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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, 1999
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, 1999 there were 17,516,139 shares of Common Stock of the
Company outstanding.
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PLEXUS CORP.
TABLE OF CONTENTS
June 30, 1999 and 1998
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...........8
GENERAL.........................................................................................8
YEAR 2000 ISSUES...............................................................................12
RESULTS OF OPERATIONS..........................................................................14
LIQUIDITY AND CAPITAL RESOURCES................................................................16
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................17
PART II - OTHER INFORMATION......................................................................................18
Item 6. Exhibits and Reports on Form 8-K...............................................................18
SIGNATURE........................................................................................................19
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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,
------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $105,600 $ 98,563 $ 310,717 $ 292,157
Cost of sales 89,933 85,399 265,557 256,857
------- ------- ------- -------
Gross profit 15,667 13,164 45,160 35,300
Selling and administrative
expenses 5,590 4,812 16,089 13,876
------- ------- ------- -------
Operating income 10,077 8,352 29,071 21,424
Other income (expense):
Interest expense (2) (3) (7) (10)
Other 464 233 1,318 544
------- ------- ------- -------
Income before income taxes 10,539 8,582 30,382 21,958
Income taxes 4,216 3,380 12,154 8,673
------- ------- ------- -------
Net income $ 6,323 $ 5,202 $ 18,228 $ 13,285
======= ======= ======= =======
Earnings per share:
Basic $ 0.42 $ 0.35 $ 1.21 $ 0.90
======= ======= ======= =======
Diluted $ 0.39 $ 0.33 $ 1.12 $ 0.83
======= ======= ======= =======
Weighted average shares outstanding:
Basic 15,195,777 14,770,934 15,046,616 14,761,273
========== ========== ========== ==========
Diluted 16,304,314 15,872,699 16,223,590 15,930,118
========== ========== ========== ==========
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,
1999 1998
---------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 33,898 $ 23,195
Accounts receivable, net of allowance of $630
and $505, respectively 50,341 48,433
Inventories 57,554 44,303
Deferred income taxes 4,446 3,344
Prepaid expenses and other 4,559 1,976
--------- --------
Total current assets 150,798 121,251
Property, plant and equipment, net 25,005 21,355
Other 1,230 1,059
--------- --------
Total assets $ 177,033 $ 143,665
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 10 $ 114
Accounts payable 44,874 36,948
Customer deposits 3,943 3,787
Accrued liabilities:
Salaries and wages 7,306 5,161
Other 4,887 6,945
--------- --------
Total current liabilities 61,020 52,955
Long-term debt 145 152
Deferred income taxes 728 700
Other liabilities 787 519
Stockholders' equity:
Preferred stock $.01 par value, 5,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.01 par value, 60,000,000 shares authorized,
15,244,752 and 14,830,689 issued, respectively 152 148
Additional paid-in capital 28,626 21,776
Retained earnings 85,575 67,920
Treasury stock, at cost, 0 and 28,944 shares, respectively - (505)
--------- --------
114,353 89,339
--------- --------
Total liabilities and stockholders' equity $ 177,033 $ 143,665
========= ========
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,
-----------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,228 $ 13,285
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 5,606 4,661
Deferred income taxes (1,074) (891)
Changes in assets and liabilities:
Accounts receivable (1,908) (269)
Inventories (13,251) 3,077
Prepaid expenses and other (2,571) (746)
Accounts payable 7,926 189
Customer deposits 156 61
Accrued liabilities 87 (107)
Other (111) (708)
------- -------
Cash flows provided by operating activities 13,088 18,552
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for property, plant and equipment (9,253) (6,911)
Other 194 112
------- -------
Cash flows used in investing activities (9,059) (6,799)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt (111) (3,410)
Proceeds from exercise of stock options 3,031 425
Tax benefit from stock options exercised 3,822 3,908
Treasury stock purchased (1,159) (2,659)
Treasury stock reissued 1,091 968
------- -------
Cash flows provided by (used in) financing activities 6,674 (768)
------- -------
Net increase in cash and cash equivalents 10,703 10,985
Cash and cash equivalents:
Beginning of period 23,195 3,655
------- -------
End of period $ 33,898 $ 14,640
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See notes to condensed consolidated financial statements
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PLEXUS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1999
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, 1999 and the results of operations for the three
months and nine months ended June 30, 1999 and 1998 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 1998 Annual Report.
