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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the Quarter ended March 31, 2003
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 April 30, 2003 there were 42,279,364 shares of Common Stock of the
Company outstanding.
PLEXUS CORP.
TABLE OF CONTENTS
March 31, 2003
PART I. FINANCIAL INFORMATION............................................................................. 3
Item 1. Consolidated Financial Statements........................................................ 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS).......... 3
CONDENSED CONSOLIDATED BALANCE SHEETS.................................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS.......................................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS..................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 15
"SAFE HARBOR" CAUTIONARY STATEMENT....................................................... 15
OVERVIEW................................................................................. 15
MERGERS AND ACQUISITIONS................................................................. 15
RESULTS OF OPERATIONS.................................................................... 16
LIQUIDITY AND CAPITAL RESOURCES.......................................................... 18
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES............................................ 20
NEW ACCOUNTING PRONOUNCEMENTS............................................................ 21
RISK FACTORS............................................................................. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 29
Item 4. Controls and Procedures.................................................................. 30
PART II - OTHER INFORMATION................................................................................ 31
Item 4. Submission of Matters to a Vote of Security Holders...................................... 31
Item 6. Exhibits and Reports on Form 8-K......................................................... 31
SIGNATURE.................................................................................................. 31
CERTIFICATIONS............................................................................................. 32
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Unaudited
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 190,773 $ 231,162 $ 396,152 $ 431,379
Cost of sales 181,150 210,691 370,989 395,437
--------- --------- --------- ---------
Gross profit 9,623 20,471 25,163 35,942
Operating expenses:
Selling and administrative expenses 16,815 16,344 33,570 30,315
Amortization of goodwill -- 1,289 -- 2,584
Restructuring costs -- 4,687 31,840 7,487
Acquisition and merger costs -- 251 -- 251
--------- --------- --------- ---------
16,815 22,571 65,410 40,637
--------- --------- --------- ---------
Operating loss (7,192) (2,100) (40,247) (4,695)
Other income (expense):
Interest expense (712) (965) (1,590) (2,317)
Miscellaneous 678 411 1,301 1,041
--------- --------- --------- ---------
Loss before income taxes and cumulative
effect of change in accounting for goodwill (7,226) (2,654) (40,536) (5,971)
Income tax benefit (2,182) (500) (14,660) (1,794)
--------- --------- --------- ---------
Loss before cumulative effect of change in
accounting for goodwill (5,044) (2,154) (25,876) (4,177)
Cumulative effect of change in accounting for
goodwill, net of income tax benefit of $4,755 -- -- (23,482) --
--------- --------- --------- ---------
Net loss $ (5,044) $ (2,154) $ (49,358) $ (4,177)
========= ========= ========= =========
Earnings per share:
Basic
Loss before cumulative effect of change in
accounting for goodwill $ (0.12) $ (0.05) $ (0.61) $ (0.10)
Cumulative effect of change in accounting
for goodwill -- -- (0.56) --
--------- --------- --------- ---------
Net loss $ (0.12) $ (0.05) $ (1.17) $ (0.10)
========= ========= ========= =========
Diluted
Loss before cumulative effect of change in
accounting for goodwill $ (0.12) $ (0.05) $ (0.61) $ (0.10)
Cumulative effect of change in accounting
for goodwill -- -- (0.56) --
--------- --------- --------- ---------
Net loss $ (0.12) $ (0.05) $ (1.17) $ (0.10)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 42,260 41,868 42,164 41,824
========= ========= ========= =========
Diluted 42,260 41,868 42,164 41,824
========= ========= ========= =========
Comprehensive income (loss):
Net loss $ (5,044) $ (2,154) $ (49,358) $ (4,177)
Foreign currency hedges and translation adjustments (706) (991) 517 (1,345)
--------- --------- --------- ---------
Comprehensive loss $ (5,750) $ (3,145) $ (48,841) $ (5,522)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
March 31, September 30,
2003 2002
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 79,503 $ 63,347
Short-term investments 33,311 53,025
Accounts receivable, net of allowance of $4,100
and $4,200, respectively 80,909 95,903
Inventories 104,906 94,032
Deferred income taxes 25,723 21,283
Prepaid expenses and other 13,832 14,221
-------- --------
Total current assets 338,184 341,811
Property, plant and equipment, net 159,929 170,834
Goodwill 31,229 64,957
Deferred income taxes 7,741 355
Other 5,019 5,988
-------- --------
Total assets $542,102 $583,945
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 1,726 $ 1,652
Accounts payable 61,079 67,310
Customer deposits 18,110 13,904
Accrued liabilities:
Salaries and wages 17,820 17,505
Other 24,937 21,586
-------- --------
Total current liabilities 123,672 121,957
Capital lease obligations, net of current portion 24,494 25,356
Other liabilities 10,366 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, 42,276
and 42,030 shares issued and outstanding, respectively 423 420
Additional paid-in capital 258,303 256,584
Retained earnings 121,460 170,818
Accumulated other comprehensive income 3,384 2,867
-------- --------
383,570 430,689
-------- --------
Total liabilities and shareholders' equity $542,102 $583,945
======== ========
See notes to condensed consolidated financial statements.
