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Plexus Corp. (PLXS - Analyst Report) reported earnings of 52 cents in the second quarter of 2013, which beat the Zacks Consensus Estimate by a penny.

Revenues

Revenues declined 2.7% year over year but increased 5.1% sequentially to $557.8 million, slightly ahead of the Zacks Consensus Estimate. Revenues were slightly ahead of the low end of management’s guided range of $550.0 million to $580.0 million.

Revenues from Networking/Communications (38.0% of total revenue) climbed 1.4% year over year and 7.0% sequentially to $213.0 million. Although revenues increased in the quarter, growth fell short of management’s expectation as Plexus customers continued to face sluggish end-market demand during the quarter.

Healthcare/Life Sciences (23.0% of total revenue) surged 13.2% from the year-ago quarter but declined 3.0% sequentially to $129.0 million.

The Industrial/Commercial sector (25.0% of total revenue) plunged 25.9% on a year-over-year basis but increased 6.9% from the previous quarter to $140.0 million.

Revenues from the Defense/Security/Aerospace sector (14.0% of total revenue) soared 26.7% year over year and 11.8% on a sequential basis to $76.0 million.

During the quarter, Plexus won 33 new programs in the manufacturing solutions group, which is expected to generate approximately $143.0 million in annualized revenues once production commences.

Margins

Gross profit decreased 4.8% from the year-ago quarter but climbed 1.7% from the previous quarter to $52.0 million. Gross margin declined 30 basis points (“bps”) sequentially and 20 bps from the year-ago quarter to 9.3%.

Selling and administrative (S&A) expense remained flat on a year-over-year basis but decreased 2.8% quarter over quarter to $28.8 million, reflecting stringent cost control.

Operating income decreased 10.0% year over year but increased 7.9% sequentially to $23.2 million. The year-over-year decline was primarily due to lower gross margin base. Operating margin contracted 30 bps from the year-ago quarter to 4.2%. However, on a sequential basis operating margin improved 20 bps due to lower expenses.

Net income decreased 9.9% year over year but jumped 8.2% sequentially to $18.0 million. As a percentage of revenues, net margin contracted 30 bps on a year-over-year basis but improved 10 bps from the previous quarter. Earnings decreased 7.4% from the year-ago quarter but increased 10% from the previous quarter.

Balance Sheet & Cash Flow

Plexus exited the second quarter of 2013 with $276.5 million in cash and investments versus $274.2 million in the first quarter of 2013. Long-term debt and capital lease obligations (including the current portion) amounted to $261.7 million versus $269.8 million in the previous quarter.

Cash flow from operations was $54.0 million in the quarter compared with $9.0 million in the previous quarter. Free cash flow was $27.0 million compared with ($17.0) million in the first quarter of 2013.

Return on invested capital (ROIC) was 12.7% at the end of the second quarter compared with 12.6% at the end of first quarter of 2013.

Outlook

For the third quarter of 2013, total revenue is projected in the range of $550.0 million to $580.0 million. Earnings are projected to be between 55 cents and 62 cents per share, excluding restructuring charges but including approximately 8 cents per share in stock-based compensation expenses.

As announced earlier, Juniper’s (JNPR - Analyst Report) disengagement is expected to be completed by the end of third quarter of 2013.

Our Take

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

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 with Juniper is expected to improve product mix going forward.

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

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