The condensed consolidated balance sheet data at September 30, 1998 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,
1999 1998
-------- ---------
Assembly parts $ 33,541 $ 25,165
Work-in-process 22,763 18,089
Finished goods 1,250 1,049
-------- --------
$ 57,554 $ 44,303
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NOTE 3 - 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,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
BASIC EARNINGS PER SHARE:
Net income $ 6,323 $ 5,202 $ 18,228 $ 13,285
======= ======= ======== ========
Weighted average shares outstanding 15,196 14,771 15,047 14,771
======= ======= ======== ========
BASIC EARNINGS PER SHARE $ 0.42 $ 0.35 $ 1.21 $ 0.90
======= ======= ======== ========
DILUTED EARNINGS PER SHARE:
Net income $ 6,323 $ 5,202 $ 18,228 $ 13,285
======= ======= ======== ========
Weighted average shares outstanding 15,196 14,771 15,047 14,761
Effect of dilutive securities:
Stock options 1,108 1,102 1,177 1,169
------- ------- -------- --------
Diluted weighted average shares outstanding 16,304 15,873 16,224 15,930
======= ======= ======== ========
DILUTED EARNINGS PER SHARE $ 0.39 $ 0.33 $ 1.12 $ 0.83
======= ======= ======== ========
NOTE 4 - NEW ACCOUNTING PRINCIPLES
The Company is required to adopt the Statement of Financial Accounting
Standard ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and
Related Information," in fiscal 1999. SFAS No. 131 is not required to be applied
to interim financial statements in the initial year of adoption. The Company is
also required to adopt the American Institute of Certified Public Accountants
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," in fiscal 2000. The Company does not
believe the adoption of these statements will have a significant impact on its
financial position or results of operations.
NOTE 5 - ACQUISITIONS
On July 15, 1999, The Company entered into an agreement in principle to
acquire a manufacturing facility from Shure Incorporated (Shure), a private
company located in Wheeling, Illinois in a cash transaction subject to
completion of definitive agreements and other conditions. The Company will build
circuit boards at the facility for Shure's wireless and digital signal
processing products. The Company intends to offer employment to approximately
180 manufacturing and related support associates in connection with the
transaction. The acquisition is expected to close late in the fourth quarter of
fiscal 1999 and will be accounted for as a purchase.
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On July 23, 1999, the Company merged with SeaMED Corporation (SeaMED), a
Seattle, Washington based designer and manufacturer of advanced durable
electronic medical and non-medical equipment, in a stock-for-stock transaction
in which each share of SeaMED Common Stock was converted into 0.4 shares of
Plexus Common Stock (approximately 2,444,600 Plexus shares in the aggregate).
The acquisition will be accounted for as a pooling-of-interests in the fourth
quarter, therefore SeaMED results are not reflected herein. One time merger
related costs, which will be recognized in the fourth quarter, are currently
expected to be approximately $5 million.
NOTE 6 - RECLASSIFICATIONS AND RESTATEMENTS
Certain amounts in the prior year condensed consolidated financial
statements have been reclassified to conform to the 1999 presentation.
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 statements including
"believe", "expect", "intend", "plan", "look forward to", "anticipate" and
similar terms) that 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 "General").
GENERAL
Plexus Corp. is a contract service provider of design, manufacturing and
testing services to the electronics industry, headquartered in Neenah,
Wisconsin. Through its wholly owned subsidiaries, Plexus Technology Group, Inc.,
Plexus Electronic Assembly Corporation and SeaMED Corporation, the Company
provides product realization services to original equipment manufacturers in the
medical, computer (primarily mainframes, servers and peripherals), industrial,
telecommunications and transportation electronics industries. The Company offers
a full range of services including product development and design, material
procurement and management, prototyping, assembly, testing, manufacturing, final
system box build and distribution.
The Company has operations in Wisconsin, Kentucky, North Carolina,
Minnesota, California, Colorado and Washington. The Company opened a new
engineering facility in Colorado in May 1999. The Company continues to look for
opportunities for geographical expansion that will improve the Company's ability
to provide services to its customers.
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On July 15, 1999, the Company entered into an agreement in principle to
acquire a manufacturing facility from Shure Incorporated (Shure), a private
company located in Wheeling, Illinois in a cash transaction subject to
completion of definitive agreements and other conditions. The Company will build
circuit boards at the facility for Shure's wireless and digital signal
processing products. The Company intends to offer employment to approximately
180 manufacturing and related support associates in connection with the
transaction. The acquisition is expected to close late in the fourth quarter of
fiscal 1999 and will be accounted for as a purchase.
