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Plexus Corp. (PLXS - Analyst Report) reported a weak first-quarter fiscal 2014. While earnings of 61 cents per share were in line with the Zacks Consensus Estimate, revenues missed the same. The company’s second-quarter guidance also failed to impress and its back-end loaded outlook will remain an overhang on the stock.

Revenues

Revenues were almost flat year over year, but declined 6.0% sequentially to $534.0 million. Revenues came within management’s guided range of $520.0 million to $550.0 million. The decline in revenues was primarily due to weak performance by the networking/communications segment.

As anticipated, Juniper’s (JNPR - Analyst Report) disengagement negatively impacted first-quarter revenues by approximately $40.0 million on a sequential basis.

Revenues from Networking/Communications sector (38.0% of revenues) decreased 18.1% year over year and 17.3% on a sequential basis to $163.0 million. The segment’s lackluster performance was primarily due to weak end-market demand experienced by the company’s customers.

Healthcare/Life Sciences (25.0% of revenues) reported a better-than-expected quarter. Revenues increased 24.1% from the year-ago quarter and 3.8% sequentially to $165.0 million. The sequential increase was due to better-than-expected performance by its top customers.

Industrial/Commercial sector (24.0% of revenues) increased 3.8% on a year-over-year basis but decreased 4.9% sequentially to $136.0 million, due to sluggish performance by its top customers. The result was in line with management’s guidance of mid single-digit percentage points decline on a sequential basis.

However, the most disappointing result was from the Defense/Security/Aerospace sector (13.0% of revenues). Revenues increased 2.9% year over year and 1.4% sequentially to $70.0 million, much lower than management’s guidance of high single-digit percentage increase on a sequential basis. Lackluster performance from a major security customer brought down the revenues.

During the quarter, Plexus won 29 new programs in the manufacturing solutions group, which is expected to generate approximately $205.0 million (48.0% in North America) in annualized revenues once production commences.

Margins

Gross margin was almost flat with the year-ago quarter and previous quarter to 9.6%.

Selling and administrative (S&A) expense as a percentage of revenues declined 70 basis points (bps) from the year-ago quarter but remained almost flat with the previous quarter to 4.9%, reflecting stringent cost control.

As a result, operating margin expanded 80 bps from the year-ago quarter and 10 bps from the previous quarter to 4.8%.

Net income margin improved 90 bps from the year-ago quarter but contracted 10 bps on a sequential basis to 4.0%.

Earnings (excluding restructuring expenses) increased 30.2% year over year but declined 8.0% quarter over quarter to 61 cents per share, which was within management’s guided range of 57 cents to 63 cents.

Balance Sheet & Cash Flow

Plexus exited the first quarter of fiscal 2014 with $324.2 million in cash and investments versus $341.9 million in the fourth quarter of fiscal 2013. Long-term debt and capital lease obligations (including the current portion) amounted to $260.7 million.

Cash flow from operations was $4.0 million in the quarter while free cash flow amounted to an outflow of $18.0 million. During the quarter, Plexus repurchased shares worth $6.9 million at an average cost of $39.88 per share.

Outlook

For the second quarter of fiscal 2014, revenues are projected in the range of $535.0 million to $565.0 million. Management expects revenues (mid-point of the outlook range) to increase 3.0% on a sequential basis.

However, the mid-point reflects approximately 1.4% decline in revenues on a year-over-year basis. Currently, the Zacks Consensus Estimate for revenues is pegged at $537.0 million for the upcoming quarter.

Moreover, management expects Network/communication segment revenues to be down in high single-digit percentage range sequentially for the upcoming quarter. Plexus noted that 14 out of 15 customers are expected to report downward growth trend in demand, which will affect the sector’s overall result.

However, this trend is expected to reverse in the third quarter of fiscal 2014. Plexus expects to benefit from new program wins, going forward.

Healthcare/Life Sciences revenues are expected to remain flat on a sequential basis. Seasonal softness in a key customer is expected to be offset by new program wins from the likes of General Electric (GE - Analyst Report).

Industrial/Commercial revenues are expected to increase at low-teen percentage on a sequential basis. Revenues from Defense/Security/Aerospace are expected to increase in the low to mid percentage point range over first quarter, driven by strong performance from Aerospace.

Earnings are projected to be between 57 cents and 63 cents per share, excluding any restructuring charges but including approximately 10 cents per share in stock-based compensation expenses. The Zacks Consensus Estimate is currently pegged at 62 cents.

Management expects gross margin in the range of 9.4% to 9.6% while operating margin is expected in the range of 4.4% to 4.6%, both down sequentially. The company expects its S&A expense to be between $27.0 million and $28.0 million, slightly up from the previous quarter.

For fiscal 2014, management expects to spend $75.0 million on capital expenditures.

Our Take

We believe that a sluggish demand environment will continue to hurt Plexus in the near term. Sluggish results from top customers in the company’s biggest Networking/Communications sector will continue to hurt top-line growth, going forward.

Moreover, a matured electronic manufacturing services market and intense competition from the likes of Jabil Circuit (JBL - Analyst Report) remain other headwinds for Plexus.

However, we believe that new business opportunities, particularly in the industrial/commercial and healthcare/life sciences sectors and global expansion will drive growth over the long term.

Moreover, the disengagement from Juniper is expected to improve the product mix, going forward. Additionally, the consolidation of the company’s production facilities in low-cost areas is expected to boost margins, going forward.

Currently, Plexus has a Zacks Rank #3 (Hold).

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