PLXS

Business Context and Reporting Period

Company: Plexus Corp.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended September 30, 2006
Industry: Electronics Manufacturing Services (EMS)
Overview: Plexus provides product realization services (design, manufacturing, testing, logistics) to OEMs in wireline/networking, wireless infrastructure, medical, industrial/commercial, and defense/security/aerospace sectors. The company operates 18 facilities in 14 locations with approximately 7,800 employees.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 19% ($231.7 million) driven by growth in wireline/networking and defense/security/aerospace sectors. Asia segment sales surged 91%.
• Profitability Turnaround: The company returned to profitability with record net income of $100.0 million, compared to a net loss of $12.4 million in 2005. This was aided by the absence of the $39.2 million in restructuring and goodwill impairment charges recorded in 2005.
• Tax Benefit: A significant non-operating factor was a $17.7 million favorable adjustment to the tax provision due to the reversal of a valuation allowance on U.S. deferred income tax assets.
• Segment Performance:
  • United States: Sales up 14.4%; Operating income improved $35.9 million.
  • Asia: Sales up 91.1%; Operating income improved $20.0 million.
  • Europe: Sales declined 9.6% due to reduced demand from a medical customer.
  • Mexico: Sales declined 28.5% due to customer program transfers and lower demand, resulting in an operating loss of $4.2 million.

Guidance, Outlook, and Risks

• Fiscal 2007 Outlook: Management expects Q1 2007 net sales in the range of $385 million to $395 million. Earnings are projected between $0.31 and $0.35 per diluted share, excluding restructuring costs. The effective tax rate is expected to normalize to approximately 25%.
• Capital Expenditures: Expected to range from $65 million to $75 million in 2007, including $30-$40 million for Asian expansion.
• Facility Changes:
  • Closures: Maldon, England facility closure planned for Q2 2007.
  • Expansions: New facility in Penang, Malaysia (364,000 sq ft) and expansion in Xiamen, China (60,000 sq ft) expected to begin operations in 2007.
• Key Risks:
  • Customer Concentration: Top 10 customers accounted for 59% of sales; Juniper Networks (19%) and General Electric (12%) are major clients.
  • Supply Chain: Exposure to component shortages and price fluctuations in a turnkey manufacturing model.
  • Foreign Operations: Risks related to currency fluctuations (no hedging currently) and political/economic instability in China, Malaysia, and the UK.
  • Regulatory: Compliance with FDA (medical), RoHS/WEEE (EU), and defense procurement regulations.

Investor Verification Checklist

• Tax Rate Normalization: Verify the sustainability of the 25% effective tax rate in 2007 compared to the negative 20.6% rate in 2006 driven by the one-time valuation allowance reversal.
• Customer Concentration: Monitor order volumes from Juniper Networks and General Electric, which collectively represent 31% of revenue.
• Defense Sector Volatility: Assess the sustainability of defense sales, which spiked in late 2006 due to a specific program but are expected to decrease in early 2007.
• Expansion Costs: Track the impact of start-up costs and inefficiencies associated with the new Penang facility and Xiamen expansion on 2007 margins.
• Working Capital: Review the increase in Days Sales Outstanding (52 days in 2006 vs. 50 days in 2005) and inventory levels to ensure cash flow efficiency is maintained.