1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarter ended March 31, 1996 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-14824 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 (414) 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 May 9, 1996 there were 6,497,697 shares of Common Stock of the Company outstanding.
2 PLEXUS CORP. TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Condensed Consolidated Statements of Operations Three Months and Six Months Ended March 31, 1996 and 1995....................................3 Condensed Consolidated Balance Sheets March 31, 1996 and September 30, 1995......................4 Condensed Consolidated Statements of Cash Flows Six Months Ended March 31, 1996 and 1995...................5 Notes to Condensed Consolidated Financial Statements.....6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: General..................................................7-8 Results of Operations...................................8-10 Liquidity and Capital Resources........................10-11 PART II. OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders......11-12 Item 6. Exhibits and Reports on Form 8-K..........................12 Signatures................................................12 2
3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS PLEXUS CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) Unaudited <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, -------------------- -------------------- 1996 1995 1996 1995 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net sales $75,286 $69,380 $146,594 $134,721 Cost of sales 70,110 63,442 136,745 124,425 --------- --------- --------- --------- Gross profit 5,176 5,938 9,849 10,296 Selling and administrative expenses 3,234 2,939 6,129 5,357 --------- --------- --------- --------- Operating income 1,942 2,999 3,720 4,939 --------- --------- --------- --------- Other income (expense): Interest expense (504) (715) (1,078) (1,457) Other (19) 126 96 396 --------- --------- --------- --------- (523) (589) (982) (1,061) --------- --------- --------- --------- Income before income taxes 1,419 2,410 2,738 3,878 Provision for income taxes 580 940 1,094 1,513 --------- --------- --------- --------- Net Income $ 839 $ 1,470 $ 1,644 $ 2,365 ========= ========= ========= ========= Net income per common share primary and fully diluted $.12 $.21 $.23 $.33 ========= ========= ========= ========= Average number of common and common equivalent shares outstanding: Primary 7,182,822 7,106,850 7,232,878 7,088,537 ========= ========= ========= ========= Fully diluted 7,182,822 7,119,953 7,232,878 7,119,953 ========= ========= ========= ========= </TABLE> See notes to condensed consolidated financial statements 3
4 PLEXUS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> MARCH 31, SEPTEMBER 30, 1996 1995 ----------- ------------- (UNAUDITED) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 3,144 $ 3,569 Accounts receivable, net of allowance of $145 36,137 47,560 Inventories 62,031 48,966 Deferred income taxes 904 904 Prepaid expenses and other 1,815 1,930 -------- -------- Total current assets 104,031 102,929 Property, plant and equipment, net 11,182 11,829 Other 262 330 -------- -------- Total assets $115,475 $115,088 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 101 $ 107 Accounts payable 28,808 23,279 Customer deposits 7,447 3,530 Accrued liabilities: Salaries and wages 2,881 2,618 Other 1,889 2,093 -------- -------- Total current liabilities 41,126 31,627 Long-term debt 31,188 41,734 Deferred income taxes 718 718 Stockholders' equity: Series A preferred stock, $.01 par value, $1,000 face value, 7,000 shares authorized, issued and outstanding (aggregate liquidation preference of $7 million) 0 0 Preferred stock $.01 par value, 4,993,000 shares authorized, none issued - - Common Stock, $.01 par value, 30,000,000 shares authorized, 6,497,697 and 6,491,345 issued and outstanding, respectively 65 65 Additional paid-in capital 14,212 14,160 Retained earnings 28,166 26,784 -------- -------- 42,443 41,009 -------- -------- Total liabilities and stockholders' equity $115,475 $115,088 ======== ======== </TABLE> See notes to condensed consolidated financial statements 4
5 PLEXUS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Unaudited <TABLE> <CAPTION> SIX MONTHS ENDED MARCH 31, ------------------ 1996 1995 -------- -------- <S> <C> <C> Cash Flows From Operating Activities Net Income $ 1,644 $ 2,365 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 1,556 1,484 Change in assets and liabilities: Accounts receivable, net 11,423 5,609 Inventories (13,065) 824 Prepaid expenses and other 115 1,507 Accounts payable 5,529 (8,166) Customer deposits 3,917 680 Accrued liabilities 59 (105) Other 68 (3) -------- ------- Net cash flows provided by operating activities 11,246 4,195 -------- ------- Cash Flows From Investing Activities Payments for property, plant and equipment (921) (942) Other, net 12 2 -------- ------- Net cash flows used for investing activities (909) (940) -------- ------- Cash Flows From Financing Activities Net decrease in outstanding debt (10,552) (2,950) Issuance of common stock 52 - Payments of preferred dividends (262) (262) -------- ------- Net cash flows used for financing activities (10,762) (3,212) -------- ------- Net increase (decrease) in cash and cash equivalents (425) 43 Cash and cash equivalents: Beginning of period 3,569 1,081 -------- ------- End of period $ 3,144 $ 1,124 ======== ======= </TABLE> See notes to condensed consolidated financial statements 5