4
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Six Months Ended
March 31,
------------------------
2003 2002
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(49,358) $ (4,177)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 14,412 18,444
Cumulative effect of change in accounting for goodwill 28,237 --
Non-cash restructuring costs 16,922 1,796
Deferred income taxes (11,826) (1,689)
Net repayments under asset securitization facility (1,614) (6,305)
Income tax benefit from stock option award plans 154 546
Changes in assets and liabilities:
Accounts receivable 16,689 12,274
Inventories (10,841) 19,765
Prepaid expenses and other 780 (11,296)
Accounts payable (6,276) 11,241
Customer deposits 4,206 (550)
Accrued liabilities 10,665 10,296
Other (454) (4,673)
-------- ---------
Cash flows provided by operating activities 11,696 45,672
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments -- (30,685)
Sales and maturities of short-term investments 19,714 20,300
Payments for property, plant and equipment (16,121) (13,108)
Payments for business acquisitions, net of cash acquired -- (42,983)
Other -- 64
-------- ---------
Cash flows provided by (used in) investing activities 3,593 (66,412)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt -- 189,461
Payments on debt and capital lease obligations (821) (234,486)
Proceeds from exercise of stock options 526 575
Issuances of common stock 1,042 1,234
-------- ---------
Cash flows provided by (used in) financing activities 747 (43,216)
-------- ---------
Effect of foreign currency translation on cash and cash equivalents 120 (199)
-------- ---------
Net increase (decrease) in cash and cash equivalents 16,156 (64,155)
Cash and cash equivalents:
Beginning of period 63,347 84,591
-------- ---------
End of period $ 79,503 $ 20,436
======== =========
See notes to condensed consolidated financial statements.
5
PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2003
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 March 31, 2003, and the
results of operations for the three months and six months ended March 31, 2003
and 2002, and the cash flows for the same six 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):
March 31, September 30,
2003 2002
--------- -------------
Assembly parts $ 71,966 $ 64,085
Work-in-process 26,751 24,507
Finished goods 6,189 5,440
--------- --------
$ 104,906 $ 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
March 31, 2003, the total available funding amount under the asset
securitization facility was approximately $22.6 million of which $15.0 million
was utilized. As a result, accounts receivable has been reduced by $15.0 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 interests sold as services
for ABS and the financial institutions. The agreement expires in September 2003.
For the three months ended March 31, 2003 and 2002, the Company incurred
financing costs of $0.1 million and $0.1 million, respectively, under the asset
securitization facility. For the six months ended March 31, 2003 and 2002, the
Company incurred financing costs of $0.2 million and $0.3 million, respectively,
under the asset securitization facility. These financing costs are included in
interest expense in the accompanying Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss). 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.
6
NOTE 4 - DEBT
Effective December 26, 2002, the Company terminated its credit facility
("Credit Facility). No amounts were outstanding during the first quarter of
fiscal 2003 prior to the termination of the Credit Facility. 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 12). 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 Six Months Ended
March 31, March 31,
2003 2002 2003 2002
-------- -------- -------- --------
Earnings:
Loss before cumulative effect of change $ (5,044) $ (2,154) $(25,876) $ (4,177)
in accounting for goodwill
Cumulative effect of change in accounting
for goodwill, net of income taxes -- -- (23,482) --
-------- -------- -------- --------
Net loss $ (5,044) $ (2,154) $(49,358) $ (4,177)
======== ======== ======== ========
Basic weighted average common shares outstanding 42,260 41,868 42,164 41,824
Dilutive effect of stock options -- -- -- --
-------- -------- -------- --------
Diluted weighted average shares outstanding 42,260 41,868 42,164 41,824
======== ======== ======== ========
Basic and diluted earnings per share:
Loss before cumulative effect of change $ (0.12) $ (0.05) $ (0.61) $ (0.10)
in accounting for goodwill
Cumulative effect of change in accounting
for goodwill, net of income taxes -- -- (0.56) --
-------- -------- -------- --------
Net loss $ (0.12) $ (0.05) $ (1.17) $ (0.10)
======== ======== ======== ========
For the three months ended March 31, 2003 and 2002, stock options to
purchase approximately 3.7 million and 2.3 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. For the
six months ended March 31, 2003 and 2002, stock options to purchase
approximately 3.8 million and 2.3 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 - STOCK-BASED COMPENSATION
In December 2002, Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of SFAS No. 123" was issued. SFAS No. 148 provides alternative methods
of transition for an entity that voluntarily changes to the fair-value-based
method of accounting for stock-based employee compensation and is effective for
fiscal years ending after December 15, 2002. In addition, SFAS No. 148 requires
prominent disclosures in both annual and interim financial statements about the
effects on reported net income of an entity's method of accounting for
stock-based employee compensation. The disclosure provisions are effective for
the Company in the second quarter of fiscal 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.
The Company accounts for its stock option plans under the guidelines of
Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense
related to the stock option plans has been recognized in the Condensed
Consolidated Statements of Operations. The following sets forth a reconciliation
of net loss and earnings
7
per share information for the three months and six months ended March 31, 2003
and 2002 had the Company recognized compensation expense based on the fair value
at the grant date for awards under the plans (in thousands, except per share
amounts):
Three Months Ended Six Months Ended
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net loss as reported $ (5,044) $ (2,154) $ (49,358) $ (4,177)
Add: stock-based employee compensation
expense included in reported net loss, net of
related income tax effect -- -- -- --
Deduct: total stock-based employee
compensation expense determined under fair value
based method for all awards granted since October 1,
1995, net of related tax effects (2,909) (2,535) (5,452) (4,790)
---------- ---------- ---------- ----------
Proforma net loss $ (7,953) $ (4,689) $ (54,810) $ (8,967)
========== ========== ========== ==========
Earnings per share:
Basic, as reported $ (0.12) $ (0.05) $ (1.17) $ (0.10)
========== ========== ========== ==========
Basic, proforma $ (0.19) $ (0.11) $ (1.30) $ (0.21)
========== ========== ========== ==========
Diluted, as reported $ (0.12) $ (0.05) $ (1.17) $ (0.10)
========== ========== ========== ==========
Diluted, proforma $ (0.19) $ (0.11) $ (1.30) $ (0.21)
========== ========== ========== ==========
Weighted average shares:
Basic 42,260 41,868 42,164 41,824
========== ========== ========== ==========
Diluted 42,260 41,868 42,164 41,824
========== ========== ========== ==========
The fair value of each option grant is estimated at the date of grant
using the Black-Scholes option pricing method.
