. The first quarter fiscal 2003 employee termination costs
include severance associated with our December 2002 announcement that will
affect approximately 400 employees, and severance associated with previous
announcements that affected approximately 100 employees.
In the first quarter of fiscal 2002, we recorded restructuring charges
totaling $2.8 million. These charges were taken in response to reductions in our
sales levels and capacity utilization and included the reduction of our work
force and the write-off of certain underutilized assets to fair value at several
locations. The employee termination and severance costs affected approximately
90 employees.
Our pre-tax restructuring charges in the first quarters of fiscal 2003
and 2002 are summarized as follows:
2002 2001
---- ----
Fixed asset impairment $11,327 $ 647
Lease exit costs 9,666 974
Write-off of goodwill 5,595 1,179
Severance costs 5,252 -
------- -------
Total restructuring costs $31,840 $ 2,800
======= =======
15
Cumulative effect of a change in accounting for goodwill. We adopted
SFAS No. 142 for the accounting of goodwill and other intangible assets on
October 1, 2002. Under the transitional provisions of SFAS No. 142, we
identified locations with goodwill, performed impairment tests on the net
goodwill and other intangible assets associated with each location using a
valuation date as of October 1, 2002, and determined that a pre-tax transitional
impairment charge of $28.2 million was required at certain of our North American
locations. The impairment charge was recorded as a cumulative effect of a change
in accounting for goodwill in our Condensed Consolidated Statements of
Operations and Comprehensive Income and (Loss).
Income taxes. Our income tax benefit increased to $17.2 million for the
three months ended December 31, 2002 from $1.3 million for the three months
ended December 31, 2001. Our effective income tax rate decreased to
approximately 28 percent for the three months ended December 31, 2002 from
approximately 39 percent for the three months ended December 31, 2001. The
decrease in the effective tax rate is due primarily to non-deductible goodwill
impairment expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operating activities were $3.1 million for the three
months ended December 31, 2002, compared to cash flows provided by operating
activities of $39.2 million for the three months ended December 31, 2001. During
the three months ended December 31, 2002, cash used in operating activities was
affected by increased deferred taxes and inventory and a decrease in accounts
payable offset, in part, by decreases in accounts receivable and increases in
accrued and other liabilities. During the three months ended December 31, 2002,
we also reduced the amount outstanding under our asset securitization facility
by approximately $3.6 million.
For the three months ended December 31, 2002, actual days sales
outstanding represented by our accounts receivable decreased to 47 days from 48
days for the three months ended September 30, 2002. Included in this calculation
is the addback of amounts utilized under the asset securitization facility to
accounts receivable in the determination of days sales outstanding (this amount
was $13.0 million and $16.6. million as of December 31, 2002 and September 30,
2002, respectively). Our annualized inventory turns declined to 7.7 turns for
the three months ended December 31, 2002 from 8.1 turns for the three months
ended September 30, 2002. Inventories increased primarily due to initial raw
material stocking for several new programs.
Cash flows provided by investing activities totaled $2.4 million for
the three months ended December 31, 2002. The primary sources were sales and
maturities of short-term investments, which were offset by payments for
property, plant and equipment.
We utilize available cash and operating leases to finance our operating
requirements. We utilize operating leases primarily in situations where
technical obsolescence concerns are determined to outweigh the benefits of
directly financing the equipment purchase. We currently estimate capital
expenditures for fiscal 2003 will be approximately $28 million to $32 million,
of which approximately $10.7 million was made during the first quarter of fiscal
2003.
Cash flows provided by financing activities totaling $0.1 million for
the three months ended December 31, 2002 primarily represent proceeds from
exercise of stock options off-set, in part, by net payments on capital lease
obligations. The ratio of total liabilities to equity was approximately 0.4 to 1
as of December 31, 2002, and September 30, 2002.
Effective November 9, 2002, we reduced our maximum borrowing capacity
under our unsecured revolving credit facility (the "Credit Facility") to $150
million from $250 million. Effective December 26, 2002, we terminated the Credit
Facility. No amounts were outstanding under the Credit Facility during the first
quarter of fiscal 2003. Our termination of the Credit Facility was occasioned by
anticipated noncompliance with covenants as of December 31, 2002, as a result of
our restructuring costs in the first quarter of fiscal 2003. At the date of
termination of the Credit Facility, we wrote-off unamortized deferred financing
costs of approximately $0.5 million. During fiscal 2003 we anticipate
negotiating a replacement to the Credit Facility, although we cannot assure
whether, or under what terms, a new credit facility will be available. While the
availability of a credit facility enhances our corporate liquidity, we do not
believe that lack of such a facility would materially affect our operations or
financial condition in the foreseeable future. Our leasing capabilities and cash
and short-term investments should be sufficient to meet our working capital and
fixed capital requirements through fiscal 2003 and the foreseeable future.