6 PLEXUS CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 1996 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 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 March 31, 1996 and the results of operations for the three months and six months ended March 31, 1996 and 1995 and the cash flows for the same six-month periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations dealing with interim financial statements. However, the Company believes that the disclosures made in the condensed consolidated financial statements included herein are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1995 Annual Report. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principals. NOTE (2) - REVENUE RECOGNITION Revenue is recognized primarily when inventory is shipped. Revenue relating to product design and development contracts (such sales are less than 10% of total revenue) is recognized as costs are incurred utilizing the percentage-of-completion method. Progress toward completion of product design and development contracts are consistently based on units of work for labor content and cost for component content. NOTE (3) - CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. NOTE (4) - INVENTORIES The major classes of inventories are as follows: <TABLE> <CAPTION> March 31, September 30, 1996 1995 --------- ------------- <S> <C> <C> Assembly Parts $37,165 $33,950 Work-in-Process 24,777 14,782 Finished Goods 89 234 ------- ------- $62,031 $48,966 ======= ======= </TABLE> 6
7 NOTE (5) - DEBT In March 1996, the Company's revolving credit agreement was amended and restated resulting in decreases in the Company's borrowing rates, while all other major terms were unchanged from the previous agreement. The new rates range from prime to prime plus 1/4% and from LIBOR plus 1% to LIBOR plus 2%, depending on the Company's consolidated debt-to-worth ratio, as defined by the Amended and Restated Revolving Credit Agreement. NOTE (6) - RECLASSIFICATIONS Certain amounts in prior years' condensed consolidated financial statements have been reclassified to conform to the 1996 presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Plexus Corp. is a contract provider of design, manufacturing and testing services to the electronics industry. Headquartered in Neenah, Wisconsin, the Company is the largest electronic assembly organization in the Midwest. Through its two wholly-owned subsidiaries, Plexus Technology Group, Inc. and Plexus Electronic Assembly, the Company develops, assembles and tests a variety of electronic component and subsystem products for major corporation in industries such as computer (primarily mainframe and peripheral products), medical, telecommunications and automotive. The Company operates manufacturing facilities in Neenah, Wisconsin and Richmond, Kentucky. Many of the industries which the Company currently provides electronic products are subject to rapid technological change, product obsolescence, as well as increased competition. These and other factors which affect the industries the Company provides services for, 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. The Company's sales can be negatively impacted by component shortages. Semiconductor manufacturers, in particular, are allocating product to a limited number of customers. Shortages of key electronic components (logic and memory devices) which are provided directly from customers or suppliers can cause manufacturing interruptions, customer rescheduling issues, production downtime and production set-up and restart inefficiencies. While in general the marketplace for such components has eased allowing greater availability, key component shortage issues can still occur with respect to 7
8 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 and mitigate shortages. 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. As a result, the Company's sales and profitability can be affected from period to period. The discussion of the Company's results of operations and financial condition should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-Q. "Safe Harbor" Cautionary Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this Form 10-Q which are not historical facts are forward looking statements that involve risks and uncertainties, including, but not limited to, the Company's ability to secure new customers and maintain its current customer base, the risk of customer reductions, delays or cancellations in both on-going and new programs, the results of cost reduction efforts, the adequate availability of components and related parts for production, the effect of economic conditions, the impact of technological changes and increased competition, and other risks detailed herein and in the Company's other Securities and Exchange Commissions filings. RESULTS OF OPERATIONS Net Sales Net sales for the three and six months ended March 31, 1996, increased $5.9 million or 8.5% and $11.9 million or 8.8%, respectively, compared to net sales