PLXS

Business Context and Reporting Period

Plexus Corp. (Plexus) is an Electronic Manufacturing Services (EMS) provider offering product realization services to OEMs in wireline/networking, wireless infrastructure, medical, industrial/commercial, and defense/security/aerospace sectors. This Form 10-Q covers the three and six months ended April 2, 2005. The company operates 18 facilities globally. As of May 6, 2005, 43,358,354 shares of common stock were outstanding.

Key Financial Metrics

Liquidity: The company maintains a $150 million secured revolving credit facility with no borrowings outstanding as of April 2, 2005. Cash and cash equivalents totaled $36.1 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 20% year-over-year for both the three and six-month periods, driven by increased demand in wireline/networking, wireless infrastructure, and medical sectors.
• Profitability Decline: Despite revenue growth, the company reported a net loss of $4.5 million for the quarter compared to a $3.5 million profit in the prior year. This was primarily due to $10.6 million in restructuring and impairment costs.
• Restructuring Costs: Significant charges included $6.7 million for lease obligations and severance related to the closure of the Bothell, Washington facility, and a $3.8 million impairment of a shop floor data-collection system.
• Customer Concentration: Sales to the top 10 customers increased to 59% of net sales (from 55% in the prior year). Juniper Networks accounted for 20% of sales, up from 13% previously.
• Bad Debt: Selling and administrative expenses included $0.8 million in bad debt expense related to a customer liquidity issue, contrasting with a $1.1 million recovery in the prior year period.

Guidance, Outlook, and Risks

• Outlook: Management expects full fiscal 2005 net sales growth of approximately 15% to 18%. Third-quarter sales are projected in the range of $305 million to $315 million.
• Profitability Pressures: Management anticipates continued profitability impacts in the third quarter due to manufacturing inefficiencies at certain sites and start-up costs at the new Penang, Malaysia facility.
• Accounting Changes: The company must adopt SFAS No. 123(R) regarding stock-based compensation in the first quarter of fiscal 2006, which is expected to have a significant adverse effect on reported earnings if stock options remain a key compensation element.
• Risks: Key risks include high customer concentration (Juniper and GE), potential order cancellations, component shortages, and the impact of new EU regulations (RoHS and WEEE) on manufacturing processes.

Investor Verification Checklist

• Restructuring Liability: Verify the $15.3 million remaining restructuring liability, specifically the $13.7 million in lease obligations and the timeline for payments through 2012.
• Customer Concentration: Assess the risk associated with Juniper Networks representing 20% of sales and the top 10 customers representing 59% of sales.
• Inventory Levels: Review the increase in finished goods inventory and the $0.9 million inventory adjustment at the Juarez facility due to theft/loss.
• ERP Implementation: Monitor the $22.4 million investment in the ERP platform and the risk of further impairments if anticipated benefits are not realized.
• Stock-Based Compensation: Evaluate the potential impact of SFAS No. 123(R) adoption on future earnings, noting the pro forma net loss would have been higher under fair value accounting.