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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, 2001
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-14824
PLEXUS CORP.
(Exact name of registrant as specified in charter)
Wisconsin 39-1344447
(State of Incorporation) (IRS Employer Identification No.)
55 Jewelers Park Drive
Neenah, Wisconsin 54957-0156
(Address of principal executive offices)(Zip Code)
Telephone Number (920) 722-3451
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of August 6, 2001 there were 41,647,826 of Common Stock of the
Company outstanding.
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PLEXUS CORP.
TABLE OF CONTENTS
June 30, 2001
PART I. FINANCIAL INFORMATION......................................................................... 3
Item 1. Consolidated Financial Statements.................................................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS...................................... 3
CONDENSED CONSOLIDATED BALANCE SHEETS................................................ 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS...................................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
SAFE HARBOR.......................................................................... 10
OVERVIEW............................................................................. 10
MERGERS AND ACQUISITIONS............................................................. 10
RESULTS OF OPERATIONS................................................................ 11
LIQUIDITY AND CAPITAL RESOURCES...................................................... 13
NEW ACCOUNTING PRONOUNCEMENTS........................................................ 14
RISK FACTORS......................................................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 21
PART II - OTHER INFORMATION............................................................................ 22
Item 6. Exhibits and Reports on Form 8-K.................................................... 22
SIGNATURE.............................................................................................. 22
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $253,172 $193,187 $805,553 $502,275
Cost of sales 223,353 165,168 703,807 430,604
-------- -------- -------- --------
Gross profit 29,819 28,019 101,746 71,671
Operating expenses:
Selling and administrative expenses 13,612 9,291 39,481 24,389
Goodwill amortization 1,000 255 2,779 320
Acquisition and merger costs 596 1,062 1,610 1,062
Restructuring costs 1,926 -- 1,926 --
-------- -------- -------- --------
17,134 10,608 45,796 25,771
-------- -------- -------- --------
Operating income 12,685 17,411 55,950 45,900
Other income (expense):
Interest expense (1,389) (431) (4,588) (435)
Miscellaneous 975 531 2,991 1,388
-------- -------- -------- --------
Income before income taxes 12,271 17,511 54,353 46,853
Income taxes 4,909 7,093 22,122 18,830
-------- -------- -------- --------
Net income $ 7,362 $ 10,418 $ 32,231 $ 28,023
======== ======== ======== ========
Earnings per share:
Basic $ 0.18 $ 0.28 $ 0.79 $ 0.78
======== ======== ======== ========
Diluted $ 0.17 $ 0.27 $ 0.75 $ 0.73
======== ======== ======== ========
Weighted average shares outstanding:
Basic 41,369 36,564 40,944 35,740
======== ======== ======== ========
Diluted 43,248 39,302 43,169 38,324
======== ======== ======== ========
See notes to condensed consolidated financial statements
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PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
Unaudited
June 30, September 30,
2001 2000
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 33,693 $ 5,293
Short-term investments 16,076 --
Accounts receivable, net of allowance of $3,677
and $1,522, respectively 127,142 140,048
Inventories 197,384 215,998
Deferred income taxes 11,928 9,109
Prepaid expenses and other 10,810 4,451
-------- --------
Total current assets 397,033 374,899
Property, plant and equipment, net 124,394 89,500
Goodwill, net 68,243 48,882
Deferred income taxes 4,828 --
Other 3,429 2,327
-------- --------
Total assets $597,927 $515,608
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,201 $ 8,365
Accounts payable 75,711 106,257
Customer deposits 12,979 10,126
Accrued liabilities:
Salaries and wages 16,247 19,039
Other 14,868 17,516
-------- --------
Total current liabilities 129,006 161,303
Long-term debt, net of current portion 52,118 141,409
Deferred income taxes -- 1,056
Other liabilities 2,795 2,478
Shareholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized,
none issued or outstanding -- --
Common stock, $.01 par value, 200,000 and 60,000 shares authorized,
respectively, 41,425 and 37,054 issued and outstanding, respectively 414 371
Additional paid-in capital 246,628 72,699
Retained earnings 167,972 136,577
Accumulated other comprehensive loss (1,006) (285)
-------- --------
414,008 209,362
-------- --------
Total liabilities and shareholders' equity $597,927 $515,608
======== ========
See notes to condensed consolidated financial statements
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PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Nine Months Ended
June 30,
-------------------------
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 32,231 $ 28,023
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 21,937 10,630
Income tax benefit from stock option award plans 4,665 6,006
Deferred income taxes (2,963) (1,798)
Changes in assets and liabilities:
Accounts receivable (2,497) (28,684)
Inventories 32,104 (75,202)
Prepaid expenses and other (5,508) (300)
Accounts payable (44,365) 49,058
Customer deposits 2,540 57
Accrued liabilities (10,305) 9,811
Other (2,297) 423
---------- ----------
Cash flows provided by (used in) operating activities 25,542 (1,976)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments (36,700) (48,042)
Sales and maturities of short-term investments 20,624 62,215
Payments for property, plant and equipment (45,738) (24,771)
Payments for business acquisitions, net of cash acquired (32,600) (54,399)
Other -- 51
---------- ----------
Cash flows used in investing activities (94,414) (64,946)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 144,077 96,495
Payments on debt (243,645) (45,505)
Proceeds from exercise of stock options 2,000 5,697
Asset securitization facility 30,000 --
Proceeds from issuance of common stock 164,829 --
---------- ----------
Cash flows provided by financing activities 97,261 56,687
---------- ----------
Effect of foreign currency translation on cash 11 --
---------- ----------
Net increase (decrease) in cash and cash equivalents 28,400 (10,235)
Cash and cash equivalents:
Beginning of period 5,293 15,906
---------- ----------
End of period $ 33,693 $ 5,671
========== ==========
See notes to condensed consolidated financial statements
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PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2001
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, 2001 and
the results of operations for the three months and nine months ended June 30,
2001 and 2000 and the cash flows for the same nine-month periods.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the SEC rules and
regulations dealing with interim financial statements. However, the Company
believes that the disclosures made in the condensed consolidated financial
statements included herein are adequate to make the information presented not
misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's 2000 Annual Report on Form 10-K.
The condensed consolidated balance sheet data as of September 30, 2000
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
NOTE 2 - INVENTORIES
The major classes of inventories are as follows (in thousands):
June 30, September 30,
2001 2000
-------- --------
Assembly parts $143,419 $139,674
Work-in-process 43,950 69,829
Finished goods 10,015 6,495
-------- --------
$197,384 $215,998
======== ========
NOTE 3 - ASSET SECURITIZATION FACILITY
On October 6, 2000, the Company entered into an agreement (amended and
restated on July 1, 2001) to sell up to $50 million of trade accounts receivable
without recourse (the "asset securitization facility") to Plexus ABS Inc.
