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Plexus Beats, Outlook Disappoints

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Electronic Manufacturing Services provider Plexus Corp. (PLXS - Free Report) reported mixed first quarter 2012 results. Earnings per share (EPS) came in at 51 cents, surpassing the Zacks Consensus Estimate of 48 cents and management’s guided range of 48 cents to 50 cents.

However, weak top-line growth during the quarter weighed down the EPS, which decreased 16.4% year over year.

Quarter Details

Total revenue in the quarter decreased 6.4% on a year-over-year basis to $529.7 million, but was in line with the higher end of management’s guided range of $525.0 million to $530.0 million. However, reported revenue missed the Zacks Consensus Estimate of $532.0 million.

The year-over-year decline in revenue was primarily attributed to continued volatility in the Networking/Communications segment. The segment reported revenue of $230.0 million, down 21.0% year over year in the quarter. Networking/Communications contributed 43.0% to the total revenue in the reported quarter compared with 51.0% in the year-ago quarter.

Industrial/Commercial (25.0% of the total revenue) increased 14.4% year over year to $135.0 million. Medical (22.0% of revenues) decreased 1.7% year over year to $114.0 million. Defense/ Security/Aerospace (10% of the total revenue) improved 24.4% year over year to $51.0 million.

During the quarter, Plexus won 28 new programs in the manufacturing solutions group, which are expected to generate approximately $203.0 million in annualized revenue when production commences.

Top 10 customers of the company accounted for 63.0% of the total revenue. Juniper Networks Inc. (JNPR - Free Report) was the only customer representing 10.0% or more of revenues during the quarter.

Gross profit decreased 6.0% from the year-ago quarter to $51.7 million, while gross margin for the quarter stood at 9.8%, up from the year-ago level of 9.7%. The year-over-year decline was primarily attributed to weak top-line growth in the quarter.

Operating profit decreased 14.7% from the prior-year quarter to $23.8 million, with the operating margin for the quarter standing at 4.5%, down from 4.9% in the year-ago quarter. Operating profit was impacted by higher-than-expected selling and administrative expenses during the quarter.

Balance Sheet and Cash Flow

Plexus exited the quarter with $248.3 million in cash and investments versus $242.1 million in the previous quarter. Long-term debt and capital lease obligations (including the current portion) amounted to $283.4 million versus $287.7 million in the previous quarter.

Cash flow provided by operations was approximately $30.0 million in the quarter. Capital expenditures were $22.0 million and free cash flow $8.0 million.

Second Quarter Guidance

For the forthcoming quarter, Plexus expects EPS to be between 51 cents and 58 cents, excluding any restructuring charges and including approximately 9 cents per share in stock-based compensation expense. The guidance was below the Zacks Consensus Estimate of 51 cents per share.

Total revenue for the second quarter of 2012 is projected in the range of $550.0 million to $580.0 million. The Zacks Consensus revenue estimate is $551.0 million.

Our Recommendation

Plexus’s second quarter guidance is disappointing and the company is expected to suffer due to the lack of visibility in customer growth and macroeconomic concerns going forward. Plexus is expanding its manufacturing facilities in Malaysia and Romania, which we believe will also hurt profitability in the near term. Moreover, intense competition, continued component challenges and supply chain constraints remain major concerns over the long term.

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

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