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Plexus Corp. (PLXS - Analyst Report) reported fourth quarter 2011 diluted earnings per share (EPS) of 52 cents, surpassing the Zacks Consensus Estimate of 50 cents and was in line with the higher end of management’s guidance range of 50 cents to 52 cents. However, EPS decreased 20.0% year over year and 10.3% sequentially.

For fiscal 2011, EPS not only increased 5.0% from the previous-year quarter to $2.30, but also surpassed the Zacks Consensus Estimate of $2.28. Despite macro-economic concerns and soft customer demands, the growth was primarily driven by new business development.

Quarter in Detail

Total revenue for the quarter decreased 3.1% on a year-over-year basis to $538.1 million and was at the lower end of management’s guidance range of $530.0 million to $560.0 million. On a sequential basis, revenues went down 3.8%. Revenues for the quarter also missed the Zacks Consensus Estimate of $540.0 million. Lower customer demand in the second half of the year was the primary reason for lower revenues.

For fiscal 2011, total revenue was $2.23 billion, up 10.9% from the previous year.

Looking into the individual segments, growth was witnessed in the Industrial/Commercial and Defense/Security/Aerospace segments on a year-on-year basis, but the Medical, Wireless and Wireline/Networking segments suffered declines.

Industrial/Commercial (29.0% of total revenue) increased 35.3% on a year-over-year basis. Defense/ Security/Aerospace (10% of total revenue) was up 41.0% from the previous-year quarter. However, Medical (21.0% of total revenue), Wireline/Networking (34.0% of total revenue) and Wireless Infrastructure (6.0% of total revenue) were down 3.4%, 16.7% and 53.9%, respectively.

During the quarter, the company won 24 new programs in the manufacturing solutions group, which are expected to generate approximately $182.0 million in annualized revenue when ramped into production.

Fifty-Nine percent of the total revenue was attributable to the top 10 customers, which was consistent with the previous quarter. Juniper Networks Inc. (JNPR - Analyst Report) (17.0% of revenues) and The Coca-Cola Co. (KO - Analyst Report) (10.0% of revenues) were the only customers representing 10.0% or more of revenues for the quarter.

Gross profit decreased 7.02% sequentially and 10.8% from the year-ago quarter to $50.3 million, while gross margin for the quarter was 9.3%, down from 9.7% sequentially and 10.2% on a year-on-year basis.

Operating profit decreased 11.6% sequentially and 24.1% from the prior-year quarter to $22.0 million, with the operating margin for the quarter coming in at 4.1%, down from 4.5% in the previous quarter and 5.2% in the year-ago quarter. Operating profit was impacted by higher-than-expected selling and administrative expenses during the quarter, including approximately $500,000 of severance expense related to cost-structure reductions.

Balance Sheet and Cash Flow

Plexus exited the quarter with $242.1 million in cash and investments, versus $208.7 million in the previous quarter. Long-term debt and capital lease obligations (including the current portion) amounted to $287.7 million versus $291.9 million in the previous quarter.

Cash flow provided by operations was approximately $95.0 million in the quarter. Capital expenditures were $27.0 million and free cash flow was a positive $68.0 million.

During the quarter, 1.0 million shares were repurchased under the share repurchase plan that was approved on February 16, 2011, totaling $30.0 million at an average price of $28.86. This completed the $200.0 million share repurchase program at a weighted average price of $31.69 per share.

Quarter Ahead

For the forthcoming quarter, management expects diluted EPS to be between 44 cents and 49 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 54 cents per share.

Total revenue for the first quarter is projected in the range of $510.0 million to $540.0 million. The Zacks Consensus Estimate expects the revenues to be $562.0 million.

Management is optimistic of the Plexus brand on the back of new business wins coupled with a channel of opportunities. Management is also confident on the capacity investments required to support long-term growth. Plexus has two new facilities in China, which will be operational by the second half of 2012.

Conclusion

Although Plexus Corp. has consistently exceeded Zacks Consensus estimates over the past year or so shares were down approximately 17.0% versus an average increase of 4.7% for the S&P 500 during the same period. We believe the positive earnings surprise in the fourth quarter was already baked into the stock price.

We believe expansion of its global footprint, a healthy pipeline of program wins and improving end-market demand will drive growth over the long-term.

Nonetheless, volatile customer forecasts coupled with uncertainty in the end markets and macro-economic concerns will likely remain the headwinds for the forthcoming quarters and we remain concerned 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 - Snapshot Report) and Jabil Circuit Inc. (JBL - Analyst Report), continued component challenges, and supply chain constraints.

Thus, we have an Underperform rating on Plexus for the long term (6-12 months). We currently have a Zacks #5 Rank on shares of Plexus Corp., which translates into a 'Strong Sell' rating for the short term.

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