PLXS

Business Context and Reporting Period

Plexus Corp. (Plexus) is an Electronic Manufacturing Services (EMS) provider offering product realization services to OEMs in sectors including wireline/networking, medical, defense, and industrial. This Form 10-Q covers the quarter and nine months ended July 1, 2006. The company operates 18 facilities across the United States, Asia, Mexico, and Europe.

Key Financial Metrics

Note: The company had no borrowings outstanding under its $150 million Secured Credit Facility as of July 1, 2006.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 26.7% ($83.7 million) for the quarter and 17.3% ($156.9 million) for the nine months compared to the prior year periods. Growth was driven by increased demand in the defense/security/aerospace and wireline/networking sectors.
• Profitability Turnaround: The company reported a net income of $25.1 million for the quarter, a significant improvement from a net loss of $21.5 million in the same period of 2005. The prior year loss included $26.9 million in goodwill impairment and $729,000 in restructuring costs.
• Margin Expansion: Gross margins improved to 11.5% (quarter) and 10.7% (nine months) from 8.7% and 8.3% respectively in the prior year, attributed to operating leverage, favorable customer mix, and the profitability of the Penang, Malaysia facility.
• Segment Performance:
  • United States: Sales up 27.5%; Operating income up $14.9 million.
  • Asia: Sales up 102.2%; Operating income improved $5.2 million.
  • Mexico: Sales declined 47.1% due to a medical customer transferring production to the U.S.
  • Europe: Sales declined 11.3% due to reduced demand from a medical customer.

Guidance, Outlook, and Risks

• Full Year Guidance: Management revised full fiscal year 2006 net sales growth target to approximately 18.3% to 19.5% over fiscal 2005.
• Q4 Outlook: Net sales for the fourth quarter are expected to range between $390 million and $405 million. Diluted earnings per share are expected to be between $0.46 and $0.50, excluding restructuring and impairment costs.
• Tax Rate: The effective tax rate for fiscal 2006 is expected to be approximately 1.0%, driven by tax holidays in Asia and U.S. net operating loss (NOL) carryforwards. The normalized global rate without the U.S. valuation allowance is estimated at 25%.
• Restructuring: The company announced the closure of its Maldon, England facility and workforce reductions in Juarez. Remaining restructuring liabilities are approximately $7.7 million, expected to be paid within 12 months.
• Risks: Key risks include customer concentration (Juniper Networks and GE accounted for 19% and 11% of sales respectively), supply chain disruptions, foreign currency fluctuations (no hedging currently in place), and the cyclical nature of the electronics industry.

Investor Verification Checklist

• Customer Concentration: Verify the stability of relationships with top customers (Juniper, GE, and the unnamed defense customer) which collectively represent a significant portion of revenue.
• Valuation Allowance: Monitor the $44.3 million valuation allowance on U.S. deferred tax assets; a reversal would significantly increase the effective tax rate.
• Restructuring Execution: Track the progress and cost of the Maldon facility closure and Juarez workforce reduction to ensure costs align with the $7.7 million liability.
• Inventory Levels: Review inventory turnover (6.4 turns) and raw material levels ($167.1 million) given the turnkey nature of the business and potential component shortages.
• Capital Expenditures: Assess the impact of planned expansions in Xiamen, China, and Penang, Malaysia, on future cash flows and capacity utilization.