On July 23, 1999, the Company merged with SeaMED Corporation (SeaMED), a
Seattle, Washington based designer and manufacturer of advanced durable
electronic medical and non-medical equipment, in a stock-for-stock transaction
in which each share of SeaMED Common Stock was converted into 0.4 shares of
Plexus Common Stock (or approximately 2,444,600 Plexus shares in the aggregate).
The acquisition will be accounted for as a pooling-of-interests in the fourth
quarter, therefore SeaMED results are not reflected herein. One time merger
related costs, which will be recognized in the fourth quarter, are currently
expected to be approximately $5 million.
Geographical expansion and growth by acquisition can have an effect on the
Company's operations. The successful integration and operation of an acquired
business, including SeaMED and the Shure facility, will require communication
and cooperation among key managers, along with the transition of customer
relationships. Acquisitions also involve risks including the retention of key
personnel and customers, the integration of information systems and purchasing
operations, the management of an increasingly larger and more geographically
dispersed business, and the diversion of management's attention from other
ongoing business concerns. In addition, while the Company anticipates cost
savings, operating efficiencies and other synergies as a result of its
acquisitions, the consolidation of functions and the integration of departments,
systems and procedures present significant management challenges. The Company
cannot assure that it will successfully accomplish those actions as rapidly as
expected. Also, the Company cannot assure the extent to which it will achieve
cost savings and efficiencies in any transaction or expansion. There can be no
assurance that the Company will successfully manage the integration of new
locations or acquired operations, and the Company may experience certain
inefficiencies that could negatively impact the results of operations or the
Company's financial condition. Additionally, no assurance can be given that any
past or future acquisition by the Company, including that of SeaMED and the
Shure facility, will enhance the Company's business.
The acquisition of new operations can introduce new types of risks to the
Company's business. For example, additional risk factors specific to SeaMED's
business and its operations include financing issues associated with SeaMED's
emerging medical customers, Food and Drug Administration (FDA) requirements
associated with Class III and pre-market approval (PMA) medical devices designed
and manufactured by SeaMED, and the uncertainty of third party reimbursement
such as Medicare, private health insurance companies or health maintenance
organization by SeaMED's customers for the cost of their products.
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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. However, a change in component costs can directly
impact the average selling price, gross margins and the Company's net sales, in
addition to the Company's added risk of inventory management. Due to the nature
of turnkey manufacturing, the Company's 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.
Since a substantial portion of the Company's sales are derived from turnkey
manufacturing, net sales can be negatively impacted by component shortages and
their lead-times. Shortages of key electronic components which are provided
directly from customers or suppliers and their lead-times 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 and component
shortages and extended lead-time issues can occur with respect to specific
industries or particular components (such as memory and logic devices). Recently
the marketplace for electronic components has firmed from recent periods,
resulting in the extension of certain component lead-times and the allocation of
specific semi-conductor components (such as SRAMs and DRAMs). 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 demand
concerns, the Company can neither eliminate component shortages nor determine
the timing or impact of such shortages on the Company's results. In addition,
because we provide our customers component procurement services, we may bear the
risk of price increases for these components if we are unable to purchase them
at the same time that we agree with our customer on the pricing for the
components. 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 both the three and nine months
ending June 30, 1999 and in fiscal 1998, approximately 4 percent of the
Company's total sales were foreign, with less than 2 percent going into the
Southeast Asian market, which has recently experienced 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.
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The Company has no long-term volume commitments from its customers, and
lead-times for customer orders and product-life cycles continue to contract.
Although the Company obtains firm purchase orders from its customers, they
typically do not make firm orders for delivery of products more than 30 to 90
days in advance. The Company does not believe that the backlog of expected
product sales covered by firm purchase orders is a meaningful measure of future
sales since orders may 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 historical sales growth rate will
continue. In addition, fixed costs may not be fully recovered as a result of
cancelled, delayed or reduced programs and therefore, could impact results of
operations. 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 coupled with the Company's strategy of focusing on
those customers with a long-term outsourcing strategy and a need for complex
products requiring the Company's sophisticated technology and engineering
capabilities. Approximately 15 to 20 percent of the Company's contract
manufacturing sales are a direct result of the product design and development
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, and any future,
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 rate will continue.
Start-up costs, the management of labor and equipment efficiencies for new
programs and new customers, and the need to estimate required resources in
advance can have an effect on the Company's gross margins. These factors can
negatively impact gross margins 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.