16
In fiscal 2001, we entered into an agreement to sell up to $50 million
of trade accounts receivable without recourse to Plexus ABS Inc. ("ABS"), a
wholly owned, limited purpose subsidiary of the Company. 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 December 31,
2002, we had utilized the maximum amount currently available of $13.0 million.
As a result, accounts receivable have been reduced by $13.0 million as of
December 31, 2002, while long-term debt and capital lease obligations do not
include this $13.0 million of off-balance-sheet financing. See Note 3 in the
Notes to Condensed Consolidated Financial Statements.
We have not paid cash dividends in the past and do not anticipate
paying them in the foreseeable future. We anticipate using any earnings to
support our business.
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 our 2002 Report on Form 10-K.
During the first quarter of fiscal 2003, the only material change to these
policies related to our accounting for intangible assets. Modifications were
also made in our policy for accounting for the impairment of long-lived assets,
however, such changes did not have a material affect on our financial position
or results of operation. Our more critical accounting 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 percent of our
total revenues. 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. 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.
Impairment of Long-Lived Assets -- We adopted SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" effective October 1, 2002.
SFAS modifies and expands the financial accounting and reporting for the
impairment or disposal of long-lived assets other than goodwill, which is
specifically addressed in SFAS No. 142 as described below. 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 it
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."
17
Intangible Assets - We adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" effective October 1, 2002. Under SFAS No. 142, beginning
October 1, 2002, we no longer amortize goodwill and intangible assets with
indefinite useful lives, but instead, test those assets for impairment at least
annually, with any related losses recognized in earnings when incurred, rather
than being amortized as previous standards required.
Under the transitional provisions of SFAS No. 142, we identified
locations with goodwill, performed impairment tests on the net goodwill and
other intangible assets associated with each location using a valuation date as
of October 1, 2002, and determined that a pre-tax transitional impairment charge
of $28.2 million was required. The impairment charge was recorded as a
cumulative effect of a change in accounting for goodwill in our Condensed
Consolidated Statements of Operations and Comprehensive Income and (Loss). See
Note 6 to the Notes to Condensed 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. In the first quarter of fiscal 2003, we recorded restructuring
charges totaling $31.8 million. See Note 11 in the Notes to Condensed
Consolidated Financial Statements. See New Accounting Pronouncements below for
discussion of SFAS No. 146, which effective January 1, 2003 may impact the
timing of the recognition of the costs and liabilities resulting from any future
restructuring activities.
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
We include 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.
On December 26, 2002, we terminated our Credit Facility. No amounts were
outstanding under the Credit Facility during the first quarter of fiscal
2003. Our termination of the Credit Facility was occasioned by
anticipated noncompliance with covenants as of December 31, 2002, as a
result of our restructuring costs in the first quarter of fiscal 2003.
It is our intention to seek to replace the existing Credit Facility with
a comparable facility. However, we cannot assure whether, or under what
terms, a new credit facility will be available. While the availability
of a credit facility facilitates corporate operations, we do not believe
that lack of such a facility would materially affect our operations or
financial condition in the foreseeable future.
b. Circumstances 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
18
commercially impracticable, such as the inability to maintain a
specified investment grade credit rating, level of earnings, earnings
per share, financial ratios, or collateral.
We are not aware of any specific factor or factors that could reasonably
be expected to impair our ability to continue to engage in our
historical operations at this time.
c. Factors specific to us and our markets that we expect to 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.
We are not aware of anything 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. We do 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).
We do 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 Footnote 4 to the financial statements in our 2002
Report on Form 10-K and Footnote 3 to our financial statements for the three
months ended December 31, 2002 in this Report of Form 10-Q, an asset
securitization facility that we entered into in fiscal 2001. Plexus' 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 December 31, 2002, the total available funding
amount under the asset securitization facility was approximately $13.0 million,
all of which was utilized. Any interests sold to the financial institutions are
removed from the balance sheet, as we have no risk of loss on such receivables
since they are sold without recourse. In December 2002 and January 2003, we,
along with our banking partners, amended our receivables purchase agreement to
allow us to revise certain covenants and be in compliance with these covenants.
We also lease various assets under both capital and operating leases.