("ABS"), a wholly owned, limited purpose subsidiary of the Company. ABS is a
separate corporate entity that sells participation interests in a pool of the
Company's accounts receivable to financial institutions. The financial
institutions then receive an ownership and security interest in the pool of
receivables. Accounts receivable sold to financial institutions, if any, are
reflected as a reduction to accounts receivable in the consolidated balance
sheets. The Company has no risk of credit loss on such receivables as they are
sold without recourse. The Company retains collection and administrative
responsibilities on the participation interest sold as services for ABS and the
financial institutions. The agreement expires in October 2003. As of June 30,
2001, the Company had utilized $30 million of the asset securitization facility.
The Company incurred financing costs of $1.4 million under the asset
securitization facility for the nine months ended June 30, 2001.
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NOTE 4 - EARNINGS PER SHARE
The following is a reconciliation of the amounts utilized in the
computation of basic and diluted earnings per share (in thousands, except per
share amounts):
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
BASIC EARNINGS PER SHARE:
Net income $ 7,362 $ 10,418 $ 32,231 $ 28,023
======== ======== ======== ========
Basic weighted average shares outstanding 41,369 36,564 40,944 35,740
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.18 $ 0.28 $ 0.79 $ 0.78
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Net income $ 7,362 $ 10,418 $ 32,231 $ 28,023
======== ======== ======== ========
Weighted average shares outstanding 41,369 36,564 40,944 35,740
Dilutive effect of stock options 1,879 2,738 2,225 2,584
-------- -------- -------- --------
Diluted weighted average shares
outstanding 43,248 39,302 43,169 38,324
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.17 $ 0.27 $ 0.75 $ 0.73
======== ======== ======== ========
For the three-month and nine-month periods ended June 30, 2001,
options to purchase approximately 930,000 and 56,000 shares of common stock,
respectively, were outstanding but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares, and therefore, their effect
would be antidilutive.
NOTE 5 - MERGER AND ACQUISITION
On May 23, 2001, the Company completed its acquisition of Qtron, Inc.,
("Qtron") a privately held electronic manufacturing service provider located in
San Diego, California. The Company acquired all of the outstanding shares of
Qtron for approximately $29.0 million in cash, repaid outstanding Qtron notes
payable of $3.6 million to Qtron shareholders and assumed liabilities of $28.6
million. The Company is accounting for the Qtron acquisition using the purchase
method of accounting. The cost of the acquisition has been allocated on the
basis of the estimated fair values of the assets acquired and the liabilities
assumed. The preliminary estimate of the excess of the cost over the fair value
of the net assets acquired of approximately $21 million has been recorded as
goodwill and is being amortized over 15 years. The purchase price is subject to
certain adjustments. The results of Qtron's operations have been reflected in
the Company's financial statements from the date of acquisition.
Unaudited pro forma revenue, net income and earnings per share as if
the acquisition occurred as of October 1, 1999 are as follows (in thousands,
except per share data):
Nine Months Nine Months
ended ended
June 30, 2001 June 30, 2000
------------- -------------
Net sales:
Plexus $798,680 $502,275
Qtron 65,787 40,492
-------- --------
$864,467 $542,767
======== ========
Net income:
Plexus $ 32,551 $ 28,023
Qtron (2,460) 745
-------- --------
$ 30,091 $ 28,768
======== ========
Earnings per share:
Basic $ 0.73 $ 0.80
======== ========
Diluted $ 0.70 $ 0.75
======== ========
The unaudited pro forma financial information is not necessarily
indicative of either the results of operations that would have occurred had the
acquisition been made during the period presented or the future results of the
combined operations.
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On December 21, 2000, the Company merged with e2E Corporation ("e2E")
through the issuance of 462,625 shares of its common stock. The transaction was
accounted for as a pooling of interests. Costs associated with this merger in
the amount of $1.0 million have been expensed as required. Pro forma statements
of operations reflecting this transaction are not shown and prior results have
not been restated, as they would not differ materially from reported results.
NOTE 6 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one business segment. The Company provides
product realization services to electronic original equipment manufactures
("OEMs"). The Company has two reportable geographic regions: North America and
Europe. The Company has 24 manufacturing and engineering facilities in North
America and Europe to serve these OEMs. The Company uses an internal management
reporting system, which provides important financial data, to evaluate
performance and allocate the Company's resources on a geographic basis.
Interregion transactions are generally recorded at amounts that approximate
arm's length transactions. Certain corporate expenses are allocated to these
regions and are included for performance evaluation. The accounting policies for
the regions are the same as for the Company taken as a whole. Geographic net
sales information reflects the origin of the product shipped. Assets information
is based on the physical location of the asset.
Three months ended Nine months ended
June 30, June 30,
--------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands)
Net sales:
North America $230,054 $193,187 $737,661 $502,275
Europe 23,118 -- 67,892 --
-------- -------- -------- --------
$253,172 $193,187 $805,553 $502,275
======== ======== ======== ========
Net income:
North America $ 6,386 $ 10,418 $ 31,101 $ 28,023
Europe 537 -- (310) --
Interregion adjustments 439 -- 1,440 --
-------- -------- -------- --------
$ 7,362 $ 10,418 $ 32,231 $ 28,023
======== ======== ======== ========
June 30, September 30,
2001 2000
-------- --------
(in thousands)
Total assets:
North America $526,582 $462,355
Europe 71,345 53,253
-------- --------
$597,927 $515,608
======== ========
NOTE 7 - SHAREHOLDERS' EQUITY
During the first quarter of fiscal 2001, the Company issued 3.45
million shares of common stock at an offering price to the public of $50 per
share. The Company received net proceeds of approximately $164.3 million after
discounts and commissions to the underwriters of approximately $8.2 million.
Additional expenses were approximately $0.6 million.
On August 1, 2000, the Company declared a two-for-one stock split
payable in the form of a stock dividend of one share of common stock for every
share of common stock outstanding. The new common stock was issued on
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August 31, 2000, to holders of record as of August 22, 2000. Share and per share
amounts, where required, have been restated to reflect this stock split.