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. In addition, the Company may not be able to offer prices as low
as some of its competitors because they may have lower cost structures than the
Company. The Company also faces competition in the form of current and
prospective customers that have the capabilities to develop and manufacture
products
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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 level of overall growth in the electronics industry, the Company's
ability to complete the Shure transaction and integrate and extract value from
acquired operations, the Company's ability to secure new customers and maintain
its current customer base, 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 risk of
customer delays or cancellations in both on-going and new programs, the effect
of start-up costs related to new programs and facilities, year 2000 compliance
issues (including those discussed below), the overall economic conditions, the
impact of increased competition and other factors and risks detailed herein and
in the Company's other Securities and Exchange Commission filings.
YEAR 2000 ISSUES
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 in the
year 2000 and beyond ("Year 2000 Compliant").
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
manufacturing, design and testing equipment, computer programs or computer
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to operate equipment,
process transactions or engage in similar normal business activities.
The Company has developed a Year 2000 compliance strategy and methodology
to help assure the Company can continue to provide engineering and manufacturing
services in the year 2000 and beyond. The Company's A/S400 hardware and software
system, which handles virtually all production data processing and accounting,
has been tested and documented to be Year 2000 compliant. Internal final
compliancy approval was completed in December 1998.
The Company's Year 2000 strategy defines focus teams responsible for
information systems including hardware and software; production and facility
equipment and systems; test equipment and software; engineering development
systems; component and inventory issues; customer and supplier issues; and third
party agents and extended enterprises. Each team will complete four phases to
assure Year 2000 compliance which include a complete inventory and
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risk assessment of items or issues (risk assessment defined as mission
critical, non mission critical, or not date sensitive); a strategy plan
including contingencies or remediation; the actual conversion or remediation
including testing and documentation; and compliancy approval.
As of July 31, 1999, the Company had substantially completed an internal
inventory and risk assessment, remediation and testing of all other mission
critical internal systems including: hardware, software, production and facility
equipment, test equipment and software, engineering development systems, and
embedded chips in components and inventory. Certain steps that the Company
believes are within its control have been postponed for various scheduling
reasons but are expected to be completed by September 1999. In addition, there
is a suite of engineering development software tools for which the Company is
awaiting Year 2000 fixes; based on information from the vendors, these will be
available in order to be Year 2000 compliant although that remains subject to
vendor performance.
As of July 31, 1999, the Company inventoried every supplier of goods and
services, and considered the potential impact of Year 2000 compliance on the
Company and its customers. Also, the Company has evaluated the key suppliers'
response to our mailing surveys and is in the process of auditing the results.
In addition, the Company has nearly completed the reviewing and testing of EDI
linkages and data transmission for its customers and suppliers. The Company
plans on providing for contingency plans by September 1999 for possible Year
2000 issues with its suppliers. Certain customer-supplied test equipment and
software must also be verified and tested for Year 2000 compliance.
Although the Company has developed initial contingency plans, final
contingency plans are scheduled to be in place by September 1999.
The Company believes the costs associated with the Year 2000 compliancy
plan will be mostly current internal labor expenses and are not expected to
materially increase. Costs to date have not been material, and future compliancy
costs have not been determined, but are not expected to be material. Other
non-Year 2000 efforts have not been materially delayed or impacted by Year 2000
compliancy plan initiatives. There can be no assurance that these estimates will
prove to be accurate and actual results could differ materially from those
currently anticipated.
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors or others. The most reasonably likely
worst case scenario could cause a production shut down in one or more
facilities. The Company has not yet completed a contingency plan for such
occurrence, but has included completion of a contingency plan in its Year 2000
planning as discussed above. In addition, there can be no assurance that one or
more of the Company's suppliers or customers will not have material Year 2000
compliance problems. There can be no assurance that the Year 2000 issues of
other entities
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will not have a material adverse impact on the Company's systems or results of
operations. Additionally, there can be no assurance that potential future costs
of defending and resolving claims, if any, will not have a material adverse
impact on the Company's results of operations.
RESULTS OF OPERATIONS
NET SALES
Net sales for the three months ended June 30, 1999, increased 7 percent to
$105.6 million from $98.6 million for the same period in the prior fiscal year.
