UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q








x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended February 28, 2009





OR





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ________ to ________





Commission
File No. 1-33752





MERIX
CORPORATION


(Exact
name of registrant as specified in its charter)








Oregon
                  93-1135197(State
      or other jurisdiction of incorporationor organization)
                  (I.R.S.
      Employer Identification No.)15725
      SW Greystone Court, Suite 200, Beaverton, Oregon
                  97006(Address
      of principal executive offices)
                  (Zip
      Code)Registrant’s
      telephone number, including area code:  503-716-3700








Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes  x   No
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer
o Accelerated filer
o   Non-accelerated
filer o (Do not
check if a smaller reporting company) Smaller reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes o   No
x





The
number of shares of common stock outstanding as of April 6, 2009 was 21,840,126
shares.


MERIXCORPORATION


INDEX
TO FORM 10-Q





PART I - FINANCIAL
    INFORMATION
                                    PageItem
      1.
                                    Consolidated Financial Statements
    (Unaudited)Consolidated Balance Sheets – February 28, 2009 and May 31,
      2008
                                    2Consolidated Statements of Operations – for the three- and
      nine-month fiscal periods Ended February 28, 2009 and March 1,
      2008
                                    3Consolidated Statements of Cash Flows – for the nine-month
      fiscal periods ended February 28, 2009 and March 1,
    2008
                                    4Notes to Consolidated Financial
    Statements
                                    5Item
      2.
                                    Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                                    14Item
      3.
                                    Quantitative and Qualitative Disclosures About Market
      Risk
                                    27Item
      4.
                                    Controls and Procedures
                                    27PART II - OTHER INFORMATIONItem
      1.
                                    Legal Proceedings
                                    29Item
      1A.
                                    Risk Factors
                                    29Item
      6.
                                    Exhibits
                                    44Signatures
                                    45




1
 Index





MERIXCORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(in
thousands)


(unaudited)




February
      28,
                          
                          
                          May
      31,2009
                          
                          
                          2008AssetsCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          19,084
                          
                          
                          $
                          5,728Accounts
      receivable, net of allowances for doubtful accounts of $2,140 and
      $2,252
                          
                          
                          45,699
                          
                          
                          
                          73,153Inventories,
      net
                          
                          
                          16,213
                          
                          
                          
                          23,631Assets
      held for sale
                          
                          
                          4
                          
                          
                          
                          1,477Deferred
      income taxes
                          
                          
                          75
                          
                          
                          
                          75Prepaid
      and other current assets
                          
                          
                          4,684
                          
                          
                          
                          12,961Total
      current assets
                          
                          
                          85,759
                          
                          
                          
                          117,025Property,
      plant and equipment, net of accumulated depreciation of $132,872 and
      $121,253
                          
                          
                          101,015
                          
                          
                          
                          103,012Goodwill
                          
                          
                          11,392
                          
                          
                          
                          31,794Definite-lived
      intangible assets, net of accumulated amortization of $9,856 and
      $8,342
                          
                          
                          7,352
                          
                          
                          
                          8,866Deferred
      income taxes, net
                          
                          
                          773
                          
                          
                          
                          885Assets
      held for sale
                          
                          
                          1,146
                          
                          
                          
                          -Other
      assets
                          
                          
                          4,732
                          
                          
                          
                          5,859Total
      assets
                          
                          $
                          212,169
                          
                          
                          $
                          267,441Liabilities
      and Shareholders' EquityCurrent
      liabilities:Accounts
      payable
                          
                          $
                          37,262
                          
                          
                          $
                          59,789Accrued
      liabilities
                          
                          
                          14,712
                          
                          
                          
                          15,783Total
      current liabilities
                          
                          
                          51,974
                          
                          
                          
                          75,572Long-term
      debt
                          
                          
                          78,000
                          
                          
                          
                          70,000Other
      long-term liabilities
                          
                          
                          3,751
                          
                          
                          
                          3,522Total
      liabilities
                          
                          
                          133,725
                          
                          
                          
                          149,094Minority
      interest
                          
                          
                          3,849
                          
                          
                          
                          4,573Commitments
      and Contingencies (Note 15)Shareholders'
      equity:Preferred
      stock, no par value; 10,000 shares authorized; none issued
                          
                          
                          -
                          
                          
                          
                          -Common
      stock, no par value; 50,000 shares authorized;21,547
      and 21,073 issued and outstanding
                          
                          
                          216,822
                          
                          
                          
                          215,085Accumulated
      deficit
                          
                          
                          (142,259
                          )
                          
                          
                          (101,358
                          )Accumulated
      other comprehensive income
                          
                          
                          32
                          
                          
                          
                          47Total
      shareholders' equity
                          
                          
                          74,595
                          
                          
                          
                          113,774Total
      liabilities and shareholders' equity
                          
                          $
                          212,169
                          
                          
                          $
                          267,441





See
accompanying Notes to Consolidated Financial Statements.




2
 Index





MERIXCORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
thousands, except per share data)


(unaudited)




Fiscal
      quarter ended
                
                
                Nine
      months endedFebruary
      28,
                
                
                March
      1,
                
                
                February
      28,
                
                
                March
      1,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      sales
                
                $
                60,721
                
                
                $
                94,275
                
                
                $
                228,248
                
                
                $
                291,083Cost
      of sales
                
                
                59,845
                
                
                
                86,351
                
                
                
                211,063
                
                
                
                262,593Gross
      profit
                
                
                876
                
                
                
                7,924
                
                
                
                17,185
                
                
                
                28,490Operating
      expenses:Engineering
                
                
                500
                
                
                
                337
                
                
                
                1,760
                
                
                
                1,287Selling,
      general and administration
                
                
                8,395
                
                
                
                9,930
                
                
                
                26,086
                
                
                
                32,161Amortization
      of intangible assets
                
                
                472
                
                
                
                527
                
                
                
                1,512
                
                
                
                1,785Severance,
      asset impairment and restructuring charges (Note 17)
                
                
                22,342
                
                
                
                14,640
                
                
                
                22,904
                
                
                
                15,861Total
      operating expenses
                
                
                31,709
                
                
                
                25,434
                
                
                
                52,262
                
                
                
                51,094Operating
      income (loss)
                
                
                (30,833
                )
                
                
                (17,510
                )
                
                
                (35,077
                )
                
                
                (22,604
                )Other
      income (expense):Interest
      income
                
                
                27
                
                
                
                155
                
                
                
                123
                
                
                
                724Interest
      expense
                
                
                (1,060
                )
                
                
                (916
                )
                
                
                (2,920
                )
                
                
                (3,088
                )Gain
      on settlement of debt
                
                
                -
                
                
                
                5,094
                
                
                
                -
                
                
                
                5,094Other
      income (expense), net
                
                
                (17
                )
                
                
                (419
                )
                
                
                (471
                )
                
                
                (986
                )Total
      other expense, net
                
                
                (1,050
                )
                
                
                3,914
                
                
                
                (3,268
                )
                
                
                1,744Loss
      before income taxes and minority interests
                
                
                (31,883
                )
                
                
                (13,596
                )
                
                
                (38,345
                )
                
                
                (20,860
                )Provision
      for (benefit from) income taxes
                
                
                628
                
                
                
                (511
                )
                
                
                2,049
                
                
                
                445Loss
      before minority interests
                
                
                (32,511
                )
                
                
                (13,085
                )
                
                
                (40,394
                )
                
                
                (21,305
                )Minority
      interest in net income of consolidated subsidiaries
                
                
                155
                
                
                
                269
                
                
                
                507
                
                
                
                707Net
      loss
                
                $
                (32,666
                )
                
                $
                (13,354
                )
                
                $
                (40,901
                )
                
                $
                (22,012
                )Basic
      and diluted loss per share
                
                $
                (1.54
                )
                
                $
                (0.63
                )
                
                $
                (1.95
                )
                
                $
                (1.05
                )Weighted
      average number of shares - basic and diluted
                
                
                21,170
                
                
                
                21,079
                
                
                
                20,957
                
                
                
                21,002





See
accompanying Notes to Consolidated Financial Statements.





3
 Index





MERIXCORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)







Nine
      months endedFebruary
      28,
                
                
                March
      1,CASH
      FLOWS FROM OPERATING ACTIVITIES
                
                2009
                
                
                2008Net
      loss
                
                $
                (40,901
                )
                
                $
                (22,012
                )Adjustments
      to reconcile net loss to cash provided by operating
      activities:Depreciation
      and amortization
                
                
                16,822
                
                
                
                16,231Contribution
      of common stock to defined contribution plan
                
                
                -
                
                
                
                873Share-based
      compensation expense
                
                
                1,309
                
                
                
                1,877Minority
      interest in net income of consolidated subsidiaries
                
                
                507
                
                
                
                707(Gain)
      loss on disposition of assets
                
                
                (648
                )
                
                
                (28
                )Asset
      impairment charges
                
                
                21,202
                
                
                
                12,722Gain
      on settlement of debt
                
                
                -
                
                
                
                (5,094
                )Deferred
      income taxes
                
                
                11
                
                
                
                (1,005
                )Changes
      in operating accounts:(Increase)
      decrease in accounts receivable, net
                
                
                27,454
                
                
                
                (2,047
                )(Increase)
      decrease in inventories, net
                
                
                7,418
                
                
                
                (2,091
                )(Increase)
      decrease in other assets
                
                
                8,484
                
                
                
                (5,227
                )Increase
      (decrease) in accounts payable
                
                
                (17,675
                )
                
                
                9,706Increase
      (decrease) in other accrued liabilities
                
                
                (1,743
                )
                
                
                2,449Increase
      (decrease) in amounts due to affiliate, net
                
                
                1,106
                
                
                
                1,214Net
      cash provided by operating activities
                
                
                23,346
                
                
                
                8,275CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property, plant and equipment
                
                
                (18,132
                )
                
                
                (19,749
                )Proceeds
      from disposal of property, plant and equipment
                
                
                961
                
                
                
                23Purchases
      of investments
                
                
                -
                
                
                
                (12,775
                )Proceeds
      from sales and maturity of securities
                
                
                -
                
                
                
                21,800Net
      cash used in investing activities
                
                
                (17,171
                )
                
                
                (10,701
                )CASH
      FLOWS FROM FINANCING ACTIVITIESBorrowing
      on revolving line of credit
                
                
                40,000
                
                
                
                -Principal
      payments on revolving line of credit
                
                
                (32,000
                )
                
                
                -Principal
      payments on notes payable
                
                
                -
                
                
                
                (2,500
                )Payments
      on capital lease obligations
                
                
                -
                
                
                
                (438
                )Proceeds
      from exercise of stock options and stock plan transactions
                
                
                447
                
                
                
                1Reacquisition
      of common stock
                
                
                (17
                )
                
                
                (86
                )Distribution
      to minority shareholder
                
                
                (1,230
                )
                
                
                (1,144
                )Other
      financing activities
                
                
                (19
                )
                
                
                (157
                )Net
      cash provided by (used in) financing activities
                
                
                7,181
                
                
                
                (4,324
                )NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                
                
                13,356
                
                
                
                (6,750
                )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                5,728
                
                
                
                17,175CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                19,084
                
                
                $
                10,425SUPPLEMENTAL
      CASH FLOW INFORMATIONCash
      paid for income taxes, net
                
                $
                2,107
                
                
                $
                1,057Cash
      paid for interest
                
                
                1,119
                
                
                
                2,176





See
accompanying Notes to Consolidated Financial Statements.




4
 Index





MERIXCORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
1.  NATURE OF BUSINESS





Merix
Corporation, an Oregon corporation, was formed in March 1994. Merix is a leading
global manufacturing service provider for technologically advanced printed
circuit boards (PCBs) for original equipment manufacturer (OEM) customers and
their electronic manufacturing service (EMS) providers. The Company’s principal
products are complex multi-layer rigid PCBs, which are the platforms used to
interconnect microprocessors, integrated circuits and other components that are
essential to the operation of electronic products and systems. The market
segments the Company serves are primarily in commercial equipment for the
communications and networking, computing and peripherals, industrial and
medical, defense and aerospace and automotive markets. The Company’s markets are
generally characterized by rapid technological change, high levels of complexity
and short product life-cycles, as new and technologically superior electronic
equipment is continually being developed.





NOTE
2.  BASIS OF PRESENTATION





The
accompanying consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in the Annual Report on Form
10-K prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to those rules or regulations. The interim
consolidated financial statements are unaudited; however, they reflect all
normal recurring adjustments and non-recurring adjustments that are, in the
opinion of management, necessary for a fair presentation. The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company’s 2008 Annual Report on Form 10-K. Results of operations for
the interim periods presented are not necessarily indicative of the results to
be expected for the full year.





The
Company’s fiscal year consists of a 52 or 53 week period that ends on the last
Saturday in May. Fiscal 2009 is a 52-week fiscal year ending on May 30,
2009.  The first quarter of fiscal 2008 ended September 1, 2008 and
included 14 weeks, whereas the first quarter of fiscal 2009 ended August 30,
2009 and included 13 weeks.  Accordingly, the year-to-date period
ended February 28, 2009 included 39 weeks and the year-to-date period ended
March 1, 2008 included 40 weeks.





NOTE
3.  BASIS OF CONSOLIDATION





The
consolidated financial statements include the accounts of Merix Corporation and
its wholly-owned and majority-owned subsidiaries. Except for activity related to
Merix Asia, for which certain intercompany amounts cannot be eliminated as
discussed below, all intercompany accounts, transactions and profits have been
eliminated in consolidation.





The
functional currency for all subsidiaries is the U.S. dollar.  There
were no material foreign exchange gains or losses for the fiscal quarter ended
February 28, 2009.  Foreign exchange losses for the fiscal quarter
ended March 1, 2008 totaled $0.4 million and are included in net other expense
in the consolidated statements of operations.  Foreign exchange losses
for the fiscal year-to-date periods ended February 28, 2009 and March 1, 2008
totaled $0.4 million and $1.0 million, respectively.





Prior to
the implementation of the Company’s new enterprise resource planning (ERP)
system completed in August 2008, Merix Asia’s financial reporting
systems were predominantly manual in nature.  Accordingly, significant
time has been required to process and review the transactions in order to assure
the financial information is properly stated.  Additionally, Merix
Asia performs a complex financial consolidation of its subsidiaries prior to the
Company’s final consolidation.  The time required to complete Merix
Asia’s consolidation, record intercompany transactions and properly report any
adjustments, intervening and/or subsequent events has required the use of a
one-month lag in consolidating the financial statements for Merix Asia with
Merix Corporation.  The new ERP system allows for the streamlining of
business processes and may eventually eliminate the need for the one-month
reporting lag for Merix Asia.  Inter-company transactions which
occurred during these periods have been eliminated in consolidation.
Inter-company balances resulting from transactions with Merix Asia during the
one-month lag period have been netted and presented as a current liability on
the consolidated balance sheet. The net intercompany payable totaled $0.9
million as of February 28, 2009.  The net intercompany receivable at
May 31, 2008, which was included as a component of other current assets, totaled
$0.2 million.





5
 Index





NOTE
4.  RECLASSIFICATIONS





Certain
immaterial reclassifications were made to the prior period financial statements
to conform to the current period presentation, including a reclassification of
certain engineering costs, which are directly related to the production of goods
for sale which are included in cost of sales in the consolidated statements of
operations.  These costs were previously included as a component of
operating expenses.  The impact of the reclassification on inventory
balances is not material.  The results of operations for the third
quarter of fiscal 2008 and the nine-month fiscal period ended March 1, 2008 has
been revised as shown below:





Fiscal
      Quarter Ended
                
                
                Nine
      Months EndedMarch
      1,
                
                
                March
      1,
                
                
                March
      1,
                
                
                March
      1,2008
                
                
                2008
                
                
                2008
                
                
                2008(as
      reported)
                
                
                (as
      revised)
                
                
                (as
      reported)
                
                
                (as
      revised)Net
      Sales
                
                $
                94,275
                
                
                $
                94,275
                
                
                $
                291,083
                
                
                $
                291,083Cost
      of Sales
                
                
                84,594
                
                
                
                86,351
                
                
                
                257,200
                
                
                
                262,593Gross
      Profit
                
                
                9,681
                
                
                
                7,924
                
                
                
                33,883
                
                
                
                28,490Gross
      margin
                
                
                10.3
                %
                
                
                8.4
                %
                
                
                11.6
                %
                
                
                9.8
                %Engineering
      expense
                
                
                2,094
                
                
                
                337
                
                
                
                6,680
                
                
                
                1,287Other
      operating expenses
                
                
                25,097
                
                
                
                25,097
                
                
                
                49,782
                
                
                
                49,807Loss
      from operations
                
                
                (17,510
                )
                
                
                (17,510
                )
                
                
                (22,579
                )
                
                
                (22,604
                )Other
      income (expense), net
                
                
                3,914
                
                
                
                3,914
                
                
                
                1,719
                
                
                
                1,744Minority
      interest and provision (benefit) for income taxes
                
                
                (242
                )
                
                
                (242
                )
                
                
                1,152
                
                
                
                1,152Net
      loss
                
                $
                (13,354
                )
                
                $
                (13,354
                )
                
                $
                (22,012
                )
                
                $
                (22,012
                )





In the
second quarter of fiscal 2009, the Company evaluated the intercompany
transactions with its Asia subsidiary which, due to the one month reporting lag
described in Note 3, result in an intercompany balance being presented on the
consolidated balance sheets.  Based on the nature of the intercompany
transactions , it was determined that the activity should be included in cash
flows from operations on the Company’s consolidated statement of cash
flows.  This amount has been reclassified from cash flows from
financing activities in the presentation of cash flows for the nine-month period
ended March 1, 2009.





NOTE
5.  INVENTORIES





Inventories
are valued at the lower of cost or market value and include materials, labor and
manufacturing overhead. Inventories are valued at (i) the actual cost to
purchase or manufacture the inventory including material, labor and
manufacturing overhead (on a first-in, first-out basis) or (ii) the current
estimated market value of the inventory.  A standard cost system is
used to estimate the actual costs of inventory.  Standard costs are
regularly compared to actual costs and the estimated market value of the
inventory.





The
Company includes a provision for inventories to cover excess inventories to
their estimated net realizable values, as necessary. A change in customer demand
for inventory is the primary indicator for changes in inventory carrying values.
The Company records provisions for excess inventories based on historical
experiences with customers, the ability to utilize inventory in other programs,
the ability to redistribute inventory back to the suppliers, the age of the
inventory and current and forecasted demand for the inventory. The increase to
inventory valuation reserves was $0.6 million and $0.7 million, respectively for
the third quarters of fiscal 2009 and 2008, and $0.4 million and $0.4 million,
respectively during the fiscal year-to-date periods ended February 28, 2009 and
March 1, 2008.  As of February 28, 2009 and May 31, 2008, inventory
reserves totaled $4.1 million and $3.7 million, respectively.





6
 Index





The
Company maintains inventories on a consignment basis in the United States and in
Asia. Consignment inventory is recorded as inventory until the product is pulled
from the consignment locations by the customer and all risks and rewards of
ownership of the consignment inventory have been transferred to the
customer.