NOTE 8 - COMPREHENSIVE INCOME/LOSS
The Company's accumulated other comprehensive income (loss) is composed
of the cumulative effect of the foreign currency translation adjustment. For the
three months ended June 30, 2001 and 2000, the Company recorded foreign currency
translation adjustments of approximately $0.5 million and $0, respectively,
which resulted in comprehensive income of $7.9 million and $10.4 million,
respectively. For the nine months ended June 30, 2001 and 2000, the Company
recorded foreign currency translation adjustments of approximately ($0.7)
million and $0, respectively, which resulted in comprehensive income of $31.5
million and $28.0 million, respectively.
NOTE 9 - CONTINGENCY
The Company (along with hundreds of other companies) has been sued by
the Lemelson Medical, Education & Research Foundation Limited Partnership
("Lemelson") related to alleged possible infringement of certain Lemelson
patents. The Company has requested a stay of action pending developments in
other related litigation. The Company believes the vendors from whom the
patent-related equipment was purchased may contractually indemnify the Company.
If a judgment is rendered and/or a license fee required, it is the opinion of
management of the Company that such judgment would not be material to the
consolidated financial position of the Company or the results of its operations.
NOTE 10 - RESTRUCTURING COSTS
In response to the reduction in our sales levels and reduced capacity
utilization during its third quarter of fiscal 2001, the Company reduced its
cost structure through the reduction of its work force and the write-off of
certain under-utilized assets. The Company recorded a pre-tax charge during the
quarter of $1.9 million associated with this restructuring. As of June 30,
2001, liabilities related to these restructuring activities were not
significant and are expected to be paid out within the next twelve months.
NOTE 11 - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." The statements eliminate the
pooling-of-interests method of accounting for business combinations and require
that goodwill and certain intangible assets not be amortized. Instead, these
assets will be reviewed for impairment annually with any related losses
recognized in earnings when incurred. The statements will be effective for the
Company on October 1, 2002 (unless adopted earlier) for existing goodwill and
intangible assets and July 1, 2001 for business combinations completed after
June 30, 2001. The adoption of these statements is expected to reduce annual
amortization expense by approximately $5 million, although the statements may
require impairment charges for the reduction of intangible assets such as
goodwill.
In October 2000, SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of SFAS No. 125" was issued. This statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral, and
requires certain disclosures and it continues most of SFAS No. 125's provisions
without reconsideration. SFAS No. 140 was adopted by the Company in its third
quarter of fiscal 2001 and did not have a significant material effect on the
Company's financial position, results of operations or cash flows.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. As amended, SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company adopted
SFAS No. 133, as amended, on October 1, 2000. The adoption of this statement did
not have a material impact on the Company's financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain views of the SEC staff for
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB No. 101 was adopted by the Company in its fourth
quarter of fiscal 2001. The adoption of SAB No. 101 did not have a significant
material effect on the Company's financial statements.
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NOTE 12 - RECLASSIFICATIONS
Certain amounts in the prior year's consolidated financial statements
have been reclassified to conform to the fiscal 2001 presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"SAFE HARBOR" CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995:
The statements contained in 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) are forward-looking statements that
involve risks and uncertainties, including, but not limited to, the economic
performance of the electronics and technology industries, the risk of customer
delays, changes, or cancellations in both on-going and new programs, the
Company's ability to complete acquisition transactions and integrate acquired
operations, the Company's ability to secure new customers and maintain its and
acquired operations' current customer base, the credit risk associated with
emerging companies, the results of cost reduction efforts, material cost
fluctuations and the adequate availability of components and related parts for
production, the effect of changes in average selling prices, the effect of
start-up costs of new programs and facilities, the effect of general economic
conditions, the impact of increased competition and other risks detailed below,
especially in "Risk Factors" and otherwise herein and in the Company's
Securities and Exchange Commission filings.
OVERVIEW
Plexus provides product realization services to OEMs in the
networking/datacommunications, medical, industrial, computer and transportation
industries. We provide advanced electronics design, manufacturing and testing
services to our customers and focus on complex, high-end products. We offer our
customers the ability to outsource all stages of product realization, including:
development and design, materials procurement and management, prototyping and
new product introduction, testing, manufacturing and after-market support. The
following information should be read in conjunction with our condensed
consolidated financial statements included herein and the "Risk Factors" section
beginning on page 15.
We provide contract manufacturing services on either a turnkey basis,
where we procure some or all of the materials required for product assembly, or
on a consignment basis, where the customer supplies some, or occasionally all,
materials necessary for product assembly. Turnkey services include materials
procurement and warehousing in addition to manufacturing and involve greater
resource investment and inventory risk management than consignment services.
Turnkey manufacturing currently represents almost all of our net sales. Turnkey
sales typically generate higher sales and higher gross profit dollars with lower
gross margin percentages than consignment sales due to the inclusion of
component costs, and related markup, in our net sales. However, turnkey
manufacturing involves the risk of inventory management, and a change in
component costs can directly impact average selling prices, gross margins and
our net sales. Due to the nature of turnkey manufacturing, our quarterly and
annual results are affected by the level and timing of customer orders,
fluctuations in materials costs and the degree of automation used in the
assembly process.
MERGERS AND ACQUISITIONS
On May 23, 2001, we completed our acquisition of Qtron, a privately
held electronic manufacturing services provider ("EMS"), located in San Diego,
California. We acquired all of the outstanding shares of Qtron for approximately
$29.0 million in cash, repaid outstanding Qtron notes payable of $3.6 million to
Qtron shareholders and assumed liabilities of $28.6 million. We are accounting
for the Qtron acquisition using the purchase method of accounting. The cost of
the acquisition has been allocated on the basis of the estimated fair values of
the assets acquired and the liabilities assumed. The preliminary estimate of the
excess of the cost over the fair value of the net
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assets acquired of approximately $21 million has been recorded as goodwill and
is being amortized over 15 years. The purchase price is subject to certain
adjustments. The results of Qtron's operations have been reflected in the
Company's financial statements from the date of acquisition. The acquisition of
Qtron establishes a presence for the Company in Southern California's wireless
market.
On December 21, 2000, we merged with e2E, a privately held circuit
board design and engineering services provider for electronic OEMs. This
transaction was accounted for as a pooling of interests. However, our prior
results were not restated, as they would not differ materially from reported
results. e2E's results are included for the nine months ended June 30, 2001. The
addition of e2E has significantly increased the Company's printed circuit board
design and engineering capabilities as well as its geographic reach.
