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Neenah, Wisconsin-based Plexus Corp. (PLXS) is a leading provider of electronic manufacturing services (EMS) to original equipment manufacturers (OEMs) in a wide range of industries, including wireline/networking, wireless infrastructure, industrial/commercial, defense/security/aerospace, and medical. Plexus provides a broad range of integrated product realization services that helps customers to outsource all stages of product realization including development and design, materials procurement and management, prototyping and new product introduction, testing, manufacturing, product configuration, logistics and test/repair to OEMs. The company's unique focused factory manufacturing model and global supply chain solutions help in the seamless transition of products from one service offering to another, thereby reducing time-to-market and total cost.

By geography, the U.S. contributed 70% (including inter-segment sales), Asia contributed 28%, Europe 4%, and Mexico 5% to total revenue in fiscal 2007. The company's major customers include Juniper Networks at 21% of revenue and GE at 10% for fiscal 2007, with its top 10 customers accounting for 61% of revenue. By end-market, the wireline/networking sector (this also includes computing) accounted for 44% of fiscal 2007 revenue, wireless infrastructure 8%, medical 24%, industrial and commercial 15%, and defense, security, and aerospace accounted for the remaining 9% of the revenue.

Plexus continues to expand its clientele and increase penetration in its existing customer base with its consumer-focused strategies. As an engineering-focused EMS player, Plexus is well-positioned to benefit from the increasing trend of outsourcing from the medical, industrial, and defense/aerospace OEMs. Engineering agreements generate higher margins and are improving the company's overall profitability. Plexus' gross margin reached 10.6% and operating margin reached 5.1% during fiscal year 2007, well ahead of its EMS peer group that typically has gross margins in the mid single-digit percentage range. A short-term defense contract pushed margins well above this rate in the first quarter of 2008, however Plexus expects to maintain its' 10% gross margin target and 5% operating income target in the second half of the year and over the long-term. Driving its profitability has been the transfer of new businesses to its new and lower-cost facility in Asia. Plexus has doubled its manufacturing capacity in China and expanded its new facility in Malaysia. The company ramped production at its new facilities in Penang, Malaysia ahead of expectations, which has resulted in better than expected margins. In the future, Plexus plans to expand into central and eastern Europe.

Following the slow-down in fiscal 2003 and 2002, sales to customers in the wireline/networking and wireless infrastructure sectors have increased significantly in recent quarters as a result of increased end-market demand and increased availability of venture capital to fund existing and emerging technologies. Following a challenging period in the wireline sector industry wide, Plexus has been able to drive meaningful growth from its largest sector over the past few years, with a CAGR of 20.6% over the past three years, including 17.5% in 2007. The company has been successful at winning increased share with its existing customers and signing new business. During the first quarter, Plexus won 14 programs worth $156 million annually, including 11 with existing customers. Approximately 30% of this incremental revenue will come from the Medical segment, which we believe offers a significant growth opportunity to the company over the next several years, as this industry is less penetrated than traditional EMS markets. In addition to the medical segment, 45% of the new revenue will come from the wireline segment, 15% from industrial and 10% from wireless. Plexus has built a healthy balance sheet, with cash and equivalents of $213 million compared to $39 million in long-term debt as of December 28, 2007.

Given its exposure to high-growth segments and continuing improvement in telecommunications spending, along with its progress in the medical segment, we still believe that over the long-term PLXS will outgrow its peer group. Moreover, we expect the company to make continued improvements at its Mexico facility, which should be reflected in higher margins over coming quarters.


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