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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the Quarter ended June 30, 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 X No
------- --------
As of July 31, 2003, there were 42,500,346 shares of Common Stock of
the Company outstanding.
PLEXUS CORP.
TABLE OF CONTENTS
June 30, 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..........17
"SAFE HARBOR" CAUTIONARY STATEMENT.............................................................17
OVERVIEW...................................................................................... 17
MERGERS AND ACQUISITIONS/DISPOSITIONS..........................................................18
RESULTS OF OPERATIONS..........................................................................18
LIQUIDITY AND CAPITAL RESOURCES................................................................21
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES..................................................23
NEW ACCOUNTING PRONOUNCEMENTS..................................................................25
RISK FACTORS...................................................................................26
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 33
Item 4. Controls and Procedures........................................................................34
PART II - OTHER INFORMATION......................................................................................35
Item 1. Legal Proceedings.............................................................................35
Item 6. Exhibits and Reports on Form 8-K..............................................................35
SIGNATURE........................................................................................................35
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
Unaudited
Three Months Ended Nine Months Ended
June 30, June 30,
-----------------------------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 195,609 $ 234,749 $ 591,761 $ 666,128
Cost of sales 183,780 211,672 554,769 607,110
--------- --------- --------- ---------
Gross profit 11,829 23,077 36,992 59,018
Operating expenses:
Selling and administrative expenses 16,250 17,260 49,819 47,574
Amortization of goodwill - 1,342 - 3,927
Restructuring costs 19,649 2,700 51,489 10,187
Acquisition and merger costs - - - 251
--------- --------- --------- ---------
35,899 21,302 101,308 61,939
--------- --------- --------- ---------
Operating income (loss) (24,070) 1,775 (64,316) (2,921)
Other income (expense):
Interest expense (658) (752) (2,144) (3,069)
Miscellaneous 638 71 1,833 1,112
--------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting for goodwill (24,090) 1,094 (64,627) (4,878)
Income tax expense (benefit) (9,343) 438 (24,003) (1,356)
--------- --------- --------- ---------
Income (loss) before cumulative effect of change in
accounting for goodwill (14,747) 656 (40,624) (3,522)
Cumulative effect of change in accounting for
goodwill, net of income tax benefit of $4,755 - - (23,482) -
--------- --------- --------- ---------
Net income (loss) $ (14,747) $ 656 $ (64,106) $ (3,522)
========= ========= ========= =========
Earnings per share:
Basic
Income (loss) before cumulative effect of change in
accounting for goodwill $ (0.35) $ 0.02 $ (0.96) $ (0.08)
Cumulative effect of change in accounting
for goodwill - - (0.56) -
--------- --------- --------- ---------
Net income (loss) $ (0.35) $ 0.02 $ (1.52) $ (0.08)
========= ========= ========= =========
Diluted
Income (loss) before cumulative effect of change in
accounting for goodwill $ (0.35) $ 0.02 $ (0.96) $ (0.08)
Cumulative effect of change in accounting
for goodwill - - (0.56) -
--------- --------- --------- ---------
Net income (loss) $ (0.35) $ 0.02 $ (1.52) $ (0.08)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 42,285 41,919 42,204 41,856
========= ========= ========= =========
Diluted 42,285 43,134 42,204 41,856
========= ========= ========= =========
Comprehensive income (loss):
Net income (loss) $ (14,747) $ 656 $ (64,106) $ (3,522)
Foreign currency hedges and translation adjustments 2,874 2,923 3,391 1,578
--------- --------- --------- ---------
Comprehensive income (loss) $ (11,873) $ 3,579 $ (60,715) $ (1,944)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
June 30, September 30,
2003 2002
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 75,602 $ 63,347
Short-term investments 25,419 53,025
Accounts receivable, net of allowance of $4,100 81,107 95,903
and $4,200, respectively
Inventories 120,722 94,032
Deferred income taxes 26,008 21,283
Prepaid expenses and other 14,307 14,221
-------- --------
Total current assets 343,165 341,811
Property, plant and equipment, net 140,647 170,834
Goodwill 32,124 64,957
Deferred income taxes 16,411 355
Other 4,930 5,988
-------- --------
Total assets $537,277 $583,945
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 1,038 $ 1,652
Accounts payable 75,086 67,310
Customer deposits 17,217 13,904
Accrued liabilities:
Salaries and wages 16,452 17,505
Other 21,461 21,586
-------- --------
Total current liabilities 131,254 121,957
Capital lease obligations, net of current portion 23,639 25,356
Other liabilities 10,381 5,943
Commitments and contingencies (Notes 10 and 11)
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 200,000 shares authorized, 42,325
and 42,030 shares issued and outstanding, respectively 423 420
Additional paid-in capital 258,610 256,584
Retained earnings 106,712 170,818
Accumulated other comprehensive income 6,258 2,867
-------- --------
372,003 430,689
-------- --------
Total liabilities and shareholders' equity $537,277 $583,945
======== ========
See notes to condensed consolidated financial statements.
4
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Nine Months Ended
June 30,
--------------------------------------
2003 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (64,106) $ (3,522)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization 20,647 27,757
Cumulative effect of change in accounting for goodwill 28,237 -
Non-cash restructuring costs 32,807 2,546
Deferred income taxes (20,781) 242
Net borrowings (repayments) under asset securitization facility 686 (6,305)
Income tax benefit from stock option award plans 154 765
Changes in assets and liabilities:
Accounts receivable 14,691 43,668
Inventories (26,232) 46,357
Prepaid expenses and other 984 (9,628)
Accounts payable 7,447 1,684
Customer deposits 3,304 (2,096)
Accrued liabilities 5,339 14,911
Other (427) (5,294)
--------- ---------
Cash flows provided by operating activities 2,750 111,085
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments - (51,729)
Sales and maturities of short-term investments 27,606 20,300
Payments for property, plant and equipment (18,394) (21,563)
Payments for business acquisitions, net of cash acquired - (41,986)
Other - 64
--------- ---------
Cash flows provided by (used in) investing activities 9,212 (94,914)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt - 189,461
Payments on debt and capital lease obligations (2,619) (241,837)
Proceeds from exercise of stock options 833 1,209
Issuances of common stock 1,042 1,234
--------- ---------
Cash flows used in financing activities (744) (49,933)
--------- ---------
Effect of foreign currency translation on cash and cash equivalents 1,037 290
--------- ---------
Net increase (decrease) in cash and cash equivalents 12,255 (33,472)
Cash and cash equivalents:
Beginning of period 63,347 84,591
--------- ---------
End of period $ 75,602 $ 51,119
========= =========
See notes to condensed consolidated financial statements.
5
PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 30, 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 June 30, 2003, and
the results of operations for the three months and nine months ended June 30,
2003 and 2002, and the cash flows for the same nine month periods. The results
for the interim periods are not necessarily indicative of results to be expected
for any other interim period or the entire fiscal year.