On July 14, 2000, we acquired all of the outstanding capital stock of
Keltek (Holdings) Limited ("Keltek"), headquartered in Kelso, Scotland, with an
additional facility in Maldon, England. We accounted for the acquisition of
Keltek using the purchase method of accounting. The results of Keltek's
operations have been included in our results from the date of acquisition. The
acquisition of Keltek has provided us with a presence in Western Europe to serve
both current and new customers.
On May 23, 2000, we completed our acquisition of the turnkey
electronics manufacturing services operations of Elamex, S.A. de C.V. ("Mexico
turnkey operations") located in Juarez, Mexico. We accounted for this
acquisition using the purchase method of accounting, and the Mexico turnkey
operations' results are included in our results from the date of acquisition.
The Mexico turnkey operations have provided our existing and potential customers
with a proven low-cost-labor solution for many of our product realization
services. In addition, the acquisition has provided the existing customers of
the Mexico turnkey operations with access to our engineering, test and
technology capabilities.
On April 28, 2000, we merged with Agility Incorporated ("Agility"), a
privately held, Boston-based EMS provider. This transaction was accounted for as
a pooling of interests. However, our prior results were not restated, as they
would not differ materially from reported results. The addition of Agility has
established a stronger presence with our current East Coast customers and
increased our capacity to assemble complex printed circuit boards with complete
final product and system box build.
RESULTS OF OPERATIONS
Net sales
Net sales for the three months ended June 30, 2001, increased 31
percent to $253 million from $193 million for the three months ended June 30,
2000. Net sales for the nine months ended June 30, 2001, increased 60 percent to
$806 million from $502 million for the nine months ended June 30, 2000. Our
acquisitions since October 1, 1999 accounted for approximately 89 percent and 54
percent of sales growth for the three and nine month periods ended June 30,
2001, respectively. Plexus' sales have been affected by the impact of the
overall slow-down in the economy as a whole, and in particular in the
networking/datacommunications infrastructure spend with some of our customers,
resulting in these customers' forecasts and orders becoming more cautious.
Plexus expects that these factors will continue to affect fiscal fourth quarter
sales.
Our largest customer for the three months ended June 30, 2001, was
Unisphere Networks, Inc., which accounted for 11 percent of sales, compared to
the three months ended June 30, 2000, when Lucent Technologies, Inc., and
General Electric Company accounted for 24 percent and 9 percent of sales,
respectively. Our largest customer for the nine months ended June 30, 2001 was
Cisco Systems, Inc., which accounted for slightly less than 10 percent of sales
compared to Lucent Technologies, Inc., and General Electric which accounted for
24 percent and 11 percent of sales, respectively, for the nine months ended June
30, 2000. No other customers accounted for more than 10 percent of the Company's
sales for the three and nine months ended June 30, 2001 or 2000.
Sales to our ten largest customers accounted for 48 percent of sales
for the three months ended June 30, 2001, compared to 65 percent for the three
months ended June 30, 2000. Sales to our ten largest customers accounted for 51
percent of sales for the nine months ended June 30, 2001 compared to 67 percent
for the nine
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months ended June 30, 2000. As with sales to most of our customers, sales to our
largest customers may vary from time to time depending on the size and timing of
customer program commencement, termination, delays, modifications and
transitions. We remain dependent on continued sales to our significant
customers, and we generally do not obtain firm, long-term purchase commitments
from our customers. Customer forecasts can and do change as a result of their
end-market demand and other factors. Although any material change in orders from
these or other customers could materially affect our results of operations, we
are dedicated to diversifying our customer base and decreasing our dependence on
any particular customer or customers.
Our sales for the three months ended June 30, 2001 and 2000,
respectively, by industry were as follows: networking/datacommunications 38
percent (38 percent), medical 23 percent (26 percent), industrial 22 percent (18
percent), computer 9 percent (11 percent) and transportation/other 8 percent (7
percent). Based upon current forecasts from our customers, we expect our
industry sales breakdown in our fiscal fourth quarter to be similar to our third
quarter results. The percent of Plexus' sales to the networking/
datacommunications industry may increase because the majority of Qtron's sales
are to the wireless infrastructure equipment industry.
Gross profit
Gross profit for the three months ended June 30, 2001, increased 6
percent to $29.8 million from $28.0 million for the three months ended June 30,
2000. Gross profit for the nine months ended June 30, 2001, increased 42 percent
to $101.7 million from $71.7 million for the nine months ended June 30, 2000.
The gross margin for the three months ended June 30, 2001, was 11.8 percent,
compared to 14.5 percent for the three months ended June 30, 2000. The gross
margins for the nine months ended June 30, 2001, was 12.6 percent compared to
14.3 percent for the nine months ended June 30, 2000.
Our gross margin reflects a number of factors that can vary from
period to period, including product mix, the level of start-up costs and
efficiencies of new programs, product life cycles, sales volumes, price erosion
within the electronics industry, capacity utilization of surface mount and other
equipment, labor costs and efficiencies, the management of inventories,
component pricing and shortages, average sales prices, the mix of turnkey and
consignment business, fluctuations and timing of customer orders, changing
demand for customers' products and competition within the electronics industry.
Gross margin for the three months ended June 30, 2001 was particularly affected
by a slowdown in the end-market demand particularly in the
networking/datacommunications sector which resulted in lower production capacity
at our manufacturing sites.
In addition, gross margins continue to be affected by acquisitions. In
particular, gross margins resulting from the Mexico turnkey operations, Keltek
and Qtron are below our historical gross margins as we work to integrate these
acquisitions into our product realization model and increase their capacity
utilization. These and other factors can cause variations in our operating
results. Although our focus is on maintaining and expanding gross margins, there
can be no assurance that gross margins will not decrease in future periods.
Gross margins have decreased from fiscal 2000 results due to the impact of the
Company's recent acquisitions and its reduced manufacturing capacity
utilization. The effect may be more pronounced in the fourth quarter of fiscal
2001 because the Qtron operations will be included for the entire quarter and,
in addition, manufacturing capacity utilization will be below fiscal 2000
levels.
Most of the research and development we conduct is paid for by our
customers and is, therefore, included in the cost of sales. We conduct other
research and development, but the 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, 2001, increased to $13.6 million from $9.3 million for the three months
ended June 30, 2000. S&A expenses for the nine months ended June 30, 2001,
increased to $39.5 million from $24.4 million for the nine months ended June 30,
2000. As a percentage of sales, S&A expenses were 5.4 percent and 4.9 percent
for the three months and nine months ended June 30, 2001, respectively, compared
to 4.8 percent and 4.9 percent for the three months and nine months ended June
30, 2000,
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respectively. The increase in dollar terms was due primarily to increases in our
sales and marketing efforts and information systems infrastructure to support
our growth and global expansion.
