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Electronic Manufacturing Services provider Plexus Corp. (PLXS - Analyst Report) reported third quarter 2012 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 13.9% year over year, primarily due to higher sales, favorable foreign exchange and a lower tax rate in the quarter.

Quarter Details

Total revenue in the quarter increased 8.9% on a year-over-year basis to $608.8 million, which was within management’s guided range of $590.0 million to $620.0 million, and also surpassed the Zacks Consensus Estimate of $607.0 million.

The year-over-year increase in revenue was primarily driven by strong performance of the Industrial/Commercial segment. The segment delivered revenue of $187.0 million, up 43.8% year over year and contributed 31.0% to the total revenue in the reported quarter compared with 23.0% in the year-ago quarter.

Medical (21.0% of the total revenue) increased 11.4% year over year to $127.0 million. Defense/ Security/Aerospace (9% of the total revenue) improved 3.6% year over year to $58.0 million. However, Networking/Communications (39.0% of the total revenue) decreased 8.5% year over year to $237.0 million.

During the quarter, Plexus won 36 new programs in the manufacturing solutions group and the company expects to generate approximately $203.0 million in annualized revenue once production commences.

Top 10 customers of the company accounted for 60.0% of the total revenue. Juniper Networks Inc. (JNPR - Analyst Report) was the only customer accounting for 10.0% or more of revenues during the quarter.

Gross profit increased 6.1% from the year-ago quarter to $57.4 million. Gross margin for the quarter stood at 9.4% compared with the year-ago level of 9.7%. Selling, general & administrative expense (SG&A) increased 3.2% year over year to $30.1 million. As a percentage of revenue, SG&A declined 30 basis points (bps) to 4.9%. Operating profit jumped 9.6% year over year to $27.3 million, while operating margin remained flat annually at 4.5%.

Net income increased 6.8% year over year to $23.5 million. Net margin stood at 3.9% in the third quarter.

Plexus exited the quarter with $277.9 million in cash and investments versus $257.8 million in the previous quarter. Long-term debt and capital lease obligations (including the current portion) amounted to $274.7 million versus $279.1 million in the previous quarter.

Fourth Quarter Guidance

For the forthcoming fourth quarter 2012, total revenue is projected in the range of $590.0 million to $620.0 million. Plexus expects earnings 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. The Zacks Consensus Estimate is pegged at 66 cents for the fourth quarter.

Our 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.

Thus, we have a Neutral recommendation on Plexus over the long term (6-12 months). Currently, Plexus has a Zacks #3 Rank, which translates into a Hold rating over the short term.

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