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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, 1998
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 10, 1998 there were 14,769,207 shares of Common Stock of
the Company outstanding.
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PLEXUS CORP.
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Condensed Consolidated Statements of Operations
Three and Nine Months Ended June 30, 1998 and 1997......................3
Condensed Consolidated Balance Sheets
June 30, 1998 and September 30, 1997....................................4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1998 and 1997................................5
Notes to Condensed Consolidated Financial Statements....................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations:
General.................................................................9
Results of Operations..................................................11
Liquidity and Capital Resources........................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................15
PART II. OTHER INFORMATION
Item 5. Other Information.............................................................15
Item 6. Exhibits and Reports on Form 8-K..............................................15
Signatures....................................................................16
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PLEXUS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Unaudited
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 98,563 $ 99,092 $ 292,157 $ 283,207
Cost of sales 85,399 87,149 256,857 252,191
------------ ------------ ------------ ------------
Gross profit 13,164 11,943 35,300 31,016
Selling and administrative
expenses 4,893 4,478 14,120 12,629
------------ ------------ ------------ ------------
Operating income 8,271 7,465 21,180 18,387
Other income (expense):
Interest expense
(3) (186) (10) (727)
Other
314 37 788 288
------------ ------------ ------------ ------------
Income before income taxes 8,582 7,316 21,958 17,948
Provision for income taxes 3,380 2,897 8,673 7,068
------------ ------------ ------------ ------------
Net income $ 5,202 $ 4,419 $ 13,285 $ 10,880
============ ============ ============ ============
Net income per common share:
Basic $ 0.35 $ 0.30 $ 0.90 $ 0.78
============ ============ ============ ============
Diluted $ 0.33 $ 0.28 $ 0.83 $ 0.71
============ ============ ============ ============
Average number of common shares:
Basic 14,770,934 14,541,182 14,761,273 13,757,301
============ ============ ============ ============
Diluted 15,872,699 15,748,453 15,930,118 15,298,753
============ ============ ============ ============
See notes to condensed consolidated financial statements
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PLEXUS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Unaudited
JUNE 30, SEPTEMBER 30,
1998 1997
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,640 $ 3,655
Accounts receivable, net of allowance of $500
and $360, respectively 47,917 47,648
Inventories 44,854 47,931
Deferred income taxes 3,358 2,571
Prepaid expenses and other 1,727 981
--------- --------
Total current assets 112,496 102,786
Property, plant and equipment, net 20,961 18,687
Other 1,159 344
--------- --------
Total assets $ 134,616 $121,817
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 165 $ 214
Accounts payable 35,288 35,099
Customer deposits 3,475 3,414
Accrued liabilities:
Salaries and wages 5,475 5,908
Other 5,219 4,893
--------- --------
Total current liabilities 49,622 49,528
Long-term debt 155 3,516
Deferred income taxes 894 998
Other liabilities 436 192
Stockholders' equity:
Preferred stock $.01 par value, 4,993,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 20,000,000 shares authorized,
14,830,689 and 14,739,914 issued, respectively 148 147
Additional paid-in capital 22,064 17,675
Retained earnings 62,566 49,761
Treasury stock, at cost, 70,617 and 0 shares, respectively (1,269) -
--------- --------
Total stockholders equity 83,509 67,583
--------- --------
Total liabilities and stockholders' equity $ 134,616 $121,817
========= ========
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,
----------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 13,285 $ 10,880
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 4,661 3,026
Deferred income taxes (891) (492)
Change in assets and liabilities:
Accounts receivable 6 (7,795)
Inventories 3,210 (932)
Prepaid expenses and other (560) 413
Accounts payable 77 6,849
Customer deposits 61 (2,388)
Accrued liabilities (279) 2,957
Other (54) 10
-------- --------
Cash flows provided by operating activities 19,516 12,528
======== ========
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for property, plant and equipment (7,221) (7,681)
Other (541) 19
-------- --------
Cash flows used in investing activities (7,762) (7,662)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt - 90,442
Payments on debt (3,410) (96,344)
Proceeds from exercise of stock options 425 2,676
Tax benefit from stock options exercised 3,908 -
Treasury stock purchased (2,659) -
Treasury stock reissued 967 -
Payments of preferred stock dividends - (338)
-------- --------
Cash flows used in financing activities (769) (3,564)
-------- --------
Net increase in cash and cash equivalents 10,985 1,302
-------- --------
Cash and cash equivalents:
Beginning of period 3,655 1,847
-------- --------
End of period $ 14,640 $ 3,149
======== ========
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, 1998
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by 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
consist only of normal recurring adjustments, necessary to present fairly the
financial position of Plexus Corp. at June 30, 1998 and the results of
operations for the three months and nine months ended June 30, 1998 and 1997 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 1997 Annual Report.