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):
June 30, September 30,
2003 2002
----------------- -----------------
Assembly parts $ 76,264 $ 64,085
Work-in-process 38,271 24,507
Finished goods 6,187 5,440
--------- --------
$ 120,722 $ 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 June 30, 2003, the total available funding amount under the asset
securitization facility was approximately $17.3 million, all of which was
utilized. As a result, accounts receivable have been reduced by $17.3 million
for the off-balance sheet financing. ABS is a separate corporate entity that
sells, under a separate agreement, 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 cost associated
with these responsibilities is not material, and the Company is not compensated
for these services. The agreement also includes various standards for
determining which, and what amount of, receivables may be sold, and includes
customary indemnification obligations (see Note 10). The agreement expires in
September 2003, and the Company does not intend to renew the agreement upon its
expiration; as a result, we will use cash to pay off our asset securitization
facility and our accounts receivable will increase by the amount which had been
sold under this agreement. For the three months ended June 30, 2003 and 2002,
the Company incurred financing costs of $0.1 million and $0.1 million,
respectively, under the asset securitization facility. For the nine months ended
June 30, 2003 and 2002, the Company incurred financing costs of $0.3 million and
$0.5 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.
6
In both December 2002 and January 2003, the Company, along with its
banking partners, amended its receivables purchase agreement to allow it to
revise covenants concerning aggregate reserves, concentration limits and
adjusted liquidity price in order to be in compliance. The Company is currently
in compliance with those covenants.
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 the minimum interest expense coverage ratio covenant 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 in the first quarter of fiscal 2003.
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 Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ----------
Earnings:
Income (loss) before cumulative effect of change
in accounting for goodwill $(14,747) $ 656 $(40,624) $ (3,522)
Cumulative effect of change in accounting
for goodwill, net of income taxes - - (23,482) -
-------- -------- -------- --------
Net income (loss) $(14,747) $ 656 $(64,106) $ (3,522)
======== ======== ======== ========
Basic weighted average common shares outstanding 42,285 41,919 42,204 41,856
Dilutive effect of stock options - 1,215 - -
-------- -------- -------- --------
Diluted weighted average shares outstanding 42,285 43,134 42,204 41,856
======== ======== ======== ========
Basic and diluted earnings per share:
Income (loss) before cumulative effect of change
in accounting for goodwill $ (0.35) $ 0.02 $ (0.96) $ (0.08)
Cumulative effect of change in accounting
for goodwill, net of income taxes - - (0.56) -
-------- -------- -------- --------
Net income (loss) $ (0.35) $ 0.02 $ (1.52) $ (0.08)
======== ======== ======== ========
For the three months ended June 30, 2003 and 2002, stock options to
purchase approximately 3.4 million and 2.2 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
nine months ended June 30, 2003 and 2002, stock options to purchase
approximately 3.7 million and 2.4 million shares of common stock, respectively,
were outstanding, but were not included in the computation of diluted earnings
per share because their effect would be anti-dilutive.
NOTE 6 - 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 were effective for
the Company in the second quarter of fiscal 2003. The Company did not effect a
voluntary change in accounting to the fair value method, and, accordingly, the
adoption of SFAS No. 148 did not have a significant impact on the Company's
results of operations or financial position.
7
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 income (loss) and earnings per share information for the three months and
nine months ended June 30, 2003 and 2002 had the Company recognized compensation
expense based on the fair value at the grant date for awards under the plans,
estimated at the date of grant using the Black-Scholes option pricing method (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss) as reported $ (14,747) $ 656 $(64,106) $ (3,522)
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, net of related tax effects (3,061) (3,101) (8,512) (7,891)
---------- ----------- -------- ----------
Proforma net income (loss) $ (17,808) $ (2,445) $(72,618) $ (11,413)
========== =========== ======== ==========
Earnings per share:
Basic, as reported $ (0.35) $ 0.02 $ (1.52) $ (0.08)
========== =========== ======== ==========
Basic, proforma $ (0.42) $ (0.06) $ (1.72) $ (0.27)
========== =========== ======== ==========
Diluted, as reported $ (0.35) $ 0.02 $ (1.52) $ (0.08)
========== =========== ======== ==========
Diluted, proforma $ (0.42) $ (0.06) $ (1.72) $ (0.27)
========== =========== ======== ==========
Weighted average shares:
Basic 42,285 41,919 42,204 41,856
========== =========== ======== ==========
Diluted 42,285 41,919 42,204 41,856
========== =========== ======== ==========
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. Recoverability of goodwill is measured at the reporting unit
level. The Company's goodwill is assigned to three reporting units: San Diego,
California ("San Diego"), Juarez, Mexico ("Juarez") and Kelso, Scotland and
Maldon, England ("United Kingdom").
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 related to
San Diego and Juarez, since the estimated fair value based on expected future
discounted cash flows to be generated from each such reporting units was
significantly less than their respective carrying values.
In the second step, the Company compared San Diego's and Juarez's
respective goodwill carrying amount to the implied fair value of each reporting
unit's respective goodwill. The implied fair value was determined by allocating
the fair value to each respective reporting unit's assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
for an acquired business. Both values were measured at the date of adoption.
Upon completion of step two, the Company identified $28.2 million of
transitional impairment losses ($23.5 million, net of income tax benefits)
related to San Diego and Juarez, which were recognized in the first
8
quarter of fiscal 2003 as a cumulative 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 related to San Diego resulting from restructuring actions taken
during the first quarter of fiscal 2003.
The Company is required to perform goodwill impairment tests at least
on an annual basis and whenever events or changes in circumstances indicate that
the carrying value may not be recoverable from estimated future cash flows. The
recoverability of goodwill under the annual impairment test is measured by
comparing a location's carrying amount, including goodwill, to the fair market
value of the location, based on projected discounted future cash flows. If the
carrying amount of the location exceeds its fair value, goodwill is considered
impaired and a second test is performed to measure the amount of impairment
loss, if any. The Company completed the annual impairment test during the third
quarter of fiscal 2003 and determined that no impairment existed.