NOTE 7 - 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. The Company will perform goodwill impairment tests annually
during the third quarter of its fiscal year and more frequently if an event or
circumstance indicates that an impairment loss has occurred.
SFAS No. 142 required the Company to perform a transitional goodwill
impairment evaluation. Step one of the evaluation required 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 impairments 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 each
location's 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 each of the location's respective 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
8
effect of a change in accounting for goodwill in the Company's Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss). See Note
12 for discussion of additional goodwill impairment resulting from restructuring
actions taken for the six months ended March 31, 2003.
The following sets forth a reconciliation of net loss and earnings per
share information for the three months and six months ended March 31, 2003 and
2002 adjusted to exclude goodwill amortization, net of income taxes (in
thousands, except per share data):
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Reported loss before cumulative effect of change
in accounting for goodwill $ (5,044) $ (2,154) $(25,876) $ (4,177)
Add back: goodwill amortization, net of income
taxes -- 1,083 -- 2,173
-------- -------- -------- --------
Adjusted loss before cumulative effect of change
in accounting for goodwill (5,044) (1,071) (25,876) (2,004)
Cumulative effect of change in accounting
for goodwill, net of income taxes -- -- (23,482) --
-------- -------- -------- --------
Adjusted net loss $ (5,044) $ (1,071) $(49,358) $ (2,004)
======== ======== ======== ========
Basic weighted average common shares
outstanding 42,260 41,868 42,164 41,824
Dilutive effect of stock options -- -- -- --
-------- -------- -------- --------
Diluted weighted average shares outstanding 42,260 41,868 42,164 41,824
======== ======== ======== ========
Basic and diluted earnings per share:
Reported loss before cumulative effect of change
in accounting for goodwill $ (0.12) $ (0.05) $ (0.61) $ (0.10)
Add back: goodwill amortization,
net of income taxes -- 0.03 -- 0.05
-------- -------- -------- --------
Adjusted loss before cumulative effect of change
in accounting for goodwill (0.12) (0.02) (0.61) (0.05)
Cumulative effect of change in accounting
for goodwill, net of income taxes -- -- (0.56) --
-------- -------- -------- --------
Adjusted net loss $ (0.12) $ (0.02) $ (1.17) $ (0.05)
======== ======== ======== ========
The changes in the carrying amount of goodwill for the six months ended
March 31, 2003 and the fiscal year ended September 30, 2002 are as follows (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 12) (5,595)
Foreign currency translation adjustments 104
--------
BALANCE AS OF MARCH 31, 2003 $ 31,229
========
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 six months ended
March 31, 2003, there were no
9
additions to identifiable intangible assets. Intangible asset amortization
expense was nominal for both the three and six months ended March 31, 2003.
NOTE 8 - 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 9 - 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 March 31, 2003, 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. Inter-region transactions are generally recorded at amounts
that approximate arm's length transactions. Certain corporate expenses are
allocated to these regions and are included for performance evaluation. The
accounting policies for the regions are the same as for the Company taken as a
whole. 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 Six Months Ended
March 31, March 31,
------------------------------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales:
North America $ 170,021 $ 205,510 $ 353,612 $ 388,402
Europe 11,867 18,380 25,769 35,705
Asia 8,885 7,272 16,771 7,272
--------- --------- --------- ---------
$ 190,773 $ 231,162 $ 396,152 $ 431,379
========= ========= ========= =========
March 31, September 30,
2003 2002
--------- -------------
Long-lived assets:
North America $ 154,357 $ 199,478
Europe 34,180 35,796
Asia 7,640 6,505
--------- ---------
$ 196,177 $ 241,779
========= =========
NOTE 10 - GUARANTEES
In November 2002, Financial Accounting Standards Interpretation ("FIN")
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" was issued. FIN No. 45
requires a Company, at the time it issues a guarantee, to recognize an initial
liability for the fair value of obligations assumed under the guarantee and to
elaborate on existing disclosure requirements. The initial recognition
requirements of FIN No. 45 are effective for guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN No. 45 were effective in
the Company's first fiscal quarter of 2003.
10
Adoption of the initial recognition provisions of FIN No. 45 did not have a
material impact on these condensed consolidated financial statements.
As of March 31, 2003, the Company offers certain indemnifications under
its asset securitization facility, leases and customer manufacturing agreements.
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. The Company does not believe its obligations under such indemnities
entered into during the quarter are material.
In the normal course of business, the Company also provides its customers
a limited warranty covering workmanship, and in some cases materials, on
products manufactured by the Company for them. Such warranty generally provides
that products will be free from defects in the Company's workmanship and meet
mutually agreed upon testing criteria for periods 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 six months
ended March 31, 2003 (in thousands):
LIMITED WARRANTY LIABILITY, AS OF OCTOBER 1, 2002 $ 1,246
Accruals for warranties issued during the period 17
Accruals related to pre-existing warranties --
Settlements (in cash or in kind) during the period (166)
-------
LIMITED WARRANTY LIABILITY, AS OF MARCH 31, 2003 $ 1,097
=======
NOTE 11 - 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
11
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 12 - RESTRUCTURING COSTS
For the six months ended March 31, 2003, the Company recorded
restructuring charges of $31.8 million, all of which was recorded in the first
quarter of fiscal 2003. These charges resulted from the Company's actions taken
in response to reductions in its 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 7) 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 estimated selling costs. 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.
For the six months ended March 31, 2002, the Company recorded
restructuring charges of $7.5 million, which included $4.7 million recorded in
the second quarter of fiscal 2002. In the second quarter of fiscal 2002, the
Company's restructuring costs included $0.7 million for employee termination and
severance, $2.8 million for lease obligation and other exit costs and $1.2
million for non-cash asset write-downs. For the six months ended March 31, 2002,
the Company's restructuring costs included $1.9 million for employee termination
and severance, $3.8 million for lease obligation and other exit activities and
$1.8 million for non-cash asset write-downs. The employee terminations resulted
in the elimination of approximately 240 employees.