The condensed consolidated balance sheet data at September 30, 1997 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,
1998 1997
---- ----
Assembly Parts $25,902 $28,828
Work-in-Process 18,449 18,557
Finished Goods 503 546
------- -------
$44,854 $47,931
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NOTE 3 - STOCKHOLDERS' EQUITY
On December 19, 1997, the Company's Board of Directors authorized the
repurchase of up to 2,000,000 shares, or a maximum of $25,000,000, of the
Company's Common Stock on the open market. The Company expects that repurchases
will occur from time to time. The Company anticipates the shares held in
treasury to be used for various purposes in the future, including satisfaction
of requirements for shares under the Company's Employee Stock Savings Plan (401k
plan) and its stock option incentive program. When the treasury shares are
reissued, any excess of the acquisition cost of the shares over the proceeds
from reissuance is charged to retained earnings. Through June 30, 1998, 170,000
shares have been repurchased, of which 99,383 have been reissued under the
Company's stock option and 401(k) plans.
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NOTE 4 - NET INCOME PER SHARE
During the year, the Company has adopted Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share", which establishes new
standards for reporting earnings per share. The earnings per share computations
for prior periods have been restated to conform with the provisions of SFAS No.
128.
The following is a reconciliation of the numerators and denominators
for the computation of basic and diluted income per share (in thousands except
per share amounts):
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
BASIC NET INCOME PER SHARE:
Net income $ 5,202 $ 4,419 $13,285 $10,880
Less: Preferred stock dividends - - - 211
------- ------- ------- -------
Income available to common
stockholders (numerator) $ 5,202 $ 4,419 $13,285 $10,669
======= ======= ======= =======
Weighted average number of
common shares (denominator) 14,771 14,541 14,761 13,757
======= ======= ======= =======
BASIC NET INCOME PER SHARE $ 0.35 $ 0.30 $ 0.90 0.78
======= ======= ======= =======
DILUTED NET INCOME PER SHARE:
Net income (numerator) $ 5,202 $ 4,419 $13,285 $10,880
======= ======= ======= =======
Weighted average number of
common shares 14,771 14,541 14,761 13,757
Effect of dilutive securities:
Stock options 1,102 1,207 1,169 926
Convertible preferred stock - - - 616
------- ------- ------- -------
Diluted weighted average number
of common shares (denominator) 15,873 15,748 15,930 15,299
======= ======= ======= =======
DILUTED NET INCOME PER SHARE $ 0.33 $ 0.28 $ 0.83 $ 0.71
======= ======= ======= =======
NOTE 5 - RECLASSIFICATIONS AND RESTATEMENTS
Certain amounts in prior years' condensed consolidated financial
statements have been reclassified to conform to the 1998 presentation. In
addition, prior year share and per share data have been restated for the
Company's two-for-one stock split effective August 25, 1997.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB")
issued a Statement of Financial Accounting Standards ("SFAS") No. 132,
"Employers' Disclosures about Pensions and Other
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Post-retirement benefits plans. This Statement is effective for the Company's
1999 fiscal year financial statements and restatement of disclosure for earlier
years provided for comparative purposes will be required unless the information
is not readily available. The Company is currently evaluating the extent to
which its financial statements will be affected.
In March 1998, the American Institute of Certified Public Accountants
("AICA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which specifies the
accounting treatment provided to computer software costs depending upon the type
of costs incurred. This Statement is effective for the Company's fiscal year
2000 financial statements and restatement of prior years will not be required.
The Company does not believe the adoption of this Statement will have a
significant impact on its financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires costs of start-up activities and
organization costs to be expensed as incurred. This Statement is effective for
the Company's fiscal year 2000 financial statements and initial application will
be reported as a cumulative effect of a change in accounting principle. The
Company does not believe the adoption of this Statement will have a significant
impact on its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133,"Accounting for Derivative
Instruments and Hedging Activities", which requires an entity recognize
derivative instruments, including certain derivative instruments embedded in
other contracts as either assets or liabilities and measure those instruments at
fair value. This Statement is effective for the Company" fiscal year 2000 first
quarter financial statements and restatement of prior years will not be
required. The Company does not believe the adoption of this Statement will have
a significant impact on its financial position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISION OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Management's Discussion and Analysis of Financial Condition and Results
of Operations, with the exception of historical matters, contains
forward-looking statements (such as statements in the future tense and those
including the terms "believe," "expect," "anticipate," "intend" and similar
terms) which involve risks and uncertainties. Actual results may differ
materially from these statements as a result of various factors, including those
discussed in further detail below (in particular under "General").