The aggregate payments under the capital leases and operating leases are
disclosed in Footnotes 4 and 9, respectively, to our financial statements in our
2002 Report on Form 10-K, and are summarized in the following subsection. There
were no significant changes to these lease arrangements during the first quarter
of fiscal 2003.
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, Footnotes 1,
4, 6, 9, and 11 to our financial statements in our 2002 Report on Form 10-K, and
Footnotes 1, 3 and 9 to our financial statements for the three months ended
December 31, 2002 in this report. In addition, we prepared schedules as of
December 31, 2002 suggested by the SEC in FR -61. Information in the following
table is in thousands as of December 31, 2002.
19
PAYMENTS DUE BY FISCAL PERIOD
CONTRACTUAL OBLIGATIONS REMAINING IN 2008 AND
TOTAL 2003 2004-2005 2006-2007 THEREAFTER
Capital Lease Obligations $ 47,768 $ 3,001 $ 7,390 $ 5,914 $ 31,463
Operating Leases 92,994 11,818 25,854 19,959 35,363
Unconditional Purchase Obligations* - - - - -
Other Long-Term Obligations** - - - - -
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $104,762 $ 14,819 $ 33,244 $ 25,873 $ 66,826
======== ======== ======== ======== ========
* - There are no unconditional purchase obligations other than inventory and
property, plant and equipment purchases in the ordinary course of business.
** - As of December 31, 2002, other than our off-balance sheet asset
securitization facility ($13.0 million outstanding as of December 31, 2002, out
of a maximum of $50 million which may be available, subject to various tests,
under the facility), 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 disclosed the effects of transactions with a related party in Note 1
to our Consolidated Financial Statements in our fiscal 2002 Report on Form 10-K.
There were no other significant transactions with related and certain other
parties.
NEW ACCOUNTING PRONOUNCEMENTS
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. We adopted
SFAS No 143 effective October 1, 2002. The adoption of this standard did not
have a material effect on our 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. We adopted SFAS No. 144 effective October 1, 2002. The adoption of this
standard 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
20
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
anticipate that the adoption of SFAS No. 146 may impact the timing of the
recognition of the costs and liabilities resulting from any future restructuring
activities, but will not have a material impact on our financial position or
results of operations.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123"
was issued. SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the effects on reported net income
of an entity's method of accounting for stock-based employee compensation. SFAS
No. 148 is effective for us in our second fiscal quarter of 2003. We do not
intend to effect a voluntary change in accounting to the fair value method, and,
accordingly, do not anticipate the adoption of SFAS No. 148 to have a
significant impact on our future results of operations or financial position.
In November 2002, the Financial Accounting Standards Board ("FASB")
Issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 requires us, at the time we issue a
guarantee, to recognize an initial liability for the fair value of obligations
assumed under the guarantee and elaborate on existing disclosure requirements.
The initial recognition requirements of Interpretation No. 45 are effective for
guarantees issued or modified after December 31, 2002; however, we were required
to adopt the disclosure requirements of FIN No. 45 in both annual and interim
financial statements effective for our first fiscal quarter of 2003. Since we
are only required to recognize a liability for new guarantees issued subsequent
to December 31, 2002, we are unable to quantify the future financial statement
impact of adopting FIN No. 45. Therefore, our adoption of the initial
recognition requirements of FIN No. 45 may have a significant impact on our
future results of operations and financial position.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus regarding EITF Issue 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The consensus addresses not only when and how an
arrangement involving multiple deliverables should be divided into separate
units of accounting but also how the arrangement's consideration should be
allocated among separate units. The pronouncement is effective for us commencing
with our fiscal year 2004 and is not expected to have a material impact on our
consolidated results of operations or financial position.
21
RISK FACTORS
OUR CUSTOMER REQUIREMENTS AND OPERATING RESULTS VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER, WHICH COULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK.
Our quarterly and annual results may vary significantly depending on
various factors, many of which are beyond our control. These factors include:
- the volume of customer orders relative to our capacity
- the level and timing of customer orders, particularly in light of the
fact that some of our customers release a significant percentage of
their orders during the last few weeks of a quarter
- the typical short life cycle of our customers' products
- market acceptance of and demand for our customers' products
- 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 state of the U.S. and global
economies and world events. A continued slowdown in the U.S. or global
economies, or in particular in the industries served by us, may result in our
customers further reducing their forecasts. Our sales have been, and we expect
them to continue to be, impacted by the slowdown in the
networking/datacommunications/telecom, industrial/commercial and computer
markets, which have been impacted by reduced end-market demand and reduced
availability of capital resources to fund existing and emerging technologies.