Below is a table summarizing the restructuring activity for the six months
ending March 31, 2003 (in thousands):
Employee
Termination and Lease Obligations and Non-cash Asset
Severance Costs Other Exit Costs Write-downs Total
---------------------------------------------------------------------------
ACCRUED BALANCE,
SEPTEMBER 30, 2002 $ 540 $ 2,957 $ -- $ 3,497
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
Restructuring charges -- -- -- --
Amount utilized (2,050) (942) -- (2,992)
------- -------- -------- --------
ACCRUED BALANCE,
MARCH 31, 2003 $ 2,246 $ 10,141 $ -- $ 12,387
======= ======== ======== ========
12
For the six months ended March 31, 2003, non-cash asset write-downs in the
above table include $5.6 million of goodwill impairment. As of March 31, 2003,
most of the remaining severance and benefit liability is expected to be paid by
the end of fiscal 2003, while the liability for lease payments on facilities
will generally be paid over their respective remaining lease terms, which
generally extend beyond one year.
See Subsequent Event - Note 14 for restructuring activities announced
subsequent to March 31, 2003.
NOTE 13 - 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 October 1, 2002. The adoption of this
standard did not have an 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)." EITF 94-3 required that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
The provisions of SFAS No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of SFAS No. 146,
effective January 1, 2003, did not have a material impact on the Company's
financial position or results of operations, but may impact the timing of the
recognition of the costs and liabilities resulting from any future restructuring
activities.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 improves financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when
a derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in FIN No. 45, and (4) amends certain
other existing pronouncements. Those changes will result in more consistent
reporting of contracts as either derivatives or hybrid instruments. In general,
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. In general,
all provisions of this Statement should be applied prospectively. However, the
provisions of SFAS No. 149 that relate to SFAS No. 133 implementation issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a) of SFAS No. 149, which relate to
forward purchases or sales of when-issued securities or other securities that do
not yet exist, should be applied to both existing contracts and new contracts
entered into after June 30, 2003. The adoption of SFAS No. 149 is not expected
to have a material impact on the Company's financial position or results of
operations.
13
In November 2002, the EITF reached a consensus regarding EITF Issue 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. The consensus
addresses not only when and how an arrangement involving multiple deliverables
should be divided into separate units of accounting but also how the
arrangement's consideration should be allocated among separate units. The
pronouncement 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.
In January 2003, the Financial Accounting Standards FIN No. 46,
"Consolidation of Variable Interest Entities was issued. FIN No. 46 clarifies
the application of Accounting Research Bulletin No. 52, Consolidated Financial
Statements, to certain entities in which equity investors lack the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. A variable interest entity is
required to be consolidated by the company that has a majority of the exposure
to expected losses of the variable interest entity. The Interpretation is
effective immediately for variable interest entities created after January 31,
2003. For variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003, the Interpretation applies in
the first fiscal year or interim period beginning after June 15, 2003. The
Company does not believe the issuance of FIN No. 46 will have material impact on
the Company's financial position or results of operations.
NOTE 14 - SUBSEQUENT EVENT
The Company expects to incur additional restructuring charges of
approximately $12 million related to restructuring activities announced in April
2003. The announcement included the Company's initiation of a program to close
its Kentucky manufacturing facility and to re-focus its PCB design group. In
addition, the Company is effecting a reduction in force in both its engineering
and corporate organizations. These measures are largely intended to align its
capabilities and resources in line with its evolving customer demand. The
Company expects the Kentucky manufacturing facility to be closed by the end of
fiscal 2003 and its production shifted to other sites in the United States and
Mexico. The other actions are expected to be completed during the third quarter
of fiscal 2003. Approximately 400 employees, or 8 percent of the Company's total
workforce, will be affected by this restructuring. The Company estimates the
restructuring costs to be recorded in the second half of fiscal 2003.
NOTE 15 - RECLASSIFICATIONS
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the fiscal 2003 presentation.
14
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
"Liquidity and Capital Resources") 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 secure new customers and maintain our current
customer base,
- the results of cost reduction efforts,
- the impact of capacity utilization and our ability to manage fixed
and variable costs,
- the effects of facilities closures and restructurings,
- material cost fluctuations and the adequate availability of
components and related parts for production,
- the effect of changes in average selling prices,
- the effect of start-up costs of new programs,
- the effect of general economic conditions and world events,
including the recent epidemic of severe acute respiratory syndrome
("SARS"),
- 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 technology, high reliability products. We offer
our customers the ability to outsource all stages of product realization,
including: development and design, materials procurement and management,
prototyping and new product introduction, testing, manufacturing, 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.
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'
15
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 March 31, 2003, decreased
17 percent to $191 million from $231 million for the three months ended March
31, 2002. Net sales for the six months ended March 31, 2003 decreased 8 percent
to $396 million from $431 million for the six months ended March 31, 2002. Our
sales levels reflect the reduced end-market demand in technology markets,
primarily in the network/datacommunications/ telecom, computing and
industrial/commercial industries, which have been further impacted by reduced
capital resources of companies in these industries. Net sales in the second
quarter of fiscal 2003 were also adversely affected by the transition of
programs for the primary customer in our San Diego facility to non-Plexus
facilities. The slowdown in the technology markets for both the three and six
months ended March 31, 2003 as compared to the same applicable periods in fiscal
2002 was offset, in part, by increased sales to the medical industry. The
factors affecting the technology markets will continue to impact our third
quarter sales. Based on customer indications to date, we currently expect third
quarter sales to be in the range of $190 million to $200 million. However, our
results will ultimately depend on actual customer order levels.