Goodwill amortization of $1.0 million for the three months ended June
30, 2001 increased $0.7 million from $0.3 million for the three months ended
June 30, 2000. Goodwill amortization of $2.8 million for the nine months ended
June 30, 2001 increased $2.5 million from $0.3 million for the nine months ended
June 30, 2000. This was a result of the acquisitions of the Mexico turnkey
operations, Keltek and Qtron over the last 15 months. In July 2001, SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets"
were issued. The adoption of these statements is expected to reduce annual
goodwill amortization expense by approximately $5 million, although the
statements may require impairment charges for the reduction of intangible assets
such as goodwill.
In response to the reduction in our sales levels and reduced capacity
utilization during its third quarter of fiscal 2001, the Company reduced its
cost structure through the reduction of its work force and writing off certain
under-utilized assets. The Company recorded a pre-tax charge during the quarter
of $1.9 million associated with this restructuring.
The Company also incurred $0.6 million of pre-tax charges related to
its acquisition of Qtron during its third quarter of fiscal 2001.
Income taxes
Income taxes decreased to $4.9 million for the three months ended June
30, 2001, from $7.1 million for the three months ended June 30, 2000. Income
taxes increased to $22.1 million for the nine months ended June 30, 2001, from
$18.8 million for the nine months ended June 30, 2000. Our effective income tax
rate has remained at approximately 40 percent excluding non-tax-deductible
merger expenses. This rate approximates the blended federal and state statutory
rate. The effective tax rate increased slightly upon the completion of the
Mexico turnkey operations and Keltek acquisitions arising from the tax treatment
of goodwill and slightly impacted the third quarter of 2001. For fiscal 2001, we
expect the annual effective tax rate to decrease slightly as foreign operations
increase as a percentage of the Company's total operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $25.5 million for the
nine months ended June 30, 2001, compared to cash flows used in operating
activities of $2.0 million for the nine months ended June 30, 2000. During the
period, cash provided by operating activities primarily related to increased net
income, the effect of non-cash expense items such as depreciation and the income
tax benefit from stock option award plans, and decreased inventories. This was
offset in part by increases in accounts receivable and prepaid expenses, and
decreases in accounts payable and accrued liabilities. Adjusting for the $30
million in receivables sold under the asset securitization facility discussed
below, net accounts receivable have increased approximately $17 million since
September 30, 2000; the increase results from increased sales, the effect of
acquisitions and a slight lengthening of average days outstanding. Due to the
general slow-down in the economy, Plexus has increased its allowance by
approximately $2.1 million since September 30, 2000.
Cash flows used in investing activities totaled $94.4 million for the
nine months ended June 30, 2001. The primary uses were payments for property,
plant and equipment, including plant expansions and additional manufacturing
equipment, purchasing short-term investments, and payments for the Qtron
acquisition.
We utilize available cash, debt and operating leases to fund our
operating requirements. We utilize operating leases primarily in situations
where technical obsolescence concerns are determined to outweigh the benefits of
financing the equipment purchase. We currently estimate capital expenditures for
fiscal 2001 will be approximately $55 million to $60 million including the $45.7
million expended during the nine months ended June 30, 2001. This includes
planned expansions at our manufacturing facilities in Kentucky and Illinois and
additional manufacturing equipment. This estimate reflects a reduction from
prior expectations as the Company has pushed out certain capital requirements
due to the reduction in anticipated sales levels. In addition, this estimate
does not include any future acquisitions which Plexus may undertake.
Cash flows provided by financing activities totaled $97.3 million for
the nine months ended June 30, 2001, primarily representing net proceeds from
the issuance of common stock and proceeds from our asset securitization
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facility, offset by net payments on debt. Plexus' ratio of total debt to equity
was 0.4 to 1 as of June 30, 2001 compared to 1.5 to 1 as of September 30, 2000.
On October 25, 2000, Plexus entered into a new unsecured revolving
credit facility (the "Credit Facility") with a group of banks. The Credit
Facility allows us to borrow up to $250 million. Borrowing capacity utilized
under the Credit Facility will be either through revolving or other loans or
through guarantees of commercial paper. Interest on borrowings is computed at
the applicable Eurocurrency rate on the agreed currency, plus any commitment
fees. The Credit Facility matures on October 25, 2003, and requires among other
things, maintenance of minimum interest expense coverage and maximum leverage
ratios. As of July 31, 2001, the Company has borrowed $47.4 million under the
Credit Facility.
Pursuant to a public offering of shares of common stock in the first
quarter of fiscal 2001, Plexus issued 3.45 million shares of common stock for
$50 per share, with an underwriters discount of $2.375 per share. The Company
received net proceeds of approximately $164.3 million, after discounts and
commissions to the underwriters of approximately $8.2 million. Additional
expenses were approximately $0.6 million. The aggregate net proceeds from the
offering were used to pay down, in part, existing debt and are being or will be
used to finance capital expenditures, capacity expansion, potential future
acquisitions and for general corporate purposes and working capital.
On October 6, 2000, Plexus entered into an agreement (amended and
restated on July 1, 2001) to sell up to $50 million of trade accounts receivable
without recourse (the "asset securitization facility") to Plexus ABS Inc.
("ABS"), a wholly owned, limited purpose subsidiary of the Company. ABS is a
separate corporate entity that sells participating interests in a pool of the
Company's accounts receivable to financial institutions. The financial
institutions then receive an ownership and security interest in the pool of
receivables. Accounts receivable sold to financial institutions, if any, are
reflected as a reduction to accounts receivable in the consolidated balance
sheets. As of June 30, 2001, the Company had utilized $30 million of the asset
securitization facility.
Our credit facilities, leasing capabilities, the asset securitization
facility, the proceeds of our October 2000 offering, cash and short-term
investments and projected cash from operations should be sufficient to meet our
working capital and capital requirements through fiscal 2001 and the foreseeable
future. We have not paid cash dividends in the past, and do not anticipate
paying them in the foreseeable future. We anticipate using earnings to support
our business.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, " Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." The statements eliminate the
pooling-of-interests method of accounting for business combinations and require
that goodwill and certain intangible assets not be amortized. Instead, these
assets will be reviewed for impairment annually with any related losses
recognized in earnings when incurred. The statements will be effective for the
Company on October 1, 2002 (unless adopted earlier) for existing goodwill and
intangible assets and July 1, 2001 for business combinations completed after
June 30, 2001. The adoption of these statements is expected to reduce annual
amortization expense by approximately $5 million, although the statements may
require impairment charges for the reduction of intangible assets such as
goodwill.