The following sets forth a reconciliation of net income (loss) and
earnings per share information for the three months and nine months ended June
30, 2003 and 2002 adjusted to exclude goodwill amortization, net of income taxes
(in thousands, except per share data):
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------------- ---------------------------------
2003 2002 2003 2002
---------------- ----------------- ---------------- ---------------
Reported income (loss) before cumulative effect
of change in accounting for goodwill $(14,747) $ 656 $(40,624) $ (3,522)
Add back: goodwill amortization, net of income
taxes - 1,118 - 3,291
-------- -------- -------- --------
Adjusted income (loss) before cumulative effect
of change in accounting for goodwill (14,747) 1,774 (40,624) (231)
Cumulative effect of change in accounting
for goodwill, net of income taxes - - (23,482) -
-------- -------- -------- --------
Adjusted net income (loss) $(14,747) $ 1,774 $(64,106) $ (231)
======== ======== ======== ========
Basic weighted average common shares outstanding 42,285 41,919 42,204 41,856
Dilutive effect of stock options - 1,215 - -
-------- -------- -------- --------
Diluted weighted average shares outstanding 42,285 43,134 42,204 41,856
======== ======== ======== ========
Basic and diluted earnings per share:
Reported income (loss) before cumulative effect
of change in accounting for goodwill $ (0.35) $ 0.02 $ (0.96) $ (0.08)
Add back: goodwill amortization,
net of income taxes - 0.02 - 0.07
-------- -------- -------- --------
Adjusted income (loss) before cumulative
effect of change in accounting for goodwill (0.35) 0.04 (0.96) (0.01)
Cumulative effect of change in accounting
for goodwill, net of income taxes - - (0.56) -
-------- -------- -------- --------
Adjusted net income (loss) $ (0.35) $ 0.04 $ (1.52) $ (0.01)
======== ======== ======== ========
9
The changes in the carrying amount of goodwill for fiscal year ended
September 30, 2002 and the nine months ended June 30, 2003 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 999
----------
BALANCE AS OF JUNE 30, 2003 $ 32,124
===========
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 one to fifteen years. The Company has no intangibles that
are not subject to amortization. During the nine months ended June 30, 2003,
there were no additions to intangible assets. Intangible asset amortization
expense was nominal for both the three and nine months ended June 30, 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 (design and manufacturing) to electronic original
equipment manufacturers ("OEMs"). The Company has three reportable geographic
regions: North America, Europe and Asia. As of June 30, 2003, the Company had 21
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 assets (in thousands):
Three Months Ended Nine Months Ended
June 30, March 31,
---------------------------------------------------------------------
2003 2002 2003 2002
-------------- ---------------- -------------- --------------
Net sales:
North America $ 170,379 $ 207,814 $ 523,991 $ 596,217
Europe 14,224 20,236 39,993 55,940
Asia 11,006 6,699 27,777 13,971
---------- ---------- ----------- -----------
$ 195,609 $ 234,749 $ 591,761 $ 666,128
========== ========== =========== ===========
10
June 30, September 30,
2003 2002
-------------- ----------------
Long-lived assets:
North America $ 135,997 $ 199,478
Europe 34,474 35,796
Asia 7,230 6,505
---------- ----------
$ 177,701 $ 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 quarter of fiscal 2003. Adoption of the initial recognition
provisions of FIN No. 45 did not have a material impact on these condensed
consolidated financial statements.
As of June 30, 2003, the Company offers certain indemnifications under
its asset securitization facility, certain leases and customer manufacturing
agreements. Under the Company's asset securitization facility agreement (see
Note 3), the Company is required to provide indemnifications typical of those
found in transactions of this sort, such as upon a breach of the Company's
representations and warranties in the facility agreement, or upon the Company's
failure to perform its obligations under such agreement, or in the event of
litigation concerning the agreement. The asset securitization agreement also
includes an obligation by the Company to indemnify 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 arrangements. The Company is unable to estimate the maximum potential
amount of future payments under this indemnification due to the uncertainties
inherent in predicting potential regulatory change. Moreover, although the
Company's indemnification obligation will survive the termination of this
facility in September 2003, the Company believes that it is unlikely to have any
on-going indemnification obligations because the Company will not be engaged in
further asset securitization transactions after such date; the Company also has
no reasonable basis to believe that any unasserted indemnification obligations
exist as of the date hereof.
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
11
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 nine months
ended June 30, 2003 (in thousands):
LIMITED WARRANTY LIABILITY, AS OF OCTOBER 1, 2002 $ 1,246
Accruals for warranties issued during the period 116
Accruals related to pre-existing warranties (20)
Settlements (in cash or in kind) during the period (341)
---------
LIMITED WARRANTY LIABILITY, AS OF JUNE 30, 2003 $ 1,001
=========
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 complaint, which is one of a series of complaints by Lemelson
against hundreds of companies, seeks injunctive relief, treble damages and
attorney's fees. The Company has obtained a stay of action pending developments
in other related litigation. The Company believes the vendors from which the
patent-related equipment was purchased may be required to contractually
indemnify the Company. However, based upon the Company's observation of the
plaintiff's actions in other parallel cases, it appears that the primary
objective of the plaintiff is to cause defendants to enter into license
agreements. If a judgment is rendered and/or a license fee required, it is the
opinion of management of the Company that such judgment or fee 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 nine months ended June 30, 2003, the Company recorded
restructuring costs of $51.5 million, of which $19.7 million was recorded in the
third quarter of fiscal 2003. SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" is applicable to restructuring costs incurred
subsequent to December 31, 2002. Under SFAS No. 146, the Company concluded that
it had a substantive severance plan, therefore, certain severance and benefit
costs were recorded in accordance with SFAS No. 112, "Employer's Accounting for
Postemployment Benefits," which results in a liability when the severance and
benefit costs result from an existing condition or situation and the payment is
both probable and reasonably estimated. The timing and related recognition of
recording other severance and benefit costs that are not presumed to be an
ongoing benefit as defined in SFAS No. 146, depends on whether employees are
required to render service until they are terminated in order to receive the
termination benefits and, if so, whether employees will be retained to render
service beyond a minimum retention period.
The third quarter fiscal 2003 restructuring costs were primarily
associated with a program to close the Company's Richmond, Kentucky reporting
unit ("Richmond") and to re-focus the Company's PCB design group. Other
restructuring included a write-down of underutilized assets to fair value and a
reduction in force in both the engineering and corporate organizations. The
asset write-downs affected Richmond and other reporting units. These measures
are largely intended to align the Company's capabilities and resources with
evolving customer demand. The Company expects to close Richmond by the end of
fiscal 2003 and shift production to other Plexus reporting units. Approximately
400 employees, or 8 percent of the Company's total workforce, will be affected
by this restructuring. The employee groups affected include approximately 330
direct and 70 indirect employees. Direct
12
employees include those employees directly associated with manufacturing
activities. Indirect employees include selling and administrative personnel, and
employees indirectly involved with manufacturing. Through June 30, 2003, 150
employees have been terminated and the remaining terminations are anticipated to
be completed by the fourth quarter of fiscal 2003. The Company estimates that it
will incur approximately $1.0 million of additional restructuring costs in the
fourth quarter of fiscal 2003 associated with the Richmond closure.
In the first quarter of fiscal 2003, the Company recorded pre-tax
restructuring costs totaling $31.8 million. Emerging Issue 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)" was applicable to restructuring costs incurred prior to January
1, 2003. The first quarter of fiscal 2003 costs resulted from the Company's
actions taken in response to reductions in its end-market demand, including the
decision of the largest customer of San Diego to transition most of its programs
to non-Plexus facilities.
The Company's most significant first quarter of fiscal 2003
restructuring included the planned closure of San Diego, 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. San Diego was phased out of
operation in May 2003. As of September 30, 2002, San Diego 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 decision
to close it. Other restructuring 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
reporting units in Seattle, Washington ("Seattle"); Neenah, Wisconsin ("Neenah")
and the United Kingdom. For leased facilities that will be abandoned and
subleased, the restructuring costs were based on future lease payments
subsequent to abandonment, less estimated sublease income. For the equipment
write-off, the restructuring costs were based on fair value estimated by using
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 affected approximately 400 employees
and severance associated with previous announcements that affected approximately
100 employees. The employee groups affected include approximately 350 direct and
50 indirect employees. As of June 30, 2003, all employees associated with the
first quarter restructuring have been terminated.