GENERAL
Plexus Corp. is a contract provider of design, manufacturing and
testing services to the electronics industry. Headquartered in Neenah,
Wisconsin, the Company provides product realization services and is one of the
largest electronic assembly organizations in the United States. Through its
wholly owned subsidiaries, principally Plexus Technology Group, Inc., and Plexus
Electronic Assembly Corporation, the Company offers a full range of services
including product development and design, material procurement and management,
prototyping, assembly, testing and failure analysis, manufacturing, final system
box build, distribution and after-sales support. Services are provided to
original equipment manufacturers in the computer (primarily mainframe, server
and peripheral products), medical, industrial, telecommunications and
transportation electronics industries. The Company has operations in Wisconsin,
Kentucky, North Carolina, Minnesota and California.
The Company's contract manufacturing services are provided on either a
turnkey basis, where the Company procures certain 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 material 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 the Company's sales. Turnkey sales typically generate higher net
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 the Company's net sales. Variations in the Company's turnkey sales have
caused, and could continue to cause, the Company's gross margin and
profitability to fluctuate year to year and quarter to quarter.
Since a substantial portion of the Company's sales are derived from
turnkey manufacturing, net sales can be negatively impacted by component
shortages and price changes. The Company's risk of price changes are minimized
by the general pass-through of component costs to customers. Shortages of key
electronic components which are provided directly from customers or suppliers
can cause manufacturing interruptions, customer rescheduling issues, production
downtime and production set-up and restart inefficiencies. From time to time,
allocations of components can be an integral part of the electronics industry.
While in general the marketplace for such components has eased, allowing greater
availability, key component shortage issues can still occur with respect to
specific industries or particular components. In response to this dynamic
environment, the Company has a corporate procurement organization whose primary
purpose is to create strong supplier alliances to assure a steady flow of
components at competitive prices and mitigate shortages. Strategic relationships
have been established with international purchasing offices to improve shortage
and pricing issues. However, because of the limited number of suppliers for
certain electronic components and other supply and
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demand concerns, the Company can neither eliminate component shortages nor
determine the timing or impact of such shortages on the Company's results. As a
result, the Company's sales and profitability can be affected from period to
period.
Many of the industries for which the Company currently provides
electronic products are subject to rapid technological changes, product
obsolescence, increased competition, and pricing pressures. In the quarter
ending June 30, 1998 and in fiscal 1997, approximately 4 percent and 6 percent,
respectively, of the Company's total sales were foreign, with less than 2
percent in each period going into the Southeast Asian market, which is currently
experiencing unfavorable currency and economic conditions. These and other
factors which affect the industries or the markets that the Company serves, and
which affect any of the Company's major customers in particular, could have a
material adverse effect on the Company's results of operations.
The Company has no long-term volume commitments from its customers, and
lead-times for customer orders and product-life cycles continue to contract.
Customer programs can be canceled and volume levels can be changed or delayed at
any time. The timely replacement of delayed, canceled or reduced programs with
new business cannot be assured. Because of these and other factors, there can be
no assurance that the Company's recent historical sales growth rate will
continue. See "Results of Operations -- Net Sales" below for certain factors
affecting net sales to the Company's largest customers.
The Company believes that its growth has been achieved in significant
part by its approach to partnering with customers mainly through its product
design and development services. Approximately 20 percent of the Company's
contract manufacturing sales are a direct result of these services. The Company
intends to continue to leverage this aspect of its product design and
development services for continued growth in contract manufacturing revenues.
Currently, the design and development services are less than 10 percent of total
sales. In order to achieve expanded sales growth, the Company must continue to
generate additional sales from existing customers from both current and future
programs, and must successfully market to new customers. The Company must also
successfully integrate and leverage its new regional product design centers into
this strategy. In addition, the Company must continue to attract and retain top
quality product development engineers in order to continue to expand its design
and development services. Because of these and other factors, there can be no
assurance that the Company's historic growth rates will continue.