In October 2000, SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS
No. 125" was issued. This statement revises the standards for accounting for
securitizations and other transfers of financial assets and collateral, and
requires certain disclosures and it continues most of SFAS No. 125's provisions
without reconsideration. SFAS No. 140 was adopted by the Company in its third
quarter of fiscal 2001 and did not have a significant material effect on the
Company's financial position, results of operations or cash flows.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. As amended, SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company adopted
SFAS No. 133, as
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amended, on October 1, 2000. The adoption of this statement did not have a
material impact on our financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain views of the SEC staff for
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB No. 101 was adopted by the Company in its fourth
quarter of fiscal 2001. The adoption of SAB No. 101 did not have a significant
material effect on the Company's financial statements.
RISK FACTORS
OUR CUSTOMER REQUIREMENTS AND OPERATING RESULTS VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER, WHICH COULD NEGATIVELY IMPACT THE PRICE OF OUR COMMON STOCK.
Our quarterly and annual results may vary significantly depending on
various factors, many of which are beyond our control. These factors include:
- the volume of customer orders relative to our capacity
- the timing of customer orders, particularly in light of the fact that
some of our customers release a significant percentage of their orders
during the last few weeks of a quarter
- the typical short life cycle of our customers' products
- market acceptance of and demand for our customers' products
- changes in our sales mix to our customers
- the timing of our expenditures in anticipation of future orders
- our effectiveness in managing manufacturing processes
- changes in cost and availability of labor and components
- changes in economic conditions
- local events that may affect our production volume, such as local
holidays.
The EMS industry is impacted by the state of the U.S. and global
economies. Any slow-down in the U.S. or global economies, or in particular in
the industries served by us, may result in our customers reducing their
forecasts. The Company's sales growth has been, and is expected to continue to
be, impacted by the slow down in the networking/datacommunications and computer
markets, as well as the economy in general. As a result, the demand for our
services could decrease, which in turn would impact our sales.
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 automation
used in the manufacturing process.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR DELAY
PRODUCTION.
Electronics manufacturing service providers must provide increasingly
rapid product turnaround for their customers. We generally do not obtain firm,
long-term purchase commitments from our customers and we continue to experience
reduced lead-times in customer orders. Customers may cancel their orders, change
production quantities or delay production for a number of reasons. The success
of our customers' products in the market affects 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 slow down in the
networking/datacommunications market and other sectors 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, personnel needs and other resource requirements, based
on our estimates of customer requirements. The short-term nature of our
customers' commitments and the possibility of rapid changes in demand for their
products reduces our ability to estimate accurately the future requirements of
those customers.
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On occasion, customers may require rapid increases in production, which
can stress our resources and reduce operating margins. Although we have
increased our manufacturing capacity and plan further increases, we may not have
sufficient capacity at any given time to meet all of our customers' demands. In
addition, because many of our costs and operating expenses are relatively fixed,
a reduction in customer demand can harm our gross margins and operating results.
WE MAY NOT BE ABLE TO OBTAIN RAW MATERIALS OR COMPONENTS FOR OUR ASSEMBLIES ON A
TIMELY BASIS OR AT ALL.
We rely on a limited number of suppliers for many components used in
the assembly process. We do not have any long-term supply agreements. At various
times, there have been shortages of some of the electronic components that we
use, and suppliers of some components have lacked sufficient capacity to meet
the demand for these components. Over the past 21 months, component shortages
have been prevalent in our industry. 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 has contributed
to an increase in our inventory levels. We expect that shortages and delays in
deliveries of some components may continue. 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.
THE MAJORITY OF OUR SALES COMES FROM A SMALL NUMBER OF CUSTOMERS AND IF WE LOSE
ANY OF THESE CUSTOMERS, OUR SALES AND OPERATING RESULTS COULD DECLINE
SIGNIFICANTLY.
Sales to our ten largest customers have represented a majority of our
sales in recent periods. Our ten largest customers accounted for approximately
48 percent of our net sales for the three months ended June 30, 2001, and 51
percent for the first nine months of fiscal 2001. Our ten largest customers
represented 63 percent of our sales for fiscal 2000. 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. If we are not able to timely
replace expired, canceled or reduced contracts with new business, our sales will
decrease.
WE MAY HAVE INCREASING NEW CUSTOMER RELATIONSHIPS WITH EMERGING COMPANIES, WHICH
MAY PRESENT MORE RISKS, INCLUDING CREDIT RISK, THAN WITH ESTABLISHED COMPANIES.
We currently anticipate that an increasing percentage of our sales will
be to emerging companies, including start-ups, particularly in the
networking/datacommunications market. However, similar to our other customer
relationships, there are no volume purchase commitments under these new
programs, and the revenues we actually achieve may not meet our expectations. In
anticipation of future activities under these programs, we incur substantial
expenses as we add personnel and manufacturing capacity and procure materials.
Because emerging companies do not have a history of operations, it will be
harder for us to anticipate needs and requirements than with established
customers. Our operating results will be harmed if sales do not develop to the
extent and within the time frame we anticipate.
Customer relationships with emerging companies also present special
risks. For example, because they do not have an extensive product history, there
is less demonstration of market acceptance of their products. Also, due to the
current economic environment, additional funding for such companies may be more
difficult. This tightening of financing for start-up customers, together with
many start-up customers' lack of prior earnings and non-proven product markets
could potentially increase the Company's credit risk, especially accounts
receivable and inventories.
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Although the Company adjusts its reserves for accounts receivable and
inventories for all customers, including start-up customers, based on the
information available, these reserves may not be adequate.
WE MAY FAIL TO COMPLETE SUCCESSFULLY FUTURE ACQUISITIONS AND MAY NOT INTEGRATE
SUCCESSFULLY ACQUIRED BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
We have pursued a strategy that has included growth through
acquisitions. We cannot assure you that we will be able to complete successfully
future acquisitions, due primarily to increased competition for the acquisition
of electronics manufacturing service operations. If we are unable to acquire
additional businesses, our growth could be inhibited. Similarly, we cannot
assure you that we will be able to integrate successfully the operations and
management of our recent acquisitions or future acquisitions. Acquisitions
involve significant risks that could have a material adverse effect on us. These
risks include:
OPERATING RISKS, SUCH AS THE:
- inability to integrate successfully our acquired operations'
businesses and personnel
- inability to realize anticipated synergies, economies of scale or
other value
- difficulties in scaling up production and coordinating management
of operations at new sites
- strain placed on our personnel, systems and resources
- possible modification or termination of an acquired business
customer program, including cancellation of current or anticipated
programs
- loss of key employees of acquired businesses.
