PLXS

Business Context and Reporting Period

Plexus Corp. (Plexus) is an Electronic Manufacturing Services (EMS) provider serving wireline/networking, wireless infrastructure, medical, industrial/commercial, and defense/security/aerospace sectors. This Form 10-Q covers the quarterly period ended July 4, 2009 (Fiscal Q3 2009) and the nine months ended July 4, 2009. The fiscal year 2009 includes an additional week added to the first quarter, resulting in a 280-day period for the nine months ended July 4, 2009, compared to 273 days in the prior year.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 17.0% ($77.8 million) for the quarter and 10.4% ($142.1 million) for the nine months compared to the prior year periods. Declines were observed in all sectors except a slight increase in defense/security/aerospace for the quarter. The nine-month decline was driven by reduced demand in industrial/commercial, defense, and wireline/networking sectors.
• Margin Compression: Gross margins decreased from 10.7% to 9.1% for the quarter and from 11.4% to 9.6% for the nine months. This was attributed to lower sales volumes, unfavorable customer mix, and fixed costs at new facilities not yet at full capacity.
• Restructuring and Impairment: The company recorded $8.6 million in restructuring and impairment costs for the nine months ended July 4, 2009. This included a $5.7 million goodwill impairment charge related to the European segment (Kelso, Scotland) and severance costs for workforce reductions in the U.S. and Mexico.
• Tax Rate: The effective tax rate for the nine months was approximately 4% (excluding discrete events), significantly lower than the 20% in the prior year, due to a higher proportion of income in North American sites and discrete tax benefits.

Guidance, Outlook, and Risks

• Q4 2009 Outlook: Management expects fourth-quarter net sales to range between $380 million and $405 million. Assuming sales within this range, diluted earnings per share are expected to be between $0.27 and $0.32, excluding restructuring and impairment costs.
• Liquidity: The company holds $215.5 million in cash and cash equivalents. It has a $150 million term loan (with $131.3 million outstanding) and a $100 million revolving credit facility available. Management believes current resources are sufficient for the next 12 months.
• Key Risks:
  • Economic Conditions: Continued global economic weakness and credit market instability may further reduce customer demand.
  • Customer Concentration: The top 10 customers accounted for 57% of sales in the quarter and 59% for the nine months. Juniper Networks alone represented 23% of quarterly sales.
  • Inventory Risk: Turnkey operations expose the company to excess or obsolete inventory risks if customer forecasts change.
  • Legal Proceedings: A securities class action lawsuit was dismissed in July 2009, but plaintiffs have until August 24, 2009, to appeal.

Investor Verification Checklist

• Verify the sustainability of the 9.1% gross margin given the decline in sales volume and fixed cost pressures at new facilities.
• Monitor the status of the $2.0 million in auction rate securities, which are currently illiquid and classified as long-term assets.
• Assess the impact of the $5.7 million goodwill impairment on future European segment profitability and potential further asset write-downs.
• Track the appeal deadline (August 24, 2009) for the dismissed securities class action lawsuit.
• Confirm the company's ability to maintain debt covenants under the Amended Credit Facility as leverage ratios fluctuate with earnings.