Recruitment of personnel in the electronics manufacturing service
industry is highly competitive and the market to recruit for certain technical
and professional employees has become increasingly tight.. The Company believes
that its future success will depend, in part, on its ability to continue to
attract and retain highly skilled executive, technical and management personnel.
Although to date the Company has been successful in recruiting and retaining
personnel, the loss of services of certain of the employees or failure to
recruit additional employees could have a material adverse effect on the
Company's results and financial condition.
Start-up costs and the management of labor and equipment efficiencies
for new programs and new customers can have an effect on the Company's gross
margins. Due to these and other factors, gross margins can be negatively
impacted early on in the life cycle of new programs. In addition, labor
efficiency and equipment utilization rates ultimately achieved and maintained by
the Company for new and current programs impact the Company's gross margins.
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Geographical expansion and growth by acquisition can have an effect on
the Company's operations. The successful operation of an acquired business will
require communication and cooperation among key managers, along with the
transition of customer relationships. There can be no assurance that the Company
will successfully manage the integration of new locations or acquired operations
and may experience certain inefficiencies which could negatively impact the
results of operations. Additionally, no assurance can be given that any past or
future acquisition by the Company will enhance the Company's business.
The Company has a corporate information technology organization whose
primary purpose is to ensure vision and direction of information systems to meet
internal and external needs. The Company must keep pace with rapid technological
developments in its management information systems and its production facilities
and equipment, and can experience costs and conversion difficulties in
connection with the implementation of new systems and processes. In addition,
like all other companies, the Company must assure that its computer and software
systems, and other machinery and systems that depend upon computer-driven
operations or which have embedded chips or micro-processors, are capable of
accurately functioning and accurately recognizing and processing data with year
2000 requirements and beyond ("Year 2000 Compliant"). The Company expects to be
Year 2000 Compliant in mid 1999, although certain functions are subject to the
efforts of third-party suppliers. The Company has substantially completed its
evaluation of all systems to determine the extent, if any, of conversion
requirements and is currently in the implementation and test phase of the
conversions. The costs associated with implementing year 2000 applications have
not been material and are not expected to be material beyond the Company's
regular technology budget, although there can be no assurances. Material costs
or consequences of incomplete or untimely resolution of year 2000 issues
currently are not expected, although no assurances can be given that it would
not negatively impact the results of operations. Additionally, there can be no
assurance that the Company's customers and suppliers have, or will have,
management information systems that are Year 2000 Compliant or that required
systems modifications will be completed before the year 2000.
The Company operates in a highly competitive industry. The Company
faces competition from a number of domestic and foreign electronic manufacturing
services companies, some with financial and manufacturing resources greater than
the Company's. The Company also faces competition in the form of current and
prospective customers that have the capabilities to develop and manufacture
products internally. In order to remain a viable alternative, the Company must
continue to enhance its total engineering and manufacturing technologies.
Other factors that could adversely affect forward-looking statements
include the Company's ability to maintain and expand its customer base, gross
margin pressures, the effect of start-up costs related to new facilities, the
overall economic conditions affecting the electronics industry, and other
factors and risks detailed herein and in the Company's other Securities and
Exchange Commission filings.
RESULTS OF OPERATIONS
NET SALES
Net sales for the nine months ended June 30, 1998 decreased slightly to
$98.6 million from $99.1 million for the same period in the prior fiscal year.
Sales for the nine months ended June 30, 1998 increased 3 percent to $292.2
million from $283.2 million in June 30, 1997. Sales were impacted by
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several external factors including a transition away from certain markets
and customers whose mix of business is no longer compatible with the
Company's long-term growth strategy, a balancing of customer inventory levels,
decreasing component pricing with related decreasing average selling prices, a
general weakening of certain markets in which some of our customers operate, and
the negative effects of the strong U.S. dollar that has impacted a few
customers. The factors that affected third quarter sales may continue to impact
future sales. Although there can be no assurances, the Company presently
anticipates sequential sales growth in the fourth quarter of fiscal 1998,
subject to the ultimate development and timing of new customers and new
programs.
By industry segment, sales increased, from the same nine-month period
to the prior fiscal period, for the telecommunications and transportation
markets which were offset by declines in the computer and industrial markets.
Sales for the quarter by industry were as follows: Computer 27 percent, Medical
22 percent, Telecommunications 20 percent, Industrial 16 percent, Transportation
12 percent, and Other 3 percent. Currently, the Company expects
telecommunications sales to continue to increase for the fourth quarter of
fiscal 1998 to be offset by a decline in transportation sales. However, the
Company does not expect there will be any other material changes in the
breakdown of its sales by industry in fiscal 1998.