Our largest customer for the three months ended March 31, 2003, was
Siemens Medical Systems, Inc. (Siemens), which accounted for 15 percent of
sales. In the comparable three months ended March 31, 2002, no customers
accounted for greater than ten percent of sales. Our largest customers for the
six months ended March 31, 2003 were Siemens and General Electric Company (GE),
which accounted for 13 percent and 10 percent of sales, respectively. In the
comparable six months ended March 31, 2002, GE accounted for 10 percent of sales
and was the only customer representing 10 percent or more of sales. Sales to our
ten largest customers accounted for 54 percent of sales for the three months
ended March 31, 2003 compared to 49 percent for the three months ended March 31,
2002. Sales to our ten largest customers accounted for 55 percent of sales for
the six months ended March 31, 2003 compared to 49 percent for the six months
ended March 31, 2002.
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 and six months ended March 31, 2003
and 2002, respectively, were as follows:
As a Percentage of Net Sales
--------------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
Industry 2003 2002 2003 2002
- -------- ---- ---- ---- ----
Networking/Datacommunications/Telecom 33 40 34 38
Medical 33 24 34 26
Industrial/Commercial 16 17 15 19
Computer 11 13 11 11
Transportation/Other 7 6 6 6
Gross profit. Gross profit for the three months ended March 31, 2003
decreased 53 percent to $9.6 million from $20.5 million for the three months
ended March 31, 2002. Gross profit for the six months ended March 31, 2003
decreased 30 percent to $25.2 million from $35.9 million for the six months
ended March 31, 2002. The gross margin for the three months ended March 31, 2003
was 5.0 percent as compared to 8.9 percent for the three months ended March 31,
2002. The gross margin for the six months ended March 31, 2003 was 6.4 percent,
compared to 8.3 percent for the six months ended March 31, 2002. The decline in
gross margin was due primarily to reduced manufacturing capacity utilization,
lower product pricing and higher than expected cost inefficiencies arising from
the transfer of customer programs among Plexus facilities related primarily to
plant closings.
16
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/telcom, computing 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 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 March 31, 2003, increased to $16.8 million from $16.3 million
for the three months ended March 31, 2002. S&A expenses for the six months ended
March 31, 2003 increased to $33.6 million from $30.3 million for the six months
ended March 31, 2002. As a percentage of net sales, S&A expenses for the three
months ended March 31, 2003 were 8.8 percent as compared to 7.1 percent for the
three months ended March 31, 2002. As a percentage of sales, S&A expenses for
the six months ended March 31, 2003 were 8.5 percent as compared to 7.0 percent
for the six months ended March 31, 2002. The increase in dollar terms and
percentage of net sales during both the three and six months ended March 31,
2003 as compared to the three and six months ended March 31, 2002 was due
primarily to additional investments for information technology systems support
related to the roll-out of our new enterprise resource planning ("ERP")
platform. In addition, S&A expenses in the six months ended March 31, 2003 were
higher than the six months ended March 31, 2002 as a result of the MCMS
acquisition. During the first six months of fiscal 2003, we converted one
manufacturing facility to the new ERP 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. We continue to incur not only S&A expenses associated with the new ERP
system, but also capital expenditures for hardware, software and certain other
costs for testing and installation. As of March 31, 2003, unamortized capital
expenditures were $27.6 million. Two additional facilities are anticipated to
convert to the new ERP platform in calendar 2003, although we continue to review
our system needs in view of our recent operating results.
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 are required to perform annual 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."
For the six months ended March 31, 2003, we recorded pre-tax restructuring
charges totaling $31.8 million, all of which was recorded in the first quarter
of fiscal 2003. These charges resulted from our actions taken in response to
reductions in our end-market demand, including the decision of the largest
customer of our San Diego facility to transition most of its programs to
non-Plexus facilities. In addition, the charges were taken 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 charges
relating to 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, 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
17
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.
For the three months and six months ended March 31, 2002, we recorded
restructuring charges totaling $4.7 million and $7.5 million, respectively.
These charges resulted from our actions 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
240 employees.
Our pre-tax restructuring charges in the three months and six months ended
March 31, 2003 and 2002 are summarized as follows (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
------ ------- ------- ------
Fixed asset impairment $ -- $ 1,150 $11,327 $1,796
Lease exit costs -- 2,847 9,666 3,822
Write-off of goodwill -- -- 5,595 --
Severance costs -- 690 5,252 1,869
------ ------- ------- ------
$ -- $ 4,687 $31,840 $7,487
====== ======= ======= ======
We expect to incur additional restructuring charges of approximately $12
million related to further restructuring activities announced in April 2003.
That announcement included the initiation of a program to close our Kentucky
manufacturing facility and to re-focus our PCB design group. In addition, we are
effecting a further reduction in force in both our engineering and corporate
organizations. These measures are largely intended to align our capabilities and
resources in line to our evolving customer demand. We expect the Kentucky
manufacturing facility to be closed by the end of fiscal 2003 and its production
shifted to other sites in the United States and Mexico. The other actions are
expected to be completed during the third quarter of fiscal 2003. Approximately
400 employees, or 8 percent of our total workforce, will be affected by this
restructuring. We estimate that these restructuring charges will primarily
include a $5 million cash severance charge and a $7 million non-cash charge
relating to the expected write-down in the value of the fixed assets in
Kentucky. We currently expect these actions to result in approximately $6
million to $8 million in annualized cost savings once the restructuring is
completed. Subject to the timely completion of these initiatives and transition
of programs to other Plexus facilities, we expect to begin to realize these cost
savings in the fourth quarter of fiscal 2003 and to realize the full effect of
the cost savings during the first quarter of fiscal 2004.
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 (Loss). We intend to perform goodwill impairment tests
annually during the third quarter of each fiscal year and more frequently if an
event or circumstance indicates that an impairment loss has occurred.