Inventories,
net of related reserves, consisted of the following (in thousands):





February
      28,
                  
                  
                  May
      31,2009
                  
                  
                  2008Raw
      materials
                  
                  $
                  3,075
                  
                  
                  $
                  4,876Work-in-process
                  
                  
                  4,970
                  
                  
                  
                  7,542Finished
      goods
                  
                  
                  3,719
                  
                  
                  
                  3,901Consignment
      finished goods
                  
                  
                  4,449
                  
                  
                  
                  7,312Total
      inventories
                  
                  $
                  16,213
                  
                  
                  $
                  23,631





NOTE
6.  PREPAID AND OTHER CURRENT ASSETS





Prepaid
expenses and other current assets consisted of the following at February 28,
2009 and May 31, 2008 (in thousands):





February
      28,
                    
                    
                    May
      31,2009
                    
                    
                    2008Prepaid
      expenses
                    
                    $
                    1,089
                    
                    
                    $
                    1,778Income
      taxes receivable
                    
                    
                    435
                    
                    
                    
                    318Value-added
      tax receivable
                    
                    
                    1,371
                    
                    
                    
                    7,176Intercompany
      receivable (Note 3)
                    
                    
                    -
                    
                    
                    
                    227Other
      assets
                    
                    
                    1,789
                    
                    
                    
                    3,462$
                    4,684
                    
                    
                    $
                    12,961





NOTE
7.  DEFINITE-LIVED INTANGIBLE ASSETS





At
February 28, 2009 and May 31, 2008, the Company’s definite-lived intangible
assets included customer relationships and a manufacturing sales representative
network. The gross amount of the Company’s definite-lived intangible assets and
the related accumulated amortization were as follows (in
thousands):





Amortization
                    
                    February
      28,
                    
                    
                    May
      31,Period
                    
                    2009
                    
                    
                    2008Customer
      relationships
                    6.5-10
      years
                    
                    $
                    17,168
                    
                    
                    $
                    17,168Manufacturing
      sales representatives network
                    5.5
      years
                    
                    
                    40
                    
                    
                    
                    4017,208
                    
                    
                    
                    17,208Accumulated
      amortization
                    
                    
                    
                    (9,856
                    )
                    
                    
                    (8,342
                    )$
                    7,352
                    
                    
                    $
                    8,866





Amortization
expense was as follows (in thousands):





Nine
      Months EndedFebruary
      28,
                    2009
                  
                  
                  March
      1,
                    2008Customer
      relationships
                  
                  $
                  1,509
                  
                  
                  $
                  1,779Manufacturing
      sales representatives network
                  
                  
                  5
                  
                  
                  
                  6$
                  1,514
                  
                  
                  $
                  1,785





Amortization
expense is scheduled as follows (in thousands):





Remainder
      of fiscal 2009
                  
                  $
                  4682010
                  
                  
                  1,7652011
                  
                  
                  1,5532012
                  
                  
                  1,1202013
                  
                  
                  727Thereafter
                  
                  
                  1,719$
                  7,352





7
 Index





NOTE
8.  ASSETS HELD FOR SALE





Assets
held for sale included the following (in thousands):





February
      28,
                  
                  
                  May
      31,2009
                  
                  
                  2008Two
      parcels of land
                  
                  $
                  1,146
                  
                  
                  $
                  1,146Excess
      equipment
                  
                  
                  4
                  
                  
                  
                  3311,150
                  
                  
                  
                  1,477Assets
      held for sale included in current assets
                  
                  
                  (4
                  )
                  
                  
                  (1,477
                  )Assets
      held for sale included in non-current assets
                  
                  $
                  1,146
                  
                  
                  $
                  -





In
accordance with SFAS No. 144, these assets are recorded at the lower of their
carrying amount or fair value, less costs to sell and the excess equipment is no
longer being depreciated.





During
the second quarter of fiscal 2009, the Company determined that land included in
assets held for sale should be presented in non-current assets as a result of
deteriorating general economic conditions.  At May 31, 2008, these
assets were classified as current assets.





During
fiscal 2008, the Company ceased manufacturing operations at its Hong Kong
facility.  The net book values of the building and related land use
rights were reduced to $0 by an impairment charge recorded in fiscal
2007.  These assets are classified as assets held for sale at February
28, 2009 and May 31, 2008.





In the
first quarter of fiscal 2009, the Company sold assets previously used in the
Hong Kong facility valued at $0.3 million at May 31, 2008 and recorded a gain on
sale of $0.6 million.  In the second quarter of fiscal 2009, the
Company implemented a plan to dispose of certain surplus plant assets to
streamline the utilization of equipment in its Merix Oregon factory and recorded
$0.7 million in impairment charges on the assets to be disposed.  The
sale of the assets was finalized in the third quarter of fiscal
2009.





NOTE
9.  OTHER ASSETS





Other
assets consisted of the following at February 28, 2009 and May 31, 2008 (in
thousands):





February
      28,
                    
                    
                    May
      31,2009
                    
                    
                    2008Leasehold
      land use rights, net
                    
                    $
                    1,206
                    
                    
                    $
                    1,227Deferred
      financing costs, net
                    
                    
                    3,218
                    
                    
                    
                    3,842Other
      assets
                    
                    
                    308
                    
                    
                    
                    790$
                    4,732
                    
                    
                    $
                    5,859





NOTE
10.  ACCRUED LIABILITIES





Accrued
liabilities consisted of the following at February 28, 2009 and May 31, 2008 (in
thousands):





February
      28,
                    
                    
                    May
      31,2009
                    
                    
                    2008Accrued
      compensation
                    
                    $
                    6,753
                    
                    
                    $
                    7,177Accrued
      warranty (Note 11)
                    
                    
                    1,050
                    
                    
                    
                    2,147Income
      taxes payable
                    
                    
                    656
                    
                    
                    
                    316Intercompany
      payable (Note 3)
                    
                    
                    879
                    
                    
                    
                    -Asset
      retirement obligation – current portion
                    
                    
                    -
                    
                    
                    
                    873Other
      liabilities
                    
                    
                    5,374
                    
                    
                    
                    5,270$
                    14,712
                    
                    
                    $
                    15,783





During
the first quarter of fiscal 2009, the Company incurred $0.8 million in costs
related to the restoration of leased Wood Village facilities which were charged
to the asset retirement obligation.





8
 Index





NOTE
11.  ACCRUED WARRANTY





The
Company generally warrants its products for a period of up to twelve months
from the point of sale. The Company records a liability for the estimated cost
of the warranty upon transfer of ownership of the products to the customer.
Using historical data, the Company estimates warranty costs and records the
provision for such charges as an element of cost of sales upon the recognition
of the related revenue.  The Company also accrues warranty liability
for certain specifically-identified items that are not covered by its assessment
of historical experience.





Warranty
activity was as follows (in thousands):





Fiscal
      Quarter Ended
                
                
                Nine
      Months EndedFebruary
      28,
                  2009
                
                
                March
      1,
                  2008
                
                
                February
      28,
                  2009
                
                
                March
      1,
                  2008Balance,
      beginning of period
                
                $
                2,070
                
                
                $
                1,862
                
                
                $
                2,147
                
                
                $
                2,129Provision
      for warranty charges
                
                
                348
                
                
                
                1,201
                
                
                
                1,858
                
                
                
                3,173Change
      in estimate for existing warranties
                
                
                (742
                )
                
                
                -
                
                
                
                (742
                )
                
                
                -Warranty
      charges incurred
                
                
                (626
                )
                
                
                (377
                )
                
                
                (2,213
                )
                
                
                (2,616
                )Balance,
      end of period
                
                $
                1,050
                
                
                $
                2,686
                
                
                $
                1,050
                
                
                $
                2,686





Prior to
its acquisition in September 2005 and in selected circumstances subsequent to
acquisition, Merix Asia granted longer warranty periods to certain customers of
up to three years. During the third quarter of fiscal 2009, the Company reduced
its accrual for warranty charges by approximately $0.7 million to reflect the
change from a three-year warranty period to a twelve-month warranty period on
products currently sold by its Asia segment and the impact of improved quality
on claim rates for its Asia factories.





NOTE
12.  COMPREHENSIVE INCOME (LOSS), EARNINGS PER SHARE AND SHARE
ACTIVITY





Comprehensive
income (loss) includes the change in our cumulative translation adjustment. The
following table sets forth the calculation of comprehensive income (loss) for
the periods indicated (in thousands):





Fiscal
      Quarter Ended
                  
                  
                  Nine
      Months EndedFebruary
      28,
                    2009
                  
                  
                  March
      1,
                    2008
                  
                  
                  February
      28, 2009
                  
                  
                  March
      1,
                    2008Net
      income (loss)
                  
                  $
                  (32,666
                  )
                  
                  $
                  (13,354
                  )
                  
                  $
                  (40,901
                  )
                  
                  $
                  (22,012
                  )Change
      in cumulative translation adjustment
                  
                  
                  1
                  
                  
                  
                  (13
                  )
                  
                  
                  (15
                  )
                  
                  
                  39Change
      in unfunded liability related to long-service payment plan
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (115
                  )Total
      comprehensive income (loss)
                  
                  $
                  (32,665
                  )
                  
                  $
                  (13,367
                  )
                  
                  $
                  (40,916
                  )
                  
                  $
                  (22,088
                  )





Basic
earnings per share (EPS) and diluted EPS are computed using the methods
prescribed by SFAS No. 128, Earnings per
Share.  The following potentially dilutive shares were excluded
from the calculation of diluted EPS because their effect would have been
antidilutive:





Fiscal
      Quarter Ended
                
                
                Nine
      Months EndedPotential
      common shares excluded fromdiluted
      EPS since their effect would be antidilutive:
                
                February
      28,
                  2009
                
                
                March
      1,
                  2008
                
                
                February
      28, 2009
                
                
                March
      1,
                  2008Stock
      options
                
                
                3,304
                
                
                
                3,113
                
                
                
                3,308
                
                
                
                3,003Restricted
      stock awards
                
                
                293
                
                
                
                -
                
                
                
                293
                
                
                
                -Convertible
      notes
                
                
                4,608
                
                
                
                4,608
                
                
                
                4,608
                
                
                
                4,608





During
the first and third quarters of fiscal 2009, approximately 147,000 and 603,000
shares, respectively, were issued related to share-based compensation
transactions, primarily due to the semi-annual share purchase under the employee
stock purchase plan.





9
 Index





NOTE
13.  SEGMENT INFORMATION





The
Company has three reportable business segments defined by geographic location in
accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information:” (1) Merix Oregon, (2) Merix San Jose and
(3) Merix Asia. Operating segments are defined as components of an
enterprise for which separate financial information is available and regularly
reviewed by senior management. The Company’s operating segments are evidence of
the internal structure of its organization. Each segment operates in the same
industry with production facilities that produce similar customized products for
its customers. The production facilities, sales management and chief
decision-makers for all processes are managed by the same executive team. The
Company’s chief operating decision maker is its Chief Executive Officer. Segment
disclosures are presented to the gross profit level as this is the primary
performance measure for which the segment managers are responsible. No other
operating results information is provided to the chief operating decision maker
for review at the segment level. The following tables reconcile certain
financial information by segment.





Net sales
by segment were as follows (in thousands):





Fiscal
      Quarter Ended
                  
                  
                  Nine
      Months EndedFebruary
      28, 2009
                  
                  
                  March
      1,
                    2008
                  
                  
                  February
      28,
                    2009
                  
                  
                  March
      1,
                    2008Merix
      Oregon
                  
                  $
                  22,964
                  
                  
                  $
                  41,151
                  
                  
                  $
                  89,638
                  
                  
                  $
                  133,057Merix
      San Jose
                  
                  
                  5,834
                  
                  
                  
                  7,485
                  
                  
                  
                  20,237
                  
                  
                  
                  24,650Merix
      Asia
                  
                  
                  31,914
                  
                  
                  
                  45,639
                  
                  
                  
                  118,373
                  
                  
                  
                  133,376$
                  60,721
                  
                  
                  $
                  94,275
                  
                  
                  $
                  228,248
                  
                  
                  $
                  291,083





Gross
profit by segment was as follows (in thousands):





Fiscal
      Quarter Ended
                  
                  
                  Nine
      Months EndedFebruary
      28, 2009
                  
                  
                  March
      1,
                    2008
                  
                  
                  February
      28,
                    2009
                  
                  
                  March
      1,
                    2008Merix
      Oregon
                  
                  $
                  (2,356
                  )
                  
                  $
                  2,200
                  
                  
                  $
                  2,261
                  
                  
                  $
                  12,534Merix
      San Jose
                  
                  
                  (30
                  )
                  
                  
                  1,206
                  
                  
                  
                  2,001
                  
                  
                  
                  4,056Merix
      Asia
                  
                  
                  3,262
                  
                  
                  
                  4,518
                  
                  
                  
                  12,923
                  
                  
                  
                  11,900$
                  876
                  
                  
                  $
                  7,924
                  
                  
                  $
                  17,185
                  
                  
                  $
                  28,490





Beginning
in fiscal 2009, the Company recorded an allocation of certain costs attributable
to costs of sales in all segments that were previously charged to the Merix
Oregon segment and included certain engineering costs in costs of sales that
were previously presented as a component of operating expenses. Gross profit by
segment for the third quarter of fiscal 2008 and nine months ended March 1, 2008
has been revised to present comparable results.  The impact of these
revisions on gross margin by segment is presented in the tables below for the
fiscal quarter and nine-month period ended March 1, 2008:





Fiscal
      Quarter Ended:
                  
                  March
      1,
                    2008
                    (as
      reported)
                  
                  
                  Effect
      of Engineering Cost Reclassification
                  
                  
                  Effect
      of Global Cost Allocation
                  
                  
                  March
      1,
                    2008
                    (as
      revised)Merix
      Oregon
                  
                  
                  6.8
                  %
                  
                  
                  (2.6
                  )%
                  
                  
                  1.2
                  %
                  
                  
                  5.3
                  %Merix
      San Jose
                  
                  
                  20.4
                  %
                  
                  
                  (3.0
                  )%
                  
                  
                  (1.3
                  )%
                  
                  
                  16.1
                  %Merix
      Asia
                  
                  
                  11.8
                  %
                  
                  
                  (1.1
                  )%
                  
                  
                  (0.8
                  )%
                  
                  
                  9.9
                  %Overall
                  
                  
                  10.3
                  %
                  
                  
                  (1.9
                  )%
                  
                  
                  -
                  
                  
                  
                  8.4
                  %








Nine
      Months Ended:
                
                March
      1,
                  2008
                  (as
      reported)
                
                
                Effect
      of Engineering Cost Reclassification
                
                
                Effect
      of Global Cost Allocation
                
                
                March
      1,
                  2008
                  (as
      revised)Merix
      Oregon
                
                
                10.7
                %
                
                
                (2.4
                )%
                
                
                1.1
                %
                
                
                9.4
                %Merix
      San Jose
                
                
                20.7
                %
                
                
                (2.9
                )%
                
                
                (1.3
                )%
                
                
                16.5
                %Merix
      Asia
                
                
                10.9
                %
                
                
                (1.1
                )%
                
                
                (0.9
                )%
                
                
                8.9
                %Overall
                
                
                11.6
                %
                
                
                (1.8
                )%
                
                
                -
                
                
                
                9.8
                %





10
 Index





Total
assets by segment were as follows (in thousands):





February
      28,
                    2009
                  
                  
                  May
      31,
                    2008Merix
      Oregon
                  
                  $
                  113,308
                  
                  
                  $
                  125,158Merix
      San Jose
                  
                  
                  24,699
                  
                  
                  
                  27,917Merix
      Asia
                  
                  
                  74,162
                  
                  
                  
                  114,366$
                  212,169
                  
                  
                  $
                  267,441





NOTE
14.  SIGNIFICANT CUSTOMERS





The
following table presents the percentage of net sales, by segment, for
significant customers comprising greater than 10% of total net
sales:





Cisco
                  
                  
                  MotorolaFiscal
      Quarter Ended
                  
                  
                  Fiscal
      Quarter EndedFebruary
      28, 2009
                  
                  
                  March
      1,
                    2008
                  
                  
                  February
      28, 2009
                  
                  
                  March
      1,
                    2008Merix
      Oregon
                  
                  
                  18
                  %
                  
                  
                  21
                  %
                  
                  
                  15
                  %
                  
                  
                  15
                  %Merix
      San Jose
                  
                  
                  3
                  %
                  
                  
                  2
                  %
                  
                  
                  *
                  (1)
                  
                  
                  *
                  (1)Merix
      Asia
                  
                  
                  *
                  (1)
                  
                  
                  *
                  (1)
                  
                  
                  13
                  %
                  
                  
                  9
                  %Consolidated
                  
                  
                  7
                  %
                  
                  
                  9
                  %
                  
                  
                  12
                  %
                  
                  
                  11
                  %


(1) Less
than 1%





Cisco
                  
                  
                  MotorolaNine
      Months Ended
                  
                  
                  Nine
      Months EndedFebruary
      28, 2009
                  
                  
                  March
      1,
                    2008
                  
                  
                  February
      28, 2009
                  
                  
                  March
      1,
                    2008Merix
      Oregon
                  
                  
                  20
                  %
                  
                  
                  23
                  %
                  
                  
                  16
                  %
                  
                  
                  13
                  %Merix
      San Jose
                  
                  
                  3
                  %
                  
                  
                  *
                  (1)
                  
                  
                  *
                  (1)
                  
                  
                  *
                  (1)Merix
      Asia
                  
                  
                  *
                  (1)
                  
                  
                  *
                  (1)
                  
                  
                  12
                  %
                  
                  
                  7
                  %Consolidated
                  
                  
                  8
                  %
                  
                  
                  11
                  %
                  
                  
                  13
                  %
                  
                  
                  9
                  %


(1) Less
than 1%





At
February 28, 2009, five entities represented approximately 49% of the Company’s
net accounts receivable balance, individually ranging from approximately 5% to
approximately 22%. The Company has not experienced significant losses related to
its accounts receivable in the past.





NOTE
15.  COMMITMENTS AND CONTINGENCIES





Litigation


The
Company is, from time to time, made subject to various legal claims, actions and
complaints in the ordinary course of its business. Except as disclosed below,
management believes that the outcome of litigation should not have a material
adverse effect on its consolidated results of operations, financial condition or
liquidity.





Securities Class
Action


Four
purported class action complaints were filed against the Company and certain of
its executive officers and directors in the first quarter of fiscal 2005. The
complaints were consolidated in a single action entitled In re Merix Corporation Securities
Litigation, Lead Case No. CV 04-826-MO, in the U.S. District Court for
the District of Oregon. After the court granted the Company’s motion to dismiss
without prejudice, the plaintiffs filed a second amended complaint. That
complaint alleged that the defendants violated the federal securities laws by
making certain inaccurate and misleading statements in the prospectus used in
connection with the January 2004 public offering of approximately $103.4 million
of the Company’s common stock. In September 2006, the Court dismissed that
complaint with prejudice. The plaintiffs appealed to the Ninth Circuit Court of
Appeals. In April 2008, the Ninth Circuit reversed the dismissal of the second
amended complaint. The Company sought rehearing which was denied and rehearing
en banc was also denied. The Company obtained a stay of the mandate from the
Ninth Circuit and filed a certiorari petition with the United States Supreme
Court on September 22, 2008.  On December 15, 2008, the Supreme Court
denied the certiorari petition. The case has been remanded back to the U.S.
District Court for the District of Oregon. The plaintiffs seek unspecified
damages. A potential loss or range of loss that could arise from these cases is
not estimable or probable at this time.