The Company's largest customers are General Electric Company (GE),
International Business Machines Corporation (IBM) and Unisys Corporation
(Unisys) who each accounted for approximately 11 percent of sales in the nine
months ended June 30, 1998 compared to approximately 12 percent, 10 percent and
12 percent of sales, respectively, in the same period in fiscal 1997. No other
customers had sales over 10 percent for the nine months ended June 30, 1998 or
1997. However, for the quarter ended June 30, 1998 sales to Ascend
Communications, Inc. (Ascend) were 11 percent of sales and are currently
expected to exceed 10 percent of sales in future quarters. The Company believes
that sales to IBM will decrease due to the potential transfer of business from
one of IBM's divisions, as well as certain programs going end of life. For the
quarter ended June 30, 1998 sales to IBM were 6 percent of sales. The Company is
continuing to focus on enhancing the customer mix and sales through new programs
with current and new customers.
Sales to the Company's ten largest customers accounted for 69 percent
of net sales for the nine months ended June 30, 1998 compared to 68 percent for
the same period in fiscal 1997 and all of fiscal 1997. The Company remains
dependent upon continued sales to GE, Unisys, Ascend and its other significant
customers. The Company's financial performance is dependent upon the continued
growth, viability and financial stability of its customers, which in turn are
dependent upon the industries in which they compete. These industries are
characterized by rapid technological change and short product life cycles. Any
material change in orders from these or other customers could have a material
effect on the Company's results of operations.
GROSS PROFIT
Gross profit increased to $13.2 million, or 10.9 percent, for the three
months ended June 30, 1998 from $11.9 million for the same period in the prior
fiscal year. The gross margin for the three months ended June 30, 1998 and 1997,
was 13.4 percent and 12.1 percent, respectively. The gross margin for the nine
month periods ended June 30, 1998 and 1997 was 12.1 percent and 11.0 percent,
respectively. The increase in gross margin in the three and nine month periods
ended June 30, 1998 compared to the same periods in fiscal 1997 reflects the
leverage generated by improved product mix, continued operational efficiency
improvements and cost controls, and better component pricing. These
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were partially offset by increased start-up costs associated with new programs
and increased hiring in the Company's engineering and technical manufacturing
areas in order to continue to expand its capabilities and meet customer demands.
The Company is continually evaluating the advantages and feasibility of
new manufacturing processes. The Company believes that its future success will
depend, in part, upon its ability to develop and market manufacturing services
which meet changing customer needs, maintain technological leadership and
successfully anticipate or respond to technological changes in manufacturing
processes on a cost-effective and timely basis. Most of the research and
development conducted by the Company is paid for by customers and is, therefore,
included in cost of sales. Other research and development is conducted by the
Company, but is not specifically identified, as the Company believes such
expenses are less than 1 percent of its total sales.
The Company's gross margin also reflects a number of other factors,
including product mix, the level of start-up costs and efficiencies of new
programs, sales volumes, capacity utilization of surface mount and other
equipment, labor costs and efficiencies, the management of inventories,
component pricing and shortages, fluctuations and timing of customer orders,
changing demand for customer's products and competition within the electronics
business. These and other factors can cause variations in the Company's
operating results. While the Company's focus is on maintaining and expanding
gross margins, there can be no assurance that gross margins will not decrease in
future periods.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative (S&A) expenses increased to $14.1 million,
or 4.8 percent of sales, for the nine months ended June 30, 1998, compared to
$12.6 million, or 4.5 percent, for the comparable prior fiscal year period. For
the quarters ended June 30, 1998 and 1997, S&A expenses were $4.9 million, or
5.0 percent of sales, and $4.5 million, or 4.5 percent, respectively. These
increases reflect the Company's planned expansion of its engineering
infrastructure, sales and marketing efforts, and enhancements of its customer
support function. The Company anticipates that future S&A expenses will increase
in absolute dollars but remain between 4.5 percent and 5.0 percent of annual
sales, as the Company continues to expand these support areas.
OTHER INCOME (EXPENSE)
Interest expense was $3,000 and $10,000 for the three and nine months
ended June 30, 1998 compared to $186,000 and $727,000 in the comparable periods
in fiscal 1997. The decrease in interest expense is primarily due to reduced
borrowings required to support working capital. See "Liquidity and Capital
Resources." Other income consists primarily of interest income.
