(PLXS) Plexus Beats The Street – Lowers Outlook

Plexus Corp.(PLXS) reported third quarter 2011 diluted earnings per share of 58 cents, surpassing the Zacks Consensus Estimate of 54 cents and topped management’s guidance range of 52 cents to 57 cents. Favorable customer mix and foreign currency exchange benefits were the primary reasons for the positive surprise.

However, earnings decreased 1.7% both on a sequential and year-on-year basis.

Quarter in Detail

Total revenue for the quarter increased 4.3% on a yearly basis to $559.2 million and was at the lower end of management’s guidance range of $550.0 million to $580.0 million. However, on a sequential basis, revenue went down 1.6%.

Lower customer demand in the second half of the year was a drag. Despite the fall in demand, growth was witnessed in the Medical, Industrial/Commercial and Defense/Security/Aerospace segments on a year-on-year basis.

On an end-market basis, Medical (21.0% of total revenue) increased 2.7% on a year over year basis. Industrial/Commercial (23.0% of total revenue) and Defense/Security/Aerospace (10.0% of total revenue) were up 32.7% and 30.2%, respectively, from its prior-year quarter. However, revenue from Wireline/Networking (40.0% of total revenue) was flat and the Wireless Infrastructure sector (6.0% of total revenue) decreased 42.6% year on year.

The company won 25 new programs in the manufacturing solutions group, which are expected to generate approximately $124.0 million in annualized revenue when ramped into production.

Fifty-three percent of the total revenue was attributable to the top 10 customers, which was consistent with the previous quarter. Juniper Networks Inc. (JNPR) (17.0% of revenues) was the only customer representing 10.0% or more of revenues for the quarter.

Gross profit decreased 2.5% both sequentially and from the year-ago quarter to $54.1 million, while gross margin for the quarter was 9.7%.

Operating profit decreased 5.7% sequentially and 7.8% from the prior-year quarter to $24.9 million, with the operating margin for the quarter coming in at 4.5%. Operating profit was impacted by higher than expected selling and administrative expenses, which eventually was due to higher headcount related costs and the delay in the recognition of an expected tax incentive.

Balance Sheet and Cash Flow

Plexus exited the quarter with $208.7 million in cash and investments versus $123.4 million in the previous quarter. Long-term debt and capital lease obligations (including the current portion) amounted to $291.9 million versus $121.1 million in the previous quarter.

Cash flow from operations was approximately $16.0 million in the quarter. Capital expenditures were $19.0 million and free cash flow was roughly a negative $3.0 million

Cash cycle days totaled 75 days, at the end of the quarter, versus 71 days in the previous quarter. Days in Inventory were 88 days, compared with 89 days in the previous quarter.

During the quarter, 2.7 million shares were repurchased under the share repurchase plan approved on February 16, 2011, totaling $92.0 million at an average price of $34.03. This completed the $175 million share repurchase program at a weighted average price of $32.29 per share.

During the quarter, Plexus completed the previously announced planned funding of $175 million of new debt, with the final portion of $75 million funding on June 15, 2011. The $175 million of senior notes, which were sold in a private placement, have a 7-year term and an effective fixed interest rate of 4.97%.

Quarter Ahead

For the forthcoming quarter, management expects diluted EPS of between 50 cents and 55 cents, excluding any restructuring charges and including approximately 7 cents per share of stock-based compensation expense. The guidance was below the Zacks Consensus Estimate of 59 cents per share.

Total revenue for the third quarter is projected in the range of $530.0 million to $560.0 million. The Zacks Consensus Estimate expects the revenues to be $580.0 million.


Over the past one week, analyst estimates remained unchanged in the run-up to the earnings results. The average estimate was 54 cents when the company reported earnings. We note that Plexus Corp. has consistently exceeded estimates over the past year or so. The average surprise in the preceding 4 quarters is a positive 4.72%, and another positive earnings surprise was expected.

Nonetheless, we remain concerned about the company achieving its 2011 targets, given the new project ramp up costs that may negatively impact the results. Other headwinds include intense competition in the electronic manufacturing services (EMS) market from Flextronics International Ltd. (FLEX) and Jabil Circuit Inc. (JBL), continued component challenges and supply chain constraints.

Thus, we have an Underperform rating on Plexus for the long term (6-12 months).

However, expansion of its global footprint, a healthy pipeline of program wins and improving end-market demand remain long-term drivers of growth.

We currently have a Zacks #4 Rank on shares of Plexus Corp., which translates into a ‘Sell’ rating for the short term.

FLEXTRONIC INTL (FLEX): Free Stock Analysis Report

JABIL CIRCUIT (JBL): Free Stock Analysis Report

JUNIPER NETWRKS (JNPR): Free Stock Analysis Report

PLEXUS CORP (PLXS): Free Stock Analysis Report

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