Income taxes. Our income tax benefit increased to $2.2 million for the
three months ended March 31, 2003 from $0.5 million for the three months ended
March 31, 2002. Our effective income tax rate decreased to approximately 28
percent for the six months ended March 31, 2003 from approximately 30 percent
for the six months ended March 31, 2002. The decrease in the effective tax rate
is due primarily to non-deductible goodwill impairment expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $11.7 million for the six
months ended March 31, 2003, compared to cash flows provided by operating
activities of $45.7 million for the six months ended March 31, 2002.
18
During the six months ended March 31, 2003, the net loss was largely off set by
various non-cash items; therefore, cash provided by operating activities was
primarily affected by a decrease in accounts receivable and an increase in
customer deposits and accrued liabilities; these favorable cash flows were off
set, in part, by increases in inventory and decreases in accounts payable.
During the six months ended March 31, 2003, we also reduced the amount
outstanding under our asset securitization facility by approximately $1.6
million.
For the three months ended March 31, 2003, actual days sales outstanding
represented by our accounts receivable improved to 45 days from the 48 days
achieved at the prior fiscal year end, primarily as a result of strong cash
collections. Included in these calculations are the addback of amounts utilized
under the asset securitization facility, $15.0 million and $16.6 million as of
March 31, 2003 and September 30, 2002, respectively. Our annualized inventory
turns declined to 6.9 turns for the three months ended March 31, 2003 from 8.1
turns at the prior year end. Inventory turns were negatively impacted by lower
net sales and increased inventory levels, primarily due to initial raw material
stocking for several new programs and higher inventories held on behalf of some
of our customers.
Cash flows provided by investing activities totaled $3.6 million for the
six months ended March 31, 2003. The primary sources were sales and maturities
of short-term investments off set, in part, by payments for property, plant and
equipment.
We utilize available cash and operating leases to finance our fixed
assets. 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 that capital
expenditures for fiscal 2003 will be approximately $28 million to $32 million,
of which approximately $16.1 million was spent through the six months ended
March 31, 2003.
Cash flows provided by financing activities totaling $0.7 million for the
six months ended March 31, 2003 which primarily represent proceeds from stock
issuances and the 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 March 31, 2003, and September 30, 2002.
Effective December 26, 2002, we terminated the credit facility ("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. We are assessing the
costs and benefits of replacing the Credit Facility. If we seek to replace the
Credit Facility, we cannot assure whether, or under what terms, a new credit
facility will be available. While the availability of a credit facility would
enhance our liquidity, we do not believe that the 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.
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. The agreement expires in
September 2003. As of March 31, 2003, the total available funding amount under
the asset securitization facility was approximately $22.6 million of which $15.0
million was utilized. As a result, accounts receivable have been reduced by
$15.0 million as of March 31, 2003, while long-term debt and capital lease
obligations do not include this $15.0 million of off-balance-sheet financing.
See Note 3 in the Notes to Condensed Consolidated Financial Statements. We
anticipate that we will seek to renew the asset securitization facility;
however, we cannot assure whether, or under what terms, a new asset
securitization facility will be available. While the availability of an asset
securitization facility would enhance our liquidity, we do not believe that the
lack of such a facility would materially affect our operations or financial
condition in the foreseeable future.
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.
19
We are no different than most other registrants in that our disclosures
regarding contractual obligations and commercial commitments are located in
various parts of our regulatory filings. Information in the following table
provides an update of our contractual obligations and commercial commitments as
of March 31, 2003 (in thousands):
Payments Due by Fiscal Period
------------------------------------------------------------
Remaining in 2008 and
Contractual Obligations Total 2003 2004-2005 2006-2007 thereafter
----------------------- ------------------------------------------------------------
Capital Lease Obligations $ 46,449 $1,798 $ 7,372 $ 5,902 $31,377
Operating Leases 87,201 7,546 24,679 19,584 35,392
Unconditional Purchase Obligations* -- -- -- -- --
Other Long-Term Obligations** -- -- -- -- --
-------- ------ ------- ------- -------
Total Contractual Cash Obligations $133,650 $9,344 $32,051 $25,486 $66,769
======== ====== ======= ======= =======
* - There are no unconditional purchase obligations other than purchases of
inventory and property, plant and equipment in the ordinary course of business.
** - As of March 31, 2003, other than our off-balance sheet asset securitization
facility ($15.0 million outstanding as of March 31, 2003, 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.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in our 2002 Report on Form 10-K.
During the six months ended March 31, 2003, the only material change to these
policies related to our accounting for intangible assets. Modifications were
also made in our policies for accounting for the impairment of long-lived assets
and restructuring costs; however, such changes did not have a material effect on
our financial position or results of operations. The new or modified accounting
policies are as follows:
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
No. 144 modifies and expands the financial accounting and reporting for the
impairment or disposal of long-lived assets other than goodwill, which is
specifically addressed in SFAS No. 142 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."
Intangible Assets - We adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" effective October 1, 2002. Under SFAS No. 142, beginning
October 1, 2002, we no longer amortize goodwill and intangible assets with
indefinite useful lives, but instead, test those assets for impairment at least
annually, with any related losses recognized in earnings when incurred. We will
perform goodwill impairment tests annually during the third quarter of each
fiscal year and more frequently if an event or circumstance indicates that an
impairment loss has occurred.
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 (Loss). See Note 7 to the
Notes to Condensed Consolidated Financial Statements.
20
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 any estimated sublease income. As of
March 31, 2003, the significant facilities we plan to sublease have not yet been
subleased and; accordingly, our estimates of expected sublease income could
change based on factors that affect our ability to sublease those facilities
such as general economic conditions and the real estate market, among others.
For equipment, the impairment losses recognized are based on the fair value
estimated using existing market prices for similar assets, less estimated costs
to sell. In the first quarter of fiscal 2003, we recorded restructuring charges
totaling $31.8 million. See Note 12 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. In April 2003, we announced that we were initiating further
restructuring programs in the third quarter of fiscal 2003, which we estimate
will result in approximately $12 million of additional restructuring charges in
the second half of fiscal 2003. See Results of Operations - Operating Expenses
for further discussion.
