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Plexus Corp. (PLXS - Analyst Report) reported earnings of 68 cents per share in the third quarter of 2013, which comfortably surpassed the Zacks Consensus Estimate by a dime. Earnings improved 3.0% on a year-over-year basis. Lower tax expense positively impacted earnings by 7 cents.

Revenues

Although revenues declined 6.1% year over year to $571.9 million, it was well above the Zacks Consensus Estimate of $564 million. Revenues came within management’s guided range of $550.0 million to $580.0 million. The year-over-year decline in revenues was negatively impacted by the Juniper’s (JNPR - Analyst Report) disengagement. Sequentially, revenues improved 2.5%.

Revenues from Networking/Communications sector (38.0% of total revenue) decreased 8.0% year over year but improved 2.3% on a sequential basis to $218.0 million. The sequential increase was primarily driven by growth from its top customers and new program ramps.

Healthcare/Life Sciences (25.0% of total revenue) sector’s revenues increased 11.8% from the year-ago quarter and 10.1% sequentially to $142.0 million. The sequential increase was due to better-than-expected performance from its top customers.

Industrial/Commercial sector (24.0% of total revenue) plunged 26.2% on a year-over-year basis and 1.4% sequentially to $138.0 million.

Revenues from Defense/Security/Aerospace sector (13.0% of total revenue) soared 27.6% year over year but declined 2.6% sequentially to $74.0 million.

During the quarter, Plexus won 28 new programs in the manufacturing solutions group, which is expected to generate approximately $212.0 million in annualized revenues once production commences. The program wins were primarily in the Healthcare/Life Sciences sector. Plexus won a number of new contracts from GE Healthcare, a division of General Electric (GE - Analyst Report).

Plexus has been consolidating its operational facilities in the low cost areas that are expected to help margins in the long run. As part of this initiative, the company has shifted to a new operational facility in Scotland and Romania.

 

Plexus is in the process of consolidating its facilities in Wisconsin and expects the process to be completed in the first quarter of 2014.

Margins

Gross profit decreased 3.3% from the year-ago quarter but increased 6.6% sequentially to $55.5 million. Gross margin expanded 30 basis points (bps) from the year-ago quarter and 40 bps from the previous quarter to 9.7%.

Gross margin was positively affected by Plexus’s efforts to improve operating performance that includes shifting of production to low cost areas. Better customer mix and robust performance from Engineering Solutions organization also drove the expansion.

Selling and administrative (S&A) expense increased marginally year over year and 5.0% sequentially to $30.3 million, reflecting stringent cost control.

Operating income decreased 7.7% year over year but increased 5.6% sequentially to $25.2 million. Operating margin contracted 10 bps from the year-ago quarter but improved 20 bps to 4.4%.

Net income decreased 1.4% year over year but increased 29.1% sequentially to $23.2 million. As percentage of revenues, net margin expanded 20 bps on a year-over-year basis and 90 bps sequentially.

Balance Sheet & Cash Flow

Plexus exited the third quarter of 2013 with $285.6 million in cash and investments versus $276.5 million in the second quarter of 2013. Long-term debt and capital lease obligations (including the current portion) amounted to $261.7 million.

Cash flow from operations was $54.0 million in the quarter while free cash flow amounted to $23.0 million. During the quarter, Plexus repurchased shares worth $12.5 million at an average cost of $27.19 per share.

Outlook

For the fourth quarter of 2013, total revenue is projected in the range of $545.0 million to $575.0 million. Management expects revenues to decline by $42 million sequentially due to the disengagement from Juniper.

Moreover, management expects revenues to be down in low-to-mid teens for Network/communication segment. Excluding the Juniper disengagement effect, revenues from the segment are expected to increase in mid teen percentage points.

Healthcare/Life Sciences and Industrial/Commercial revenues are expected to improve by high single-digit and mid single-digit percentage points sequentially, respectively. Revenues from Defense/Security/Aerospace are expected to remain flat sequentially.

Earnings are projected to be between 60 cents and 66 cents per share, excluding any restructuring charges and including approximately 8 cents per share in stock-based compensation expenses.

Management expects gross margin in the range of 9.8% to 10.0% while operating margins are expected in the range of 4.5% to 4.6%. The company expects its selling, general and administrative (SG&A) expenses to be between $29.0 million and $30 million. For fiscal 2013, management expects to spend $100.0 million on capital expenditures.

Our Take

We believe that sluggish demand environment will continue to hurt Plexus in the near term. Moreover, a matured electronic manufacturing services market and intense competition from the likes of Jabil (JBL - Analyst Report)  remain other long-term headwinds for Plexus.

However, we believe that new business opportunities, particularly in the industrial/commercial and medical sector and global expansion will drive growth over the long term. Moreover, the disengagement from Juniper is expected to improve the product mix, going forward. Moreover, the consolidation of the company’s production facilities in the low-cost areas are expected to boost margins.

Currently, Plexus has a Zacks Rank #1 (Strong Buy).

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