PLXS

Plexus Corp. 10-Q Summary: Quarter Ended June 30, 2004

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, and the nine-month period ended June 30, 2004, for Plexus Corp., a provider of product realization services (design, manufacturing, and testing) to electronic original equipment manufacturers (OEMs). The company operates in the Electronic Manufacturing Services (EMS) industry with facilities in North America, Europe, and Asia.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 40% year-over-year for the quarter and 30% for the nine-month period, driven by strengthening demand in networking/datacommunications, medical, and industrial sectors.
• Profitability Improvement: The company returned to profitability for the nine-month period ($5.2 million net income) compared to a net loss of $64.1 million in the prior year. This improvement is largely due to the absence of the $23.5 million cumulative effect of goodwill impairment recorded in the prior year.
• Restructuring Costs: Restructuring and impairment costs dropped significantly to $5.5 million for the nine months ended June 30, 2004, compared to $51.5 million in the prior year. The 2004 costs were primarily related to lease obligations for abandoned facilities in Seattle and a design office consolidation in Hillsboro, Oregon.
• Cash Flow: Operating cash flow turned negative ($34.4 million used) compared to positive ($2.8 million provided) in the prior year, primarily due to increased accounts receivable and inventory build-up to support sales growth.

Guidance, Outlook, and Risks

• Outlook: Management anticipates full fiscal year 2004 revenue growth of approximately 28% to 30%, exceeding the initial 15-20% forecast. Fourth-quarter sales are expected to range between $270 million and $280 million.
• Margin Pressure: Despite revenue growth, gross margins and profitability have been strained by rapid expansion, including the hiring and training of approximately 1,200 new employees and start-up costs for new programs and facilities (specifically a new facility in Penang, Malaysia).
• Capital Resources: The company amended its Secured Credit Facility in July 2004, increasing the borrowing capacity to $150 million and extending the maturity to October 2007. Capital expenditures for fiscal 2004 are estimated at $20 million to $22 million.
• Risks: Key risks include customer concentration (top 10 customers represent ~54% of sales), supply chain shortages, the impact of new program start-up inefficiencies, and potential additional restructuring costs related to subleasing abandoned facilities.
• Legal: The company is involved in patent litigation with the Lemelson Foundation, though the case is stayed pending an appeal in related litigation. Management does not believe the outcome will be material.

Investor Verification Checklist

• Customer Concentration: Verify the stability of contracts with Juniper Networks (14% of Q3 sales) and the top 10 customers (54% of sales).
• Inventory Levels: Assess the $166.8 million inventory balance and the decline in inventory turns (6.2x) to ensure no obsolescence risk exists given the rapid sales growth.
• Restructuring Accruals: Monitor the $11.3 million remaining restructuring liability, specifically the $10.6 million in lease obligations, for potential adjustments if sublease income estimates change.
• ERP Implementation: Track the $28.0 million capitalized ERP costs and the projected additional $3.5 million spend to ensure no impairment charges are required if the project scope changes.
• Debt Covenants: Confirm compliance with the amended credit facility covenants, particularly the minimum adjusted EBITDA and leverage ratios.