13
Below is a table summarizing the restructuring activity for the nine
months ending June 30, 2003 (in thousands):
Employee
Termination and Lease Obligations and Non-cash Asset Write-
Severance Costs Other Exit Costs downs
(Cash) (Cash) (Non-cash) Total
-------------------------------------------------------------------------------
ACCRUED BALANCE,
SEPTEMBER 30, 2002 $ 540 $ 2,957 $ - $ 3,497
Restructuring costs 5,252 9,666 16,922 31,840
Adjustment to provisions - - - -
Amounts utilized (1,496) (1,540) (16,922) (19,958)
-------- -------- -------- --------
ACCRUED BALANCE,
DECEMBER 31, 2002 4,296 11,083 - 15,379
Restructuring costs - - - -
Adjustment to provisions - - - -
Amount utilized (2,050) (942) - (2,992)
-------- -------- -------- --------
ACCRUED BALANCE,
MARCH 31, 2003 2,246 10,141 - 12,387
Restructuring costs 2,757 1,008 15,884 19,649
Adjustment to provisions - - - -
Amount utilized (3,549) (2,277) (15,884) (21,710)
-------- -------- -------- --------
ACCRUED BALANCE
JUNE 30, 2003 $ 1,454 $ 8,872 $ - $ 10,326
======== ======== ======== ========
For the nine months ended June 30, 2003, non-cash asset write-downs in
the above table include $5.6 million of goodwill impairment. As of June 30,
2003, most of the remaining employee termination and severance costs are
expected to be paid by the end of fiscal 2003, while approximately $3.9 million
of the lease obligations and other exit costs are expected to be paid in the
next twelve months. The remaining liability for lease payments is expected to be
paid through June 2008.
The Company recorded total restructuring costs of $2.7 million in the
third quarter of fiscal 2002 and $10.2 million in the nine months ended June 30,
2002. Restructuring actions were taken in response to the reduction in the
Company's sales levels and reduced capacity utilization and resulted in a
reduction of its workforce, the consolidation of certain leased facilities, the
write-off of under utilized equipment to fair value and facility closures.
The reporting unit closures in fiscal 2002 included two owned
facilities: one located in Neenah (the oldest of the Company's four facilities
in Neenah) and the other located in Minneapolis, Minnesota ("Minneapolis").
These facilities were no longer adequate to service the needs of the Company's
customers and would have required significant investment to upgrade. The Neenah
facility was phased out of operation in February 2003 and is currently used for
warehousing and administrative purposes. The Minneapolis facility was phased out
of operations in July 2002 and sold in October 2002. There were no impairment
charges associated with these two facilities. Production from these facilities
was shifted to other reporting units in the United States.
The lease consolidations primarily affected our facilities in Seattle
and San Diego.
The fiscal 2002 employee termination and severance costs related to the
elimination of approximately 700 employees, of which approximately 640 occurred
prior to the fiscal 2002 year end and 60 occurred early in the current fiscal
year. The employee groups affected included approximately 600 direct and 100
indirect employees.
14
The following table summarizes restructuring costs recorded in fiscal
year 2002:
Employee
Termination and Lease Obligations and
Severance Costs Other Exit Costs Non-cash Write-downs
(Cash) (Cash) (Non-cash) Total
--------------------------------------------------------------------------------
ACCRUED BALANCE,
OCTOBER 1, 2001 $ 79 $ - $ - $ 79
Restructuring costs 3,819 3,872 4,890 12,581
Adjustment to provisions - - - -
Amount utilized (3,358) (915) (4,890) (9,163)
-------- -------- -------- --------
ACCRUED BALANCE,
SEPTEMBER 30, 2002 $ 540 $ 2,957 $ - $ 3,497
======== ======== ======== ========
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 EITF No. 94-3, which required that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 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. The adoption
of SFAS No. 149 is not expected to have a material impact on the Company's
financial position or results of operations.
15
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Financial instruments that are within the scope of the statement, which
previously were often classified as equity, must now be classified as
liabilities. This statement is effective for financial instruments entered into
or modified subsequent to May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 is not expected to have a material impact on the
Company's financial position or results of operations.
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. FIN No. 46 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 its
financial position or results of operations.
NOTE 14 - RECLASSIFICATIONS
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the fiscal 2003 presentation.
16
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:
o the continued weak economic performance of the electronics and
technology industries,
o the risk of customer delays, changes or cancellations in both
ongoing and new programs,
o our ability to secure new customers and maintain our current
customer base, o the results of cost reduction efforts,
o the impact of capacity utilization and our ability to manage fixed
and variable costs, o the effects of facilities closures and
restructurings,
o material cost fluctuations and the adequate availability of
components and related parts for production,
o the effect of changes in average selling prices,
o the effect of start-up costs of new programs,
o the effect of general economic conditions and world events,
including the recent epidemic of severe acute respiratory
syndrome ("SARS"),
o the effect of the impact of increased competition and
o 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 (design and manufacturing) 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 26.
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.
17
MERGERS AND ACQUISITIONS/DISPOSITIONS
In January 2002, we acquired certain assets of MCMS, Inc. ("MCMS"), an
electronics manufacturing services provider, for approximately $42.0 million in
cash. The assets purchased from MCMS include manufacturing operations in Penang,
Malaysia; Xiamen, China; and Nampa, Idaho. The results from MCMS' operations are
reflected in our financial statements from the date of acquisition. No goodwill
resulted from this acquisition. We incurred approximately $0.3 million of
acquisition costs in the second quarter of fiscal 2002 associated with the
acquisition of MCMS.
In fiscal 2003, we have closed our facility in San Diego, ceased
production in our oldest plant in Neenah, and announced plans to close our
Richmond facility by fiscal 2003 year end. Those actions are further discussed
below. In addition, in the third quarter, we sold our PCB design facility in
Nashua, New Hampshire to a group of employees. The transaction did not have a
material impact on either revenues or net income.
RESULTS OF OPERATIONS
Net sales. Net sales for the three months ended June 30, 2003,
decreased 17 percent to $196 million from $235 million for the three months
ended June 30, 2002. Net sales for the nine months ended June 30, 2003 decreased
11 percent to $592 million from $666 million for the nine months ended June 30,
2002. Our sales levels for both the three and nine months ended June 30, 2002
reflect the reduced end-market demand in technology markets, primarily in the
industrial/commercial and network/datacommunications/telecom industries, which
have been further impacted by reduced capital available to companies in these
industries. Net sales in the third quarter of fiscal 2003 compared to the same
period in fiscal 2002 were also adversely affected by the loss of programs for
the primary customer in our San Diego facility. The slowdown in the technology
markets for the nine months ended June 30, 2003 as compared to the same period
in fiscal 2002 was offset, in part, by increased sales to the medical industry.