These factors have and continue to contribute substantially to our net sales
levels. 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.
THE MAJORITY 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 majority or near
majority of our sales in recent periods. Our ten largest customers accounted for
approximately 57 percent, and 51 percent of our net sales for the three months
ended December 31, 2002 and 2001, respectively. The identities of our principal
customers have varied from year to year, and our principal customers may not
continue to purchase services from us at current levels, if at all. Significant
reductions in sales to any of these customers, or the loss of major customers,
could seriously harm our business. For example, the primary customer of our San
Diego, California facility provided us notice in December 2002 of its intent to
move two new programs to other non-Plexus facilities during our second quarter
of fiscal 2003; as a consequence, we are closing that facility and took
significant restructuring charges in the first quarter of fiscal 2003. If we are
not able to replace expired, canceled or reduced contracts with new business on
a timely basis, our sales will decrease.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY
PRODUCTION.
Electronics manufacturing service providers must provide 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
reduced 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
22
cancellations, reductions or delays have occurred and may continue to occur in
response to the slowdown in the networking/datacommunications/telecom,
industrial/commercial and computer 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, component
procurement commitments, facility requirements, personnel needs and other
resource requirements, based on our estimates of customer requirements. The
short-term nature of our customers' commitments and the possibility of rapid
changes in demand for their products reduce our ability to estimate accurately
the future requirements of those customers. Because many of our costs and
operating expenses are relatively fixed, a reduction in customer demand can harm
our gross margins and operating results.
On occasion, customers may require rapid increases in production, which
can stress our resources and reduce operating margins. Although we have had a
net increase in our manufacturing capacity over the past few fiscal years, we
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.
WE MAY HAVE SIGNIFICANT NEW 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
continue to 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 plan or we previously experienced. This tightening
of financing for start-up customers, together with many start-up customers' lack
of prior earnings and unproven product markets increase our credit risk,
especially in accounts receivable and inventories. Although we adjust our
reserves for accounts receivable and inventories for all customers, including
start-up customers, based on the information available, these reserves may not
be adequate.
FAILURE TO MANAGE OUR GROWTH AND OUR CONTRACTION MAY SERIOUSLY HARM OUR
BUSINESS.
We have experienced rapid growth in recent years, both internally and
through acquisitions, even though the most recent periods have seen reductions
in sales levels. This growth has placed, and would continue to place,
significant strain on our operations. To manage any future 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 future growth effectively, our operating results could be
harmed.
Periods of contraction or reduced sales, such as fiscal 2002 and to
date in fiscal 2003, also create tensions and challenges. We must determine
whether all facilities remain productive and determine how to respond to
changing levels of customer demand. While maintenance of facilities increases
short-term costs, too much capacity reduction could impair our ability to
respond to later market improvements or to maintain customer relationships. Our
decisions as to how to reduce costs and capacity can affect our results in both
the short-term and long-term.
We have 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.
23
OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS.
As part of the MCMS acquisition in January 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 in these countries. We also purchase a significant number
of components manufactured in foreign countries. Because of these international
aspects of our operations, we are subject to the following risks that could
materially impact our operating results:
- economic or political instability
- transportation delays or interruptions and other effects of less
developed infrastructure in many countries
- foreign exchange rate fluctuations
- utilization of different systems and equipment
- difficulties in staffing and managing foreign personnel and diverse
cultures
- the effects of international political developments.
In addition, changes in policies by the U.S. or foreign governments
could negatively affect our operating results due to changes in duties, tariffs,
taxes or limitations on currency or fund transfers. For example, our Mexico
based operation utilizes the Maquiladora program, which provides reduced tariffs
and eases import regulations, and we could be adversely affected by changes in
that program. Also, the Chinese and Malaysian subsidiaries currently receive
favorable tax treatment from the governments in those countries for
approximately 4 to 10 years, which may or may not be renewed.
WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING
PROCESS EXPERTISE.
The markets for our manufacturing and engineering services are
characterized by rapidly changing technology and evolving process development.
The continued success of our business will depend upon our ability to:
- 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 expenses to us. While many of
our customer agreements
24
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 supplies.
WE MAY NOT BE ABLE TO OBTAIN RAW MATERIALS OR COMPONENTS FOR OUR ASSEMBLIES ON A
TIMELY BASIS OR AT ALL.