Sales for the nine months ended June 30, 1999 increased 6 percent to $310.7
million from $292.2 million at June 30, 1998. Unit volume sales were strong;
however, sales growth was impacted by industry-wide pressure on average selling
prices, component prices, and on the Company's continued focus to move toward
higher technology business. These factors are expected to continue. Although
there can be no assurances, the Company presently anticipates sales volume to
remain steady, subject to the development and timing of new customers and new
programs.
Sales increased by customer industry group, from the same period in the
prior fiscal year, for medical and telecommunications. This reflects the
Company's ongoing migration toward a more attractive mix of business, with
strength in the networking/telecom and medical markets. The Company has
transitioned away from the more commodity-related computer-peripheral and
automotive markets. The Company continues its strategy of shifting the business
mix towards customers with a long-term outsourcing strategy and a need for
complex products requiring the Company's advanced technology solutions and
engineering capabilities. Sales for the quarter ending June 30, 1999 and 1998,
respectively, by industry were as follows: Telecommunications 32 percent (19
percent), Medical 26 percent (22 percent), Industrial 15 percent (16 percent),
Computer 15 percent (27 percent), Transportation 8 percent (11 percent), and
Other 4 percent (5 percent). Currently, the Company does not expect there will
be any material changes in the breakdown of its sales by industry in fiscal 1999
from the current fiscal quarter, except that sales to the medical industry will
likely increase compared to the Company's historical patterns as a result of the
SeaMED acquisition.
The Company's largest customers for the quarter ending June 30, 1999 were
Lucent Technologies which just completed its acquisition of Ascend
Communications, Inc. (Lucent) and General Electric Company (GE) accounting for
23 percent and 13 percent of sales, respectively. For the nine months ended June
30, 1999 sales to Lucent and GE were 19 percent and 13 percent of sales,
respectively. The Company's largest customers for the nine months ending June
30, 1998 were International Business Machines Corporation, GE and Unisys
Corporation which each accounted for 11 percent of sales. No other customers
accounted for more than 10 percent of the Company's sales for the nine months
ended June 30, 1999 or 1998. Sales to the Company's ten largest customers
accounted for 65 percent for the nine months ended June 30, 1999 compared to 69
percent for the same period in fiscal 1998 and 70 percent for all of fiscal
1998. These results reflect the Company's dedication to continue diversifying
its customer base and decreasing its dependence on any particular customer or
customers. The Company remains dependent upon continued sales to Lucent, GE, and
its other significant customers, as well as SeaMED's
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customers. 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 28 percent to $45.2 million, for the nine months
ended June 30, 1999 from $35.3 million for the same period in the prior fiscal
year. The gross margin for the nine months ended June 30, 1999 and 1998, was
14.5 percent and 12.1 percent, respectively. The gross margin increased to 14.8
percent for the three months ended June 30, 1999 from 13.4 percent for the same
period in the prior fiscal year, compared to 12.6 percent for all of fiscal
1998. The increase in gross margin primarily reflects the shift in business mix
to leading-technology products and markets and continued operating efficiencies.
Most of the research and development conducted by the Company is paid for
by customers and is, therefore, included in cost of sales. Certain 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 which
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 customer's products and competition within the electronics
business. The acquisition of SeaMED and the Shure facility are expected to
initially reduce gross margins until synergies and efficiencies are realized and
SeaMED's cost structure is aligned with its reduced sales volume. 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 $16.1 million, or
5.2 percent of sales for the nine months ended June 30, 1999, compared to $13.9
million, or 4.7 percent of sales, for the comparable prior fiscal year period.
For the quarters ended June 30, 1999 and 1998, S&A expenses were $5.6 million,
or 5.3 percent of sales, and $4.8 million, or 4.9 percent of sales,
respectively. The increase in expenses was mainly attributable to increased
engineering, sales and marketing, and information systems support. The Company
anticipates future S&A expenses will increase in absolute dollars and may
increase as a percentage of sales as the Company builds the infrastructure
necessary to integrate SeaMED and the Shure facility, as well as continue to
support the Company's growth. In addition, the Company will have one-time merger
related expenses associated with the acquisition of SeaMED in the fourth quarter
of approximately $5 million.
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INCOME TAXES
Income taxes increased to $4.2 million and $12.2 million for the three and
nine months ended June 30, 1999 compared to $3.4 million and $8.7 million in the
comparable period in fiscal 1998, as a result of increased earnings. The
Company's effective income tax rate has remained constant at rates between 39
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $13.1 million for the nine months
ended June 30, 1999 compared to $18.6 million in the comparable period in fiscal
1998. The decrease in cash from operations was a result of increased net income
and accounts payable offset by increases in inventory, accounts receivable and
prepaid expenses compared to the prior fiscal year period. Annualized inventory
turnover decreased to 7.2 turns as of June 30, 1999, from 7.6 turns as of June
30, 1998 and from 7.5 turns for all of fiscal 1998 as a result of anticipated
fourth quarter sales growth.