Overall, the factors adversely affecting technology markets will continue to
impact our fourth quarter sales compared to the prior year. We currently expect
fourth quarter sales to be in the range of $200 million to $210 million.
However, our results will ultimately depend on actual customer order levels.
Our largest customers for the three months ended June 30, 2003, were
Siemens Medical Systems, Inc. (Siemens) and Juniper Networks, Inc., which
accounted for 13 percent and 10 percent of sales, respectively. In the
comparable three months ended June 30, 2002, no single customer accounted for
ten percent or more of sales. Our largest customer for the nine months ended
June 30, 2003 was Siemens, which accounted for 13 percent of sales. In the
comparable nine months ended June 30, 2002, no single customer represented ten
percent or more of sales. Sales to our ten largest customers accounted for 55
percent of sales for the three months ended June 30, 2003 compared to 48 percent
for the three months ended June 30, 2002. Sales to our ten largest customers
accounted for 54 percent of sales for the nine months ended June 30, 2003
compared to 48 percent for the nine months ended June 30, 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 customers, or other
customers, could materially affect our results of operations.
Our sales by industry for the three and nine months ended June 30, 2003
and 2002, respectively, were as follows:
As a Percentage of Net Sales
-------------------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
Industry 2003 2002 2003 2002
- -------- ---- ---- ---- ----
Networking/Datacommunications/Telecom 37 36 35 37
Medical 32 27 33 27
Industrial/Commercial 15 21 15 19
Computer 12 11 11 11
Transportation/Other 4 5 6 6
18
Gross profit. Gross profit for the three months ended June 30, 2003
decreased 49 percent to $11.8 million from $23.1 million for the three months
ended June 30, 2002. Gross profit for the nine months ended June 30, 2003
decreased 37 percent to $37.0 million from $59.0 million for the nine months
ended June 30, 2002. The gross margin for the three months ended June 30, 2003
was 6.0 percent as compared to 9.8 percent for the three months ended June 30,
2002. The gross margin for the nine months ended June 30, 2003 was 6.3 percent,
compared to 8.9 percent for the nine months ended June 30, 2002. The decline in
gross margin was due primarily to reduced manufacturing capacity utilization,
lower product pricing and higher costs incurred to transfer customer programs
among other Plexus reporting units as a result of closing the San Diego,
California ("San Diego") and Richmond, Kentucky ("Richmond") reporting units.
Overall gross margins continue to be affected by relatively low sales
levels as a result of a slowdown in end-market demand, particularly in the
networking/datacommunications/telecom and industrial/commercial industries, and
more specifically, the impact of reduced demand on 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 June 30, 2003, decreased to $16.3 million from $17.3 million
for the three months ended June 30, 2002. S&A expenses for the nine months ended
June 30, 2003 increased to $49.8 million from $47.6 million for the nine months
ended June 30, 2002. As a percentage of net sales, S&A expenses for the three
months ended June 30, 2003 were 8.3 percent as compared to 7.4 percent for the
three months ended June 30, 2002. As a percentage of net sales, S&A expenses for
the nine months ended June 30, 2003 were 8.4 percent as compared to 7.1 percent
for the nine months ended June 30, 2002.
The decrease in dollar terms during the three months ended June 30,
2003 as compared to the three months ended June 30, 2002 was due primarily to
current year restructuring actions and reductions in corporate spending. These
reductions were offset, in part, by approximately $0.4 million of additional
expenses for information technology systems support related to the
implementation of a new enterprise resource planning ("ERP") platform. This ERP
platform is intended to augment our management information systems and includes
software from J.D. Edwards and other vendors to enhance and standardize our
ability to globally translate information from production facilities into
operational and financial reporting and create a consistent set of core business
applications at our worldwide facilities. The increase in dollar terms during
the nine months ended June 30, 2003 as compared to the nine months ended June
30, 2002 was due primarily to higher spending of approximately $1.9 million for
information technology related to implementation of the ERP platform. In
addition, S&A expenses in the nine months ended June 30, 2003 were higher than
the nine months ended June 30, 2002 as a result of the MCMS acquisition in
January 2002.
During the first nine months of fiscal 2003, two manufacturing
facilities were converted to the new ERP platform, which resulted in additional
training and implementation costs. Over the next two to three quarters, we
intend to develop enhancements for the new ERP platform. We anticipate
converting at least one more facility to the new ERP platform. Training and
implementation costs are expected to continue over the next several quarters as
we make our system enhancements and convert the additional facility to the new
ERP platform. The conversion timetable and project scope remain subject to
change based upon our evolving needs and sales levels. In addition to S&A
expenses associated with the new ERP system, we continue to incur capital
expenditures for hardware, software and certain other costs for testing and
installation. As of June 30, 2003, capital expenditures related to the new ERP
platform were $29.3 million. We anticipate spending at least an additional $4.5
million on the ERP platform over the next nine months.
19
Effective the first quarter of fiscal 2003, in accordance with SFAS No.
142 "Goodwill and Other Intangible Assets," we no longer amortize goodwill.
However, goodwill was impaired as a result of a transitional impairment
evaluation upon adoption of SFAS No. 142. See discussion below under "Cumulative
effect of a change in accounting for goodwill." Subsequent to the initial
adoption of SFAS No. 142, we are required to perform an annual impairment test,
or more frequently if an event or circumstance indicates that an impairment loss
has occurred, which could materially affect the result in any given period. We
completed the annual impairment test during our third quarter of fiscal 2003 and
determined that no impairment existed.
For the nine months ended June 30, 2003, we recorded pre-tax
restructuring costs totaling $51.5 million, of which $19.7 million was recorded
in the third quarter of fiscal 2003. Our third quarter restructuring was
primarily associated with closing Richmond and re-focusing our PCB design group.
Other restructuring activities included a write-down of underutilized assets to
fair value and a reduction in force in both our engineering and corporate
organizations. The asset write-downs affected Richmond and other reporting
units. These measures are largely intended to align our capabilities and
resources with our customer demand. We expect Richmond to be closed by the end
of fiscal 2003 and production shifted to other Plexus reporting units in the
United States and Mexico. Approximately 400 employees, or 8 percent of our total
workforce, were affected by this restructuring. The employee groups affected
include approximately 330 direct and 70 indirect employees. Direct employees
include those employees directly associated with manufacturing activities.
Indirect employees include selling and administrative personnel, and employees
indirectly involved with manufacturing. Through June 30, 2003, 150 employees
have been terminated and the remaining terminations are anticipated to be
completed by the fourth quarter of fiscal 2003. We estimate that we will incur
approximately $1.0 million of additional restructuring costs associated with the
Richmond closure.