We rely on a limited number of suppliers for many components used in
the assembly process. We do not have any long-term supply agreements. At various
times, there have been shortages of some of the electronic components that we
use, and suppliers of some components have lacked sufficient capacity to meet
the demand for these components. At times, component shortages have been
prevalent in our industry, and in certain areas recur from time to time. In some
cases, supply shortages and delays in deliveries of particular components have
resulted in curtailed production, or delays in production, of assemblies using
that component, which contributed to an increase in our inventory levels. We
expect that shortages and delays in deliveries of some components will continue
from time to time. An increase in economic activity could also result in
shortages, if manufacturers of components do not adequately anticipate the
increased orders. If we are unable to obtain sufficient components on a timely
basis, we may experience manufacturing and shipping delays, which could harm our
relationships with customers and reduce our sales.
A significant portion of our sales is derived from turnkey
manufacturing in which we provide materials procurement. While most of our
customer contracts permit quarterly or other periodic adjustments to pricing
based on decreases and increases in component prices and other factors, we
typically bear the risk of component price increases that occur between any such
repricings or, if such repricing is not permitted, during the balance of the
term of the particular customer contract. Accordingly, component price increases
could adversely affect our operating results.
START-UP COSTS AND INEFFICIENCIES RELATED TO NEW 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 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 34 percent of our net sales in the first quarter of fiscal 2003,
is subject to substantial government regulation, primarily from the FDA and
similar regulatory bodies in other countries. We must comply with statutes and
regulations covering the design, development, testing, manufacturing and
labeling of medical devices and the reporting of certain information regarding
their safety. Failure to comply with these rules can result in, among other
things, our and our customers' being subject to fines, injunctions, civil
penalties, criminal prosecution, recall or seizure of devices, 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. Violations may lead to penalties or shutdowns of a program or a
facility. In addition, the failure or noncompliance could have an adverse effect
on our reputation.
25
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 or may not be able
to assume responsibility for any costs or payments.
OUR PRODUCTS ARE FOR THE ELECTRONICS INDUSTRY, WHICH PRODUCES TECHNOLOGICALLY
ADVANCED PRODUCTS WITH SHORT LIFE CYCLES.
Factors affecting the electronics industry, in particular the short
life cycle of products, could seriously harm our customers and, as a result, us.
These factors include:
- the inability of our customers to adapt to rapidly changing technology
and evolving industry standards, 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. Consolidations and
other changes in the electronics manufacturing services industry result in a
continually changing competitive landscape. The consolidation trend in the
industry also results in larger and more geographically diverse competitors 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
- 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.
WE MAY FAIL TO SECURE NECESSARY 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. On
26
December 26, 2002, we terminated our Credit Facility. Our termination of the
Credit Facility was occasioned by anticipated noncompliance with covenants as of
December 31, 2002, as a result of our restructuring costs in the first quarter
of fiscal 2003. It is our intention to seek to replace the revolving credit
facility. However, we cannot assure whether, or under what terms, a new credit
facility will be available.
Our future success may depend on our ability to obtain financing and
capital to support our continued growth and operations, including our working
capital needs. We may seek to raise capital by:
- issuing additional common stock or other equity securities
- issuing debt securities
- obtaining new credit facilities
- obtaining off-balance-sheet financing.
We may not be able to obtain capital when we want or need it, and
capital may not be available on satisfactory terms. If we issue additional
equity securities or convertible debt to raise capital, it may be dilutive to
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, and our ability to meet any
financing covenants will largely depend on our financial performance, which in
turn will be subject to general economic conditions and financial, business and
other factors.
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 significant, and the loss of key employees, generally none
of whom is subject to an employment agreement for a specified term or a
post-employment non-competition agreement, could harm our business.
WE MAY FAIL TO SUCCESSFULLY COMPLETE FUTURE ACQUISITIONS AND MAY NOT
SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
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 increased 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 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 integrate successfully our acquired operations' businesses
and personnel
- inability to realize anticipated synergies, economies of scale or other
value
- difficulties in scaling up production and coordinating management of
operations at new sites
- strain placed on our personnel, systems and resources
- possible modification or termination of an acquired business customer
programs, including cancellation of current or anticipated programs
- loss of key employees of acquired businesses.
Financial risks, such as the:
- use of cash resources, or incurrence of additional debt and related
interest costs
- dilutive effect of the issuance of additional equity securities
- inability to achieve expected operating margins to offset the increased
fixed costs associated with acquisitions, and/or inability to increase
margins at acquired entities to Plexus' desired levels
- incurrence of large write-offs or write-downs
27
- impairment of goodwill and amortization of 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.