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 required
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
adoption of SFAS No. 146 did not have a material impact on our financial
position or results of operations, but may impact the timing of the recognition
of the costs and liabilities resulting from any future restructuring activities.
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 provides alternative methods of transition for an
entity that voluntarily changes to the fair-value-based method of accounting for
stock-based employee compensation and is effective for fiscal years ending after
December 15, 2002. In addition, SFAS No. 148 requires prominent disclosures in
both annual and interim financial statements about the effects on reported net
income of an entity's method of accounting for stock-based employee
compensation. The disclosure provisions are effective for us in the 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.
21
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. SFAS No. 149 improves financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when
a derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in the Financial Accounting Standards
Board Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and (4) amends certain other existing pronouncements. Those changes will
result in more consistent reporting of contracts as either derivatives or hybrid
instruments. In general, SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. In general, all provisions of this Statement should be applied
prospectively. However, the provisions of SFAS No. 149 that relate to SFAS No.
133 implementation issues that have been effective for fiscal quarters that
began prior to June 15, 2003, should continue to be applied in accordance with
their respective effective dates. In addition, paragraphs 7(a) and 23(a) of SFAS
No. 149, which relate to forward purchases or sales of when-issued securities or
other securities that do not yet exist, should be applied to both existing
contracts and new contracts entered into after June 30, 2003. The adoption of
SFAS No. 149 is not expected to have a material impact on our financial position
or results of operations.
In November 2002, FIN No. 45 was issued, which 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 FIN No. 45 are effective
for guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN No. 45 were effective in our first fiscal quarter of 2003.
Adoption of the initial recognition provisions of FIN No. 45 did not have a
material impact on our condensed consolidated financial statements; however, FIN
No. 45 may have a significant impact on our future results of operations and
financial position.
In November 2002, the EITF reached a consensus regarding EITF Issue 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. The consensus
addresses not only when and how an arrangement involving multiple deliverables
should be divided into separate units of accounting but also how the
arrangement's consideration should be allocated among separate units. The
pronouncement 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.
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"
was issued. FIN No. 46 clarifies the application of Accounting Research Bulletin
No. 52, Consolidated Financial Statements, to certain entities in which equity
investors lack the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. A variable
interest entity is required to be consolidated by the company that has a
majority of the exposure to expected losses of the variable interest entity. The
Interpretation is effective immediately for variable interest entities created
after January 31, 2003. For variable interest entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003, the
Interpretation applies in the first fiscal year or interim period beginning
after June 15, 2003. We do not believe the issuance of FIN No. 46 will have
material impact on our financial position or results of operations.
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
22
- the typical short life cycle of our customers' products
- market acceptance of and demand for our customers' products
- customer announcements of operating results and business conditions
- changes in our sales mix to our customers
- the timing of our expenditures in anticipation of future orders
- our effectiveness in managing manufacturing processes
- changes in cost and availability of labor and components
- local events that may affect our production volume, such as local
holidays
- credit ratings and stock analyst reports
- changes in economic conditions and world events, including the
recent epidemic of SARS.
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 COME FROM A SMALL NUMBER OF CUSTOMERS AND IF WE LOSE
ANY OF THESE CUSTOMERS, OUR SALES AND OPERATING RESULTS COULD DECLINE
SIGNIFICANTLY.
Our largest customer for the three months ended March 31, 2003 represented
15 percent of our net sales. No customer represented more than 10 percent of our
net sales for the comparable three months ended March 31, 2002. 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 54 percent
and 49 percent of our net sales for the three months ended March 31, 2003 and
2002, 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 most of its
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 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
23
accurately estimate the future requirements of those customers. Because many of
our costs and operating expenses are relatively fixed, a reduction in customer
demand can harm our gross margins and operating results.
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 CONTRACTION AND OUR GROWTH MAY SERIOUSLY HARM OUR
BUSINESS.
Periods of contraction or reduced sales, such as fiscal 2002 and to date
in fiscal 2003, create tensions and challenges. We must determine whether all
facilities remain productive and determine how to respond to changing levels of
customer demand. While maintaining multiple 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 are involved in a multi-year project to install a common ERP platform
and associated information systems. The project was begun at a time when
anticipated sales growth and profitability were expected to be much higher than
has actually occurred in recent financial performance. We are reviewing a number
of alternatives to this project, including curtailment or slow-down in the rate
of implementation. As of March 31, 2003, unamortized ERP implementation costs
included in property, plant and equipment totaled $27.6 million; changes in this
project could result in impairment of these capitalized costs.
The resumption of sales growth would require us 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.
OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS.
As part of the MCMS acquisition in fiscal 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:
24
- - 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.
OUR OPERATIONS, INCLUDING IN CHINA, COULD BE NEGATIVELY AFFECTED BY THE SARS
EPIDEMIC.
We have a production facility in Xiamen, China, which is one of the
countries that has been hardest hit by the epidemic of SARS. To the best of our
knowledge, the SARS epidemic has not affected any of our employees in China, or
any employees at our other facilities. In addition, we have not experienced any
disruption in our supply chain as a result of the SARS epidemic. We have taken a
number of initiatives to protect our employees from contracting the SARS virus;
however, our production could be severely impacted, if our employees, or the
region in which the facility in China is located, experience an outbreak of
SARS. For example, the facility in China could be closed by government
authorities, some or all of our workforce could be unavailable due to
quarantine, fear of catching the disease or other factors, and local, national
or international transportation or other infrastructure could be affected,
leading to delays or loss of production.
The SARS epidemic has not been limited to China, and SARS or other disease
outbreaks could also affect our other foreign or domestic facilities in similar
ways. In addition, SARS and these other factors also could affect our suppliers,
leading to a shortage of components, or our customers, leading to a reduction in
their demand for our services.