FINANCIAL RISKS, SUCH AS THE:
- dilutive effect of the issuance of additional equity securities
- incurrence of additional debt and related interest costs
- inability to achieve expected operating margins to offset the
increased fixed costs associated with acquisitions, and/or
inability to increase margins at acquired entities to Plexus'
historical levels
- incurrence of large write-offs or write-downs
- amortization of goodwill or other intangible assets
- unforeseen liabilities of the acquired businesses.
EXPANSION OF OUR BUSINESS AND OPERATIONS MAY NEGATIVELY IMPACT OUR BUSINESS.
We may expand our operations by establishing or acquiring new
facilities or by expanding capacity in our current facilities. We may expand
both in geographical areas in which we currently operate and in new geographical
areas within the United States and internationally. However, we may not be able
to find suitable facilities on a timely basis or on terms satisfactory to us.
Expansion of our business and operations involves numerous business risks,
including the:
- inability to integrate successfully additional facilities or capacity
and to realize anticipated synergies, economies of scale or other value
- additional fixed costs which may not be fully absorbed by the new
business
- difficulties in the timing of expansions, including delays in the
implementation of construction and manufacturing plans
- diversion of management's attention from other business areas during
the planning and implementation of expansions
- strain placed on our operational, financial, management, technical and
information systems and resources
- disruption in manufacturing operations
- incurrence of significant costs and expenses
- inability to locate enough customers or employees to support the
expansion.
In addition, Qtron moved to a new facility shortly after its
acquisition by Plexus. The continuing effects of that move could make the
integration process more difficult. Further, Qtron's operations (and Plexus'
other California operations) may be effected by the power shortages in that
state.
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OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS.
We have acquired operations in Mexico and the United Kingdom. We may in
the future expand into other international regions. We have limited experience
in managing geographically dispersed operations and in operating in Mexico and
the United Kingdom. We also purchase a significant number of components
manufactured in foreign countries. Because of these international aspects of our
operations, we are subject to the following risks that could materially impact
our operating results:
- economic or political instability
- transportation delays or interruptions and other effects of less
developed infrastructure in many countries
- foreign exchange rate fluctuations
- utilization of different systems and equipment
- difficulties in staffing and managing foreign personnel and diverse
cultures.
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. Also, 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.
WE MAY NOT BE ABLE TO MAINTAIN OUR ENGINEERING, TECHNOLOGICAL AND MANUFACTURING
PROCESS EXPERTISE.
The markets for our manufacturing and engineering services are
characterized by rapidly changing technology and evolving process development.
The continued success of our business will depend upon our ability to:
- hire, retain and expand our qualified engineering and technical
personnel
- maintain and enhance our technological capabilities
- develop and market manufacturing services which meet changing customer
needs
- successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis.
Although we believe that our operations utilize the assembly and
testing technologies, equipment and processes that are currently required by our
customers, we cannot be certain that we will develop the capabilities required
by our customers in the future. The emergence of new technology industry
standards or customer requirements may render our equipment, inventory or
processes obsolete or noncompetitive. In addition, we may have to acquire new
assembly and testing technologies and equipment to remain competitive. The
acquisition and implementation of new technologies and equipment may require
significant expense or capital investment which could reduce our operating
margins and our operating results. Our failure to anticipate and adapt to our
customers' changing technological needs and requirements could have an adverse
effect on our business.
FAILURE TO MANAGE OUR GROWTH MAY SERIOUSLY HARM OUR BUSINESS.
We have experienced rapid growth, both internally and through
acquisitions. This growth has placed, and will continue to place, significant
strain on our operations. To manage our growth effectively, we must continue to
improve and expand our financial, operational and management information
systems; continue to develop the management skills of our managers and
supervisors; and continue to train, manage and motivate our employees. If we are
unable to manage our growth effectively, our operating results could be harmed.
Plexus has recently entered into a licensing arrangement for new ERP
software and related information systems. The Company is in the process of
developing its global model and expects site conversions to begin in mid-fiscal
2002. Conversions to new software and systems are complicated processes, and can
cause management and operational disruptions which may affect Plexus.
Information flow and production could also be affected if the new software and
systems do not perform as Plexus expects.
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OUR TURNKEY MANUFACTURING SERVICES INVOLVE INVENTORY RISK.
Most of our contract manufacturing services are provided on a turnkey
basis, where we purchase some or all of the materials required for designing,
product assembling and manufacturing. These services involve greater resource
investment and inventory risk management than consignment services, where the
customer provides these materials. Accordingly, various component price
increases and inventory obsolescence could adversely affect our selling price,
gross margins and operating results. We also have the risk that customers may
not honor their commitments to reimburse the Company for excess inventory
purchases if the customers cancel orders.
START-UP COSTS AND INEFFICIENCIES RELATED TO NEW PROGRAMS CAN ADVERSELY AFFECT
OUR OPERATING RESULTS.
Start-up costs, the management of labor and equipment resources in
connection with the establishment of new programs and new customer
relationships, and the need to estimate required resources in advance can
adversely affect our gross margins and operating results. These factors are
particularly evident in the early stages of the life cycle of new products and
new programs. These factors also affect our ability to efficiently use labor and
equipment. In addition, if any of these new programs or new customer
relationships were terminated, our operating results could be harmed,
particularly in the short term.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS.
We are also subject to environmental regulations relating to the use,
storage, discharge, recycling and disposal of hazardous chemicals used in our
manufacturing process. If we fail to comply with present and future regulations,
we could be subject to future liabilities or the suspension of business. These
regulations could restrict our ability to expand our facilities or require us to
acquire costly equipment or incur significant expense. While we are not
currently aware of any material violations, we may have to spend funds to comply
with present and future regulations or be required to perform site remediation.
In addition, our medical device business, which represented
approximately 23 percent of our sales for the three months ended June 30, 2001,
and 27 percent for fiscal year 2000, 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. Noncompliance with
these rules can result in, among other things, us and our customers being
subject to fines, injunctions, civil penalties, criminal prosecution, recall or
seizure of devices, total or partial suspension of production, failure of the
government to grant pre-market clearance or record approvals for projections or
the withdrawal of marketing approvals. The FDA also has the authority to require
repair or replacement of equipment, or refund of the cost of a device
manufactured or distributed by our customers. In addition, the failure or
noncompliance could have an adverse effect on our reputation.