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 us, our competitors and
the market for our services, many of which are beyond our control.
In addition, the stock market in general, and especially the Nasdaq
Stock Market along with market prices for technology companies in particular,
have experienced extreme volatility and weakness that sometimes has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the market price of our common
stock, regardless of our operating results.
Among other things, volatility and weakness in Plexus' stock price
could mean that investors will not be able to sell their shares at or above the
prices which they pay. The volatility and weakness could also impair Plexus'
ability in the future to offer common stock or convertible securities as a
source of additional capital and/or as consideration in the acquisition of other
businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign exchange and
interest rates. To reduce such risks, we selectively use financial instruments.
FOREIGN CURRENCY RISK
We do not use derivative financial instruments for speculative
purposes. Our policy is to selectively hedge our foreign currency denominated
transactions in a manner that substantially offsets the effects of changes in
foreign currency exchange rates. Presently, we use foreign currency contracts to
hedge only those currency exposures associated with certain assets and
liabilities denominated in non-functional currencies. Corresponding gains and
losses on the underlying transaction generally offset the gains and losses on
these foreign currency hedges. Our fiscal 2002 expansion into additional
international markets (Malaysia and China) increases the complexity and size of
our foreign exchange risk. As December 31, 2002, we had no foreign currency
contracts outstanding.
28
INTEREST RATE RISK
We have financial instruments, including cash equivalents and
short-term investments, which are sensitive to changes in interest rates. We
consider the use of interest-rate swaps based on existing market conditions. We
currently do not use any interest-rate swaps or other types of derivative
financial instruments to hedge interest rate risk.
The primary objective of our investment activities is to preserve
principal, while maximizing yields without significantly increasing market risk.
To achieve this, we maintain our portfolio of cash equivalents and short-term
investments in a variety of highly rated securities, money market funds and
certificates of deposit and limit the amount of principal exposure to any one
issuer.
Our only material interest rate risk is associated with our asset
securitization facility. Interest on borrowings is computed based on our
participating interests at a variable rate, equivalent to the financial
institution's commercial paper rate plus other program and facilities fees. A 10
percent change in our weighted average interest rate on average long-term
borrowings would have had a nominal impact on net interest expense for the three
months ended December 31, 2002, compared to an impact of approximately $0.1
million for the three months ended December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Plexus and the
certifying officers of this report have implemented disclosure controls and
procedures, as defined in Rules 13d - 14(c) and 15d - 14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act"), to ensure that material information
relating to Plexus is made known to the signing officers, and consequently
reflected in periodic SEC reports. These controls and procedures were augmented
and further formalized in part in response to the adoption of the Sarbanes-Oxley
Act of 2002, building upon already existing practices. Plexus and those officers
have evaluated for this report the effectiveness of those disclosure controls
and procedures within 90 days prior to filing of this report, and will similarly
review them for future filings. Based upon this evaluation, Plexus and the
certifying officers believe that these disclosure controls and procedures are
effective in bringing to their attention, on a timely basis, material
information relating to Plexus required to be included in Plexus' periodic
filings under the Exchange Act.
Changes in internal controls. During the period since the evaluation
referred to above, there were not any significant changes in Plexus's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with respect to significant deficiencies and material weaknesses.
Asset-backed issuers. Not applicable
29
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Notice of Plexus dated December 26, 2002
eliminating credit line.
10.2 Limited Waiver and Seventh Amendment to
Receivables Purchase Agreement, dated January
28, 2003.
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.
No reports on Form 8-K were filed during the
period.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
2/13/03 /s/ Dean A. Foate
- ---------- ------------------------
Date Dean A. Foate
President and Chief Executive Officer
2/13/03 /s/ F. Gordon Bitter
- ---------- ------------------------
Date F. Gordon Bitter
Executive Vice President and
Chief Financial Officer
30
I, Dean A. Foate, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Plexus Corp.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluations,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
February 13, 2003
/s/ Dean A. Foate
------------------------------
Dean A. Foate
President and Chief Executive Officer
31
I, Gordon Bitter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Plexus Corp.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weakness in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluations,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
February 13, 2003
/s/ F. Gordon Bitter
--------------------------------
F. Gordon Bitter
Chief Financial Officer
32
EXHIBIT INDEX
10.1 Notice of Plexus dated December 26, 2002 eliminating credit line.
10.2 Limited Waiver and Seventh Amendment to Receivables Purchase Agreement,
dated January 28, 2003.
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.