Cash flows used in investing activities totaled $9.1 million and was
utilized primarily to purchase additional manufacturing equipment.
The Company utilizes available cash, debt and operating leases to fund its
manufacturing equipment needs. The Company utilizes operating leases primarily
in situations where technical obsolescence concerns are determined to outweigh
the benefits of financing the equipment purchase. Apart from the acquisitions
discussed above, the Company estimates that capital expenditures for fiscal 1999
to be similar to fiscal 1998 at approximately $10 to $12 million, which the
Company expects to fund through cash flows from operations and, if needed, its
$40 million long-term revolving credit agreement. The Company expects to fund
the Shure facility acquisition through available cash. The SeaMED acquisition
was a stock-for-stock transaction, although the Company has incurred
approximately $5.0 million in merger related expenses, also to be funded through
available cash.
Cash flows provided by financing activities totaled $6.7 million for the
nine months ended June 30, 1999, primarily representing the proceeds and tax
benefit from the exercise of stock options. There have been no borrowings under
the Company's revolving credit agreement since October 1, 1997. The ratio of
total debt-to-equity as of June 30, 1999 and September 30, 1998 was 0.5 to 1 and
0.6 to 1, respectively.
Working capital was $89.8 million at June 30, 1999 and $68.3 million at
September 30, 1998. The Company's future needs for financial resources include
increases in working capital to support anticipated sales growth and investment
in manufacturing and engineering facilities and equipment. However, because of
the dynamics of the Company's industry, the exact timing and amount of increases
in working capital cannot be determined. Currently, the Company anticipates
incurring future facility related expenditures in connection with the expansion
of its
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engineering headquarters in Neenah, Wisconsin, purchase of the Shure facility
and expansion of additional regional engineering facilities. The Company has and
will continue to evaluate geographical expansion and growth by acquisition.
The Company believes that its $40 million long-term revolving credit
agreement, leasing capabilities and projected cash from operations will be
sufficient to meet its working capital and capital requirements through fiscal
1999 and the foreseeable future. While there can be no assurance that future
financing will be available on terms acceptable to the Company, the Company may
seek to raise additional capital through the issuance of either public or
private debt or equity securities. Debt financing may require the Company to
pledge assets as collateral and comply with certain financial ratios and
covenants. Equity financing may result in dilution to stockholders.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's risk-management activities may
include forward-looking statements that involve risk and uncertainties. Actual
results could differ materially from those discussed.
The Company has financial instruments, including short-term cash
investments and long-term debt, which are sensitive to changes in interest
rates. However, the Company currently does not use any interest-rate swaps or
other types of derivative financial instruments to limit its sensitivity to
changes in interest rates because of the relatively short-term nature of its
cash investments and immaterial amount of its long-term debt.
The Company does not believe there has been any material changes in the
reported market risks faced by the Company since the end of its most recent
quarter June 30, 1999.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
third quarter of fiscal 1999. Subsequent to the end of the
quarter, but prior to the filing of this report on Form 10-Q,
the Company filed a Report on Form 8-K dated July 23, 1999,
related to the Company's acquisition of SeaMED Corporation on
that date. That report incorporated by reference the following
financial statements:
1. Audited financial statements of SeaMED as of June 30,
1998 and 1997, and for each of the three fiscal years
in the period ended June 30, 1998;
2. Unaudited interim period financial statements of
SeaMED as of March 31, 1999, and for the quarters and
nine month periods ended March 31, 1999 and 1998;
3. Unaudited pro forma financial statements of the
Company at March 31, 1999, for each of the three
fiscal years in the period ended September 30, 1998
and for the six month periods ended March 31, 1999
and 1998, in each case giving effect to the SeaMED
acquisition.
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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.
8/13/99 /s/ Peter Strandwitz
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Date Peter Strandwitz
Chairman and CEO
(Principal Executive Officer)
8/13/99 /s/ Thomas B. Sabol
- --------- ------------------------------------
Date Thomas B. Sabol
Vice President-Finance &
Chief Financial Officer
(Principal Financial Officer)
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