Plexus Reports Mixed 4Q

Zacks

Electronic Manufacturing Services provider Plexus Corp. (PLXS) reported fourth quarter 2012 adjusted earnings of 66 cents per share, which surpassed the Zacks Consensus Estimate by three cents and was in line with the high end of management’s guided range of 60 cents to 66 cents per share. Earnings surged 26.9% year over year, primarily due to higher sales and modest margin expansions.

Quarter Details

Total revenue increased 10.5% on a year-over-year basis to $594.8 million, which was at the lower end of management’s guided range of $590 million to $620 million, but missed the Zacks Consensus Estimate of $604.0 million. The year-over-year increase in revenue was primarily driven by strong performance from all its business segments.

Revenue from Networking/Communications (38% of total revenue) increased 6.5% year over year to $228 million. Medical sector, which will be renamed as Healthcare/Life Sciences starting FY13 (23% of total revenue) increased 23.2% from the previous-year quarter to $138 million.

Industrial/Commercial sector (27% of total revenue) increased a modest 1.3% on a year-over-year basis to $159 million. Revenue from Defense/Security/Aerospace sector (12% of total revenue) was up 27.3% from the previous-year quarter to $70 million.

During the quarter, Plexus won 28 new programs in the manufacturing solutions group and the company expects to generate approximately $234 million in annualized revenue once production commences. Top 10 customers of the company accounted for 55% of the total revenue. Juniper Networks Inc. (JNPR) contributed 13% of the revenues and was the only customer accounting for 10% or more of revenues during the quarter.

Gross profit increased 11.8% from the year-ago quarter to $56.2 million. Gross margin for the quarter stood at 9.5% compared with the year-ago level of 9.3%. Gross margin edged up primarily due to higher revenue base.

Operating income for the quarter increased 24.1% from the previous-year quarter to $27.3 million. Operating margin for the quarter was 4.6%, which increased 50 basis points from the previous-year quarter as operating expenses as a percentage of revenue contracted 40 basis points on a year-over-year basis.

Adjusted net income increased 28.3% year over year to $23.5 million.

Plexus exited the quarter with $297.6 million in cash and investments versus $277.9 million in the previous quarter. Long-term debt and capital lease obligations (including the current portion) amounted to $270.4 million versus $274.7 million in the previous quarter. Cash flow from operations was $41 million in the quarter. The company also announced a share buyback program of approximately $50 million.

Outlook

For the forthcoming first quarter 2013, total revenue is projected in the range of $550.0 million to $580.0 million. Plexus expects earnings to be between 50 cents and 55 cents per share, excluding any restructuring charges and including approximately 8 cents per share in stock-based compensation expenses. The Zacks Consensus Estimate is pegged at 53 cents for the first quarter.

Recommendation

We believe that stabilizing end markets, new business opportunities, particularly in the industrial/commercial and medical sector and global expansion will drive growth over the long term. We also believe that the gradual improvement in the U.S. market will boost Plexus’ top line going forward.

However, intense competition, continued component challenges and supply chain constraints remain major concerns for Plexus over the long term. Moreover, the company’s tepid outlook for the forthcoming quarter also would weigh on the stock.

Thus, we have a Neutral recommendation on Plexus over the long term (6-12 months). Currently, Plexus has a Zacks #4 Rank, which translates into a Sell rating over the short term.

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