11
 Index





Breach of
Contract


In June
2008, a complaint was filed against Merix Caymans Trading Company Ltd. by Clark
Sales, LLC, Case No. 2:08-CV-12551-MOR-VMM, in the United States District Court,
Eastern District of Michigan.  The complaint alleges breach of
contract in relation to payment of post-termination commissions.  The
plaintiffs sought damages in excess of $4 million.  The parties
reached a settlement agreement on November 24, 2008 and the Company recorded an
accrual of $0.4 million in the second quarter of fiscal
2009.  The  terms of the settlement amount included a lump
sum payment of $0.4 million paid in December 2008, and monthly payments
thereafter based on net sales of certain products through August 15, 2009, paid
in accordance with the Company’s existing commission structure for outside sales
representatives.





Commitments


As of
February 28, 2009, the Company had capital commitments of approximately
$0.4 million, primarily relating to the purchase of machinery
and equipment.





NOTE
16.  RELATED PARTY TRANSACTIONS





The
Company paid the following amounts to Huizhou Desay Holdings Co. Ltd. and its
wholly-owned subsidiary, a minority shareholder of two Merix Asia manufacturing
facilities, during the periods indicated (in thousands):





Fiscal
      Quarter Ended
              
              
              Nine
      Months EndedFebruary
      28, 2009
              
              
              March
      1,
                2008
              
              
              February
      28,
                2009
              
              
              March
      1,
                2008Consulting
      fees
              
              $
              53
              
              
              $
              48
              
              
              $
              158
              
              
              $
              145Operating
      lease rental fees
              
              
              82
              
              
              
              74
              
              
              
              245
              
              
              
              224Management
      fees
              
              
              34
              
              
              
              18
              
              
              
              109
              
              
              
              55Capitalized
      construction costs for factory expansion
              
              
              -
              
              
              
              651
              
              
              
              326
              
              
              
              1,406Other
      fees
              
              
              68
              
              
              
              92
              
              
              
              235
              
              
              
              322$
              237
              
              
              $
              883
              
              
              $
              1,073
              
              
              $
              2,152





NOTE
17.  SEVERANCE, ASSET IMPAIRMENT AND RESTRUCTURING
CHARGES





Total
severance, asset impairment and restructuring charges were as follows (in
thousands):





Fiscal
      Quarter Ended
                
                
                Nine
      Months EndedFebruary
      28, 2009
                
                
                March
      1, 2008
                
                
                February
      28, 2009
                
                
                March
      1,
                  2008Hong
      Kong closure severance charges
                
                $
                7
                
                
                $
                180
                
                
                $
                60
                
                
                $
                1,289Other
      severance charges – Merix Asia
                
                
                151
                
                
                
                85
                
                
                
                219
                
                
                
                85Gain
      on sale of Merix Asia equipment
                
                
                -
                
                
                
                -
                
                
                
                (567
                )
                
                
                -Goodwill
      impairment – Merix Asia
                
                
                20,500
                
                
                
                -
                
                
                
                20,500
                
                
                
                -Asset
      impairment – Merix Asia
                
                
                -
                
                
                
                92
                
                
                
                -
                
                
                
                187Severance
      charges – Merix Oregon
                
                
                1,413
                
                
                
                1,117
                
                
                
                1,719
                
                
                
                1,117Asset
      impairment – Merix Oregon
                
                
                -
                
                
                
                12,767
                
                
                
                702
                
                
                
                12,767Lease
      termination charges – Merix Oregon
                
                
                222
                
                
                
                -
                
                
                
                222
                
                
                
                -Executive
      severance
                
                
                -
                
                
                
                365
                
                
                
                -
                
                
                
                365Other
      restructuring charges
                
                
                49
                
                
                
                34
                
                
                
                49
                
                
                
                51$
                22,342
                
                
                $
                14,640
                
                
                $
                22,904
                
                
                $
                15,861





Due to a
number of factors including: 1) the substantial variance between the Company’s
market capitalization based on the current trading price range for its common
stock and the net asset value reflected in its consolidated balance sheet, 2)
continuing operating losses sustained in the first three quarters of fiscal 2009
and 3) the deterioration of general economic environment, management has
undertaken quarterly assessments of potential impairment of the Company’s
long-lived assets in the throughout fiscal 2009.  Management’s
analyses included assessments of current fair value based on an update of
forecasted future cash flows used in our annual impairment test at the end of
fiscal 2008.  As a result of the deepening economic downturn and
resulting reduction in demand for the Company’s products and net sales in the
third quarter of fiscal 2009, management has reduced its forecast of net sales
and future cash flows and believe that the recovery will occur later than
initially anticipated.  As a result, an impairment charge of $20.5
million has been recorded in the third quarter of fiscal 2009 to reduce the
value of goodwill recorded in the acquisition of the Asia subsidiary to
$0.  The Company has also performed an assessment of potential
impairment of other long-lived assets and has determined that no additional
impairment charges are necessary as of February 28, 2009.





12
 Index





Due
primarily to the deteriorating macroeconomic conditions, the Company has taken
cost reduction actions to mitigate declines in the Company’s net
sales.  Most of the larger cost reductions were related to three major
reductions-in-force that occurred in September 2008, December 2008 and January
2009.  These headcount reductions resulted in severance and related
charges paid totaling approximately $1.6 million in the third quarter of fiscal
2009 and $2.0 million for the nine months ended February 28,
2009.  The Company has also significantly reduced its labor costs due
to attrition within its labor force, particularly in the People’s Republic of
China (PRC).  As of the end of February 2009, the Company has reduced
its labor force by approximately 25% compared to July 2008.





In the
second quarter of fiscal 2009, the Company implemented a plan to dispose of
certain surplus plant assets to streamline the utilization of equipment in its
Merix Oregon factory and recorded $0.7 million in impairment charges on the
assets to be disposed.  The sale of the assets was finalized in the
third quarter of fiscal 2009.





In the
third quarter of fiscal 2008, the Company approved a plan to close its
manufacturing facility located in Wood Village, Oregon, and relocated production
to its Forest Grove facility.  This restructuring action was completed
in the fourth quarter of fiscal 2008.  The Company recorded severance
and impairment charges in the third quarter of fiscal 2008 totaling $13.9
million, comprising approximately $12.8 million in asset impairments and
adjustments to the asset retirement obligation accrual for the Wood Village
lease and $1.1 million in severance and related charges.  In the third
quarter of fiscal 2009, the Company recorded $0.2 million in additional lease
termination costs related to the closure of the Wood Village factory due to a
revised agreement with the sub lessee regarding the amount to be charged for
property taxes during the term of the sublease.





In the
third quarter of fiscal 2008, the Company terminated its Executive Vice
President of Global Operations.  In accordance with the executive
employment agreement related to this termination, the Company recorded $0.4
million of severance and related costs.





In the
first quarter of fiscal 2008, the Company committed to phasing out operations at
its Hong Kong facility, closing the facility and relocating production to other
manufacturing facilities.  Closure of the facility was substantially
complete in the fourth quarter of fiscal 2008.  This closure was a
part of the Company’s actions to consolidate its Asian operations at its
lower-cost facilities in China and expand the facilities at its Huiyang
plant.  The Company recorded $0.2 million, in severance and related
costs in the third quarter of fiscal 2008 in connection with the closure of the
Hong Kong facility.  The Company recorded approximately $0.1 and $1.3
million, respectively, in Hong Kong facility severance and other restructuring
costs in the first nine months of fiscal 2009 and fiscal 2008.  In the
first quarter of fiscal 2009, the Company recorded a gain of $0.6 million
related to the sale of equipment previously used at the Hong Kong
facility.





A
roll-forward of the Company’s severance accrual for the Hong Kong plant closure
for the first three quarters of fiscal 2009 was as follows (in
thousands):





Beginning
      Balance
              
              
              Charged
      to Expense
              
              
              Expenditures
              
              
              Ending
      BalanceFirst
      quarter
              
              $
              134
              
              
              $
              40
              
              
              $
              (132
              )
              
              $
              42Second
      quarter
              
              
              42
              
              
              
              13
              
              
              
              (10
              )
              
              
              45Third
      quarter
              
              
              45
              
              
              
              7
              
              
              
              (52
              )
              
              
              -





13
 Index





NOTE
18.  NEW ACCOUNTING PRONOUNCEMENTS





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” and
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements.”  SFAS Nos. 141(R) and 160 require most identifiable
assets, liabilities, noncontrolling interests and goodwill acquired in a
business combination to be recorded at “full fair value” and require
noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity, which changes the accounting for transactions
with noncontrolling interest holders.  Both statements are effective
for annual reporting periods beginning on or after December 15, 2008 and earlier
adoption is prohibited.  SFAS No. 141(R) will be applied to business
combinations occurring after the effective date and SFAS No. 160 will be applied
prospectively to all noncontrolling interests, including any that arose before
the effective date. The adoption of SFAS Nos. 141(R) and 160 is not expected to
have a significant impact on the Company’s current financial position and
results of operations.





Item2.  Management's Discussion and Analysis of Financial
Condition and Results of Operations





Forward
Looking Statements





This
Quarterly Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements made in
this Quarterly Report, other than statements of historical fact, are
forward-looking, including, but not limited to, statements regarding industry
prospects and cyclicality and future results of operations or financial
position. We use words such as
“anticipates,” “believes,” “expects,” “future” and “intends” and
other similar expressions to identify forward-looking statements.
Forward-looking statements reflect management’s current expectations, plans or
projections and are inherently uncertain. Actual results could differ materially
from management’s expectations, plans or projections. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date of this report. Certain risks and uncertainties that could cause our
actual results to differ significantly from management’s expectations, plans and
projections are described in Part II, Item 1A, “Risk Factors” under the
subheading “Risk Factors Affecting Business and Results of Operations.” This
section, along with other sections of this Quarterly Report, describes some, but
not all, of the factors that could cause actual results to differ significantly
from management’s expectations, plans and projections. We do not intend to
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are urged, however, to review the factors set
forth in reports that we file from time to time with the Securities and Exchange
Commission, including our most recent Annual Report on Form 10-K for the fiscal
year ended May 31, 2008.





Business





We are a
leading global manufacturing service provider for technologically advanced
printed circuit boards (PCBs) for original equipment manufacturer (OEM)
customers and their electronic manufacturing service (EMS) providers. Our
principal products are complex multi-layer rigid printed circuit boards, which
are the platforms used to interconnect microprocessors, integrated circuits and
other components that are essential to the operation of electronic products
and systems. The market segments we serve are primarily in commercial equipment
in the communications and networking, computing and peripherals, industrial and
medical, defense and aerospace, and automotive markets. Our markets are
generally characterized by rapid technological change, high levels of complexity
and short product life-cycles, as new and technologically superior electronic
equipment is continually being developed.





Operating
Segments





Our
business has three operating segments: (1) Merix Oregon, (2) Merix San
Jose and (3) Merix Asia. Operating segments are defined as components of an
enterprise for which separate financial information is available and regularly
reviewed by senior management. Each operating segment operates predominately in
the same industry with production facilities that produce similar customized
products for our global customers. The chief decision maker for all of
our operating segments is our Chief Executive Officer.





14
 Index





Markets
and Customers





The
following table presents the percentage of net sales, by segment, for
significant customers comprising greater than 10% of total net
sales:





Cisco
                    
                    
                    MotorolaFiscal
      Quarter Ended
                    
                    
                    Fiscal
      Quarter EndedFebruary
      28, 2009
                    
                    
                    March
      1,
                      2008
                    
                    
                    February
      28, 2009
                    
                    
                    March
      1,
                      2008Merix
      Oregon
                    
                    
                    18
                    %
                    
                    
                    21
                    %
                    
                    
                    15
                    %
                    
                    
                    15
                    %Merix
      San Jose
                    
                    
                    3
                    %
                    
                    
                    2
                    %
                    
                    
                    *
                    (1)
                    
                    
                    *
                    (1)Merix
      Asia
                    
                    
                    *
                    (1)
                    
                    
                    *
                    (1)
                    
                    
                    13
                    %
                    
                    
                    9
                    %Consolidated
                    
                    
                    7
                    %
                    
                    
                    9
                    %
                    
                    
                    12
                    %
                    
                    
                    11
                    %


(1) Less
than 1%





Cisco
                  
                  
                  MotorolaNine
      Months Ended
                  
                  
                  Nine
      Months EndedFebruary
      28, 2009
                  
                  
                  March
      1,
                    2008
                  
                  
                  February
      28, 2009
                  
                  
                  March
      1,
                    2008Merix
      Oregon
                  
                  
                  20
                  %
                  
                  
                  23
                  %
                  
                  
                  16
                  %
                  
                  
                  13
                  %Merix
      San Jose
                  
                  
                  3
                  %
                  
                  
                  *
                  (1)
                  
                  
                  *
                  (1)
                  
                  
                  *
                  (1)Merix
      Asia
                  
                  
                  *
                  (1)
                  
                  
                  *
                  (1)
                  
                  
                  12
                  %
                  
                  
                  7
                  %Consolidated
                  
                  
                  8
                  %
                  
                  
                  11
                  %
                  
                  
                  13
                  %
                  
                  
                  9
                  %


(1) Less
than 1%





Approximately
47% and 56%, respectively, of our OEM sales in third quarter of fiscal 2009 and
2008 were made to EMS providers and in the first nine months of fiscal 2009 and
2008 approximately 50% and 55%, respectively, of our OEM sales were made to EMS
providers. Although our contractual relationship is with the EMS provider, most
of our shipments to EMS providers are directed by OEMs that negotiate product
pricing and volumes directly with us. In addition, we are on the approved vendor
list of several EMS providers and are awarded incremental discretionary
orders directly from some of them.





Backlog





Backlog
comprises purchase orders received and, in some instances, forecast requirements
released for production under customer contracts. Backlog shippable within
the next 90 days totaled $32.2 million and $66.3 million at February 28, 2009
and May 31, 2008, respectively.  The decrease in backlog is due
to a decrease in demand experienced in the third quarter as a result of the
decline in general economic conditions, and also due to the reduction in lead
times achieved over the first nine months of fiscal 2009. Compared to the
average booking rate, backlog was abnormally high at the end of fiscal 2008 due
to extended customer lead times resulting from the fourth quarter closure
of our Wood Village facility requiring customers to place orders over a
longer-than-normal period of time.  As the production lead times were
shortened during the first nine months of fiscal 2009, customers did not need to
place orders as far in advance, leading to a reduction in orders placed in the
current quarter that is shippable in future quarters.





Customers
may cancel or postpone all scheduled orders, in most cases without penalty.
Therefore, backlog may not be a meaningful indicator of future financial
results.





Summary
of Sequential Quarterly Results and Outlook for Fourth Quarter of Fiscal
2009





The
global printed circuit board demand is cyclical and cycles typically last 18 to
24 months in which demand declines from peak to trough levels and then
rebounds.  These variances in demand are normal and in response
management may make modest variations in its labor force and hours of
production.  Since the beginning of our second fiscal quarter of 2009,
the global economy has begun to experience a significant contraction affecting
many end markets, products and services.  The economic contraction has
adversely affected the demand for most of Merix’ customers and has significantly
reduced our orders, backlog and net sales.





15
 Index





Net sales
of $60.7 million in the current quarter decreased $16.2 million or 21% compared
to net sales of $76.9 million in the second quarter of fiscal 2009, resulting
from a 22% decrease in net sales in our Oregon segment, a 13% decrease in net
sales in our San Jose segment and a 22% decrease in net sales in our Asia
segment.  These decreases reflect lower demand for our products due to
the deterioration of general macroeconomic conditions.  Net sales
decreased sequentially in all end markets, led by a 34% decrease in the
automotive end market.  We also experienced net sales declines ranging
from approximately 18% to 24% in our other primary end markets, which reflects
the decrease in demand resulting from further deterioration of general economic
conditions during the third quarter of fiscal 2009.





Consolidated
gross margin decreased to 1.4% in the current quarter compared to 7.8% in the
second quarter of fiscal 2009.  Our North American segments’ gross
margin decreased approximately 12 percentage points. Despite reductions in
variable manufacturing costs consistent with the decrease in revenue and a 6%
reduction in our labor and other fixed costs, reduced variable contribution
margins on lower production volumes resulted in significantly lower gross
margins.  Our Asia segment gross margin decreased by 1 percentage
point, reflecting the benefit of a two-week plant shutdown for the Chinese New
Year holiday as well as the benefit from a reduction in the accrued warranty
provision that increased gross margin by approximately 2 percentage
points.  Operating expenses of $9.4 million, excluding severance,
asset impairment and restructuring charges, increased $0.2 million compared $9.2
million in the second quarter of fiscal 2009. Selling, general and
administrative expenses increased by $0.4 million primarily due an increase in
the allowance for doubtful accounts related to customers in our automotive end
market, offset by a $0.2 million decrease in engineering expenses due to
headcount reductions and the relocation of certain engineering employees
into functions directly affecting manufacturing and thus classified in cost of
goods sold. Restructuring charges totaling $22.3 million in the third quarter of
fiscal 2009 were primarily comprised of an impairment charge of $20.5 million on
goodwill recorded on the acquisition of our Asia subsidiary and $1.6 million in
severance charges.  Net non-operating expense, primarily comprised of
interest expense, remained stable at $1.0 million in the second and third
quarters of fiscal 2009.  Net loss for the quarter totaled $32.7
million or $1.54 per diluted share, compared to $6.1 million or $0.29 per
diluted share in the second quarter of fiscal 2009.





During
normal cyclical downturns the Company’s attention would be focused on minimizing
the negative impact on net income.  However, given the significance of
the current economic decline and reduced customer demand we are principally
focused on maximizing cash flow, maintaining and improving customer service and
retaining factory capacity and flexibility.





In the
fourth quarter, we expect that overall net sales will be flat compared to the
third quarter of fiscal 2009.  We expect that costs, exclusive of
restructuring charges, will decrease compared to the third quarter of
fiscal 2009, as we will benefit from the full-quarter impact of cost reduction
activities undertaken in the third quarter. Additional cost reduction activities
in the March 2009 will result in $0.8 million in restructuring charges in the
fourth quarter. No significant changes are expected for other non-operating
expenses compared to third quarter levels.





16
 Index





Results
of Operations





The
following table sets forth our statement of operations data, both in absolute
dollars and as a percentage of net sales (dollars in thousands).