In the first quarter of fiscal 2003, we recorded pre-tax restructuring
costs totaling $31.8 million. These costs resulted from our actions taken in
response to reductions in our end-market demand, including the decision of the
largest customer of San Diego to transition most of its programs to non-Plexus
facilities. In addition, the charges were taken to improve our capacity
utilization. Our primary first quarter of fiscal 2003 restructuring included the
planned closure of San Diego, which resulted in a write-off of goodwill, the
write-down of underutilized assets to fair value, and costs relating to the
elimination of the facility's work force. San Diego was phased out of operation
in May 2003. As of September 30, 2002, San Diego 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
reporting units in Seattle, Washington ("Seattle"); Neenah, Wisconsin ("Neenah")
and the United Kingdom. The first quarter fiscal 2003 employee termination costs
include severance associated with our December 2002 announcement that affected
approximately 400 employees, and severance associated with previous
announcements that affected approximately 100 employees. The employee groups
affected include approximately 350 direct and 50 indirect employees. As of June
30, 2003, all employees associated with the first quarter restructuring have
been terminated.
For the three months and nine months ended June 30, 2002, we recorded
restructuring charges totaling $2.7 million and $10.2 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 through June 30, 2002
affected approximately 425 employees. The employee groups affected include
approximately 350 direct and 75 indirect employees. The reporting units closures
included two owned facilities: one located in Neenah (the oldest of our four
facilities in Neenah) and the other located in Minneapolis, Minnesota
("Minneapolis"). These facilities were no longer adequate to service the needs
of our customers and would have required significant investment to upgrade. The
Neenah facility was phased out of operations in February 2003 and is currently
used for warehousing and administrative purposes. The Minneapolis facility was
phased out of operations in July 2002 and sold in October 2002. There were no
building impairment charges associated with the closure of these two facilities.
The lease consolidations primarily affected our facilities in Seattle and San
Diego. Production from the closed facilities shifted to other reporting units in
the United States.
20
Our pre-tax restructuring costs in the three months and nine months
ended June 30, 2003 and 2002 are summarized as follows (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
------------ ----------------------------- --------------
Non-Cash
Fixed asset impairment $ 15,884 $ 750 $ 27,211 $ 2,546
Write-off of goodwill - - 5,595 -
-------- --------- -------- ---------
15,884 750 32,806 2,546
-------- --------- -------- ---------
Cash
Severance costs 2,757 1,950 8,009 3,819
Lease termination costs 1,008 - 10,674 3,822
-------- --------- -------- ---------
3,765 1,950 18,683 7,641
-------- --------- -------- ---------
Total restructuring costs $ 19,649 $ 2,700 $ 51,489 $ 10,187
======== ========= ======== =========
As of June 30, 2003, total liabilities of $5.4 million related to these
restructurings are expected to be paid in the next twelve months. The remaining
$4.9 million liability is expected to be paid through June 2008.
We currently expect that our restructuring actions through June 30,
2003 (including our fiscal 2002 actions) will result, when fully implemented, in
annualized cost savings of approximately $35 million, although offset in part by
reduced revenues from the loss of the primary customer of our San Diego
facility. These savings will primarily impact cost of sales through lower
depreciation, lower lease expense and reduced employee expenses. We cannot
assure this level of savings, however, because certain elements are subject to
future events.
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 San Diego and our Juarez,
Mexico reporting unit ("Juarez"). 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).
Income taxes. For the three months ended June 30, 2003 we had an income
tax benefit of $9.3 million compared to income tax expense of $0.4 million for
the three months ended June 30, 2002. Our effective income tax rate increased to
approximately 31 percent for the nine months ended June 30, 2003 from
approximately 28 percent for the nine months ended June 30, 2002. The increase
in the effective tax rate is due primarily to the absence in fiscal 2003 of
non-deductible goodwill amortization expenses that were present in fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $2.8 million for the
nine months ended June 30, 2003, compared to cash flows provided by operating
activities of $111.1 million for the nine months ended June 30, 2002. During the
nine months ended June 30, 2003, cash provided by operating activities was
primarily affected by a decrease in accounts receivable and an increase in
accounts payable, customer deposits and accrued liabilities; these favorable
cash flows were offset, in part, by increases in inventory.
For the three months ended June 30, 2003, 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, $17.3 million and $16.6 million as of
June 30, 2003 and September 30, 2002, respectively. Our annualized inventory
turns declined to 6.5 turns for the three months ended June 30, 2003 from 8.1
turns at the prior year-end. Inventory turns were negatively impacted due to raw
material stocking for several new programs and a build up of work-in process
inventory for certain of our customers. The build up of work-in-process
inventory includes preparation for implementation of a vendor managed inventory
("VMI") program, under which we will hold and manage finished goods inventory
for two key customers. Starting in the fourth quarter of fiscal 2003, the VMI
21
program may result in higher finished goods inventory levels, further reduce our
inventory turns, and increase our financial risk with such customers, although
our customers will have contractual obligations to buy the inventory from us.
Cash flows provided by investing activities totaled $9.2 million for
the nine months ended June 30, 2003. The primary sources were sales and
maturities of short-term investments offset, 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 $20 million to $25 million,
of which approximately $18.4 million was spent through the nine months ended
June 30, 2003.
Cash flows used in financing activities totaling $0.7 million for the
nine months ended June 30, 2003 which primarily represent net payments on
capital lease obligations offset, in part, by proceeds from stock issuances and
the exercise of stock options. The ratio of total liabilities to equity was
approximately 0.4 to 1 as of June 30, 2003, and September 30, 2002.
We terminated our credit facility ("Credit Facility") effective
December 26, 2002 at which time no amounts were outstanding. Our termination of
the Credit Facility was occasioned by anticipated noncompliance with a minimum
interest expense coverage ratio covenant 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 currently negotiating with a number
of banks to provide external financing of up to $100 million; however, 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, under a separate agreement, 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 also includes standards for determining which
receivables may be sold, and includes customary indemnification obligations
which are more specifically described in Note 10 of Notes to Consolidated
Financial Statements. We are currently in compliance with the agreement. The
agreement expires in September 2003. We do not intend to renew the agreement
upon its expiration; as a result, we will use cash to pay off our asset
securitization facility and our accounts receivable will increase by the amount
which had been sold under this agreement.
The actual amount which could be utilized under the facility was lower
than $50 million because of the credit worthiness of certain of our customers,
the concentration to individual customers and other similar factors. As of June
30, 2003, the total available funding amount under the asset securitization
facility was approximately $17.3 million all of which was utilized. As a result,
accounts receivable have been reduced by $17.3 million as of June 30, 2003,
while long-term debt and capital lease obligations do not include this $17.3
million of off-balance-sheet financing. See Note 3 in the Notes to Condensed
Consolidated Financial Statements.
We have not paid cash dividends in the past and do not anticipate
paying them in the foreseeable future. We anticipate using any earnings to
support our business.
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 June 30, 2003 (in thousands):
22
Payments Due by Fiscal Period
------------------------------------------------------------------------------------
Remaining in 2008 and
Contractual Obligations Total 2003 2004-2005 2006-2007 thereafter
----------------------- ------------------------------------------------------------------------------------
Capital Lease Obligations $ 44,489 $ 817 $ 6,101 $ 5,910 $ 31,661
Operating Leases 83,481 3,764 24,705 19,609 35,403
Unconditional Purchase Obligations* - - - - -
Other Long-Term Obligations** - - - - -
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $127,970 $ 4,581 $ 30,806 $ 25,519 $ 67,064
======== ======== ======== ======== ========
* - There are no unconditional purchase obligations other than purchases of
inventory and property, plant and equipment in the ordinary course of business.