for the same periods in the prior fiscal year. The increases in net sales were due to increased orders from existing customers, including on-going and new programs, and the addition of new customers. However, the increases were not as extensive as anticipated by Company management due to a number of factors. First, the Company continues to be affected by delays in several major new programs from certain new and existing customers, especially at its Advanced Manufacturing Facility. These delays have occurred primarily due to customer cutbacks in original forecasts, component shortages and customer time-to-market issues caused by design changes or other factors. Secondly, certain on-going programs have seen reductions in volume levels from prior years based on revised customer forecasts and reduced manufacturing outsourcing by certain customers. The Company's two largest customers during the first six months of fiscal 1996 continue to be International Business Machines Corporation (IBM) and General Electric Company (GE). Net sales to IBM (including up to six subsidiaries or divisions) for the six months ended March 31, 1996 and 1995 were 29.5% and 30.2%, respectively, of total net sales. Net sales to GE (including up to five subsidiaries or divisions) for the six months ended March 31, 1996 and 1995 were 14.5% and 17.1%, respectively, of total net sales. Each division or subsidiary of these companies contracts independently of the other division or subsidiary, and the Company does not believe that sales to any particular division or subsidiary depends upon sales to any other. While the combined net 8
9 sales for these two customers increased in absolute amounts during the six months ended March 31, 1996 compared to the same period in the prior fiscal year, the Company has continued to obtain new business from other customers. Net sales to the Company's top ten customers accounted for approximately 72% and 75%, of total net sales for the six months ended March 31, 1996 and 1995, respectively. The Company is dependent upon continued sales to IBM, GE and the rest of its significant customers. Any material change in orders from these or other customers could have a material effect on the Company's results of operations. Except for the past six months, the Company's sales have grown at double-digit annual growth rates over the past few years. 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% 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 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. Gross Profit The Company's gross profit for the three and six months ended March 31, 1996 decreased $762,000 or 12.8% and $447,000 or 4.3%, respectively, compared to gross profits for the same periods in the prior fiscal year. Gross margins decreased from 8.6% to 6.9% of net sales for the three months, and from 7.6% to 6.7% for the six months ended March 31, 1996, respectively, as compared to the same periods in fiscal 1995. The decrease in gross margins in fiscal 1996 compared to fiscal 1995 was primarily attributed to increases in variable and fixed costs in connection with increased manufacturing capacity in anticipation of higher sales volumes. Such costs related mainly to labor and recent surface mount equipment additions. In addition, start-up costs and manufacturing labor inefficiencies associated with several new programs impacted negatively on gross margins. In order to realign costs with revenues, the Company has implemented a number of initiatives designed to enhance profitability at current and near-term sales levels. Specifically, the Company has reduced production and administrative personnel by approximately 140 since February 1, 1996, through layoffs and attrition. These reductions amounted to an approximate 6% decrease in overall employment at the Company. Severance and related costs with respect to the staff reductions were not material. In addition to the staffing decreases, the Company reduced fixed expenses, primarily through equipment lease reductions. Based on the actions taken, the Company's goal is to realize at least $3,000,000 of annual cost savings, on a pretax basis, beginning with its third fiscal quarter, although that is dependent on the Company's ability to maintain realigned expense levels, and that cannot be assured. The Company has also implemented tighter controls over the monitoring and addition of variable and fixed costs. 9
10 The Company's gross margin reflects a number of factors including product mix, the level of start up costs and efficiencies associated with new programs, capacity utilization of surface mount and other equipment, and pricing within the electronics industry. Selling and Administrative Expenses Selling and administrative (S&A) expenses for the three and six months ended March 31, 1996 increased $0.3 million or 10.0% and $0.7 million or 14.4%, respectively, from the comparable prior periods. As a percentage of net sales, S&A expenses increased to 4.3% from 4.2% for the three months, and to 4.2% from 4.0% for the six months ended March 31, 1996 and 1995, respectively. The increases in S&A expenses were due primarily to increased staffing and increased investments in information systems to support higher revenue levels. The Company anticipates future