INCOME TAXES
Income taxes increased to $3.4 million and $8.7 million for the three
and nine months ended June 30, 1998 compared to $2.9 million and $7.1 million in
the comparable period in fiscal 1997, as a result of increased earnings. The
Company's effective income tax rate has remained relatively constant at rates
between 38 percent to 40 percent. These rates approximate the blended Federal
and state statutory rate as a result of the Company's operations being located
within the United States.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $19.5 million for the nine
months ended June 30, 1998 compared to $12.5 million in the comparable period in
fiscal 1997. Cash from operations was provided primarily by improved net income
and inventory management. Inventory turnover improved to 7.4 turns for the nine
months ended June 30, 1998 from 6.7 turns for all of fiscal 1997. The cash
generated from operating activities was utilized primarily to purchase
additional manufacturing equipment and facilities, to reduce outstanding debt
and acquire treasury stock.
Cash flows used in investing activities for the first nine months of
fiscal 1998 totaled $7.8 million and were utilized primarily for capital
additions, including the acquisition of the majority of assets of NEI
Electronics, Inc., a contract electronics manufacturer located in Minneapolis,
and Tertronics, Inc., a Silicon Valley electronic design and quick-turn company.
The Company has historically utilized operating leases to fund the
majority of its manufacturing equipment needs. The Company now anticipates
utilizing operating leases primarily in situations where technical obsolescence
concerns are determined to outweigh the benefits of financing the equipment
purchase. The Company estimates total capital expenditures for fiscal 1999 and
1998 will be similar to fiscal 1997, at approximately $10 million to $12
million, which the Company expects to fund through cash flows from operations
and its $40 million long-term revolving credit agreement.
Cash flows used in financing activities totaled $0.8 million for the
nine months ended June 30, 1998, primarily representing the payments of the
Company's long-term revolving credit facility and purchase of treasury stock
offset by reduced cash payments for income taxes resulting from the tax benefit
of stock options exercised. Through July 31, 1998 there were no borrowings under
the Company's $40 million long-term revolving credit agreement. The ratio of
total debt-to-equity as of June 30, 1998, was 0.6 to 1, compared to 0.8 to 1 as
of September 30, 1997.
The Company anticipates increases in working capital in order to
facilitate growth. However, because of the dynamics of the Company's industry,
the exact timing and amount of these increases cannot be determined. The Company
believes that its credit facilities, leasing capabilities and projected cash
flows from operations will be sufficient to meet its anticipated working capital
needs and its anticipated short-term and long-term capital requirements.
On December 19, 1997, the Company's Board of Directors authorized the
repurchase of up to 2,000,000 shares, or a maximum of $25,000,000, of the
Company's Common Stock on the open market. The Company expects that repurchases
will occur from time to time. The Company anticipates the shares held in
treasury to be used for various purposes in the future, including satisfaction
of requirements for shares under the Company's Employee Stock Savings Plan and
its stock option incentive program. Through July 31, 1998, the Company
repurchased 170,000 shares for approximately $2.7 million.
The Company has not paid dividends on its Common Stock, but has
reinvested its earnings to support its working capital and expansion
requirements. The Company intends to continue to utilize its earnings in the
development and expansion of the business and does not expect to pay cash
dividends in the foreseeable future.
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NEW ACCOUNTING PRINCIPLES
The Company is required to adopt Statement of Financial Accounting
Standards ("SFAS") No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" in fiscal year 1999. The Company is required to adopt
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
the American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use", and the AICPA SOP 98-5, "Reporting on the Costs
of Start-Up Activities" in fiscal year 2000. See footnote 6 to the Company's
consolidated financial statements for detail.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Requirements not yet applicable to the Company.
* * * * *
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
DEADLINES FOR SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-5(e) under the Securities Exchange Act of 1934, as
amended effective June 29, 1998:
1. The deadline for submitting shareholder proposals for inclusion in
the Company's proxy statement and form of proxy for the Company's
annual meeting of shareholders to be held in 1999 pursuant to Rule
14a-8 is September 8, 1998.
2. The date after which notice of a shareholder proposal submitted
outside the processes of Rule 14a-8 is considered untimely is
November 20, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
8/12/98 /s/ Peter Strandwitz
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Date Peter Strandwitz
Chairman and CEO
8/12/98 /s/ Thomas B. Sabol
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Date Thomas B. Sabol
Vice President-Finance &
Chief Financial Officer
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