** - As of June 30, 2003, other than our off-balance sheet asset securitization
facility ($17.3 million outstanding as of June 30, 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. The asset securitization facility expires in September
2003.
DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES
Our accounting policies are disclosed in our 2002 Report on Form 10-K.
During the nine months ended June 30, 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 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."
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.
Revenue - Revenue from manufacturing services is generally recognized
upon shipment of the manufactured product to the Company's customers, under
contractual terms, which are generally FOB shipping point. Upon shipment, title
transfers and the customer assumes risks and rewards of ownership of the
product. Generally, there are no formal customer acceptance requirements or
further obligations related to manufacturing
23
services; if such requirements or obligations exist, then revenue is recognized
at the point when such requirements are completed and such obligations
fulfilled.
Revenue from engineering design and development services, which are
generally performed under contract of twelve months or less duration, is
recognized as costs are incurred utilizing the percentage-of-completion method;
any losses are recognized when anticipated. Revenue from engineering design and
development services is less than ten percent of total revenue.
Revenue is recorded net of estimated returns of manufactured product
based on management's analysis of historical returns, current economic trends
and changes in customer demand. Revenue also includes amounts billed to
customers for shipping and handling. The corresponding shipping and handling
costs are included in costs of sales.
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. Prior to January 1, 2003, severance and benefit costs were recorded
when incurred. For leased facilities that were abandoned and subleased, the
estimated lease loss was accrued for future remaining lease payments subsequent
to abandonment, less any estimated sublease income. As of June 30, 2003, the
significant facilities which 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.
Subsequent to December 31, 2002, costs associated with a restructuring
activity are recorded in compliance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Under this statement, we concluded
that we have a substantive severance plan, therefore, certain severance and
benefit costs are recorded in accordance with SFAS No. 112, "Employer's
Accounting for Postemployment Benefits," which results in a liability when the
severance and benefit costs result from an existing condition or situation and
the payment is both probable and reasonably estimated. The timing and related
recognition of recording other severance and benefit costs that are not presumed
to be an ongoing benefit as defined in SFAS No. 146, depends on whether
employees are required to render service until they are terminated in order to
receive the termination benefits and, if so, whether employees will be retained
to render service beyond a minimum retention period. For leased facilities that
will be abandoned and subleased, a liability for the future remaining lease
payments subsequent to abandonment, less any estimated sublease income that
could be reasonably obtained for the property, is recognized and measured at its
fair value. For contract termination costs, including costs that will continue
to be incurred under a contract for its remaining term without economic benefit
to the entity, a liability for future remaining payments under the contract is
recognized and measured at its fair value. In the third quarter of fiscal 2003,
we recorded restructuring charges totaling $19.7 million. See Note 12 in the
Notes to Condensed Consolidated Financial Statements.
24
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 did not effect a voluntary change in accounting to
the fair value method, and, accordingly, SFAS No. 148 did not have a significant
impact on our results of operations or financial position.
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. The adoption of SFAS No. 149 is not expected to have a material impact
on our financial position or results of operations.
25
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Financial instruments that are within the scope of the statement, which
previously were often classified as equity, must now be classified as
liabilities. This statement is effective for financial instruments entered into
or modified subsequent to May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 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:
o the volume of customer orders relative to our capacity
o 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
o the typical short life cycle of our customers' products
o market acceptance of and demand for our customers' products
o customer announcements of operating results and business conditions
o changes in our sales mix to our customers
o the timing of our expenditures in anticipation of future orders
o our effectiveness in managing manufacturing processes
o changes in cost and availability of labor and components
o local events that may affect our production volume, such as local
holidays
o credit ratings and stock analyst reports
o changes in economic conditions and world events, including the recent
epidemic of SARS.
26
The EMS industry is impacted by the state of the U.S. and global
economies and world events. A continued slowdown or flat performance 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 and industrial/commercial 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 two largest customers for the three months ended June 30, 2003
represented 13 percent and 10 percent of our net sales, respectively. No single
customer represented 10 percent or more of our net sales for the comparable
three months ended June 30, 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 55 percent and 48 percent of our
net sales for the three months ended June 30, 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 notified us in December
2002 of its intent to move most of its programs to other non-Plexus facilities
during our second quarter of fiscal 2003; subsequently, we closed 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 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
have significantly reduced our capacity from its peak, and 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.
27
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 FUTURE GROWTH, IF ANY, 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, determine whether staffing levels need to be
reduced, and determine how to respond to changing levels of customer demand.
While maintaining multiple facilities or higher levels of employment increases
short-term costs, too much capacity or reductions in employment 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, such as the
recent closure of our San Diego facility and the planned closure of our Kentucky
facility, 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 June 30, 2003, ERP implementation costs
included in property, plant and equipment totaled $29.3 million and we
anticipate spending at least an additional $4.5 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:
o economic or political instability
o transportation delays or interruptions and other effects of less
developed infrastructure in many countries
o foreign exchange rate fluctuations
o utilization of different systems and equipment
o difficulties in staffing and managing foreign personnel and diverse
cultures
o the effects of international political developments.
28
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:
o retain our qualified engineering and technical personnel
o maintain and enhance our technological capabilities
o develop and market manufacturing services which meet changing customer
needs
o successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis.
Although we believe that our operations utilize the assembly and
testing technologies, equipment and processes that are currently required by our
customers, we cannot be certain that we will develop the capabilities required
by our customers in the future. The emergence of new technology industry
standards or customer requirements may render our equipment, inventory or
processes obsolete or noncompetitive. In addition, we may have to acquire new
assembly and testing technologies and equipment to remain competitive. The
acquisition and implementation of new technologies and equipment may require
significant expense or capital investment which could reduce our operating
margins and our operating results. Our failure to anticipate and adapt to our
customers' changing technological needs and requirements could have an adverse
effect on our business.
OUR 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
29
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.
In addition, we have recently begun to provide a vendor managed
inventory ("VMI") program under which we will hold and manage finished goods
inventory for two of our key customers. Starting in the fourth quarter of fiscal
2003, the VMI program may result in higher finished goods inventory levels,
further reduce our inventory turns and increase our financial risk with such
customers, although our customers will have contractual obligations to purchase
the inventory from us.
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 32 percent of our net sales in the third quarter of fiscal 2003,
is subject to substantial government regulation, primarily from the FDA and
similar regulatory bodies in other countries. We must comply with statutes and
regulations covering the design, development, testing, manufacturing and
labeling of medical devices and the reporting of certain information regarding
their safety. Failure to comply with these rules can result in, among other
things, our and our customers' being subject to fines, injunctions, civil
penalties, criminal prosecution, recall or seizure of devices, total or partial
suspension of production, failure of the government to grant pre-market
clearance or record approvals for projections
30
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:
o the inability of our customers to adapt to rapidly changing technology
and evolving industry standards, which result in short product life
cycles
o the inability of our customers to develop and market their products,
some of which are new and untested
o 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:
o respond more quickly to new or emerging technologies
o have greater name recognition, critical mass and geographic and market
presence
o be better able to take advantage of acquisition opportunities
o adapt more quickly to changes in customer requirements
o devote greater resources to the development, promotion and sale of
their services
o be better positioned to compete on price for their services.