Fiscal
      Quarter Ended(1)
                  
                  
                  Fiscal
      Quarter Ended(1)February
      28, 2009
                  
                  
                  March
      1, 2008Net
      sales
                  
                  $
                  60,721
                  
                  
                  
                  100.0
                  %
                  
                  $
                  94,275
                  
                  
                  
                  100.0
                  %Cost
      of sales
                  
                  
                  59,845
                  
                  
                  
                  98.6
                  
                  
                  
                  86,351
                  
                  
                  
                  91.6Gross
      profit
                  
                  
                  876
                  
                  
                  
                  1.4
                  
                  
                  
                  7,924
                  
                  
                  
                  8.4Engineering
                  
                  
                  500
                  
                  
                  
                  0.8
                  
                  
                  
                  337
                  
                  
                  
                  0.4Selling,
      general and administrative
                  
                  
                  8,395
                  
                  
                  
                  13.8
                  
                  
                  
                  9,930
                  
                  
                  
                  10.5Amortization
      of identifiable intangible assets
                  
                  
                  472
                  
                  
                  
                  0.8
                  
                  
                  
                  527
                  
                  
                  
                  0.6Severance,
      impairment and restructuring charges
                  
                  
                  22,342
                  
                  
                  
                  36.8
                  
                  
                  
                  14,640
                  
                  
                  
                  15.5Operating
      loss
                  
                  
                  (30,833
                  )
                  
                  
                  (50.8
                  )
                  
                  
                  (17,510
                  )
                  
                  
                  (18.6
                  )Other
      income (expense), net
                  
                  
                  (1,050
                  )
                  
                  
                  (1.7
                  )
                  
                  
                  3,914
                  
                  
                  
                  4.2Loss
      before income taxes and minority interests
                  
                  
                  (31,883
                  )
                  
                  
                  (52.5
                  )
                  
                  
                  (13,596
                  )
                  
                  
                  (14.4
                  )Provision
      for (benefit from) income taxes
                  
                  
                  628
                  
                  
                  
                  1.0
                  
                  
                  
                  (511
                  )
                  
                  
                  (0.5
                  )Minority
      interest
                  
                  
                  155
                  
                  
                  
                  0.3
                  
                  
                  
                  269
                  
                  
                  
                  0.3Net
      loss
                  
                  $
                  (32,666
                  )
                  
                  
                  (53.8
                  )%
                  
                  $
                  (13,354
                  )
                  
                  
                  (14.2
                  )%





Nine
      Months Ended(1)
                
                
                Nine
      Months Ended(1)February
      28, 2009
                
                
                March
      1, 2008Net
      sales
                
                $
                228,248
                
                
                
                100.0
                %
                
                $
                291,083
                
                
                
                100.0
                %Cost
      of sales
                
                
                211,063
                
                
                
                92.5
                
                
                
                262,593
                
                
                
                90.2Gross
      profit
                
                
                17,185
                
                
                
                7.5
                
                
                
                28,490
                
                
                
                9.8Engineering
                
                
                1,760
                
                
                
                0.8
                
                
                
                1,287
                
                
                
                0.4Selling,
      general and administrative
                
                
                26,086
                
                
                
                11.4
                
                
                
                32,161
                
                
                
                11.0Amortization
      of identifiable intangible assets
                
                
                1,512
                
                
                
                0.7
                
                
                
                1,785
                
                
                
                0.6Severance,
      impairment and restructuring charges
                
                
                22,904
                
                
                
                10.0
                
                
                
                15,861
                
                
                
                5.4Operating
      loss
                
                
                (35,077
                )
                
                
                (15.4
                )
                
                
                (22,604
                )
                
                
                (7.8
                )Other
      income (expense), net
                
                
                (3,268
                )
                
                
                (1.4
                )
                
                
                1,744
                
                
                
                0.6Loss
      before income taxes and minority interests
                
                
                (38,345
                )
                
                
                (16.8
                )
                
                
                (20,860
                )
                
                
                (7.2
                )Provision
      for income taxes
                
                
                2,049
                
                
                
                0.9
                
                
                
                445
                
                
                
                0.2Minority
      interest
                
                
                507
                
                
                
                0.2
                
                
                
                707
                
                
                
                0.2Net
      loss
                
                $
                (40,901
                )
                
                
                (17.9
                )%
                
                $
                (22,012
                )
                
                
                (7.6
                )%





(1)  Percentages
may not add due to rounding.





Net
Sales





Net sales
decreased by $33.6 million, or 36%, to $60.7 million, in the third quarter of
fiscal 2009 compared to $94.3 million in the third quarter of fiscal 2008. Net
sales of $228.2 million in the nine months ended February 28, 2009 decreased by
$62.8 million, or 22%, compared to net sales of $291.1 million in the comparable
period of the prior fiscal year.





Net sales
for our North American segments of 41% and 30%, respectively, for the three- and
nine-month periods ended February 28, 2009 compared to the same periods in the
prior fiscal year.  Net sales in our Asia segment decreased by 30% in
the current quarter compared to the third quarter of fiscal 2008, and decreased
11% in the nine months ended February 28, 2009 compared to the nine months ended
March 1, 2008.





Net
Sales by Segment





Net sales
by segment were as follows (in thousands):





Fiscal
      Quarter Ended
                
                
                Nine
      Months EndedFebruary
      28,
                  2009
                
                
                March
      1,
                  2008
                
                
                February
      28,
                  2009
                
                
                March
      1,
                  2008Merix
      Oregon
                
                $
                22,964
                
                
                $
                41,151
                
                
                $
                89,638
                
                
                $
                133,057Merix
      San Jose
                
                
                5,843
                
                
                
                7,485
                
                
                
                20,237
                
                
                
                24,650Merix
      Asia
                
                
                31,914
                
                
                
                45,639
                
                
                
                118,373
                
                
                
                133,376$
                60,721
                
                
                $
                94,275
                
                
                $
                228,248
                
                
                $
                291,083





17
 Index





Per
Unit Information





Selected
statistical information is summarized below. We define “unit” as the number of
panels. Percentage increases (decreases) in unit volume and pricing were as
follows:





Fiscal
      Quarter Ended
                    February
      28, 2009 Compared
                    to
      Fiscal Quarter Ended
                  
                  
                  Nine
      Months Ended February
                    28,
      2009 Compared to Nine
                    Months
      EndedMarch
      1, 2008
                  
                  
                  March
      1, 2008Merix
      Oregon:Unit
      volume
                  
                  
                  (51
                  )%
                  
                  
                  (37
                  )%Average
      unit pricing
                  
                  
                  13
                  %
                  
                  
                  5
                  %Merix
      San Jose:Unit
      volume
                  
                  
                  (21
                  )%
                  
                  
                  (24
                  )%Average
      unit pricing
                  
                  
                  (1
                  )%
                  
                  
                  11
                  %Merix
      Asia:Unit
      volume
                  
                  
                  (37
                  )%
                  
                  
                  (19
                  )%Average
      unit pricing
                  
                  
                  10
                  %
                  
                  
                  10
                  %Overall:Unit
      volume
                  
                  
                  (38
                  )%
                  
                  
                  (20
                  )%Average
      unit pricing
                  
                  
                  3
                  %
                  
                  
                  (3
                  )%





Consolidated


Consolidated
unit sales volume decreased 38% in the current quarter compared to the third
quarter of fiscal 2008 and 20% in the first nine months of fiscal 2009 versus
the comparable period in the prior year, driven primarily by decreases in demand
from customers in each of our segments.  In addition, the Oregon
segment’s unit volume declined as a result of the closure of the Wood Village
facility in March 2008.  Consolidated average unit pricing increased
by 3% in the quarter ended February 28, 2009, driven by significant increases in
average unit pricing in our Oregon and Asia segments, as further discussed
below.  For the nine-month period ended February 28, 2009, average
unit pricing decreased by 3% compared to the same period of the prior fiscal
year, despite increases in average unit pricing reflected for each of our
segments as discussed below.  On a year-to-date basis, an overall
shift in product mix from higher-technology, higher-priced PCBs produced by our
North American facilities to generally lower-technology, lower-priced PCBs
produced by our facilities in Asia results in a lower consolidated average unit
price. The Asia segment’s average price per unit is significantly lower than
both the Oregon and San Jose segments. Our Asia segment comprised 53% of net
sales in the nine months ended February 28, 2009 compared to 48% in the nine
months ended March 1, 2008.





Merix
Oregon


Merix
Oregon net sales of $23.0 million decreased by $18.2 million or 44% compared to
the third quarter of fiscal 2008.  Net sales of $89.6 million in the
first nine months of fiscal 2009 decreased $43.4 million or 33%.  The
decreases in net sales at Merix Oregon were primarily due to decreases in unit
volume of 51% and 37%, respectively, for the three- and nine-month periods ended
February 28, 2009 compared to the same periods in fiscal 2008 resulting
from:





·
            demand
      decreases resulting from the deterioration of macroeconomic
      conditions;


·
            a
      strategic decision to rationalize our production with a focus on more
      profitable parts;


·
            strategic
      efforts to transition production to our Asia manufacturing
      facilities;


·
            capacity
      decrease as a result of the closure of our Wood Village facility in the
      fourth quarter of fiscal 2008; and


·
            ongoing
      impact to customer relationships of the extended lead time issues
      experienced in the fourth quarter of fiscal 2008 which resulted in lower
      quick-turn revenue in the first quarter of fiscal
  2009.





18
 Index





The
volume decreases were partially offset by increases in average unit pricing of
13% and 5%, respectively, for the three- and nine-month periods ended February
28, 2009 compared to the same periods in the prior fiscal year.  These
average unit pricing increases resulted primarily from our efforts to be more
selective on orders and utilize plant capacity for more profitable parts as well
as increases in higher technology production which generates higher average
prices.





Merix San
Jose


Compared
to the same periods in the prior fiscal year, net sales at Merix San Jose
decreased by $1.6 million (22%) to $5.8 million in the third quarter of fiscal
2009 and decreased by $4.4 million (18%) to $20.2 million in the nine months
ended February 28, 2009.  These decreases were primarily due to lower
demand, principally for quick-turn services, resulting from the impact of the
global recession. Compared to fiscal 2008, unit volume declined by 21% on a
quarterly basis, and 24% on a fiscal year-to-date basis.  Beginning in
the third quarter of the prior fiscal year, the San Jose segment’s average unit
pricing reflected an increase resulting from efforts to use capacity for
products with less than 10-day lead times, which carry a higher price
premium.  These efforts were sustained over the past 12 months,
resulting in relatively stable unit pricing when comparing the third quarter of
fiscal 2009 with the third quarter of fiscal 2008, and an 11% increase in
average unit pricing for the nine months ended February 28, 2009 compared to the
fiscal year-to-date period ended March 1, 2008.





Merix
Asia


Net sales
at Merix Asia of $31.9 million in the third quarter in fiscal 2009 decreased by
$13.7 million or 30% compared to the third quarter of fiscal
2008.  Net sales of $118.4 million in the nine months ended February
28, 2009 decreased by $15.0 million or 11% compared to the first nine months of
fiscal 2008.  The decreases in net sales at Merix Asia in the three-
and nine-month periods ended February 28, 2009 compared to the same periods of
the prior fiscal year were primarily due to a 38% and 20% decrease,
respectively, in sales unit volumes, due primarily to a drop in demand in the
second and third quarters of fiscal 2009 due to deteriorating global economic
conditions.  The unit volume decreases were offset by efforts to
improve our product mix through enhanced technology offerings from our Asia
manufacturing operations over the past year which resulted in a 10% increase in
average unit pricing for both the third quarter and first nine months of fiscal
2009.





Net
Sales by End Market





The
following table shows, for the periods indicated, the amount of net sales to
each of our principal end-user markets and the percentage of the end-user
market’s sales to our consolidated net sales (dollars in
thousands):


.


Fiscal
      Quarter EndedFebruary
      28, 2009
                  
                  
                  March
      1, 2008Communications
      & Networking
                  
                  $
                  24,917
                  
                  
                  
                  41.0
                  %
                  
                  $
                  40,402
                  
                  
                  
                  42.9
                  %Automotive
                  
                  
                  11,511
                  
                  
                  
                  19.0
                  %
                  
                  
                  17,520
                  
                  
                  
                  18.6
                  %Computing
      & Peripherals
                  
                  
                  4,725
                  
                  
                  
                  7.8
                  %
                  
                  
                  9,681
                  
                  
                  
                  10.3
                  %Test,
      Industrial & Medical
                  
                  
                  7,153
                  
                  
                  
                  11.8
                  %
                  
                  
                  9,753
                  
                  
                  
                  10.3
                  %Defense
      & Aerospace
                  
                  
                  5,998
                  
                  
                  
                  9.9
                  %
                  
                  
                  6,534
                  
                  
                  
                  6.9
                  %Other
                  
                  
                  6,417
                  
                  
                  
                  10.5
                  %
                  
                  
                  10,385
                  
                  
                  
                  11.0
                  %$
                  60,721
                  
                  
                  
                  100.0
                  %
                  
                  $
                  94,275
                  
                  
                  
                  100.0
                  %





Nine
      Months EndedFebruary
      28, 2009
                          
                          
                          March
      1, 2008Communications
      & Networking
                          
                          $
                          93,357
                          
                          
                          
                          40.9
                          %
                          
                          $
                          122,909
                          
                          
                          
                          42.2
                          %Automotive
                          
                          
                          48,373
                          
                          
                          
                          21.2
                          %
                          
                          
                          58,583
                          
                          
                          
                          20.1
                          %Computing
      & Peripherals
                          
                          
                          17,294
                          
                          
                          
                          7.6
                          %
                          
                          
                          26,065
                          
                          
                          
                          9.0
                          %Test,
      Industrial & Medical
                          
                          
                          26,938
                          
                          
                          
                          11.8
                          %
                          
                          
                          32,022
                          
                          
                          
                          11.0
                          %Defense
      & Aerospace
                          
                          
                          20,520
                          
                          
                          
                          9.0
                          %
                          
                          
                          18,827
                          
                          
                          
                          6.5
                          %Other
                          
                          
                          21,766
                          
                          
                          
                          9.5
                          %
                          
                          
                          32,677
                          
                          
                          
                          11.2
                          %$
                          228,248
                          
                          
                          
                          100.0
                          %
                          
                          $
                          291,083
                          
                          
                          
                          100.0
                          %




Compared
to the third quarter of fiscal 2008, the decreases in net sales of $15.5 million
(38%) in communications & networking, $5.0 million (51%) in computing &
peripherals, $2.6 million (27%) in test, industrial & medical and $3.9
million (38%) in other end markets were due primarily to a reduction in end
demand for our customers’ products as a result of the global economic slowdown,
as well as a strategic rationalization of our production to focus on more
profitable parts.  Automotive net sales, historically a steady end
market, decreased by $6.0 million or 34% due to a sharp global decrease in
automobile sales. These end markets also reflect decreases on a fiscal
year-to-date basis compared to the prior fiscal year, driven by the same factors
discussed above.





19
 Index





Defense
& aerospace net sales decreased by only $0.5 million or 8% in the third
quarter of fiscal 2009 compared to the third quarter of fiscal 2008 and
increased by $1.7 million or 9.0% in the first nine months of fiscal 2009
compared to same period in fiscal 2008 due to strategic efforts to penetrate
this market to diversify our customer base and provide a steady and profitable
North American revenue stream.





We
believe that our key competitive advantages include our reputation for high
product quality and our unique value proposition, which enables a seamless
interface from quick-turn production at the beginning of product life cycles to
lower-cost volume production in the U.S. and Asia as a product’s life cycle
matures.  While the current global economic crisis has adversely
impacted end customer demand and delayed our return to profitability, operating
our restructured North American factories and upgraded Asian factories are
positioned well to enable us to leverage our unique value proposition and
profitably grow our customer base when market conditions improve.





Net
Sales by Geographic Region





Net sales
to customers outside the United States totaled 51% and 32% of net sales in the
third quarters of fiscal 2009 and fiscal 2008, respectively.  Net
sales to customers outside the United States totaled 45% and 32% in the nine
months ended February 28, 2009 and March 1, 2008, respectively.  In
the third quarter of fiscal 2009, sales to customers in China comprised 12% of
net sales.  In the third quarter of the prior fiscal year, as well as
in the nine-month periods ended February 28, 2009 and March 1, 2008, there were
no countries outside of the United States to which sales totaled 10% or more of
net sales.





Cost
of Sales and Gross Margin





Cost of
sales includes manufacturing costs, such as materials, labor (both direct and
indirect) and factory overhead.





A number
of costs, including those for labor, utilities and manufacturing supplies,
incurred by our plants in the People’s Republic of China (PRC) are denominated
in Chinese renminbi. Strengthening or weakening of the Chinese Renminbi relative
to the U.S. dollar affects our cost of sales and profitability. Increases in the
value of the Chinese renminbi relative to the U.S. dollar in current fiscal
periods compared to prior year have caused the costs of our Chinese operations
to increase as stated in U.S. dollars.





Cost of
sales decreased $26.5 million, or 31%, to $59.8 million in the third quarter of
fiscal 2009 compared to $86.4 million in the third quarter of fiscal 2008 and
decreased $51.5 million, or 20%, to $211.1 million in the nine months ended
February 28, 2009 compared to $262.6 million in first nine months of fiscal
2008.





Beginning
in fiscal 2009, we recorded an allocation of certain costs attributable to costs
of sales in all segments that were previously charged to the Merix Oregon
segment.  Gross margin by segment for the third quarter of fiscal 2008
and the nine months ended March 1, 2008 has been revised to present comparable
results using the same allocation methodology.  Gross profit by
segment was as follows (in thousands):





Fiscal
      Quarter Ended
                      
                      
                      Nine
      Months EndedFebruary
      28, 2009
                      
                      
                      March
      1,
                        2008
                      
                      
                      February
      28,
                        2009
                      
                      
                      March
      1,
                        2008Merix
      Oregon
                      
                      $
                      (2,356
                      )
                      
                      $
                      2,200
                      
                      
                      $
                      2,261
                      
                      
                      $
                      12,534Merix
      San Jose
                      
                      
                      (30
                      )
                      
                      
                      1,206
                      
                      
                      
                      2,001
                      
                      
                      
                      4,056Merix
      Asia
                      
                      
                      3,262
                      
                      
                      
                      4,518
                      
                      
                      
                      12,923
                      
                      
                      
                      11,900$
                      876
                      
                      
                      $
                      7,924
                      
                      
                      $
                      17,185
                      
                      
                      $
                      28,490





20
 Index





Our gross
margin as a percentage of net sales by segment was as follows:





Fiscal
      Quarter Ended
                
                
                Nine
      Months EndedFebruary
      28, 2009
                
                
                March
      1,
                  2008
                
                
                February
      28,
                  2009
                
                
                March
      1,
                  2008Merix
      Oregon
                
                
                (10.3
                %)
                
                
                5.3
                %
                
                
                2.5
                %
                
                
                9.4
                %Merix
      San Jose
                
                
                (0.5
                %)
                
                
                16.1
                %
                
                
                9.9
                %
                
                
                16.5
                %Merix
      Asia
                
                
                10.2
                %
                
                
                9.9
                %
                
                
                10.9
                %
                
                
                8.9
                %Overall
                
                
                1.4
                %
                
                
                8.4
                %
                
                
                7.5
                %
                
                
                9.8
                %





In the
middle of the third quarter of fiscal 2009, we implemented cost reduction
programs further discussed below which are expected to reduce manufacturing
costs by approximately $14.4 million on an annual basis.





Merix
Oregon


Gross
margin at Merix Oregon decreased to negative 10.3% of net sales in the current
quarter from 5.3% of net sales in the third quarter of fiscal 2008, and
decreased to 2.5% of net sales in the nine months ended February 28, 2009
compared to 9.4% in the same period of fiscal 2008.  These decreases
in gross margin for both the current quarter and fiscal year-to-date periods are
driven by the decrease in unit sales, particularly in the higher-margin premium
service line, which decreased by 72% in the current quarter compared to the
third quarter of fiscal 2008. Factory margins are heavily influenced by factory
utilization rates because the cost structure needed to produce PCBs is heavily
weighted to fixed or step-variable costs. Thus, lower demand resulted in lower
utilization rates and decreases in gross margin as a percentage of net sales,
despite cost containment programs including plant shutdowns and reductions in
head count.  In late January 2009, we eliminated one of Merix Oregon’s
four production shifts, reducing headcount as well as reducing overtime costs
for retained employees.  This action, along with reductions-in-force
(RIF) and other cost reduction measures taken in the third quarter of fiscal
2009, is expected to reduce quarterly manufacturing costs by $2.0
million.  As a result of the cumulative RIF actions taken during
fiscal 2009, the manufacturing labor force at Merix Oregon has been reduced by
approximately 30% since July 2008.