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:
- - retain our qualified engineering and technical personnel
- - maintain and enhance our technological capabilities
- - develop and market manufacturing services which meet changing customer
needs
- - successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis.
Although we believe that our operations utilize the assembly and testing
technologies, equipment and processes that are currently required by our
customers, we cannot be certain that we will develop the capabilities required
by our customers in the future. The emergence of new technology industry
standards or customer requirements may render our equipment, inventory or
processes obsolete or noncompetitive. In addition, we may have to acquire new
assembly and testing technologies and equipment to remain competitive. The
acquisition and implementation of new technologies and equipment may require
significant expense or capital investment 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.
25
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 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. World events, such as terrorism, armed conflict and the SARS
epidemic, also could affect supply chains. If we are unable to obtain sufficient
components on a timely basis, we may experience manufacturing and shipping
delays, which could harm our relationships with customers and reduce our sales.
A significant portion of our sales is derived from turnkey manufacturing
in which we provide materials procurement. While most of our customer contracts
permit quarterly or other periodic adjustments to pricing based on decreases and
increases in component prices and other factors, we typically bear the risk of
component price increases that occur between any such repricings or, if such
repricing is not permitted, during the balance of the term of the particular
customer contract. Accordingly, component price increases could adversely affect
our operating results.
START-UP COSTS AND INEFFICIENCIES RELATED TO NEW OR TRANSFERRED PROGRAMS CAN
ADVERSELY AFFECT OUR OPERATING RESULTS.
Start-up costs, the management of labor and equipment resources in
connection with the establishment of new programs and new customer
relationships, and the need to estimate required resources in advance can
adversely affect our gross margins and operating results. These factors are
particularly evident in the early stages of the life cycle of new products and
new programs or program transfers. 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
33 percent of our net sales in the second quarter of fiscal 2003, is subject to
substantial government regulation, primarily from the FDA and similar
26
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.
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, and
has become more so as a result of excess capacity in the industry. We compete
against numerous U.S. and foreign electronics manufacturing services providers
with global operations, as well as those who operate on a local or regional
basis. In addition, current and prospective customers continually evaluate the
merits of manufacturing products internally. Consolidations and other changes in
the electronics manufacturing services industry result in a continually changing
competitive landscape. The consolidation trend in the industry also results in
larger and more geographically diverse competitors which may 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.
27
We may be operating at a cost disadvantage compared to manufacturers who
have greater direct buying power from component suppliers, distributors and raw
material suppliers or who have lower cost structures. As a result, competitors
may have a competitive advantage and obtain business from our customers. Our
manufacturing processes are generally not subject to significant proprietary
protection, and companies with greater resources or a greater market presence
may enter our market or increase their competition with us. Increased
competition could result in price reductions, reduced sales and margins or loss
of market share.
WE MAY FAIL TO SECURE NECESSARY FINANCING.
We intend to continue to make substantial capital expenditures to remain
competitive in the rapidly changing electronics manufacturing services industry.
On December 26, 2002, we terminated our Credit Facility. The 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. We are assessing the costs and benefits of replacing the Credit
Facility. If we seek to replace the Credit Facility or renew our asset
securitization facility, we cannot assure whether, or under what terms, a new
credit facility or asset securitization facility will be available.
Our future success may depend on our ability to obtain financing and
capital to support our anticipated growth. 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
shareholders' ownership interests. 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.
Although we have previously grown through acquisitions, our current focus
is on pursuing organic growth opportunities. If we were to pursue growth through
acquisitions, this would involve significant risks that could have a material
adverse effect on us. These risks include:
Operating risks, such as the:
- - inability to integrate successfully our acquired operations' businesses
and personnel
- - inability to realize anticipated synergies, economies of scale or other
value
- - difficulties in scaling up production and coordinating management of
operations at new sites
- - strain placed on our personnel, systems and resources
- - possible modification or termination of an acquired business customer
programs, including cancellation of current or anticipated programs
28
- - 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
- - 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.
At some future point, we again 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.
29
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) increased the complexity and size of our foreign exchange
risk. As of March 31, 2003, we had no foreign currency contracts outstanding.
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 both the
three months and six months ended March 31, 2003, compared to an impact of
approximately $0.1 million and $0.2 million for the three months and six months
ended March 31, 2002, respectively.
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
30
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders on February 12, 2003,
the seven nominees were elected or re-elected to the board for one year terms.
The directors were elected with the following votes:
Authority for
Director's Name Votes "For" Voting Withheld
--------------- ----------- ---------------
Stephen P. Cortinovus 36,260,565 307,992
David J. Drury 35,402,957 1,165,600
Dean A. Foate 36,260,697 307,860
John L. Nussbaum 30,256,806 6,311,751
Thomas J. Prosser 35,404,157 1,164,400
Charles M. Strother 36,243,965 324,592
Jan K. VerHagen 35,404,157 1,164,400
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of the CEO pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of the CFO pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K during this period.
None. However, a report dated April 23, 2003 was
filed by Plexus Corp. to disclose and submit under
Items 7 and 9 of Form 8-K its operating results for
the second quarter of fiscal 2003, ended March 31,
2003, and for the six months then ended.
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.
5/14/03 /s/ Dean A. Foate
- ----------- ------------------------------------------
Date Dean A. Foate
President and Chief Executive Officer
5/14/03 /s/ F. Gordon Bitter
- ------------ ------------------------------------------
Date F. Gordon Bitter
Executive Vice President and
Chief Financial Officer
31
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.
May 14, 2003
/s/ Dean A. Foate
-------------------------------------
Dean A. Foate
President and Chief Executive Officer
32
I, F. 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.
May 14, 2003
/s/ F. Gordon Bitter
---------------------------
F. Gordon Bitter
Chief Financial Officer
33
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
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.
34