We may be operating at a cost disadvantage compared to manufacturers
who have greater direct buying power from component suppliers, distributors and
raw material suppliers or who have lower cost structures. As a result,
competitors may 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.
31
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. In addition, our asset securitization
facility expires in September 2003, and we do not intend to renew the facility.
We are negotiating with a number of banks to provide external financing of up to
$100 million; however, we cannot assure whether, or under what terms, a new
credit facility will be available.
Our future success may depend on our ability to obtain financing and
capital to support our possible future growth. We may seek to raise capital by:
o issuing additional common stock or other equity securities
o issuing debt securities
o obtaining new credit facilities
o 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 future
growth through acquisitions, however, this would involve significant risks that
could have a material adverse effect on us. These risks include:
Operating risks, such as the:
o inability to integrate successfully our acquired operations' businesses
and personnel
o inability to realize anticipated synergies, economies of scale or
other value
o difficulties in scaling up production and coordinating management of
operations at new sites
o strain placed on our personnel, systems and resources
o possible modification or termination of an acquired business customer
programs, including cancellation of current or anticipated programs
o loss of key employees of acquired businesses.
Financial risks, such as the:
o use of cash resources, or incurrence of additional debt and related
interest costs
o dilutive effect of the issuance of additional equity
securities
32
o 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
o incurrence of large write-offs or write-downs
o impairment of goodwill and amortization of other intangible assets
o 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:
o inability to successfully integrate additional facilities or capacity
and to realize anticipated synergies, economies of scale or other value
o additional fixed costs which may not be fully absorbed by the new
business
o difficulties in the timing of expansions, including delays in the
implementation of construction and manufacturing plans
o creation of excess capacity, and the need to reduce capacity elsewhere
if anticipated sales or opportunities do not materialize
o diversion of management's attention from other business areas
during the planning and implementation of expansions
o strain placed on our operational, financial, management, technical and
information systems and resources
o disruption in manufacturing operations
o incurrence of significant costs and expenses
o inability to locate enough customers or employees to support the
expansion.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our stock price has fluctuated significantly and experienced declines
in recent periods. The price of our common stock may fluctuate significantly in
response to a number of events and factors relating to us, our competitors and
the market for our services, many of which are beyond our control.
In addition, the stock market in general, and especially the Nasdaq
Stock Market along with market prices for technology companies in particular,
have experienced extreme volatility and weakness that sometimes has been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the market price of our common
stock, regardless of our operating results.
Among other things, volatility and weakness in Plexus' stock price
could mean that investors will not be able to sell their shares at or above the
prices which they pay. The volatility and weakness could also impair Plexus'
ability in the future to offer common stock or convertible securities as a
source of additional capital and/or as consideration in the acquisition of other
businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign exchange and
interest rates. To reduce such risks, we selectively use financial instruments.
FOREIGN CURRENCY RISK
We do not use derivative financial instruments for speculative
purposes. Our policy is to selectively hedge our foreign currency denominated
transactions in a manner that substantially offsets the effects of changes in
foreign currency exchange rates. Presently, we use foreign currency contracts to
hedge only those currency exposures associated with certain assets and
liabilities denominated in non-functional currencies. Corresponding gains and
losses on the underlying transaction generally offset the gains and losses on
these foreign currency hedges. Our
33
fiscal 2002 expansion into additional international markets (Malaysia and China)
increased the complexity and size of our foreign exchange risk. As of June 30,
2003, foreign currency contracts were scheduled to mature in less than three
months and were not material.
For the three months ended June 30, 2003 and 2002, we had net sales of
approximately 7 percent and 9 percent, respectively, denominated in currencies
other than the U.S. dollar. For the nine months ended June 30, 2003 and 2002, we
had net sales of approximately 7 and 8 percent, respectively, denominated in
currencies other than the U.S. dollar.
For the three months ended June 30, 2003 and 2002, we incurred total
costs of approximately 11 percent and 11 percent, respectively, denominated in
currencies other than the U.S. dollar. For the nine months ended June 30, 2003
and 2002, we incurred total costs of approximately 10 percent and 11 percent,
respectively, denominated in currencies other than the U.S. dollar.
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 nine months ended June 30, 2003, compared to an impact of
approximately $0.3 million and $0.5 million for the three months and nine months
ended June 30, 2002, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures: The Company maintains disclosure
controls and procedures designed to ensure that the information the Company must
disclose in its filings with the Securities and Exchange Commission is recorded,
processed, summarized and reported on a timely basis. The Company's principal
executive officer and principal financial officer have reviewed and evaluated
the Company's management, with the participation of the disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the
period covered by this report (the " Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in bringing to their
attention on a timely basis material information relating to the Company
required to be included in the Company's periodic filings under the Exchange
Act.
Internal Control Over Financial Reporting: There have not been any
changes in the Company's internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the
Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As we have previously disclosed, the Company (along with hundreds of
other companies) has been sued by the Lemelson Medical, Educational & Research
Foundation Limited Partnership ("Lemelson") for alleged possible infringement of
certain Lemelson patents. The complaint, which is one of a series of complaints
by Lemelson against hundreds of companies, seeks injunctive relief, treble
damages (amount unspecified) and attorney's fees. The Company has obtained a
stay of action pending developments in other related third party litigation; a
decision in that litigation is expected in late 2003. The Company believes the
vendors from which patent-related equipment was purchased may be required to
contractually indemnify the Company. However, based upon the Company's
observation of the plaintiff's actions in other parallel cases, it appears that
the primary objective of the plaintiff is to cause defendants to enter into
license agreements. If a judgment is rendered and/or a license fee required, it
is the opinion of management that such judgment or fee would not be material to
the consolidated financial position of the Company or the results of its
operations. Lemelson Medical, Educational & Research Foundation Limited
Partnership vs. Esco Electronics Corporation et al, US District Court for the
District of Arizona, Case Number CIV 000660 PHX JWS (2000).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer
pursuant to Section 302(a) of the
Sarbanes Oxley Act of 2002.
31.2 Certification of Chief Financial Officer
pursuant to section 203(a) of the
Sarbanes Oxley Act of 2002.
32.1 Certification of the CEO pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the CFO pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K during this period.
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. Also, a
report dated July 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 third quarter of
fiscal 2003, ended June 30, 2003, and for the nine 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.
8/14/03 /s/ Dean A. Foate
- ----------- ---------------------
Date Dean A. Foate
President and Chief Executive Officer
8/14/03 /s/ F. Gordon Bitter
- ------------ -----------------------
Date F. Gordon Bitter
Vice President and
Chief Financial Officer
35
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
31.1 Certification of Chief Executive Officer pursuant to
to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 203(a) of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the CEO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the CFO pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.