Merix San
Jose


Gross
margins at Merix San Jose decreased to negative 0.5% of net sales in the current
quarter from 16.1% of net sales in the third quarter of fiscal 2008, and
decreased to 9.9% of net sales in the nine months ended February 28, 2009
compared to 16.5% in the same period in fiscal 2008.  The decrease on
a quarterly basis is primarily due to reductions in the volume of quick-turn
services as a result of the global economic slowdown which is reflected in the
21% decrease in unit volume shipments for Merix San Jose, resulting in lower
fixed cost absorption.  These impacts are less pronounced in a
comparison of fiscal year-to-date gross margins for fiscal 2009 and fiscal 2008
as Merix San Jose experienced efficiency issues in the first quarter of the
prior fiscal year due to implementation of the ERP system in North
America.  At Merix San Jose, the quarterly manufacturing cost
reduction resulting from the RIF and other programs implemented in the third
quarter of fiscal 2009 is estimated at $0.5 million. As a result of the
cumulative RIF actions taken during fiscal 2009, the manufacturing labor force
at Merix San Jose has been reduced by approximately 15% since July
2008.





21
 Index





Merix
Asia


Gross
margins at Merix Asia increased to 10.2% of net sales in the current quarter
compared to 9.9% in the second quarter of the prior fiscal year and increased to
10.9% of net sales in the nine months ended February 28, 2009 compared to 8.9%
in the first nine months of fiscal 2008.  These increases are
primarily the result of improvements in the product mix due to higher-technology
capabilities developed in our China-based facilities, which, along with a
two-week plant shutdown for Chinese New Year, offset lower factory utilization
rates resulting from a decrease in demand. Additionally, gross margin in the
third quarter of fiscal 2009 benefited by approximately 2 percentage points from
a reduction in the provision for warranty charges to reflect the change from a
three-year warranty period to a twelve-month warranty period on products sold by
our Asia segment and the impact of improved quality on claim rates for our Asia
factories.  We also achieved cost efficiencies in the first three
quarters of fiscal 2009 due to the closing of our Hong Kong facility completed
in the fourth quarter of fiscal 2008.  Merix Asia has used formal RIFs
to a lesser extent than Merix Oregon and San Jose.  Instead, we have
reduced the number of hours of operations within our Asian factories and
significantly reduced overtime costs.  Along with other cost reduction
measures, these actions have resulted in higher attrition and are expected to
result in manufacturing labor cost savings of approximately $1.1 million per
quarter.  The manufacturing labor force at Merix Asia has been reduced
by approximately 20% since July 2008.





Engineering
Costs





Engineering
costs include indirect labor, materials and overhead to support the development
of new manufacturing processes required to meet our customers’ technology
requirements.





Engineering
costs increased $0.2 million, or 48%, to $0.5 million in the third quarter of
fiscal 2009 compared to $0.3 million in the third quarter of fiscal 2008 and
increased $0.5 million, or 37%, to $1.8 million in the nine months ended
February 28, 2009 compared to $1.3 million in the nine months ended March 1,
2008. The increases were due primarily to costs to support the development of
higher technology products in Asia.





Selling,
General and Administrative Costs





Selling,
general and administrative (SG&A) costs include indirect labor, travel,
outside services and overhead incurred in our sales, marketing, management and
administrative support functions.





SG&A
costs decreased $1.5 million, or 15%, to $8.4 million in the third quarter of
fiscal 2009 compared to $9.9 million in the third quarter of fiscal 2008 and
decreased $6.1 million, or 19%, to $26.1 million in the nine months ended
February 28, 2009 compared to $32.2 million in the nine months ended March 1,
2008. The decreases on both a quarterly and fiscal year-to-date comparative
basis were primarily due to lower labor costs resulting from headcount
reductions, lower stock compensation expense, reduced commission expense on the
lower revenue base and reduced overall expense levels due to aggressive cost
management programs.  These decreases in the third quarter of fiscal
2009 compared to the third quarter of fiscal 2008 were offset by increased bad
debt expense recorded to reflect additional collection risk on customers in our
automotive end market.





Amortization
of Identifiable Intangible Assets





Amortization
of identifiable intangible assets was $0.5 million and $1.5 million,
respectively, in the third quarter of fiscal 2009 and the nine months ended
February 28, 2009 compared to $0.5 million and $1.8 million, respectively, in
the comparable periods of the prior fiscal year. The reduction in amortization
on a fiscal year-to-date basis was primarily related to declining amortization
amounts for customer relationships acquired in the Merix San Jose acquisition.
Our identifiable intangible assets balance at February 28, 2009 was $7.4 million
and current amortization is approximately $0.5 million per quarter.





22
 Index





Severance
and Impairment and Restructuring Charges





Total
severance and impairment and restructuring charges were as follows (in
thousands):





Fiscal
      Quarter Ended
                
                
                Nine
      Months EndedFebruary
      28, 2009
                
                
                March
      1, 2008
                
                
                February
      28, 2009
                
                
                March
      1,
                  2008Hong
      Kong closure severance charges
                
                $
                7
                
                
                $
                180
                
                
                $
                60
                
                
                $
                1,289Other
      severance charges – Merix Asia
                
                
                151
                
                
                
                85
                
                
                
                219
                
                
                
                85Gain
      on sale of Merix Asia equipment
                
                
                -
                
                
                
                -
                
                
                
                (567
                )
                
                
                -Goodwill
      impairment – Merix Asia
                
                
                20,500
                
                
                
                -
                
                
                
                20,500
                
                
                
                -Asset
      impairment – Merix Asia
                
                
                -
                
                
                
                92
                
                
                
                -
                
                
                
                187Severance
      charges – Merix Oregon
                
                
                1,413
                
                
                
                1,117
                
                
                
                1,719
                
                
                
                1,117Asset
      impairment– Merix Oregon
                
                
                -
                
                
                
                12,767
                
                
                
                702
                
                
                
                12,767Lease
      termination charges – Merix Oregon
                
                
                222
                
                
                
                -
                
                
                
                222
                
                
                
                -Executive
      severance
                
                
                -
                
                
                
                365
                
                
                
                -
                
                
                
                365Other
      restructuring charges
                
                
                49
                
                
                
                34
                
                
                
                49
                
                
                
                51$
                22,342
                
                
                $
                14,640
                
                
                $
                22,904
                
                
                $
                15,861





Due to a
number of factors including: 1) the substantial variance between our market
capitalization based on the current trading price range for our common stock and
the net asset value reflected in our consolidated balance sheet, 2) continuing
operating losses sustained in the first three quarters of fiscal 2009 and 3) the
deterioration of general economic environment, we have undertaken quarterly
assessments of potential impairment of our long-lived assets in the throughout
fiscal 2009.  Our analyses included assessments of current fair value
based on an update of forecasted future cash flows used in our annual impairment
test at the end of fiscal 2008.  As a result of the deepening economic
downturn and resulting reduction in demand for our products and net sales in the
third quarter of fiscal 2009, we have reduced our forecast of net sales and
future cash flows and believe that the recovery will occur later than initially
anticipated.  As a result, an impairment charge of $20.5 million has
been recorded in the third quarter of fiscal 2009 to reduce the value of
goodwill recorded in the acquisition of the Asia subsidiary to $0.  We
have also performed an assessment of potential impairment of other long-lived
assets and have determined that no additional impairment charges are necessary
as of February 28, 2009.





Due
primarily to the deteriorating macroeconomic conditions, we have taken cost
reduction actions to mitigate declines in our net sales.  Most of the
larger cost reductions were related to three major reductions-in-force that
occurred in September 2008, December 2008 and January 2009.  These
headcount reductions resulted in severance and related charges paid totaling
approximately $1.6 million in the third quarter of fiscal 2009 and $2.0 million
for the nine months ended February 28, 2009.  We have also
significantly reduced our labor costs due to attrition within our labor force,
particularly in the PRC.  As of the end of February 2009, we reduced
our labor force by approximately 25% compared to July 2008.





Additional
actions taken in March 2009 to reduce management headcount are expected to
reduce operating expenses by $1.6 annually and will result in severance and
related charges of $0.8 million in the fourth quarter of fiscal
2009.





In the
second quarter of fiscal 2009, we implemented a plan to dispose of certain
surplus plant assets to streamline the utilization of equipment in our Merix
Oregon factory and recorded $0.7 million in impairment charges on the assets to
be disposed.  The sale of the assets was finalized in the third
quarter of fiscal 2009.





In the
third quarter of fiscal 2008, we approved a plan to close our manufacturing
facility located in Wood Village, Oregon, and relocated production to its Forest
Grove facility.  This restructuring action was completed in the fourth
quarter of fiscal 2008.  We recorded severance and impairment charges
in the third quarter of fiscal 2008 totaling $13.9 million, comprising
approximately $12.8 million in asset impairments and adjustments to the asset
retirement obligation accrual for the Wood Village lease and $1.1 million in
severance and related charges.  In the third quarter of fiscal 2009,
we recorded $0.2 million in additional lease termination costs related to the
closure of the Wood Village factory due to a revised agreement with the sub
lessee regarding the amount to be charged for property taxes during the term of
the sublease.





23
 Index





In the
third quarter of fiscal 2008, we terminated our Executive Vice President of
Global Operations.  In accordance with the executive employment
agreement related to this termination, we recorded $0.4 million of severance and
related costs.





In the
first quarter of fiscal 2008, we committed to phasing out operations at our Hong
Kong facility, closing the facility and relocating production to other
manufacturing facilities.  Closure of the facility was substantially
complete in the fourth quarter of fiscal 2008.  This closure was a
part of our actions to consolidate our Asian operations at the lower-cost
facilities in China and expand the facilities at our Huiyang
plant.  We recorded $0.2 million, in severance and related costs in
the third quarter of fiscal 2008 in connection with the closure of the Hong Kong
facility.  We recorded approximately $0.1 and $1.3 million,
respectively, in Hong Kong facility severance and other restructuring costs in
the first nine months of fiscal 2009 and fiscal 2008.  In the first
quarter of fiscal 2009, we recorded a gain of $0.6 million related to the sale
of equipment previously used at the Hong Kong facility.





Interest
Income





Interest
income was $27,000 and $0.1 million, respectively, for the three- and nine-month
periods ended February 28, 2009 compared to $0.2 million and $0.7 million in the
same periods in fiscal 2008 due to reduced average cash-on-hand balances in the
current fiscal year.





Interest
Expense





Interest
expense was $1.1 million and $2.9 million, respectively, in the three- and
nine-month periods ended February 28, 2009 compared to $0.9 million and $3.1
million, respectively, in the comparable periods of the prior fiscal
year.  The increase in interest expense in the third quarter of fiscal
2009 compared to the third quarter of fiscal 2008 is primarily due to increased
borrowings outstanding on our revolving line of credit in the current
quarter.





In the
third quarter of fiscal 2008, we repaid $2.5 million on the subordinated
promissory note in connection with the reduction in the purchase price of Merix
Asia and the remaining $5.1 million of outstanding debt was eliminated as
further discussed below.  The resulting reduction in interest expense
in the nine months ended February 28, 2009 compared to the same period in fiscal
2008 was partially offset by increased interest expense related to average
outstanding borrowings on our revolving line of credit during fiscal
2009.





Gain
on Settlement of Debt





Under the
terms of the subordinated note payable related to the Merix Asia acquisition, a
principal payment of approximately $2.1 million would ordinarily have been due
December 1, 2007. However, we exercised our rights under the subordinated note
to not make this payment due to Merix’ claims against the seller. On January 25,
2008, we settled these claims and made a payment of $2.5 million to settle all
remaining obligations under the subordinated promissory note. The remaining
balance of $5.1 million outstanding on the subordinated note payable, plus
$53,000 of accrued interest, was eliminated in exchange for us releasing the
seller from all past and any future claims relating to the Merix Asia
acquisition. The $53,000 of accrued interest that was eliminated was included as
a component of the $5.1 million gain on settlement of debt on our statement of
operations during the quarter ended March 1, 2008.





Other
Income (Expense), net





There was
no material other income or expense in the third quarter of fiscal 2009,
compared to $0.4 million in the third quarter of fiscal 2008, comprised
primarily of foreign currency losses.  On a fiscal year to date basis,
net other expense decreased by $0.5 million to $0.5 million in the nine months
ended February 28, 2009 due to reduced foreign currency losses resulting from
the strengthening of the U.S. dollar when compared to average exchange rates in
nine months ended March 1, 2008.





24
 Index





Income
Tax Expense





On a
quarterly basis, we estimate our provision for income taxes based on our
projected results of operations for the full year. Income tax is provided for
entities expected to generate profits that are not offset by losses generated by
entities in other tax jurisdictions. As a result, our effective income tax rate
was negative 5.3% in the nine months ended February 28, 2009 and negative 2.1%
in the comparable period of the prior fiscal year.In the third quarter of
fiscal 2008, we reversed $1.5 million of valuation allowance against certain
Merix Asia deferred tax assets. This reversal was recorded as a $1.5 million
increase in deferred tax assets, a $0.5 million decrease to goodwill and a $1.0
million decrease to tax expense in the third quarter of fiscal
2008.





Our
effective income tax rate differs from tax computed at the federal statutory
rate primarily as a result of our mix of earnings in various tax jurisdictions,
the diversity in income tax rates, and our continuous assessment of the
realization of our uncertain tax positions and deferred tax assets. The
effective tax rate reflects current taxes expected to be paid in profitable
jurisdictions, provision for taxes and interest accrued on uncertain tax
positions and maintenance of valuation allowances in jurisdictions with
cumulative losses or profitability risks.





Liquidity
and Capital Resources





Our
sources of liquidity and capital resources as of February 28, 2009 consisted of
$19.1 million of cash and cash equivalents and $31.1 million unused availability
under our revolving bank credit agreement, described below. Based on
management’s forecast for results of operations and cash flow subject to various
scenarios, we expect our capital resources, together with the borrowing capacity
under our credit agreement, to be sufficient to fund our operations and known
capital requirements for at least one year from February 28, 2009, although we
may seek additional sources of funds.





We have a
Loan and Security Agreement with Bank of America, N.A. (the Credit Agreement)
which provides a revolving line of credit of up to $55.0 million on a borrowing
based calculated with respect to the value of accounts receivable, equipment and
real property.  The Credit Agreement expires in February
2013.  The obligations under the Credit Agreement are secured by
substantially all of our U.S. assets.  The borrowings bear interest
based, at the Company’s election, on either the prime rate announced by Bank of
America or LIBOR plus an applicable margin.  As of February 28, 2009,
the unused borrowing base was $31.1 million, with an outstanding balance of
$8.0 million.  The Credit Agreement contains usual and customary
covenants for credit facilities of this type, all of which we were in compliance
with as of February 28, 2009.  In addition, the Credit Agreement also
includes a financial covenant requiring a minimum fixed charge coverage
ratio of 1.1:1 if Excess Availability, defined in the Credit Facility agreement
as a function of the unused borrowing base and cash held in certain U.S. bank
accounts, falls below $20.0 million.  Excess Availability at February
28, 2009 was $36.2 millionand
as such, this covenant is not currently in effect.  We would not be in
compliance if this covenant was currently applicable.  Based on
management forecasts, we do not expect that Excess Availability will fall below
$20.0 million for at least one year from February 28, 2009.





In the
first nine months of fiscal 2009, cash and cash equivalents increased $13.4
million to $19.1 million as of February 28, 2009 from $5.7 million as of May 31,
2008 primarily as a result of $23.3 million provided by operations (as described
in more detail below) and net borrowings on our revolving line of credit
totaling $8.0 million, offset by the use of $18.1 million for the purchase of
property, plant and equipment.





Cash
flows from operating activities totaled $23.3 million.  Cash totaling
$1.7 million was provided by net loss of $32.6 million, adjusted for $39.2
million in non-cash charges, primarily $21.2 million of impairment charges,
$16.8 million for depreciation and amortization and $1.3 million in share-based
compensation expense.  As discussed in more detail below, other
significant changes in working capital generating $25.0 million in cash from
operations in the first nine months of fiscal 2009 include $27.5 million from
reductions in accounts receivable, $7.4 million from reductions in inventory, a
$1.1 million increase in amounts due to affiliate, and $8.5 million from
decreases in other assets, primarily related to a VAT refund received from the
Chinese tax authorities.  These cash inflows were offset by the use of
$19.4 million in cash for settlement of accounts payable and other accrued
liabilities. Note that changes in working capital balances vary from cash flows
from operations due to the impact of non-cash transactions on amounts reported
in the consolidated balance sheets.





25
 Index





Accounts
receivable, net of allowances for bad debts, decreased $27.5 million to $45.7
million at February 28, 2009 from $73.2 million as of May 31, 2008. The decrease
is primarily due to the reduced revenue base in the third quarter of fiscal
2009.  Due to the global economic slowdown, our customers have been
seeking to extend payment terms.  However, we have increased
collections staff and implemented improved collection programs and as a result
days sales outstanding, calculated on a quarterly basis, was 68 days at February
28, 2009 and 76 days at May 31, 2008.





Inventories,
net of reserves, decreased by $7.4 million to $16.2 million at February 28, 2009
compared to $23.6 million at May 31, 2008.  The variance is comprised
of a net decrease of $3.0 million in finished goods and consignment inventories
and a $4.4 million reduction in raw materials and work-in-process inventories as
a result of reductions to support currently expected net sales volumes and the
timing of purchases and production.





Prepaid
and other current assets decreased $8.3 million to $4.7 million as of February
28, 2009 compared to $13.0 million as of May 30, 2008, primarily due to VAT
refunds received during the first and third quarters of fiscal 2009 as well as
decreases in prepaid employee insurance benefits and receivables for scrapped
commodity materials. Other non-current assets decreased by $1.1 million to $4.7
million as of February 28, 2009 due to amortization of deferred financing costs
and minor reductions in various other assets.





Accounts
payable and other current liabilities, exclusive of the $0.9 million net
intercompany payable recorded due to the one-month reporting lag for Asia,
totaled $51.1 million at February 28, 2009, a decrease of $24.5 million compared
to $75.6 million at May 31, 2008.  The decrease is due primarily to a
$22.5 million reduction in accounts payable resulting from decreased purchases
to support the lower revenue base.  Additionally, accrued warranty
decreased by $1.1 million due to the decrease in net sales as well as improved
quality and a transition from a three-year warranty provision to a 12-month
warranty provision for our Asia operations, and other accrued liabilities
decreased by $0.8 million primarily due to accruals for professional services
related to fiscal year end and the refinancing of our revolving line of credit
included in current liabilities at May 31, 2008.





Amounts
due to affiliate increased to a $0.9 million payable balance at February 28,
2009 from a $0.2 million receivable balance at May 31, 2008.  The
increase is due to the timing of payments for intercompany purchases, which
impact our balance sheet as a result of the one-month reporting lag for our Asia
subsidiary.