OUR PRODUCTS ARE FOR THE ELECTRONICS INDUSTRY, WHICH PRODUCES TECHNOLOGICALLY
ADVANCED PRODUCTS WITH SHORT LIFE CYCLES.
Factors affecting the electronics industry, in particular the short
life cycle of products, could seriously harm our customers and, as a result, us.
These factors include:
- the inability of our customers to adapt to rapidly changing technology
and evolving industry standards, which result in short product life
cycles
- the inability of our customers to develop and market their products,
some of which are new and untested
- the potential that our customers' products may become obsolete or the
failure of our customers' products to gain widespread commercial
acceptance.
INCREASED COMPETITION MAY RESULT IN DECREASED DEMAND OR PRICES FOR OUR SERVICES.
The electronics manufacturing services industry is highly competitive.
We compete against numerous U.S. and foreign electronics manufacturing services
providers with global operations, as well as those who operate on a
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local or regional basis. In addition, current and prospective customers
continually evaluate the merits of manufacturing products internally.
Consolidation in the electronics manufacturing services industry results in a
continually changing competitive landscape. The consolidation trend in the
industry also results in larger and more geographically diverse competitors who
have significant combined resources with which to compete against us.
Some of our competitors have substantially greater managerial,
manufacturing, engineering, technical, financial, systems, sales and marketing
resources than we do. These competitors may:
- respond more quickly to new or emerging technologies
- have greater name recognition, critical mass and geographic and market
presence
- be better able to take advantage of acquisition opportunities
- adapt more quickly to changes in customer requirements
- devote greater resources to the development, promotion and sale of
their services
- be better positioned to compete on price for their services.
We may be operating at a cost disadvantage compared to manufacturers
who have greater direct buying power from component suppliers, distributors and
raw material suppliers or who have lower cost structures. As a result,
competitors may procure a competitive advantage and obtain business from our
customers. Our manufacturing processes are generally not subject to significant
proprietary protection, and companies with greater resources or a greater market
presence may enter our market or increase their competition with us. Increased
competition could result in price reductions, reduced sales and margins or loss
of market share.
WE MAY FAIL TO SECURE NECESSARY ADDITIONAL FINANCING.
We have made and intend to continue to make substantial capital
expenditures to expand our operations, acquire businesses and remain competitive
in the rapidly changing electronics manufacturing services industry. Our future
success may depend on our ability to obtain additional financing and capital to
support our continued growth and operations, including our working capital
needs. We may seek to raise capital by:
- issuing additional common stock or other equity securities
- issuing debt securities
- increasing available borrowings under our existing credit facility or
obtaining new credit facilities
- obtaining off-balance-sheet financing.
We may not be able to obtain additional capital when we want or need
it, and capital may not be available on satisfactory terms. If we issue
additional equity securities or convertible debt to raise capital, it may be
dilutive to your ownership interest. Furthermore, any additional financing and
capital may have terms and conditions that adversely affect our business, such
as restrictive financial or operating covenants.
WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF KEY PERSONNEL MAY HARM OUR
BUSINESS.
Our future success depends in large part on the continued service of
our key technical and management personnel and on our ability to continue to
attract and retain qualified employees, particularly those highly skilled
design, process and test engineers involved in the manufacture of existing
products and the development of new products and processes. The competition for
these individuals is intense, 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 believe
that we have a relatively small management group whose resources could be
strained as a result of expansion of our business.
PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS WHICH COULD
RESULT IN REDUCED DEMAND FOR OUR SERVICES AND LIABILITY CLAIMS AGAINST US.
We manufacture products to our customers' specifications which are
highly complex and may at times contain design or manufacturing errors or
failures. Defects have been discovered in products we manufactured in the
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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.
The FDA investigates and checks, occasionally on a random basis, compliance with
statutory and regulatory requirements. Violations may lead to penalties or
shutdowns of a program or a facility.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Our stock price has fluctuated significantly. The price of our common
stock may fluctuate significantly in response to a number of events and factors
relating to our company, our competitors and the market for our services, many
of which are beyond our control.
In addition, the stock market in general, and especially the NASDAQ
National Market along with market prices for technology companies, in
particular, have experienced extreme volatility and weakness that has often been
unrelated to the operating performance of these companies. These broad market
and industry fluctuations may adversely affect the market price of our common
stock, regardless of our operating results.
Among other things, volatility in Plexus' stock price could mean that
investors will not be able to sell their shares at or above the prices which
they pay. The volatility also could impair Plexus' ability in the future to
offer common stock 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 certain foreign currency
denominated transactions in a manner that substantially offsets the effects of
changes in foreign currency exchange rates. Presently, we use foreign currency
forward contracts to hedge only those currency exposures associated with certain
assets and liabilities denominated in non-functional currencies. Corresponding
gains and losses on the underlying transaction generally offset the gains and
losses on these foreign currency hedges. As of June 30, 2001, the foreign
currency forward contracts were scheduled to mature in less than three months
and were not material.
INTEREST RATE RISK
We have financial instruments, including cash equivalents, short-term
investments, long-term debt and our asset securitization facility, which are
sensitive to changes in interest rates. We consider the use of interest-rate
swaps based on existing market conditions. We currently do not use any
interest-rate swaps or other types of derivative financial instruments.
The primary objective of our investment activities is to preserve
principal, while maximizing yields without significantly increasing market risk.
To achieve this, we maintain our portfolio of cash equivalents and short-term
investments in a variety of securities such as money market funds and
certificates of deposit and limit the amount of principal exposure to any one
issuer.
Our only material interest rate risk is associated with our credit
facilities and asset securitization facility. Interest on borrowings is computed
at the applicable Eurocurrency rate on the agreed currency. A 10 percent change
in our weighted average interest rate on average borrowings would have impacted
net interest expense by approximately $0.1 million and $0.5 million for the
three months and nine months ended June 30, 2001, respectively.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Receivables Sale Agreement dated
July 1, 2001 between Plexus Services Corp. and Plexus
ABS, Inc.
10.2 First Amendment to Receivables Purchase Agreement
dated July 1, 2001 among Plexus ABS, Inc., Plexus
Corp., Preferred Receivables Funding Corporation and
Bank One, NA.
(b) Plexus did not file any reports on Form 8-K during this
period.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
8/13/01 /s/ John L. Nussbaum
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Date John L. Nussbaum
President and Chief Executive Officer
8/13/01 /s/ Thomas B. Sabol
- --------- ---------------------------------------------
Date Thomas B. Sabol
Executive Vice President and
Chief Financial Officer
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