S&A expenses will increase in absolute dollar amounts, and may increase as a percentage of net sales over the near term, as the Company expands its marketing efforts, systems development and customer support. Interest Expense Interest expense was $0.5 million and $1.1 million, respectively, for the three and six months ended March 31, 1996, compared to $0.7 million and $1.5 million for the comparable periods in fiscal 1995. The decrease in interest expense is primarily due to reduced borrowings required to support working capital, coupled with lower interest rates. In March 1996, the Company's revolving credit agreement was amended and restated resulting in a reduction in the Company's borrowing rates. All other major terms were unchanged from the previous agreement. The new rates range from prime to prime plus 1/4% and from LIBOR plus 1% to LIBOR plus 2%, depending on the Company's consolidated debt-to-worth ratio, as defined by the Amended and Restated Revolving Credit Agreement. Income Taxes The Company's effective tax rate was 40.8% and 40.0% for the three and six months ended March 31, 1996, respectively, as compared to a tax rate of 39.0% for the three and six months ended March 31, 1995. These rates approximate the blended Federal and state statutory rate as a result of all of the Company's operations being located within the United States. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities were $11.2 million and $4.2 million for the six months ended March 31, 1996 and 1995, respectively. Cash from operations was provided primarily by decreases in accounts receivable and increases in accounts payable and customer deposits offset by an increase in inventories. Increases in inventories continue to be influenced mainly by customer-imposed program reductions or delays. The Company is attempting to mitigate the impact of such reductions or delays by obtaining customer 10
11 deposits for inventories carried by the Company in situations of this nature. The cash generated from operating activities was utilized primarily to reduce outstanding debt. Capital additions of $0.9 million for the six months ended March 31, 1996 were primarily concentrated in surface mount assembly equipment and management information systems hardware and software. 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. Due to this change in strategy, the Company anticipates increased future capital additions due to the number of operating leases expiring through the remainder of fiscal 1996 and fiscal 1997. In February, 1996, the Company entered into a lease agreement with Oneida Nation Electronics of Green Bay, Wisconsin. Pursuant to the lease agreement, Oneida Nation Electronics has agreed to construct and equip an approximately 111,000 square foot manufacturing facility located in Green Bay, Wisconsin for the use of the Company. Based on current construction plans, this facility is expected to be completed in early calendar 1997. Annual lease payments for the building and equipment will be based on the profitability of the facility pursuant to a formula defined in the lease agreement. There are no required minimum lease payments. Company management believes this lease provides a financial arrangement under which the Company's earnings would be less likely to be negatively impacted during the start-up phase of the facility and capital commitments would be minimized, although it involves a sharing of future profits. The total debt to equity ratio as of March 31, 1996 was 1.6 to 1 compared to 1.8 to 1 at September 30, 1995. The Company believes that its credit facilities, leasing capabilities and projected cash flows from operations will be sufficient to meets its anticipated short-term and long-term capital requirements. * * * * * PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders on February 14, 1996, management's nominees named below were elected as directors by the indicated votes cast for and withheld with respect to each nominee. Of the 6,342,148 shares of Common Stock which were represented at the meeting, at least 6,273,881 shares (98.9%) were voted for the election of all of management's nominees. There were no abstentions or broker non-votes with respect to the election of directors. 11
12 <TABLE> <CAPTION> Name of Nominee For Withheld - --------------- --- -------- <S> <C> <C> Robert A. Cooper 6,276,381 65,767 Rudolph T. Hoppe 6,274,531 67,617 Harold R. Miller 6,276,181 65,967 Allan C. Mulder 6,275,406 66,742 John L. Nussbaum 6,277,931 64,217 Gerald A. Pitner 6,277,831 64,317 Thomas J. Prosser 6,277,300 64,848 Peter Strandwitz 6,273,881 68,267 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.16- Lease Agreement between Plexus Corp. and Oneida Nation Electronics dated February 12, 1996* Exhibit 10.17- Amended and Restated Revolving Credit Agreement dated March 18, 1996* Exhibit 11 - Statement Regarding Computation of Per Share Earnings Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K --None-- * - Without schedules SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 5/9/96 /s/ Peter Strandwitz - ------ ------------------------ Date Peter Strandwitz Chairman and CEO 5/9/96 /s/ Thomas B. Sabol - ------ ------------------------ Date Thomas B. Sabol Vice President-Finance & Chief Financial Officer 12