Expenditures
for property, plant and equipment of $18.1 million in the first nine months of
fiscal 2009 primarily consisted of expenditures for the expansion and
improvement of the process technology at our China-based Huiyang facility,
improvement of the process technology and increasing the processing speed of our
North American facility and the implementation of a company-wide ERP system.
Most of the capital expenditure associated with the recent expansion of our
Huiyang, China facility and ERP implementation was completed in the first
quarter of fiscal 2009.  In response to the economic downturn and the
resulting reduction in demand for our products, discretionary capital
expenditures have been substantially curtailed.  We believe our
facilities and equipment are in good condition and do not require significant
investments in the near term.  It is management’s intent to minimize
capital spending until market conditions and cash flows
improve.  Remaining capital expenditures in fiscal 2009 are currently
estimated at approximately $1 million.





We are
currently marketing for sale the facility formerly housing our Hong Kong
manufacturing operation.  Although a transaction is not imminent, we
estimate proceeds on sale in the range of $10 million to $15
million.





Recently
Issued Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” and
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements.”  SFAS Nos. 141(R) and 160 require most identifiable
assets, liabilities, noncontrolling interests and goodwill acquired in a
business combination to be recorded at “full fair value” and require
noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity, which changes the accounting for transactions
with noncontrolling interest holders.  Both statements are effective
for annual reporting periods beginning on or after December 15, 2008 and earlier
adoption is prohibited.  SFAS No. 141(R) will be applied to business
combinations occurring after the effective date and SFAS No. 160 will be applied
prospectively to all noncontrolling interests, including any that arose before
the effective date. The adoption of SFAS Nos. 141(R) and 160 is not expected to
have a significant impact on our current financial position and results of
operations.





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 Index





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a material current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.





Critical
Accounting Policies and Use of Estimates





We
reaffirm the information included under the heading “Critical Accounting
Policies and Use of Estimates” appearing at page 45 of our Annual Report on Form
10-K for the year ended May 31, 2008, which was filed with the Securities and
Exchange Commission on August 7, 2008.





Item3.  Quantitative and Qualitative Disclosures About
Market Risk





There
have been no material changes in our reported market risks and risk management
policies since the filing of our Annual Report on Form 10-K for the year ended
May 31, 2008, which was filed with the Securities and Exchange Commission on
August 7, 2008.





Item4.  Controls and Procedures





Attached
to this quarterly report as exhibits 31.1 and 31.2 are the certifications of our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO) required by
section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications).
This portion of our quarterly report on Form 10-Q is our disclosure of the
conclusions of our principal executive officer and principal financial officer
regarding the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report based on management’s evaluation of
those disclosure controls and procedures. This disclosure should be read in
conjunction with the Section 302 Certifications for a complete understanding of
the topics presented.





Material
Weakness





In
connection with management’s assessment of our internal control over financial
reporting as of February 28, 2009, we determined that the material weakness in
our internal control continued to exist as a result of the control deficiency
previously identified with respect to our Merix Asia operations.





Background





Merix
Asia was acquired in September 2005.  Upon acquisition, Merix Asia had
weak internal controls over financial reporting and needed to develop processes
to strengthen its accounting systems and control environment
management.  We have devoted significant time and resources to
improving the internal controls over financial reporting since the
acquisition.  However, Merix management did not maintain sufficient
controls to adequately monitor the accounting and financial reporting of our
Merix Asia operations. This control deficiency could result in a material
misstatement to the interim or annual consolidated financial statements that
would not be prevented or detected in a timely manner.  Accordingly,
management has determined that this control deficiency constitutes a material
weakness.





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 Index





Remediation Steps to Address
Material Weakness





Because
of the material weakness identified in our evaluation of internal control over
financial reporting, we performed and plan to perform additional steps to
enhance internal control over financial reporting.  Our procedures
include, but were not limited to, the following:





·
            In
      August 2008, we implemented our global ERP system for our Asia operations.
      The new ERP system allows for greater consistency of accounting processes
      and internal controls between our U.S. and Asia operations and provides
      greater visibility into the accounting records and accounting practices in
      Merix Asia.


·
            We
      continued to perform quarterly physical inventory counts at our Asia
      facilities.


·
            We
      have devoted time and resources to implement and improve the cost
      accounting systems for Merix Asia and to strengthen our analytical
      procedures focused on trends and variance analysis to budgets and
      forecasts.  In fiscal 2008, we implemented detailed periodic
      reviews of the results of Merix Asia with follow-up actions to improve the
      control currently in place.  These reviews provide for more
      formal communication processes related to the financial statements
      adjustments and changes in the internal control
    environment.


·
            We
      have invested significant amounts of time and expense on training for
      financial personnel in the U.S. and Asia. U.S. management has also
      commenced more frequent oversight trips to
Asia.


·
            We
      continue to reaffirm a message that compliance with our controls over
      financial reporting is extremely important and will continue to impress
      that throughout our Company.


·
            We
      have realigned our organizational structure across the company along
      functional lines.  We believe this has resulted in more
      accountability across the organization and allows for sharing of best
      practices across all functions, improving the internal control
      environment.





Despite
the significant improvement of internal controls over financial reporting
related to our Merix Asia operations, management believes that it cannot be
determined that the material weakness is sufficiently remediated until the
successful implementation of the global ERP system for our Asia operations along
with related improvements in system reporting and restructuring of global
finance staff responsibilities can be evaluated in the fourth quarter of fiscal
2009.  The ERP system in Asia was implemented at the beginning of our
Asia subsidiary’s second fiscal quarter in August 2008 and we are currently
assessing the impact of the new ERP system on our internal controls at our Asia
subsidiary.





Based on
management’s evaluation of the effectiveness of our disclosure controls and
procedures, our CEO and CFO concluded that as of the end of the period covered
by the Form 10-Q, due to the need to evaluate the implementation of the global
ERP system for our Asia operations, our disclosure controls and procedures were
not effective in providing reasonable assurance that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934 is accumulated and communicated to our management, including our CEO and
our CFO, as appropriate to allow timely decisions regarding required disclosure
and that such information is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.





Changes
in Internal Control Over Financial Reporting


There has
been no change in our internal control over financial reporting that occurred
during our last fiscal quarter that has materially affected or is reasonably
likely to materially affect our internal control over financial
reporting.





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 Index





PART
II – OTHER INFORMATION





Item1.  Legal Proceedings





We are,
from time to time, made subject to various legal claims, actions and complaints
in the ordinary course of its business. Except as disclosed below, management
believes that the outcome of litigation should not have a material adverse
effect on our consolidated results of operations, financial condition or
liquidity.





Securities Class
Action


Four
purported class action complaints were filed against Merix and certain of its
executive officers and directors in the first quarter of fiscal 2005. The
complaints were consolidated in a single action entitled In re Merix Corporation Securities
Litigation, Lead Case No. CV 04-826-MO, in the U.S. District Court for
the District of Oregon. After the court granted our motion to dismiss without
prejudice, the plaintiffs filed a second amended complaint. That complaint
alleged that the defendants violated the federal securities laws by making
certain inaccurate and misleading statements in the prospectus used in
connection with the January 2004 public offering of approximately $103.4 million
of our common stock. In September 2006, the Court dismissed that complaint with
prejudice. The plaintiffs appealed to the Ninth Circuit Court of Appeals. In
April 2008, the Ninth Circuit reversed the dismissal of the second amended
complaint. We sought rehearing which was denied and rehearing en banc was also
denied. We obtained a stay of the mandate from the Ninth Circuit and filed a
certiorari petition with the United States Supreme Court on September 22, 2008.
On December 15, 2008, the Supreme Court denied our certiorari petition. The case
has been remanded back to the U.S. District Court for the District of Oregon.
The plaintiffs seek unspecified damages. A potential loss or range of loss that
could arise from these cases is not estimable or probable at this
time.





Breach of
Contract


In June
2008, a complaint was filed against Merix Caymans Trading Company Ltd. by Clark
Sales, LLC, Case No. 2:08-CV-12551-MOR-VMM, in the United States District Court,
Eastern District of Michigan.  The complaint alleges breach of
contract in relation to payment of post-termination commissions.  The
plaintiffs sought damages in excess of $4 million.  The parties
reached a settlement agreement on November 24, 2008 and the Company recorded an
accrual of $0.4 million in the second quarter of
fiscal  2009.  The terms of the settlement included a lump
sum payment of $0.4 million paid in December 2008, and monthly payments
thereafter based on net sales of certain products through August 15, 2009, paid
in accordance with our existing commission structure for outside sales
representatives.





Item1A.  Risk Factors





RISK
FACTORS AFFECTING BUSINESS AND RESULTS OF OPERATIONS





Investing in our securities involves
a high degree of risk. If any of the following risks impact our business, the
market price of our
shares of common stock and other securities could decline and investors could
lose all or part of their investment. In addition, the following risk
factors and uncertainties could cause our actual results to differ materially
from those projectedin
our forward-looking statements, whether made in this Quarterly Report on Form
10-Q or the other documents we file with the SEC, or in our annual or quarterly
reports to shareholders, future press releases, or orally, whether in
presentations, responsesto questions or
otherwise.





We
are dependent upon the electronics industry, which is highly cyclical and
suffers significant downturns in demand resulting in excess manufacturing
capacity and increased price competition.




The
electronics industry, on which a substantial portion of our business depends, is
cyclical and subject to significant downturns characterized by diminished
product demand, rapid declines in average selling prices and over-capacity. This
industry has experienced periods characterized by relatively low demand and
price depression and is likely to experience recessionary periods in the future.
Economic conditions affecting the electronics industry in general, or specific
customers in particular, have adversely affected our operating results in the
past and may do so in the future.  Currently, the global economy has
been greatly impacted by the global recessionary conditions linked to a
collapse of values in the U.S. home mortgage sector, volatile fuel
prices, and a changing political and economic landscape. These factors have
contributed to historically low consumer confidence levels which has
resulted in a significantly intensified downturn in the demand for products
incorporating PCBs, which has in turn adversely affected our results of
operations for the first three quarters of fiscal 2009.





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 Index





The
electronics industry is characterized by intense competition, rapid
technological change, relatively short product life cycles and pricing and
profitability pressures. These factors adversely affect our customers and we
suffer similar effects. Our customers are primarily high-technology equipment
manufacturers in the communications and networking, computing and peripherals,
test, industrial and medical, defense and aerospace and automotive
markets of the electronics industry. Due to the uncertainty in the markets
served by most of our customers, we cannot accurately predict our future
financial results or accurately anticipate future orders. At any time, our
customers can discontinue or modify products containing components manufactured
by us, adjust the timing of orders and shipments or affect our mix of
consolidated net sales generated from quick-turn and premium services revenues
versus standard lead time production, any of which could have a material adverse
effect on our results of operations.





Competition
in the printed circuit board market is intense and we could lose sales if we are
unable to compete effectively.




The
market for PCBs is intensely competitive, highly fragmented and rapidly
changing. We expect competition to persist, which could result in continued
reductions in pricing and profitability and loss of market share. We believe our
major competitors are U.S., Asian and other international independent
manufacturers of multi-layer printed circuit boards, backplanes and other
electronic assemblies. Those competitors include Daeduck Electronics Co., DDi
Corp., Elec and Eltek., Meadville Holdings, Ltd., LG Electronics, Multek
Corporation (a division of Flextronics International Ltd.), Sanmina-SCI
Corporation, TTM Technologies, Inc., WUS Printed Circuits Company Ltd.,
ViaSystems, Inc and Ibiden Co., Ltd.





Some of
our competitors and potential competitors may have a number of advantages over
us, including:


·
            significantly
      greater financial, technical, marketing and manufacturing
      resources;


·
            preferred
      vendor status with some of our existing and potential
      customers;


·
            more
      focused production facilities that may allow them to produce and sell
      products at lower price points;


·
            more
      capital; and


·
            larger
      customer bases.





In
addition, these competitors may have the ability to respond more quickly to new
or emerging technologies, be more successful in entering or adapting to existing
or new end markets, adapt more quickly to changes in customer requirements and
devote greater resources to the development, promotion and sale of their
products than we can. Consolidation in the PCB industry, which we expect to
continue, could result in an increasing number of larger PCB companies with
greater market power and resources. Such consolidation could in turn increase
price competition and result in other competitive pressures for us. We must
continually develop improved manufacturing processes to meet our customers’
needs for complex, high-technology products, and our basic interconnect
technology is generally not subject to significant proprietary protection. We
may not be able to maintain or expand our sales if competition increases and we
are unable to respond effectively.





Other
considerations that affect our ability to compete include providing
manufacturing services that are competitively priced, providing continually
evolving technical capabilities, having competitive lead times and meeting
specified delivery dates.





Due to
the severe downturn in the economic environment, coupled with our recent
financial performance, we have noted and expect to see continuing concern from
our customers about our ability to continue operations in the current
environment.  We have not had any major customer cease doing business
with us as a result of concerns about our stability.  However, if one
or more major customers were to significantly reduce its purchases from us, it
could have a material adverse effect on our results of operations.





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 Index





During
recessionary periods in the electronics industry, our competitive advantages in
providing an integrated manufacturing solution and responsive customer service
may be less important to our customers than they are in more favorable economic
climates.





If
competitive production capabilities increase in Asia, where production costs are
lower, we may lose market share in both North America and Asia and our
profitability may be materially adversely affected by increased pricing
pressure.




PCB
manufacturers in Asia and other geographies often have significantly lower
production costs than our North American operations and may even have cost
advantages over Merix Asia. Production capability improvements by foreign and
domestic competitors may play an increasing role in the PCB markets in which we
compete, which may adversely affect our revenues and profitability. While PCB
manufacturers in these locations have historically competed primarily in markets
for less technologically advanced products, they are expanding their
manufacturing capabilities to produce higher layer count, higher technology PCBs
and could compete more directly with our North American operations.





If
we are unable to respond to rapid technological change and process development,
we may not be able to compete effectively.




The
market for our products is characterized by rapidly changing technology and
continual implementation of new production processes. The success of our
business depends in large part upon our ability to maintain and enhance our
technological capabilities, to manufacture products that meet changing customer
needs, and to successfully anticipate or respond to technological changes on a
cost-effective and timely basis. In addition, the PCB industry could encounter
competition from new or revised manufacturing and production technologies that
render existing manufacturing and production technology less competitive or
obsolete. We may not be able to respond effectively to the technological
requirements of the changing market. If we need new technologies and equipment
to remain competitive, the development, acquisition and implementation of those
technologies and equipment may require us to make significant capital
investments. We may not be able to raise the necessary additional funds at all
or as rapidly as necessary to respond to technological changes as quickly as our
competitors.





During periods of
excess global PCB manufacturing capacity, our profitability may decrease and/or
we may have to incur additional restructuring charges if we choose to reduce the
capacity of or close any of our facilities.


A
significant portion of our factory costs of sales and operating expenses are
relatively fixed in nature, and planned expenditures are based in part on
anticipated orders. When we experience excess capacity, our sales revenues may
not fully cover our fixed overhead expenses, and our gross margins will fall. In
addition, we generally schedule our quick-turn production facilities at less
than full capacity to retain our ability to respond to unexpected additional
quick-turn orders. However, if these orders are not received, we may forego some
production and could experience continued excess capacity.





If we
conclude we have significant, long-term excess capacity, we may decide to
permanently close one or more of our facilities, and lay off some of our
employees. Closures or lay-offs could result in recording of restructuring
charges such as severance, other exit costs, and asset
impairments.





Damage
to our manufacturing facilities or information systems due to fire, natural
disaster, or other events could harm our financial results.




We have
U.S. manufacturing and assembly facilities in Oregon, California and China. The
destruction or closure of any of our facilities for a significant period of time
as a result of fire, explosion, act of war or terrorism, or blizzard, flood,
tornado, earthquake, lightning, or other natural disaster could harm us
financially, increasing our costs of doing business and limiting our ability to
deliver our manufacturing services on a timely basis. Additionally, we rely
heavily upon information technology systems and high-technology equipment in our
manufacturing processes and the management of our business.  We have
developed disaster recovery plans; however, disruption of these technologies as
a result of natural disaster or other events could harm our business and have a
material adverse effect on our results of operations.





31
 Index





A
small number of customers account for a substantial portion of our consolidated
net sales and our consolidated net sales could decline significantly if we lose
a major customer or if a major customer orders fewer of our products or cancels
or delays orders.




Historically,
we have derived a significant portion of our consolidated net sales from a
limited number of customers. Our five largest OEM customers, which vary from
period to period, comprised 37% of our consolidated net sales during the third
quarter of fiscal 2009. Net sales to one customer represented 12% of
consolidated net sales during the third quarter of fiscal 2009. We expect to
continue to depend upon a small number of customers for a significant portion of
our consolidated net sales for the foreseeable future. The loss of, or decline
in, orders or backlog from one or more major customers could reduce our
consolidated net sales and have a material adverse effect on our results of
operations and financial condition. Further, as part of our plan to improve the
profitability of our North American operations we have reduced our reliance on
certain customers and certain products that have historically generated
significant revenues for Merix.  We anticipate retaining a meaningful
portion of this business, but there can be no assurance we will be
successful.  An unplanned loss of a large portion of this revenue
could adversely affect our financial results.





Some of
our customers are relatively small companies, and our future business with them
may be significantly affected by their ability to continue to obtain financing.
If they are unable to obtain adequate financing, they will not be able to
purchase products, which, in the aggregate, would adversely affect our
consolidated net sales.





We
are exposed to the credit risk of some of our customers and also as a result of
a concentration of our customer base.




Most of
our sales are on an “open credit” basis, with standard industry payment terms.
We monitor individual customer payment capability in granting open credit
arrangements, seek to limit open credit to amounts we believe the customers can
pay, and maintain reserves we believe are adequate to cover exposure for
doubtful accounts. During periods of economic downturn in the global economy and
the electronics and automotive industries, our exposure to credit risks from our
customers increases. Although we have programs in place to monitor and mitigate
the associated risk, those programs may not be effective in reducing our credit
risks.





In total,
five entities represented approximately 49% of the consolidated net trade
accounts receivable balance at February 28, 2009, individually ranging from
approximately 5% to approximately 21%. Our OEM customers direct our sales to a
relatively limited number of electronic manufacturing service providers. Our
contractual relationship is typically with the electronic manufacturing service
providers, who are obligated to pay us for our products. Because we expect our
OEM customers to continue to direct our sales to electronic manufacturing
service providers, we expect to continue to be subject to the credit risk
of a limited number of customers. This concentration of customers exposes us to
increased credit risks. If one or more of our significant customers were to
become insolvent or were otherwise unable to pay us, our financial condition and
results of operations would be adversely affected.





Because
we do not generally have long-term contracts with our customers, we are subject
to uncertainties and variability in demand by our customers, which could
decrease consolidated net sales and negatively affect our operating
results.




We
generally do not have long-term purchase commitments from our customers, and,
consequently, our consolidated net sales are subject to short-term variability
in demand by our customers. Customers generally have no obligation to order from
us and may cancel, reduce or delay orders for a variety of reasons. The level
and timing of orders placed by our customers vary due to:





·
            fluctuation
      in demand for our customers’
products;


·
            changes
      in customers’ manufacturing strategies, such as a decision by a customer
      to either diversify or consolidate the number of PCB manufacturers
      used;


·
            customers’
      inventory management;


·
            our
      own operational performance, such as missed delivery dates and repeated
      rescheduling; and


·
            changes
      in new product introductions.





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 Index





We have
experienced terminations, reductions and delays in our customers’ orders. Future
terminations, reductions or delays in our customers’ orders could lower our
production asset utilization, which would lower our gross profits, decrease our
consolidated net sales and negatively affect our business and results of
operations.





The increasing
prominence ofEMSproviders in the
PCB industry could reduce our gross margins, potential sales, and
customers.


Sales to
EMS providers represented approximately 47% of our net sales in the third
quarter of fiscal 2009. Sales to EMS providers include sales directed by OEMs as
well as orders placed with us at the EMS providers’ discretion. EMS providers
source on a global basis to a greater extent than OEMs. The growth and
concentration of EMS providers increases the purchasing power of such providers
and could result in increased price competition or the loss of existing OEM
customers. In addition, some EMS providers, including some of our customers,
have the ability to directly manufacture PCBs within their own businesses. If a
significant number of our other EMS customers were to acquire these abilities,
our customer base might shrink, and our sales might decline substantially.
Moreover, if any of our OEM customers outsource the production of PCBs to these
EMS providers, our business, results of operations and financial condition may
be harmed.





Automotive
customers have higher quality requirements and long qualification times and, if
we do not meet these requirements, our business could be materially adversely
affected.




For
safety reasons, our automotive customers have strict quality standards that
generally exceed the quality requirements of our other customers. Because a
significant portion of Merix Asia’s products are sold to customers in the
automotive industry, if our manufacturing facilities in Asia do not meet these
quality standards, our results of operations may be materially and adversely
affected. These automotive customers may require long periods of time to
evaluate whether our manufacturing processes and facilities meet their quality
standards. If we were to lose automotive customers due to quality control
issues, we might not be able to regain those customers, or gain new automotive
customers, for long periods of time, which could significantly decrease our
consolidated net sales and profitability.





The
cyclical nature of automotive production and sales could adversely affect Merix’
business.




A
significant portion of Merix Asia’s products are sold to customers in the
automotive industry. In the third quarter of fiscal 2009, net sales to the
automotive market accounted for approximately 19% of our consolidated net sales.
As a result, Merix Asia’s results of operations may be materially and adversely
affected by market conditions in the automotive industry. Automotive production
and sales are cyclical and depend on general economic conditions and other
factors, including consumer spending and preferences. In addition, automotive
production and sales can be affected by labor relations issues, regulatory
requirements, trade agreements and other factors. Any significant economic
decline that results in a reduction in automotive production and sales by Merix
Asia’s customers could have a material adverse effect on Merix’ business,
results of operations and financial condition.





We have
experienced significant decreases in demand from our automotive customers who
have been affected by the significant economic difficulties facing the
automotive industry.  Recent public liquidity concerns of certain
companies in the automotive supply chain could impact our future demand levels
and the collectibility of outstanding receivables with those
customers.  We have approximately $11.6 million in outstanding
receivables and consigned inventory with this customer base.  A
prolonged downturn or the failure of one or more of our automotive customers
could result in the impairment of assets invested in this end market, including
our Huizhou, China facility, which is heavily reliant on the automotive industry
for sales of its products.





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 Index





Products
we manufacture may contain manufacturing defects, which could result in reduced
demand for our products and liability claims against us.




We
manufacture highly complex products to our customers’ specifications. These
products may contain manufacturing errors or failures despite our quality
control and quality assurance efforts. Further, our technology expansion efforts
including the major expansion in our Huiyang factory increase the risk related
to unanticipated yield issues, as well as to uncertainties related to future
warranty claims. Defects in the products we manufacture, whether caused by a
design, manufacturing or materials failure or error, may result in delayed
shipments, increased warranty costs, customer dissatisfaction, or a reduction in
or cancellation of purchase orders. If these defects occur either in large
quantities or too frequently, our business reputation may be impaired. Since our
products are used in products that are integral to our customers’ businesses,
errors, defects or other performance problems could result in financial or other
damages to our customers beyond the cost of the PCB, for which we may be liable
in some cases. Although we generally attempt to sell our products on terms
designed to limit our exposure to warranty, product liability and related
claims, in certain cases, the terms of our agreements allocate to Merix
substantial exposure for product defects. In addition, even if we can
contractually limit our exposure, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability provisions.
Product liability litigation against us, even if it were unsuccessful, would be
time consuming and costly to defend. Although we maintain a warranty reserve,
this reserve may not be sufficient to cover our warranty or other expenses that
could arise as a result of defects in our products.





We
may incur material losses and costs as a result of product liability and
warranty claims that may be brought against us.




We face
an inherent business risk of exposure to warranty and product liability claims
in the event that our products, particularly those supplied by Merix Asia to the
automotive industry, fail to perform as expected or such failure results, or is
alleged to result, in bodily injury and/or property damage. In addition, if any
of our products are or are alleged to be defective, we may be required to
participate in a recall of such products. As suppliers become more integral to
the vehicle design process and assume more of the vehicle assembly functions,
vehicle manufacturers are increasingly looking to their suppliers for
contributions when faced with product liability claims or recalls. In addition,
vehicle manufacturers, who have traditionally borne the cost associated with
warranty programs offered on their vehicles, are increasingly requiring
suppliers to guarantee or warrant their products and may seek to hold us
responsible for some or all of the costs related to the repair and replacement
of parts supplied by us to the vehicle manufacturer. A successful warranty or
product liability claim against us in excess of our available insurance coverage
or established warranty and legal reserves or a requirement that we participate
in a product recall may have a material adverse effect on our business,
financial condition and results of operations.





We
rely on suppliers for the timely delivery of materials used in manufacturing our
PCBs, and an increase in industry demand, a shortage of supply or an increase in
the price of raw materials may increase the cost of the raw materials we use and
may limit our ability to manufacture certain products and adversely impact our
profitability.




To
manufacture our PCBs, we use materials such as laminated layers of fiberglass,
copper foil and chemical solutions which we order from our suppliers. Suppliers
of laminates and other raw materials that we use may from time to time extend
lead times, limit supplies or increase prices due to capacity constraints or
other factors, which could adversely affect our profitability and our ability to
deliver our products on a timely basis. We have experienced in the past, and may
experience in the future, significant increases in the cost of laminate
materials, copper products and petroleum-based raw materials. These cost
increases have had an adverse impact on our profitability and the impact has
been particularly significant on our Asian operations which have fixed price
arrangements with a number of large automotive customers. Some of our products
use types of laminates that are only available from a single supplier that holds
a patent on the material. Although other manufacturers of advanced PCBs also
must use the single supplier and our OEM customers generally determine the type
of laminates used, a failure to obtain the material from the single supplier for
any reason may cause a disruption, and possible cancellation, of orders for PCBs
using that type of laminate, which in turn would cause a decrease in our
consolidated net sales.





Additionally,
a significant portion of our raw material purchases is obtained from one
supplier.  Due to customer requalification requirements and a lack of
competitive alternate suppliers, we could experience a material adverse effect
on our business and results of operations if this supplier were not able to
provide the materials required to fulfill customer orders.





34
 Index





If
we lose key management, operations, engineering or sales and marketing
personnel, we could experience reduced sales, delayed product development and
diversion of management resources.




Our
success depends largely on the continued contributions of our key management,
administration, operations, engineering and sales and marketing personnel, many
of whom would be difficult to replace. We generally do not have employment or
non-compete agreements with our key personnel. If one or more members of
our senior management or key professionals were to resign, the loss of personnel
could result in loss of sales, delays in new product development and diversion
of management resources, which would have a negative effect on our
business. We do not maintain “key man” insurance policies on any of our
personnel.





Due to
the global economic downturn, the Company has made substantial
reductions-in-force, including a number of significant management
personnel.  The Company does not anticipate the loss of any of the
personnel will have a material impact on its operation and has attempted to
mitigate the impact of the change in personnel.  However, there can be
no assurance that these risks are fully mitigated.




Successful
execution of our day-to-day business operations, including our manufacturing
process, depends on the collective experience of our employees and we have
experienced periods of high employee turnover. If high employee turnover
persists, our business may suffer and we may not be able to compete
effectively.




We rely
on the collective experience of our employees, particularly in the manufacturing
process, to ensure we continuously evaluate and adopt new technologies and
remain competitive. Although we are not generally dependent on any one employee
or a small number of employees involved in our manufacturing process, we have
experienced periods of high employee turnover generally and continue to
experience significantly high employee turnover at our Asian facilities. If we
are not able to replace these people with new employees with comparable
capabilities, our operations could suffer as we may be unable to keep up with
innovations in the industry or the demands of our customers. As a result, we may
not be able to continue to compete effectively.





We export
products from theUnited
Statesto other
countries. If we fail to comply with export laws, we could be subject to
additional taxes, duties, fines and other punitive
actions.


Exports
from the United States are regulated by the U.S. Department of Commerce.
Failure to comply with these regulations can result in significant fines and
penalties. Additionally, violations of these laws can result in punitive
penalties, which would restrict or prohibit us from exporting certain products,
resulting in significant harm to our business.





Because
we have significant foreign sales and presence, we are subject to political,
economic and other risks we do not face in the domestic market.




As a
result of increased Asian operations, we expect sales in, and product shipments
to, non-U.S. markets to represent an increasingly significant portion of our
total sales in future periods. Our exposure to the business risks presented by
foreign economies includes:


·
            logistical,
      communications and other operational difficulties in managing a global
      enterprise;


·
            potentially
      adverse tax consequences;


·
            restrictions
      on the transfer of funds into or out of a
  country;


·
            longer
      sales and collection cycles;


·
            potential
      adverse changes in laws and regulatory practices, including export license
      requirements, trade barriers, tariffs and tax
  laws;


·
            protectionist
      and trade laws and business practices that favor local
      companies;


·
            restrictive
      governmental actions;


·
            burdens
      and costs of compliance with a variety of foreign
  laws;


·
            political,
      social and economic instability impacting our foreign labor force,
      including terrorist activities;


·
            natural
      disaster or outbreaks of infectious diseases affecting the regions in
      which we operate or sell products;
and


·
            difficulties
      in collecting accounts receivable.





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 Index





Any one,
or a combination, of these risks may materially adversely affect our business
operations, our results of operations and/or our financial
position.





We
must comply with the Foreign Corrupt Practices Act.




We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some of our competitors, are not subject
to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in many jurisdictions, including
mainland China. If our competitors engage in these practices they may receive
preferential treatment from personnel of some companies, giving our competitors
an advantage in securing business or from government officials who might give
them priority in obtaining new licenses, which would put us at a disadvantage.
Although we inform our personnel that such practices are illegal, we cannot
assure that our employees or other agents will not engage in such conduct for
which we might be held responsible. If our employees or other agents are
found to have engaged in such practices, we could suffer severe
penalties.





We
are subject to risks associated with currency fluctuations, which could have a
material adverse effect on our results of operations and financial
condition.




A
significant portion of our costs is denominated in foreign currencies, primarily
the Chinese renminbi. Substantially all of our consolidated net sales are
denominated in U.S. dollars. As a result, changes in the exchange rates of these
foreign currencies to the U.S. dollar will affect our cost of sales and
operating margins and could result in exchange losses. The exchange rate of the
Chinese renminbi to the U.S. dollar is closely monitored by the Chinese
government. Recent increases in the value of the renminbi relative to the U.S.
dollar have caused the costs of our Chinese operations to increase relative to
related dollar-denominated sales. The impact of future exchange rate
fluctuations on our results of operations cannot be accurately predicted. We may
enter into exchange rate hedging programs from time to time in an effort to
mitigate the impact of exchange rate fluctuations. However, hedging transactions
may not be effective and may result in foreign exchange hedging
losses.





Our
operations in the People’s Republic of China subject us to risks and
uncertainties relating to the laws and regulations of the PRC.




Under its
current leadership, the Chinese government has been pursuing economic reform
policies, including the encouragement of foreign trade and investment and
greater economic decentralization. However, the government of the PRC may not
continue to pursue such policies. Despite progress in developing its legal
system, the PRC does not have a comprehensive and highly developed system of
laws, particularly with respect to foreign investment activities and foreign
trade. Enforcement of existing and future laws and contracts is uncertain, and
implementation and interpretation thereof may be inconsistent. As the Chinese
legal system develops, the promulgation of new laws, changes to existing laws
and the preemption of local regulations by national laws may adversely affect
foreign investors. For example, the PRC recently passed a unified enterprise
income tax law, which changes and increases the income tax on foreign-owned
facilities. The PRC also enacted new labor laws that became effective January 1,
2008 that make it more difficult and expensive for companies to make changes in
their workforce. In addition, some government policies and rules are not
published or communicated in local districts in a timely manner, if they are
published at all. As a result, we may operate our business in violation of new
rules and policies without having any knowledge of their existence. These
uncertainties could limit the legal protections available to us. Any litigation
in the PRC may be protracted and result in substantial costs and diversion of
resources and management attention.





Our
Chinese manufacturing operations subject us to a number of risks we have not
faced in the past.




A
substantial portion of our current manufacturing operations is located in the
PRC. The geographical distances between these facilities and our U.S.
headquarters create a number of logistical and communications challenges. We are
also subject to a highly competitive market for labor in the PRC, which may
require us to increase employee wages and benefits to attract and retain
employees and spend significant resources to train new employees due to high
employee turnover, either of which could cause our labor costs to exceed
our expectations.





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 Index





In
addition, because of the location of these facilities, we could be affected by
economic and political instability in the PRC, including:


·
            lack
      of developed infrastructure;


·
            currency
      fluctuations;


·
            overlapping
      taxes and multiple taxation issues;


·
            employment
      and severance taxes;


·
            the
      burdens of cost, compliance and interpretation of a variety of foreign
      laws;


·
            difficulty
      in attracting and training workers in foreign markets and problems caused
      by labor unrest; and


·
            less
      protection of our proprietary processes and
  know-how.





Moreover,
inadequate development or maintenance of infrastructure in the PRC, including
inadequate power and water supplies, transportation or raw materials
availability, communications infrastructure or the deterioration in the general
political, economic or social environment, could make it difficult and more
expensive, and possibly prohibitive, to continue to operate our manufacturing
facilities in the PRC.





New
labor laws in the PRC may adversely affect our results of
operations.




Approximately
two-thirds of our workforce is located in the PRC. Effective on January 1, 2008,
the PRC government enacted a new labor law that significantly impacts the cost
of a company’s decision to reduce its workforce. Further, the law requires
certain terminations to be based upon seniority and not merit. In the event we
decide to significantly change or decrease our workforce in the PRC, the new
labor law could adversely affect our ability to enact such changes in a manner
that is most advantageous to our circumstances or that is timely and cost
effective.  Additionally, in response to inflationary concerns, wages
in certain provinces in China have increased in the past and may continue to do
so in the future.  In the current economic environment, these concerns
are not as significant, but could arise in the future due to improving demand
for products or services produced in the region.  Significant
increases in wages paid to employees in our Merix Asia facilities could reduce
our profitability.





Success
in Asia may adversely affect our U.S. operations.




To the
extent Asian PCB manufacturers, including Merix Asia, are able to compete
effectively with products historically manufactured in the United States, our
facilities in the United States may not be able to compete as effectively and
parts of our North American operations may not remain viable.





If
we do not effectively manage the expansion of our operations, our business may
be harmed, and the increased costs associated with the expansion may not be
offset by increased consolidated net sales.




In the
first half of fiscal 2009, we substantially completed efforts to significantly
expand the Huiyang, China-based facility and any other future capacity expansion
with respect to our facilities will expose us to significant start-up risks
including:


·
            delays
      in receiving and installing required manufacturing
    equipment;


·
            inability
      to retain management personnel and skilled employees, or labor shortages
      in general;


·
            difficulties
      scaling up production, including producing products at competitive costs,
      yields and quality standards at our expanded
  facilities;


·
            challenges
      in coordinating management of operations and order fulfillment between our
      U.S. and Asian facilities;


·
            a
      need to improve and expand our management information systems and
      financial controls to accommodate our expanded
  operations;


·
            additional
      unanticipated costs;  and


·
            shortfalls
      in production volumes as a result of unanticipated start-up or expansion
      delays that could prevent us from meeting our customers’ delivery
      schedules or production needs.





Our
forward-looking statements depend upon a number of assumptions and include our
ability to execute tactical changes that may adversely impact both short-term
and long-term financial performance. The success of our expansion efforts will
depend upon our ability to expand, train, retain and manage our employee base in
both Asia and North America. In connection with our expansion efforts in Asia,
we expect to require additional employees throughout the company. If we are
unable to attract, train and retain new workers, or manage our employee base
effectively, our ability to fully utilize our Asian assets will likely be
impaired. If we are unable to effectively expand, train and manage our employee
base, our business and results of operations could be adversely
affected.





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 Index





In
addition, if our consolidated net sales do not increase sufficiently to offset
the additional fixed operating expenses associated with our Asian operations,
our consolidated results of operations may be adversely affected. If demand for
our products does not meet anticipated levels, the value of the expanded
operations could be significantly impaired, which would adversely affect our
results of operations and financial condition.




Electrical
power shortages in certain areas of southern China have, in the past, caused the
government to impose a power rationing program and additional or extended power
rationings could adversely affect our China operations.




In the
winter months of fiscal 2008, certain areas of Southern China faced electrical
power constraints which resulted from extreme winter weather in the area. In
order to deal with the power constraints, the Southern China Province Government
initiated a power rationing plan. This rationing program affected our Huizhou
and Huiyang facilities. In order to minimize the effect on our operations, we
realigned our routine equipment maintenance program to coincide with the power
rationing schedule. The power rationing program was terminated in May 2008.
Although power rationing did not impact our Asia operations during the recent
winter months, we may experience issues in the future with obtaining power or
other key services due to infrastructure weaknesses in China that may impair our
ability to compete effectively as well as adversely affect revenues and
production costs.





Failure
to maintain good relations with minority investors in our China manufacturing
facilities could materially adversely affect our ability to manage our Asian
operations.




Currently,
we have two PCB manufacturing plants in the PRC that are each partially owned by
a separate Chinese company. While we are the majority interest holder in both of
these companies, there is a minority interest holder in each subsidiary, owning
a 5% and 15% share, respectively. These minority holders are local investors
with close ties to local economic development and other government agencies. The
investors are the leaseholders for the land on which the plants owned by our
Chinese operating companies are located. In connection with the negotiation of
their investments, the local investors secured certain rights to be consulted
and consent to certain operating and investment matters concerning the plants
and to board representation. Failure to maintain good relations with the
investors in either China joint venture could materially adversely affect our
ability to manage the operations of one or more of the plants and our
ability to realize the anticipated benefits of the Asian
acquisition.





We
do not currently have options to renew our leased manufacturing facility in the
PRC and failure to renew such lease could adversely affect our ability to
realize the anticipated benefits of the Asian acquisition.




Our
Huizhou manufacturing facility is leased from a Chinese company under an
operating lease that expires in 2010 and does not contain a lease renewal
option. Although the landlord also has a minority interest in our subsidiary
that operates the facility, this minority interest holder may choose to not
renew our lease. Failure to maintain good relations with this investor could
materially adversely affect our ability to negotiate the renewal of our
operating lease or to continue to operate the plant. Although we have renewed
this lease in the past, failure to successfully renew such lease in the future
could materially adversely affect our ability to realize the anticipated
benefits of the Asian acquisition. In addition, the lease renewal allows early
termination by either party, so failure to maintain good relations with this
investor could materially impact our continued leasehold of the facility.
Further, zoning and changes in laws in China could impair the ability of the
landlord to extend or renew the lease.





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 Index





Our
bank credit covenant that limits our incremental investment in Merix Asia may
restrict our ability to adequately fund our Asian operations and our growth
plans in Asia.





Merix has
a bank credit agreement covenant that limits the incremental investment into
Merix Asia to $40 million and provides that our investments cannot be made if a
default exists under the credit agreement or the Excess Availability (defined in
the credit agreement as a function of outstanding borrowings and available cash)
is less than $20 million. As of February 28, 2009, we had advanced Merix Asia
approximately $8.9 million against the incremental investment
limit.  The advance to Merix Asia was reduced significantly by an
intercompany sale of accounts receivable from the Asia subsidiary to the U.S.
parent company during the second quarter of fiscal 2009. If our Asian operations
at any time require an amount of cash greater than our available capital
resources, or than is permitted to be advanced under applicable credit
agreements, there is risk that we will not be able to fund our Asian operations
or achieve our growth plans in Asia.





Acquisitions
may be costly and difficult to integrate, may divert and dilute management
resources and may dilute shareholder value.




As part
of our business strategy, we have made and may continue to make acquisitions of,
or investments in, companies, products or technologies that complement our
current products, augment our market coverage, enhance our technical
capabilities or production capacity or that may otherwise offer growth
opportunities.  In any future acquisitions or investments, we could
potentially experience:


·
            problems
      integrating the purchased operations, technologies or
      products;


·
            failure
      to achieve potential sales, materials costs and other
      synergies;


·
            inability
      to retain existing customers of acquired entities when we desire to do
      so;


·
            the
      need to restructure, modify or terminate customer relationships of the
      acquired company;


·
            increased
      concentration of business from existing or new
  customers;


·
            unanticipated
      expenses and working capital
requirements;


·
            diversion
      of management’s attention and loss of key
  employees;


·
            asset
      impairments related to the acquisitions;
or


·
            fewer
      resources available for our legacy businesses as they are being redirected
      to the acquired entities to integrate their business
      processes.





In
addition, in connection with any future acquisitions or investments, we
could:


·
            enter
      lines of business and/or markets in which we have limited or no prior
      experience;


·
            issue
      stock that would dilute our current shareholders’ percentage
      ownership;


·
            incur
      debt and assume liabilities that could impair our
    liquidity;


·
            record
      goodwill and non-amortizable intangible assets that will be subject to
      impairment testing and potential periodic impairment
    charges;


·
            incur
      amortization expenses related to intangible
  assets;


·
            uncover
      previously unknown liabilities;


·
            become
      subject to litigation and environmental remediation
  issues;


·
            incur
      large and immediate write-offs that would reduce net income;
      or


·
            incur
      substantial transaction-related costs, whether or not a proposed
      acquisition is consummated.





Any of
these factors could prevent us from realizing anticipated benefits of an
acquisition or investment, including operational synergies, economies of scale
and increased profit margins and revenue. Acquisitions are inherently risky, and
any acquisition may not be successful. Failure to manage and successfully
integrate acquisitions could harm our business and operating results in a
material way. Even when an acquired company has already developed and marketed
products, product enhancements may not be made in a timely fashion. In addition,
unforeseen issues might arise with respect to such products after the
acquisition.





We face a risk
that capital needed for our business and to repay our debt obligations will not
be available when we need itor may not be
available to us on favorable terms, if at all. Additionally,
our leverage and our debt service obligations may adversely affect our cash
flow, results of
operations and financial position.


Recent
turmoil in global financial markets has limited access to capital for many
companies.  We are not currently experiencing any limitation of access
to our revolving line of credit and management is not aware of any issues
currently impacting our lender’s ability to honor its commitment to extend
credit.  However, if we were unable to borrow on our revolving line of
credit in the future due to the global credit crisis, our business and results
of operations could be adversely affected.  Furthermore, additional
capital may not be available to us on favorable terms or at all. To the extent
that additional capital is raised through the sale of equity, or securities
convertible into equity, current shareholders may experience dilution of their
proportionate ownership.





39
 Index





As of
February 28, 2009, we had total indebtedness of approximately $78.0 million,
which represented approximately 45% of our total capitalization. We also have
$31.1 million unused availability under a secured bank revolving line of
credit that would increase our leverage if utilized.





Our
indebtedness could have significant negative consequences,
including:





·
              increasing
      our vulnerability to general adverse economic and industry
      conditions;


·
              limiting
      our ability to obtain additional
financing;


·
              requiring
      the use of a substantial portion of any cash flow from operations to
      service our indebtedness, thereby reducing the amount of cash flow
      available for other purposes, including capital
    expenditures;


·
              limiting
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we
compete; and


·
              placing
      us at a possible competitive disadvantage to less leveraged competitors
      and competitors that have better access to capital
    resources.





Additionally,
we are exposed to interest rate risk relating to our revolving credit facility
which bears interest based, at our election, on either the prime rate or
LIBOR plus an additional margin based on our use of the credit facility. At
February 28, 2009, there was $8.0 million outstanding under the revolving line
of credit.  When we utilize our revolving credit facility to meet our
capital requirements, we are subject to market interest rate risk that could
increase our interest expense beyond expected levels and decrease our
profitability.





Restructuring
efforts have required both restructuring and impairment charges and we may be
required to record asset impairment charges in the future, which would adversely
affect our results of operations and financial condition.




We have
recorded impairment charges against certain assets in fiscal 2009, fiscal 2008
and fiscal 2007.  As our strategy evolves and due to the cyclicality
of our business, rapid technological change and the migration of business to
Asia, we might conclude in the future that some of our manufacturing facilities
are surplus to our needs or will not generate sufficient future cash flows to
cover the net book value and, thus, we may be required to record an impairment
charge. Such an impairment charge would adversely affect our results of
operations and financial condition.





Due to
the substantial variance between our market capitalization based on the current
trading price range for our common stock and the net asset value reflected in
our consolidated balance sheet, as well as other factors regarding our results
of operations and the current economic environment, management has undertaken
quarterly assessments of potential impairment of the company’s long-lived assets
in fiscal 2009.  In the third quarter of fiscal 2009, an impairment
charge was recorded to reduce the value of goodwill recorded in the acquisition
of our Asia operations to $0.  We have also performed an assessment
for potential impairment of other long-lived assets and determine that no
further impairment charges are required as of February 28,
2009.  However, it is possible that further impairment charges may be
recorded in the future, which would adversely affect our results of operations
and financial condition.





As of
February 28, 2009, our consolidated balance sheet reflected $18.7 million of
goodwill and intangible assets. We periodically evaluate whether events and
circumstances have occurred that indicate the remaining balance of goodwill and
intangible assets may not be recoverable. If factors indicate that assets are
impaired, we would be required to reduce the carrying value of our goodwill and
intangible assets, which could adversely affect our results during the periods
in which such a reduction is recognized. Our goodwill and intangible assets may
increase in future periods if we consummate other acquisitions. Amortization or
impairment of these additional intangibles would, in turn, adversely affect our
earnings.





40
 Index





As
a result of the implementation of a global enterprise resource planning (ERP)
system, unexpected problems and delays could occur and could cause disruption to
the management of our business and significantly increase costs.




During
fiscal 2008, we completed the implementation for our world-wide ERP system at
our North American operations.  The new ERP system is integral to our
ability to accurately and efficiently maintain our books and records, record our
transactions, provide critical information to our management and prepare our
financial statements. We implemented  the ERP system at our Asian
operations in August 2008 and we are evaluating the success of that
implementation as we use the system to report the results of operations for our
Asia subsidiary in the remainder of fiscal 2009. These systems are new to us and
we have not had extensive experience with them. Implementation of the new ERP
system has required us to change certain internal business practices and
training may be inadequate. We may encounter unexpected difficulties, delays,
internal control issues, costs, unanticipated adverse effects or other
challenges, any of which may disrupt our business. Corrections and improvements
may be required as we continue to refine the implementation of our new system,
procedures and controls, and could cause us to incur additional costs and
require additional management attention, placing burdens on our internal
resources. Any disruption in the transition to our new or enhanced systems,
procedures or controls, could harm our ability to accurately forecast sales
demand, manage our supply chain, achieve accuracy in the conversion of
electronic data and records, compete effectively and report financial and
management information on a timely and accurate basis. Failure to properly or
adequately address these issues could result in the diversion of management’s
attention and resources and impact our ability to manage our business and our
results of operations.





We
have reported material weaknesses in our internal control over financial
reporting and if additional material weaknesses are discovered in the future,
our stock price and investor confidence in us may be adversely
affected.




A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected. In connection with management’s assessments of our
internal control over financial reporting over the prior fiscal year, we
identified material weaknesses in our internal control over financial
reporting.





We have
previously identified a material weakness in controls over financial reporting
for our Merix Asia operations and have determined that this material weakness
still exists at February 28, 2009. At the time of the acquisition in September
2005, Merix Asia had weak internal controls over financial reporting and needed
to develop processes to strengthen its accounting systems and control
environment management. We have devoted significant time and resources to
improving the internal controls over financial reporting since the acquisition;
however, as of February 28, 2009, we have determined that we did not maintain
sufficient controls to adequately monitor the accounting and financial reporting
related to our Merix Asia operations. See Item 4. “Controls and
Procedures.”





We may,
in the future, identify additional internal control deficiencies that could rise
to the level of a material weakness or uncover errors in financial reporting.
Material weaknesses in our internal control over financial reporting may cause
investors to lose confidence in us, which could have an adverse effect on our
business and stock price.





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 Index





Our
failure to comply with environmental laws could adversely affect our
business.




Our
operations are regulated under a number of federal, state and municipal
environmental and safety laws and regulations including laws in the U.S. and the
PRC that govern, among other things, the discharge of hazardous and other
materials into the air and water, as well as the handling, storage, labeling,
and disposal of such materials. When violations of environmental laws
occur, we can be held liable for damages, penalties and costs of investigation
and remedial actions. Violations of environmental laws and regulations may occur
as a result of our failure to have necessary permits, human error,
equipment failure or other causes. Moreover, in connection with our acquisitions
in San Jose, California and in Asia, we may be liable for any violations of
environmental and safety laws at those facilities by prior owners. If we violate
environmental laws, we may be held liable for damages and the costs of
investigations and remedial actions and may be subject to fines and penalties,
and revocation of permits necessary to conduct our business. Any permit
revocations could require us to cease or limit production at one or more of our
facilities, and harm our business, results of operations and financial
condition. Even if we ultimately prevail, environmental lawsuits against us
would be time consuming and costly to defend. Our failure to comply with
applicable environmental laws and regulations could limit our ability to expand
facilities or could require us to acquire costly equipment or to incur other
significant expenses to comply with these laws and regulations. In the future,
environmental laws may become more stringent, imposing greater compliance costs
and increasing risks and penalties associated with violations. We operate in
environmentally sensitive locations and we are subject to potentially
conflicting and changing regulatory agendas of political, business and
environmental groups. Changes or restrictions on discharge limits, emissions
levels, permitting requirements and material storage, handling or disposal might
require a high level of unplanned capital investment, operating expenses or,
depending on the severity of the impact of the foregoing factors, costly plant
relocation. It is possible that environmental compliance costs and penalties
from new or existing regulations may harm our business, results of operations
and financial condition.





We are
potentially liable for contamination at our current and former facilities as
well as at sites where we have arranged for the disposal of hazardous wastes, if
such sites become contaminated. These liabilities could include investigation
and remediation activities. It is possible that remediation of these sites could
adversely affect our business and operating results in the future.





Pending
or future litigation could have a material adverse effect on our operating
results and financial condition.




We are
involved, from time to time, in litigation incidental to our business including
complaints filed by investors. This litigation could result in substantial costs
and could divert management’s attention and resources which could harm our
business.  Risks associated with legal liability are often difficult
to assess or quantify, and their existence and magnitude can remain unknown for
significant periods of time. In cases where we record a liability, the amount of
our estimates could be wrong. In addition to the direct costs of litigation,
pending or future litigation could divert management’s attention and resources
from the operation of our business. While we maintain director and officer
insurance, the amount of insurance coverage may not be sufficient to cover a
claim and the continued availability of this insurance cannot be assured. As a
result, there can be no assurance that the actual outcome of pending or future
litigation will not have a material adverse effect on our results of operations
or financial condition.





We
may be subject to claims of intellectual property infringement.




Several
of our competitors hold patents covering a variety of technologies, applications
and methods of use similar to some of those used in our products. From time to
time, we and our customers have received correspondence from our competitors
claiming that some of our products, as used by our customers, may be infringing
one or more of these patents. Competitors or others have in the past and may in
the future assert infringement claims against our customers or us with respect
to current or future products or uses, and these assertions may result in costly
litigation or require us to obtain a license to use intellectual property rights
of others. If claims of infringement are asserted against our customers, those
customers may seek indemnification from us for damages or expenses they
incur.





If we
become subject to infringement claims, we will evaluate our position and
consider the available alternatives, which may include seeking licenses to use
the technology in question or defending our position. These licenses, however,
may not be available on satisfactory terms or at all. If we are not able to
negotiate the necessary licenses on commercially reasonable terms or
successfully defend our position, our financial condition and results of
operations could be materially and adversely affected.





42
 Index





We
may have exposure to income tax rate fluctuations as well as to additional tax
liabilities, which would impact our financial position.




As a
corporation with operations both in the United States and abroad, we are subject
to taxes in the United States and various foreign jurisdictions. Our effective
tax rate is subject to fluctuation as the income tax rates for each year are a
function of the following factors, among others:


·
            the
      effects of a mix of profits or losses earned by us and our subsidiaries in
      numerous tax jurisdictions with a broad range of income tax
      rates;


·
            our
      ability to utilize net operating
losses;


·
            changes
      in contingencies related to taxes, interest or penalties resulting from
      tax audits; and


·
            changes
      in tax laws or the interpretation of such
laws.





Changes
in the mix of these items and other items may cause our effective tax rate to
fluctuate between periods, which could have a material adverse effect on our
financial position.





We are
also subject to non-income taxes, such as payroll, sales, use, value-added, net
worth, property and goods and services taxes, in both the United States and
various foreign jurisdictions.





Significant
judgment is required in determining our provision for income taxes and other tax
liabilities. Although we believe that our tax estimates are reasonable, we
cannot provide assurance that the final determination of tax audits or tax
disputes will not be different from what is reflected in our historical income
tax provisions and accruals.





RISKS
RELATED TO OUR CORPORATE STRUCTURE AND STOCK





Our
stock price has fluctuated significantly, and we expect the trading price of our
common stock to remain highly volatile.




The
closing trading price of our common stock has fluctuated from a low of less than
$0.20 per share to a high of more than $70.00 per share over the past 14
years.





The
      market price of our common stock may fluctuate as a result of a number of
      factors including:


·
            actual
      and anticipated variations in our operating
  results;


·
            general
      economic and market conditions, including changes in demand in the PCB
      industry and the end markets which we
serve;


·
            interest
      rates;


·
            geopolitical
      conditions throughout the world;


·
            perceptions
      of the strengths and weaknesses of the PCB industry and the end markets
      which it serves;


·
            our
      ability to pay principal and interest on our debt when
  due;


·
            developments
      in our relationships with our lenders, customers, and/or
      suppliers;


·
            announcements
      of alliances, mergers or other relationships by or between our competitors
      and/or our suppliers and customers;


·
            announcements
      of plant closings, layoffs, restructurings or bankruptcies by our
      competitors; and


·
            developments
      related to regulations, including environmental and wastewater
      regulations.





We expect
volatility to continue in the future. The stock market in general has recently
experienced extreme price and volume fluctuations that have affected the PCB
industry and that may be unrelated to the operating performance of the companies
within these industries. These broad market fluctuations may adversely affect
the market price of our common stock and limit our ability to raise capital or
finance transactions using equity instruments.




A
large number of our outstanding shares and shares to be issued upon exercise of
our outstanding options may be sold into the market in the future, which could
cause the market price of our common stock to drop significantly, even if our
business is doing well.




We may,
in the future, sell additional shares of our common stock, or securities
convertible into or exercisable for shares of our common stock, to raise
capital. We may also issue additional shares of our common stock, or securities
convertible into or exercisable for shares of our common stock, to finance
future acquisitions.  As of February 28, 2009, we had approximately 3.2
million outstanding options, each to purchase one share of our common stock,
issued to employees, officers and directors under our equity incentive plans.
The options have exercise prices ranging from $1.62 per share to
$67.06 per share. These outstanding options could have a significant
adverse effect on the trading price of our common stock, especially if a
significant volume of the options was exercised and the stock issued was
immediately sold into the public market. Further, the exercise of these options
could have a dilutive impact on other shareholders by decreasing their ownership
percentage of our outstanding common stock. If we attempt to raise
additional capital through the issuance of equity or convertible debt
securities, the terms upon which we will be able to obtain additional equity
capital, if at all, may be negatively affected since the holders of outstanding
options can be expected to exercise them, to the extent they are able, at a time
when we would, in all likelihood, be able to obtain any needed capital on terms
more favorable than those provided in such options.





43
 Index





Some
provisions contained in our Articles of Incorporation, Bylaws and Shareholders
Rights Agreement, as well as provisions of Oregon law, could inhibit an attempt
by a third party to acquire or merge with Merix Corporation.




Some of
the provisions of our Articles of Incorporation, Bylaws, Shareholders Rights
Agreement and Oregon’s anti-takeover laws could delay or prevent a merger or
acquisition between us and a third party, or make a merger or acquisition with
us less desirable to a potential acquirer, even in circumstances in which our
shareholders may consider the merger or acquisition favorable. Our Articles of
Incorporation authorize our Board of Directors to issue series of preferred
stock and determine the rights and preferences of each series of preferred stock
to be issued. Our Shareholder Rights Agreement is designed to enhance the
Board’s ability to protect shareholders against unsolicited attempts to acquire
control of us that do not offer an adequate price to all shareholders or are
otherwise not in the Company’s best interests and the best interests of our
shareholders. The rights issued under the rights agreement will cause
substantial dilution to any person or group who attempts to acquire a
significant amount of common stock without approval of our Board of Directors.
Any of these provisions that have the effect of delaying or deterring a merger
or acquisition between us and a third party could limit the opportunity for our
shareholders to receive a premium for their shares of our common stock, and
could also affect the price that some investors are willing to pay for our
common stock.





Item6.   Exhibits





The
following exhibits are filed herewith and this list is intended to constitute
the exhibit index:


31.1
              
              Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934.31.2
              
              Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934.32.1
              
              Certification
      of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of
      the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350.32.2
              
              Certification
      of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of
      the Securities Exchange Act of 1934 and 18 U.S.C. Section
      1350.





44
 Index





SIGNATURES








Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.








MERIX
      CORPORATIONDated:  April
      8, 2009
                                    /s/ MICHAEL D. BURGERMichael
      D. BurgerDirector,
      President andChief
      Executive Officer(Principal
      Executive Officer)/s/ KELLY E. LANGKelly
      E. LangExecutive
      Vice President and Chief Financial Officer(Principal
      Financial Officer)/s/ ALLEN L. MUHICHAllen
      L. MuhichVice
      President, Finance and Corporate Controller(Principal
      Accounting
Officer)






45